Monday, December 21, 2015

Personal Recollections of the Underground Railroad by Mark Campbell McMaken

I found this written account by Mark Campbell McMaken. Mark McMaken was the younger brother of my great-great-great grandfather Joseph Hamilton McMaken (born 1787). This branch of the McMaken family lived primarily in Southern Ohio and Eastern Indiana. Some of them were active in the anti-slavery movement, including Mark McMaken. I found the following document on the web site of the Ohio Historical Society. The documents have since been taken down, but I preserved screen shots. In this document, written by Mark McMaken himself, recounts some episodes in which he and other members of the community worked to free slaves who had crossed the river from Kentucky. (Warning: the "n word" is used in this 1895 document. In spite of his egalitarian sentiments, McMaken was not PC by modern standards.)

Note: The place names appear to all still be current except "Port Union" which is now better known as West Chester Township.  The area used to be known as Union Township, but before that, was known as "McMaken's Bridge." 

Wednesday, December 16, 2015

Fed Slightly Raises Target Fed Funds Rate After Seven Years

The Fed today announced that it will increase the target Federal Funds rate from 0.00-0.25 percent up to 0.25-0.5 percent.

The last time the target rate exceeded 0.25 percent was in November of 2008 when the higher bound of the target rate was 1 percent. In December of 2008, the Fed lowered the target rate to 0.00-0.25 and it has stayed there ever since. 

Back in September, when we thought that the Fed might raise rates, The Economist noted that "The last time the Federal Reserve raised its benchmark interest rate, there was no one to tweet about it," because Twitter did not yet exist. Moreover, Zero Hedge ran a somewhat amusing article reminding us of what the world was like the last time the target rate was above 0.25. Remember Nelly Furtado? George W. Bush was still president back then, too. 

The sheer length of the Fed's flatlining has made it seem that a move to a 0.5 target rate is an immense change. Here's what the huge change looks like: 

The fact that this is being labeled such a large change underscores just how fragile the current economic "recovery" is. Ever since 2009, the Fed has been telling us that its monetary easing will help the economy regain its footing, and then momentum will take over from there. We're still waiting.

Median incomes are falling, workforce participation is down, and housing is becoming more unaffordable. But, the fed may have figured out that if the economy's going to be lackluster anyway, the Fed might as well try to regain some of its credibility by letting rates inch up ever so slightly.

It could be worse, though.  We could be living under the European Central Bank which is doubling down on negative interest rates.  Nevertheless, Europe's future may soon be our future, since, as many Fed critics are predicting, the increased in the Fed Funds rate is really just a temporary measure. We may see the economy stall even more in the face of higher rates, at which point the Fed will quickly use the opportunity to return rates to zero or even negative.

At this point anything could happen. We live in such an abnormal economic world right now, it's hard to guess much of anything.  After all, it wasn't all that long ago that the Federal Funds Rate was between four and six percent.

On the other hand, I'm an old man of 38 years, so I can remember the ancient world of the 1990s, albeit I was a teenager at the time.  Some people working at the Fed, though, don't know, in practice, what it even means to raise rates.

Tuesday, December 15, 2015

Homicide Rates in Mexico, by Region

As I noted here, and here, I'm not a big fan of speaking about demographics or trends at the national level when we're talking about a large country with large regional differences. It's nonsensical to  speak about "the United States" as if the 318 million people in the US lived under similar conditions and were affected by identical demographic trends.

The same is true of Mexico, which has nearly 120 million people and displays very large regional differences, especially from north to south. The south is densely populated and tends to be poorer. The north is more sparsely populated and tends to be richer. Culturally, there are big differences. Chiapas, for example is mostly populated by people descended from Indians, while Chihuahua has a slight majority of  "whites" descended largely from migrants of German, Spanish, and French origins (among others).

So, given that Mexico has a reputation for a remarkably high murder rate right now, I thought we might look more closely at this indicator. I mentioned this metric a bit in this post, but thanks to this data from the OECD, we can list by region the homicide rate in each Mexican state (from 2013 data).

Mapped by state, this is what it looks like:

Here's a map to help you identify the name of each state:

The biggest factor in the homicide rate in Mexico right now is the War on Drugs. It's a huge factor, so it's not a coincidence that the states that border the USA are some of the worst, in terms of homicide. Other high-murder states, such as Guerrero and Sinaloa are also notable for being connected to the drug trade. Gone for now are the days of seemingly endless crowds of happy tourists in Acapulco in Guerrero state.

Most Mexicans, however, live in states where the homicide rate is relatively low. Moreover, places where you're likely to vacation, such as Baja California Sur (i.e., Cabo), Vercruz, Jalisco (i.e., Guadalajara), and the Yucatan region are relatively low-crime areas.  Indeed, most of southern Mexico has a homicide rate of around 10 or less per 100,000. If that seems like a lot, remember that the US homicide rate in the 70s and 80s was around 9.5 per 100,000, and it was over 10 in many US states at the time. Even as late as 1995, the US overall homicide rate was over 8 per 100,000. Somehow, we lived through it. This isn't to say that homicide is not a serious problem in Mexico. It's just important to have perspective.

Where people live in Mexico:

And just as a final note, it's interesting to see that drug murders often come along with higher GDP per capita. Are the two related? In some ways yes, because the same factors behind the international trade that makes northern Mexico wealthier are also important factors to international drug runners: 

Unemployment Rates in Colorado Metro Areas Keep Falling

Through October, the overall trend in unemployment rates for Colorado metros remain downward.

For October 2015, the unemployment rate for each metro area in Colorado (according to the Colorado Department of Labor and Employment) was:

Boulder: 2.7%
Colorado Spr:3.9%
Denver: 3.1%
Fort Collins: 2.8%
Grand Junction:
Greeley: 3.2%

This numbers are remarkable low, and I discourage comparisons with unemployment rates in the current cycle to unemployment rates of past cycles. Declines in work force participation are a significant factor in determining the unemployment rate. Nevertheless, these rates are quite helpful; in comparing geographical areas.

Historically, the best job markets have been in Boulder, Ft. Collins and Denver. Greeley has recently joined that group thanks to oil jobs:

Unemployment, as expected, is a bit higher in the lower part of the state. Pueblo rather consistently has the highest unemployment rate among Colorado metros, but all areas have seen big drops since 2010.

Compared nationally, Colorado enjoys a very low unemployment rate, as can be seen in this data from the US Bureau of Labor Statistics:
Nationwide for October 2015, the unemployment rate was 4.8 percent, compared to 3.3 percent for Colorado. Colorado's unemployment rate situation has increasingly improved relative to the nation overall over the past year. In other words, the job market in Colorado is getting better faster than in the US overall. This likely has implications for the overall demand for real estate here.

All data used in this article is not seasonally adjusted.

Saturday, December 12, 2015

Apartment Vacancy Rate Rises to Five Percent in Metro Denver

According to the Multifamily Vacancy survey from the AAMD, the vacancy rate for the third quarter in metro Denver was 5 percent. That's up from 3.9 percent during the third quarter of 2014. And it's also up from 4.5 percent during the second quarter of this year.

It's unlikely that this is a seasonal softening, as the third quarter tends to be one of the tightest quarters of the year in terms of rental housing. We can expect further softening during the fourth and first quarters coming up.

Five percent is what the report's original author, Gordon Von Stroh, used to call "the equilibirum rate," since it's the rate at which you wouldn't say that the market is either tight or soft. This is a change from most quarters in the last two years, though. One would certainly say that a vacancy rate of 3.5 percent is indeed a tight market, as was clearly the case last year. There does appear to be real softening in the market right now, though:

Note that the third quarter's rate of 5 percent was the highest rate recorded in six quarters. 

I like to compare the vacancy rate to the unemployment rate as well, since there has historically been a connection between the two. Naturally, a hot job market tends to lead to a tight rental market since more people can afford to go out and found a new rental household without the need for roommates. Thus, more households are created and more units demanded. We can see the two curves move together in most cases. 

 Thanks to sustained population increases in the metro Denver area over the past decade, the rental market tightened after 2010 even in the face of a very lackluster job market. As the unemployment rate declined, the vacancy rate moved quickly toward some of the lowest rates ever recorded.

The metro Denver vacancy rate rarely falls below 4 percent. Whether or not the current tight market can be sustained remains to be seen, however. As we'll see in other data, median household income growth in Denver has not been robust in recent years, and this will tend to put a damper on multifamily demand as people take on roommates or share quarters with other families. 

Metro Denver's Inflation-Adjusted Rents Hit An All-time high This Year

New third-quarter average rent data came out for metro Denver last month. The average rent hit a new all-time high during the third quarter of 2015. During the third quarter, the average rent in metro Denver, according to the Apartment Association of Metro Denver's vacancy survey, was $1,291. That's up from the third-quarter 2014 average rent of $1,145:

Year-over-year, the third quarter saw one of the largest growth rates ever recorded. During the third Q of 2015, the YOY change was 12.7 percent. That's down slightly from the second quarter's all-time highest growth rate of 13.2 percent:

Although this graph only goes back to 1988, we'd still find that recent YOY growth is the highest ever, even if we go back to the earliest data recorded by this survey (which was in 1982). We can safely say that we're now experiencing the highest levels of rent growth seen in thirty years. 

But what if we adjust for inflation? Is the rent really at an all time high? The answer is yes.  In this graph, I've adjusted the average rent data so that everything is in constant 2015 dollars: 

When we adjust for inflation, we find that real rents were fairly high even by today's standard during 2000 and 2001. Back in the 4th quarter of 2000, real rents had peaked at $1,085. They would not reach that level again until the 4th Q of 2013. Since then, rents have been regularly reaching new all-time highs. 

Also note that rents were going down in real terms between 2001 and 2009. Those were the days when, in real terms, your rent actually went down when you renewed your lease. For now, renters are facing some of the biggest rent growth ever, both in nominal terms and in real terms. 

This data is for multifamily rentals only. "Multifamily" means structures with more than four units. 

Friday, December 11, 2015

It's Not Only a Supply Issue: Oil Price Falls to 35 Dollars per Barrel

According to the LA Times, the US crude slumped to $35 per barrel this week, "the lowest price since early 2009."

Up through last week, the West Texas Intermediate Crude price had fallen to 40 dollars per barrel, putting it close to the sorts of prices we saw during the dark days of the last recession. If this week's trends keep up, we'll be headed back to ten-year lows in oil prices:

Source: US Energy Information Administration

A year ago, the oil price was more than 30 dollars per barrel higher, and came in around 70 dollars, although by that point, the price had already tumbled from a price of 105 dollars that had been reached during mid-2014.

The 2014 prices were not as high as they seemed, given the effects of price inflation. If we make a  mild adjustment based on the official CPI data, we find that 2014's peak levels had really only been matching the prices we saw during the early 80s. Those prices are indeed near historical highs, but the decline since then has not taken us down to historically cheap gas in real terms (in 2015 dollars):

Source: US energy Information Administration and Bureau of Labor Statistics
Even with today's relatively cheap gas, we're still looking at real prices that are above the good ol' days of the 1990s.

Nevertheless, prices are no longer what they need to be to sustain much of the shale oil industry. As Retuers reported yesterday:

Drained by a 17-month crude rout, some U.S. shale oil companies are merely hanging on for life as oil prices lurch further away from levels that allow them to profitably drill new wells and bring in enough cash to keep them in business. 
The slump has created dozens of oil and gas "zombies," a term lawyers and restructuring advisers use to describe companies that have just enough money to pay interest on mountains of debt, but not enough to drill enough new wells to replace older ones that are drying out.
Meanwhile, CNBC reports that the energy sector became the biggest "job cutter of 2015." It was only 18 months ago that we were still hearing about how oil jobs — and especially shale oil jobs — were going to save us from any serious downturn in jobs.

Moreover, much of the nation's economic growth was coming from a handful of oil-rich states, including Texas, Oklahoma, and Colorado, among other places. It's not a coincidence that the BEA reports the highest GDP growth in 2014 in California, Texas, Oklahoma, North Dakota, and a few other Western States.

Those areas may now be in trouble, and national GDP will suffer the more oil rigs go dark. Texas has been the salvation of the nation's overall jobs-gains totals in recent years, as Texas's size and oil-based wealth has made the national numbers look much better than they would have without Texas. But the statisticians at the BEA and BLS may not be able to rely on Texas much longer. The Arkansas Democrat-Gazette reports:
Unemployment in Texas may surpass the national rate in the next year for the first time since 2006, according to Prestige Economics, JPMorgan Chase and ING Bank. Texas is already experiencing a "rapid deceleration" in job growth to just a third of what it was last year following a slump in oil prices, said the Wood Mackenzie consultancy group.
Perhaps in an attempt to put a silver lining on the matter, many continue to cling to the belief that the collapse in oil prices is driven almost entirely by excess supply. In other words, we're being told that there's still plenty of good hearty demand out there, it's just that we extracted too much oil.

If it's just a problem of too much oil supply, the thinking goes, then there's not all that much to worry about because people will take all the money they saved on gasoline or fuel and spend it somewhere else right away.

However, The Wall Street Journal admitted yesterday that this doesn't seem to be happening. The subtitle reads: "Experts expected the drop in gasoline and oil prices would jolt spending by U.S. consumers and businesses. It hasn’t turned out that way."
It hasn't worked out that way because demand is much weaker than the "experts" are willing to admit. As I noted here earlier today, median income and wages are lackluster at best, and there's little reason to believe that consumers are just itching at the chance to spend away any money they might save at the gas pump.

Like the owners of oil rigs, consumers have plenty of debt to deal with. Or they may be realizing that their incomes aren't going to go up as much as they hoped. Or they may just be uncomfortable enough about the future that they're saving a little more than usual.

In other words, some individual households may be doing the right thing. By saving and cutting back on spending, they're imposing a temporary "recession" and temporary drop in their standard of living on themselves at the household level to make up for some past malinvestments. This would especially be true of people employed in energy-related fields or other bubble industries. They made a mistake by investing their time, labor, and energy into an industry that was really based on malinvestments stemming from what David Stockman calls the Fed-money-fueled Wall Street Casino. When enough households do this, the overall economy will go into recession which — if left alone — would repair the economy.  The Fed, however, will do everything in its power to keep that from happening. If the energy sector will no longer do the trick, the Fed will find some other sector to flood with money, just as the housing bubble replaced the dot-com bubble beginning in 2002.

Yes, all things being equal, falling oil prices would free up funds for other types of spending. But when there are larger economic headwinds at work, a little freed-up cash in one place may not be enough to overcome the global malaise. The WSJ article gives a perfect example of the complexity of markets right now:

Beef ‘O’ Brady’s, a restaurant chain based in Tampa, Fla., saw sales rise late last year thanks to cheaper gas, said Chief Executive Chris Elliott. But the momentum waned, especially in the factory-heavy Midwest. “The restaurant industry seems to be slowing,” he said, though lower prices for beef and other ingredients have “helped firm up” profit margins.
It may be too little too late.

As Mark Thornton noted a year ago, large drops in the oil price tend to accompany economic downturns. They don't cause the downturns of course, but there's good reason to be extra cautious before declaring that a dropping oil price is going to be followed by a boon to new consumer spending. It rarely happens that way. In fact, a big drop in the oil price is often followed by some very bad economic news. 

Wednesday, December 2, 2015

World Bank: Extreme Poverty Worldwide Has Plummeted

The World Bank recently announced that the world had reached a new milestone. Extreme poverty, the Bank explained, is likely to dip below 10 percent worldwide for the first time in 2015.

Extreme poverty, according to the WB, is a situation in which a person lives on an income of less than $1.90 per day. In other words, we're talking about real, grinding poverty, and not a lifestyle at the poverty line in America where the poor have cell phones and air conditioning. In other words, this measure of poverty isn't a relative measure, as is often used by the UN for measures such as its child poverty report.

According to the Bank:
The World Bank projects that global poverty will have fallen from 902 million people or 12.8 per cent of the global population in 2012 to 702 million people, or 9.6 per cent of the global population, this year.

We must note that richest countries of the world have already eradicated extreme poverty. There are not people who live on $1.90 in the US, Canada, Australia, or Western Europe. These countries simply do not contain more than a negligible number of people who live in mud huts, walk miles a day to get clean water, and have no access to modern health care. Even in Eastern Europe, where Soviet-style socialism persisted into the 1990s, we rarely find a population with more than 1 percent of the population that endured extreme poverty levels.

So, we look to Latin America, Asia, and Africa to find the populations that continue to endure under conditions of extreme poverty.

All data is from the World Bank and reflects data collected over the twenty years from 1992 to 2012, the last year that data is published. Worldwide during that period, extreme poverty fell from 34.7 percent to 12.7 percent.

Latin America is the least poor of the regions outside the wealthy west and Eastern Europe. The largest countries in Latin America have all been well below the worldwide rates for extreme poverty over the past twenty years:

In addition to seeing that Latin America has lower poverty in general than the world overall, we also can note that there has been substantial improvement in the twenty-year period. In Mexico during this period, extreme poverty dropped from 9.7 percent to 2.7 percent. Extreme poverty dropped even further in Brazil where the rate fell from 20.8 percent to 4.9 percent. In Columbia, the drop was smaller, but remained on the right track, with extreme poverty dropping from 8 percent to 6 percent.

Conditions are considerably worse in southern Asia and southeast Asia where extreme poverty rates exceeding 40 percent can be found. Nevertheless, in these cases we also find profound improvement over the 20 year period. In China, for example, extreme poverty fell from 57 percent to 11 percent. In Indonesia, the rate fell from 57 percent to 15 percent. Some of the least amount of progress was found in Bangladesh.  But even , there, extreme poverty dropped by 20 percentage points from 63 percent to 43 percent. 

The worst situation, however, was found in Africa where overall extreme poverty rates were higher, and the least amount of improvement was seen.

Among the largest countries in Africa, we find that extreme poverty continues to plague large portions of the population, although significant improvement was experienced in South Africa and Ethiopia. In Ethiopia, from 1992 to 2012, extreme poverty dropped from 67 percent to 33 percent, and it fell from 32 percent to 17 percent in South Africa. 

Tuesday, December 1, 2015

Federal spending, state by state

The Pew Charitable trusts recently released new data up through 2013 on federal spending in the states.

If we look at federal spending as a proportion of each state's overall GDP, we find that the recipients are not exactly evenly distributed:

Source: Pew Charitable Trusts  (based on data from 2004–2013)

This is all federal spending, so these totals are a combination of military spending, social welfare programs such as Medicare, and ordinary civilian federal spending, including civilian research facilities and other programs funded by federal grants.

These are proportional numbers, so they are a function of both the amount of federal spending as well as the overall size of GDP. So, in California, for example, which receives immense amounts of government spending, is nevertheless a state where federal spending is offset by a very large private sector. In a more rural state with few major private industries, such as New Mexico, the state shows up as being highly reliant on federal spending.

By this measure, the state most reliant on federal spending is Mississippi where federal spending is equal to 32 percent of the state's GDP. The state least reliant on federal spending is Wyoming where federal spending is equal to 11 percent of the state's GDP:

Source: Pew Charitable Trusts  (based on data from 2004–2013)

The above measure gives us a sense of how much federal spending is taking place relative to overall economic activity. But, it tells us little about how much the feds are spending in each state relative to the tax revenue being produced in each state.

To discover that, we need to compare federal spending to tax collections from each state. So, I took gross tax collection by state, and then subtracted refund totals. I then compared the "net" collections to Pew's total federal spending data in each state. (The tax data used was 2013 data.) We can then measure the result in terms of dollars spend in each state per dollar in tax revenue collected. States that have a value of less than a dollar in the map below receive less than a dollar in federal spending for every dollar in taxes paid from that state. So, for example, Ohio receives 91 cents in federal spending for every dollar collected in taxes from Ohio:

I've divided this graph up into "net tax payer states," "break-even states" and "net tax receiver" states. The lightest shade of blue are states that, by far, pay in more than they receive back, such as New Jersey and Minnesota. The next lightest shade of blue are states that are more or less "break even" in the sense that spending and tax collections hover somewhat around a 1-for-1 relationship. The darker blue states are states that receive considerably more in federal spending than they pay in taxes.
Here are all states, including values:

Naturally, these values aren't spread evenly within the states themselves, either. Areas that are more rural and reliant on agriculture will tend to be net tax receiver areas both because farmers and ranchers receive a lot of government subsidies, and also because agricultural work tends to have lower productivity than urban work.

Urban areas, in contrast, produce most of the tax revenue, so highly urbanized states will tend to more often be "break even" or "net tax payer" states.

Other Considerations

One thing that must not be ignored is the fact that the US government spends more than it takes in nationwide. During 2013, for example, the federal government spent a dollar for every 80 cents it took in via taxes.

Nationwide, the tax-spending ratio is not one dollar, but it about $1.20. So, states that are getting around $1.20 back for every dollar extracted in taxes are really just at the national average.
This is being made possible by old-fashioned deficit spending and also by monetization of the debt which the Federal Reserve facilitates by expanding the money supply. Once interest rates rise or the international value of the dollar begins to fall significantly, this sort of overspending will no longer be possible, and many states will find themselves in dire straits. (States that are "net tax payer" or "break even" states will adjust the best to any significant disruptions in federal spending.)

Friday, November 13, 2015

Government Shutdown Averted: Record-Breaking Spending to Continue

Republican Congressional leaders and President Obama recently agreed on a two-year budget deal. And in case you were worried, rest assured there were not any significant cuts to any government program.

Oh sure, there will be spending increases for some programs, and cuts for others, but the total amount spent is only going up with minimal changes to the big picture. Some of it will be covered by tax revenues, but about half of it will be covered, yet again, by an increase in debt. The Brookings Institution notes:
The second problem is that the lubricant Congress used to enact the deal was money it doesn't have. Thus, according to CRFB, all the spending in the deal cost $154 billion but the offsets in the bill amounted to only $78 billion. Thus, the true net cost of the bill, excluding budget gimmicks, was $76 billion. As always, the money will be obtained by additional borrowing, thereby increasing the nation's debt.
So, more than $150 billion will be spent, with 76 billion of that added to the national debt so future taxpayers and pay the principal and interest.

Moreover, much of this undoes the alleged "cuts" that were in the earlier sequestration. Remember when we were promised that government spending would be reduced over time thanks to the sequester? Pay no attention to that sort of thing. Nowadays, we have what's called "sequester relief" also known as "more spending."

All of this comes after several years of astronomically high government spending that came in the wake of the 2008 financial crisis, so to claim in any way that there have been anything resembling "cuts" in any context that extends beyond a single fiscal year strains the boundaries of credibility.

After having already driven through a massive expansion in Medicare for prescription drugs in 2003, George W. Bush kicked off an even bigger expansion in late 2008 with TARP and other enormous increases in fiscal "stimulus." Obama has been more than happy to keep us on that plateau:

Now, you're likely to read a lot about how this program was slashed, or that program was "cut," in the latest budget deal, but there's certainly no danger of overall spending going down.

Thanks to the way things work in DC, every new budget deal involves a lot of logrolling where some politicians promise to support new spending, while other politicians agree to cuts. This is done in the context of promising support for some other political favor on some other part of the budget or on future legislation. Everyone understands that in the big scheme of things, there's no political will to cut much of anything.

After all, where would anyone make any actual budget cuts? Let's look at where most of the money is spent. Here's the 2015 breakdown:

Source: Office of Management and Budget, Table 5.1

There Is No Public Support for Spending Cuts
It's hard to see where any of these cuts could come, politically speaking. When many people gripe about government spending, it is often a safe bet that they are really only complaining about spending that goes to programs they don't like.

For example, lopsided majorities of Americans oppose any cuts to benefits in Social Security or Medicare, which combined make the single biggest government expense.

In fact, in 2013, when Pew surveyed Americans as to which government programs should be cut, lopsided majorities opposed any cuts to Medicare or Social Security. When asked what programs should be cut as part of budget negotiations in DC, 87 percent of respondents opposed cuts to Social Security, while 82 percent opposed cuts to Medicare. (The popularity of these programs extends across Republicans, Democrats, and unaffiliated voters.)

If Social Security and Medicare are off limits according to 80 percent of the population, that puts 36 percent of the budget off limits right away. And unless the US plans to default on its debt, the government is locked into another six percent on top of that. (When interest rates start to go up, that six percent will get a lot bigger.)

So where to cut? Perhaps, we could cut defense? According to Pew, 73 percent of those polled are opposed to cutting defense. That puts another 23 percent off limits, so we're now up to 65 percent of the budget that few want to cut. Pew reports that 71 percent of Americans are opposed to cuts in "aid to needy" (i.e., Medicaid, TANF, etc). That leaves us with cuts to highway funds, scientific research, and other forms of discretionary spending. Those programs are all popular too.

Indeed, the least popular programs, those which more than a third of those polled would like to cut, are the State Department and Foreign Aid. Unfortunately for deficit hawks, those two programs combine for a paltry sum of 38 billion dollars. In other words, only one percent of the budget is ripe for cutting. Good luck getting the government budget under control.

Again, there are no significant cuts planned, but even if there were, they would come after years of substantial expansion. If we look at the three biggest areas of spending (defense, poverty programs, and entitlement spending) we'd see plenty of growth over the past decade (in constant 2009 dollars, millions of $):

Source: Office of Management and Budget, Table 5.1

Many critics of growing government spending like to imagine that everything's being driven by spending on poor people, but it's not. In fact, spending on poverty programs barely outpaces spending on the old-age programs Medicare and Social Security.

Over the past yen years, Social Security and Medicare have grown 43 percent. Meanwhile, programs aimed at the poor, such as Medicaid, the earned income tax credit, food stamps, and others, grew 48 percent over the same time period.

Defense spending, which is also near historic highs, grew 11 percent over that time.

Poverty programs will see increases in coming years as Obamacare subsidies increase, but spending on Medicare is likely to accelerate as well. While Social Security may be topping out, retirees are likely to continue receive more back in Medicare benefits than they paid in. Indefinitely.

Of course, if Republicans manage to gain control of the White House and expand control of Congress, we'll likely see cuts to poverty programs. But those cuts will be matched by more military spending, and we'll see no overall decline in spending. Medicare will continue to expand.

Deficits Make It All Possible

Although it is abundantly clear that few want to see any cuts to government programs,  most can agree that they don't want any new taxes.

So, if the voters want more spending, but no tax increases, how will the new spending be possible?

Fortunately, we can just add it to the deficit! People used to worry about the deficit, but those days are gone. Now, we can just keep the Medicare and Obamacare cash flowing, and it's no problem, because we can just borrow:

Thanks to the American love of charging current spending binges to future generations, the 2015 deficit was 438 billion — which is an improvement over the years of 2009-2012 when the deficit topped a trillion dollars each year — but deficits year after year have added up to a total government debt of 18 trillion dollars:

A little trimming of one program here or another program there is nothing more than window dressing.

So far, thanks to a continued demand for US debt globally, and thanks to partial monetization of the debt through the Fed, the feds (with the approval of the voters) can continue to pretend that the binge can go on forever.  As long as the central bank continues to successfully play the game in which interest rates for US government debt remain low, it will continue to be relatively painless for the US to rack up huge deficits and debts. Certainly, other large economies in the world are doing the US a favor by being even more debt-ridden and fiscally unpredictable than the US. So, US debt looks relatively attractive.

When the Spending Binge Ends

However, when the day arrives that US debt suffers from declining global demand (whether for economic or geopolitical reasons), maintaining the spending spree will suddenly become a lot more expensive. That 6 percent of the federal budget will get a lot bigger, and programs like Medicare, Medicaid, and Defense will all be faced with significant cuts to service the debt.

Americans do not want to see any cuts to any of their favorite programs (which is all of them). Thus, the political will to cut budgets will never come domestically. It will be forced on us when foreigners begin to dump US debt and force up its price.  In other words, the decision to slash benefits will be made for us by global investors.
Graphs by Ryan McMaken.

Thursday, November 12, 2015

A Better View of Poverty Rates: We Must Consider the Cost of Living

This week a number of wire services picked up a story in which states are ranked according to which states are the "most expensive states to raise a family." The list, which was created by a private company to drive web traffic to its site, attempts to quantify the cost of raising a family by factoring in government mandated family leave, the cost of child care, and other factors.

The use of mandatory family leave is rather novel, given that mandated leave raises the effective minimum wage for many workers, and thus negatively impacts the least-skilled workers the most.  Nevertheless, the list appealed to the common-sense notion that there's more to one's standard of living than a relatively high income. The cost of living is an important factor.

The US Poverty Rate Does Not Account for Local Cost of Living 

Given the importance of the cost of living, it is very problematic that the official poverty rate totals for US states do not take costs into account.

When measuring poverty rates internationally, poverty is just defined as households that make 50 percent or 60 percent of the national median income. Although these measures often attempt to take into account differences in the cost of living among different countries, measuring poverty this way provides its own set of problems. It simply makes poverty a purely relative measure, so we end up with a situation where purchasing power for a median household in one country (say, Portugal) is actually lower than a poverty-level household in another country (say, the US).

The US official measure, on the other hand, attempts to get around this problem by defining the poverty rate as an actual dollar amount based on what a household can buy. The federal government has set the poverty income at $24,250 for a family of four in 2015.

The problem is this dollar amount is applied nationwide and then used to calculate poverty rates. So, a household in Arkansas at this income level is deemed "poor" while a household in California at the same income level is deemed equally poor. However, the cost of living in much of Arkansas is quite a bit lower than in much of California.

If we fail to adjust for the cost of living, the poverty rate  map looks like this:

In this case, the highest poverty rate is found in Mississippi with a rate of 23 percent, with Arizona and New Mexico close behind at 21 percent and 19 percent, respectively. New York and California are a dozen states down the list with poverty rates 15 percent for both. (See here for full list based on 2009 calculations.)

Many have noticed certain regional trends here, and that has led to a myriad of articles claiming that so-called "red states" have higher poverty rates than the "blue states." In many cases, "red states" is really code for "low tax" or "free-market-ish" state. In other words, this map "proves" that low taxes and freer economies cause more poverty.

This might be a conundrum if it were not for the fact that this measure of poverty completely ignores the plight of low-income households in states where the cost of living is very high. The biggest offenders here are, not surprisingly, California and New York, where rents and the cost of living in general is very high.

The feds have long recognized the discrepancy here, and in the fine print have long noted that poverty rates should only be used as very general "guidelines" or measures over time. Comparisons among states are discouraged.

That doesn't stop pundits from claiming that blue states like California and New York have been successful in combating poverty through tighter regulation of business, and higher taxation.

If we adjust the states and poverty rates for the cost of living, however, the map looks a bit different:

In this case, the state with the highest poverty rate is California at  23 percent. Arizona and Florida are close behind with rates of 22 percent and 20 percent, respectively. New York has risen to sixth place with a poverty rate of 18 percent, while Mississippi has fallen to eighth place with a rate of 17 percent.

Here we see our bias-confirming assumptions no longer seem to apply since  no correlation is apparent along the lines of the red-state/blue-state claims. Right-wing Indiana, at 15 percent, is more or less equal with left-wing Illinois, while Mississippi and New York, with widely divergent public policy regimes, also have similar poverty rates. (See Table 3.)

Obviously, we have to look somewhere beyond our neat-and-nice ideas about red states and blue states to come up with an explanation.

Of course, poverty can be a function of so many things, that it's impossible to generalize. Public policy is certainly a factor, but so are cultural factors, access to capital, the transportation infrastructure, and more. Some states are influenced by the presence of Indian Reservations (such as Arizona) where local economic policy is more influenced by federal law than state law.

But most of the discussion about "rich states" and "poor states" has long been skewed by the fact we tend to ignore cost of living.

As a final illustration, we can look at median incomes from each state. The median income figures put out by the census bureau do not account for regional "price parity."

Using just the basic median income numbers from the Current Population Survey, we get this:

The US median income is $51,849, and many high-cost states come in well above this, with Hawaii at $59,244 and California at $57,688.  Meanwhile, Mississippi and Louisiana come in at $39,011 and $39,637, respectively.

State median incomes vary by as much as $31,000, with New Hampshire coming in at $70,063 which is $31,051 higher than Mississippi.

But once we adjust incomes for price parity, we find that many of the high-income, high-cost states fall quite a bit in the list:

First, we notice that this compresses the variation in median incomes. The difference between the highest-income state (New Hampshire at $66,159) and the lowest income state (Louisiana at $43,462), shrinks to $22,697.

We also notice that New York now has the second-lowest median income in the country, right between Louisiana and Mississippi. New York now has a real median income of $44,326, while Mississippi has a real median income of $44,944. California and Hawaii fall from being near the top of the list to below the national median income, with median incomes of $51,369 in California and $50,984 in Hawaii.

Basically, the purchasing power of a median household in New York or California is much lower than has been traditionally suggested.

This is also important to keep in mind when comparing US median incomes and poverty rates to foreign countries. Much of the US is very inexpensive in terms of cost of living and well below northern Europe, New Zealand, Australia, and even Canada.
Maps and graphs by Ryan McMaken.

Monday, October 19, 2015

Is Living-at-Home an Indicator of the Standard of Living?

In this article, I noted that median incomes — even when adjusted for cost of living, taxes, and social benfits — are higher in the United States than in Europe. What's more, Americans at poverty level (i.e., 60% of national median income) have more purchasing power than median-level households in many European countries.

But what are some outward indications of this? The UNICEF report on childhood poverty, for example, attempts to quantify the effects of poverty by asking extremely subjective questions like "Did you feel stress this week?" and using the answer to compile a type of index. The problems with indicators such as these should be obvious, since "stress" can mean any number of things.

But let's try for a somewhat more concrete manifestation of a low standard of living: adults living with parents.

In the US, at least, it's been long accepted that new household formation is an indicator of the state of the economy. Specifically, it is assumed that young people who can find gainful employment will be able to move out of their parents' homes more quickly, and also potentially find spouses and/or have children sooner. Economic factors are generally blamed on trends in living at home, as with the discussion about the "boomerang effect" during the most recent business cycle.

This has been the case historically in the US as the marrying age of Americans has fluctuated over time and geography with the availability of land, which was a key factor in economic self-sufficiency in an agrarian setting.

It appears to have been an important factor in Europe as well, since in pre-industrial times, there was little land available for purchase or settlement — and even less in the way of manufacturing jobs — and adult children often had to wait to simply inherent the family lands rather than attempt to find a new household.

So what percentage of adults ages 25-34 still live with their parents nowadays? According to Eurostat, the percentage of adults in this group that still live at home varies substantially from country to country:

The US numbers are from the Census. (Men tend to live with their parents in much larger percentages than women, by the way.)

The percentages here swing quite a bit between 57 percent in Slovakia and Denmark at 1.4 percent.

It's reasonable to accept that cultural factors may be at play here.  Clearly, living at home with one's parents appears to be frowned upon more in Scandinavia than in other rich countries of similar median income levels.

Nevertheless, if we do plot the living-home numbers against median disposable income, we do see a pretty clear correlation:

The countries where the median household has more purchasing power have fewer cases of adult children living with parents. Few should be surprised to find Greece and Portugal up in the top left of graph, for example. Almost all countries with median incomes above $20,000 have living-at-home percentages below 20 percent, while almost all countries with median income below $30,000 have living-at-home levels above 30 percent.

While it's not a perfect proxy for household purchasing power, the percentage of adults that continue to live at home in the prime family formation years does give us some insight into the real-world implications of the fact that real disposable income is lower in most European countries than it is in the United States.

A note on the data: This is all 2013 data, except for Turkey, which is 2007 (the most recent available.) The US data matches up with the Euro data on the age of the adults measured (i.e., 25-34), although in the case of the Euro data, it includes married or cohabiting adults children living with parents. These people are excluded in the US data. Fortunately for us, though, the percentage of people living at home who were also married or cohabiting is under 5 percent

Tuesday, October 6, 2015

Metro Denver: Average Apartment Rent Growth Sets New Record During Second Quarter

Third quarter multifamily vacancy and rent data will be coming out in a about a month, but let's have a closer look at the second quarter's numbers. If current trends are any indication, the third quarter — which tends to be the strongest quarter of the year for multifamily — will be another period of low vacancies and high rent growth.

The first graph shows the overall apartment vacancy rate in metro Denver through the second quarter of this year. The rate was 4.5 percent for the second quarter. that's down from the first quarter rate of 4.9 percent, and down from 4.7 percent during the second quarter of 2014. So, vacancies are low, given that 4 percent is pretty much as low as the vacancy rate ever goes in the metro area. From a tenant perspective, it's about as easy to find an apartment now as it was during the final days of the dot-com boom:

And when vacancy rates get low, we generally expect rent growth. But this time around, we're seeing some of the largest rent growth we've ever seen since the survey was first initiated in the early 1980s. The average rent in metro Denver during the second quarter was $1,265, which is the highest rent ever recorded in nominal terms. It's also the highest rent ever recorded in real terms, but I'll have to adjust the rents for inflation in a future post. The current acceleration in rents outpaces the 1990s:  

In fact, the past three quarters, when measured in year-over-year comparisons, show by far the largest YOY growth in rents ever recorded.  The second quarter's average rent of $1,265 was up an enormous  13.2 percent from the second quarter of 2014 when the average rent was $1,117. The YOY increase was over 12 percent for both the fourth quarter of 2014 and the first quarter of 2015:

Thanks to continued in-migration and a relatively small amount of new single-family construction, multifamily housing remains the most feasible option for many households. Those seeking affordability will move outward from the urban center to more affordable C-class units in further out neighborhoods. Some households will double up or take on roommates. 

The population growth data, though, won't come in for a year after the fact, so it's hard to know to what extent a lack of affordability is impacting in-migration at this time.

Compared to to other markets, the Denver market is experiencing some of the highest rent growth rates in the nation. But, of course, rent level remain well below those in San Francisco

Note: The report also tracks median rent, although, at this time, there is no significant difference in the trend between median rents and average rents. the median rent during the second quarter of 2015 was $1,225, which was up 14.7 percent from the 2nd Q 2014 median rent of $1,067. The median rent during the first quarter of 2015 was $1,203.

Thursday, October 1, 2015

Colorado One of the Best States for Property Tax

This map from the Tax Foundation shows that Colorado has some of the lowest property taxes in the nation:

This should not be interpreted as a proxy map for which states have the lowest overall tax burden, for example. Note that Texas has relatively high property tax. But, Texas has no income tax so there's little we can discern about taxes in general from this map.

But when thinking about property taxes, it is useful to note that property taxes are especially damaging to people on fixed incomes like retirees and disabled people. Old people with low incomes, for example, would do fairly well in a state with high income tax and low property tax. But if property taxes are high, those seniors would get pummeled by repeated increases  in the property tax.

Wednesday, September 30, 2015

Denver Continues to Outpace the Nation in Latest Case-Shiller Home Price Index Data

Case-Shiller released new home price index data for July this week. As has been the case since 2012, the data shows continued increases in home prices. The first graph shows the index value for both the nationwide 20-city composite index, and the metro Denver index:

While the trend has clearly been upward in recent years, we are now seeing that a plateau has been hit in both the Denver metro area and in the composite index. Of course, the metro Denver plateau around ten percent points to continued strong gains in prices, and is a reason for current homowners and landlords to be happy. first time homebuyers, on the other hand, have less reason to be happy. 

At the national level, though, the composite index suggests more of a cooling in the market. Growth rates are clearly down from where they were back in 2013, and outside of Denver and San Francisco, price growth has moderated throughout many of the cities covered in the index.  Index growth is now flat around 5 percent, and has been so since last September. With interest rates at historic lows, this further suggests an inflexibility in the market that refuses to take off in spite of high accomodative monetary policy. 

In Denver, however, in-migration continues to drive strong price increases, though. The second graph compares the rate growth of the composite index and the Denver index.  Denver is clearly outpacing the nation overall.

Note also that the 2-city composite index is still below its former peak level. July 2015's index number was still 11.9 percent below the peak level, reached during July 2006. Metro Denver's July value, however, was well above its former peak and is at an all-time high. During July, the metro Denver index was 22.1 percent above the 2006 peak achieved during August 2006.

Thursday, September 24, 2015

Comparing Whole Countries on Murder Rates Is Often Misleading

We often see the United States compared to a variety of other countries in terms of life expectancy, murder rates, and more. But, it's a bit dishonest to compare a country the size of Portugal, for example, with the United States.Portugal has ten million people and is not geographically diverse. The United States has more than 300 million people, and is extremely diverse in its geography.

So, it makes much more sense to compare the particular states within the US with foreign countries, and most people tend to underestimate the diversity in factors such as life expectancy and murder rates among states.

For example, the murder rate in Oregon (2.0 per 100,000) places it about 160th among 218 countries measured. That's quite low, and well below the US overall rate of  4.7 (per 100,000), which places it at 91st in the world. In other words, there are many places in the US that are well below the national murder rate, including Iowa, Wisconsin, and Colorado. If we were use this more detailed analysis, we would find that, in spite of claims that the US is a relatively high-crime country, much of the US is actually quite moderate, or even low, in this regard.

Were we to do this, we would then be asking ourselves not why the US murder rate is what it is. We would be asking ourselves what it is about Maryland, Louisiana, and South Carolina that are driving up the US murder rate.

Indeed, this should be done for other large countries as well. Mexico is a large country, so it's of little value to simply speak of the murder rate in Mexico as high. The question is this: where is the murder rate high in Mexico?

If we look at this analysis from The Economist, we find that the murder rate in much of Mexico is on a par with Costa Rica and the Bahamas.  And almost no one ever says "don't go to the Bahamas, or you'll be beheaded!" The perception of Mexico is as a high-crime area, and the Bahamas are seen as a serene place to vacation. But the answer is really more complicated than that.

The murder rates in Mexican states vary so widely that Yucatan state has a murder rate equivalent to the very low-crime country of Finland, while Chihuahua state has a rate equivalent to El Salvador, one of the alleged murder capitals of the world.

And if you want to take a vacation soaking up some sun in Cabo? No problem, amigo, because the murder rate in Baja California Sur is lower than the murder rate in Texas.

The overall murder rate is 18, but note the diversity:

 Source: The Economist.

And here are two wonderful maps I came across, which appear to be from an earlier version of the UNODC Global Study on Homicide.  Russia is another case where it's obviously useless to talk about the country-wide murder rate.