Which Is Better, Weak Currency Or Strong?

The field of economics is characterized by many brilliant insights about human behavior, combined with almost as many preposterous fallacies that somehow get widespread acceptance.  Like the idea that the way to improve a sluggish economy is to have the government borrow huge sums of money and waste it on unproductive projects -- how could anyone actually believe that?  (OK, it helps that the government puts out fake data that value wasteful projects as fully equal to productive projects.  But I digress.)

Right up there with that one is the idea that currency devaluation improves a country's economic position relative to others.  Suppose I put the issue this way:  Should the goal of a country's economic policy be to enrich the people of the country or to impoverish them?  Put in those terms, I would hope that most everyone would agree that the goal should be to enrich the people, and certainly not to impoverish them.  If a country that imports 20% of its consumption from other currency areas has its currency appreciate 10% relative to the other currencies, then its people just got 2% richer; and if its currency depreciates 10%, then its people just got 2% poorer.  Obviously currency appreciation is better.  What's so complicated about that to understand?

And yet we all know that in the 1930s world governments engaged in successive currency devaluations to try to improve the economic standing of their own country relative to others.  You may have thought that that era had passed.  No, it's back.  Today seemingly every major currency area is engaged in a game to drive its currency down -- Europe, Japan, China.  The ECB has just launched a big "QE" program, and suddenly the euro has had rather a dramatic decline against the dollar over the last several weeks.  And the big question is, should the U.S. be following suit?

Of course, the usual economic fallacists are popping up to advocate for competitive devaluation by the U.S.  As always, the leader is Official Manhattan Contrarian Worst Economics Writer Paul Krugman, with a column on March 13:

Who wins from this market move [of the declining euro]? Europe: a weaker euro makes European industry more competitive against rivals, boosting both exports and firms that compete with imports, and the effect is to mitigate the euroslump. Who loses? We do, as our industry loses competitiveness, not just in European markets, but in countries where our exports compete with theirs. America has been experiencing a modest manufacturing revival in recent years, but that revival will be cut short if the dollar stays this high for long.  In effect, then, Europe is managing to export some of its stagnation to the rest of us.

Well, of course certain export industries benefit from a declining currency, but obviously they are a minority of any economy and the people as a whole are hurt.

In the category of people who can usually be counted on not to fall for fallacies, we have Megan McArdle of Bloomberg News, who also comes out (on March 12) for the benefits of a weaker currency.  Megan sees the positive of a weak currency in "export[ing] more than we import" because of the "importance of work" to our lives.  Huh?  There's no inconsistency between a hard currency and full employment.  In fact, it doesn't take much looking at world economies to figure out that the most successful ones have consistently strong currencies and really low unemployment.  Switzerland -- now there's a strong currency!  Sure the exporters complain every time the currency goes up, but somehow they always figure out that they still have a comparative advantage in something.  The unemployment rate has ranged between 2.9% and 3.5% over the past year.  Or Singapore.  There the unemployment rate is barely 2% and you have to pay about $80,000 per year to hire a hotel maid.

And then there are the economies where the currency is not just declining, but collapsing.  Russia and Venezuela come to mind.  Do they really represent models to emulate?

Can New York Ever Have A Normal Housing Market Again?

I've been spending the week in the area of Sarasota, Florida, and since I can't help myself I've been sizing up what the housing market looks like.   Of course the big historical event in the market here -- as in much of the rest of the country -- was the overbuilding up to 2006, followed by the bust of 2007.  According to this HUD report from 3Q 2013, the rental vacancy rate in this area was 10% as recently as 2010, but had dropped steadily to about 4% at that time.  New construction has resumed at levels more modest than at the peak.  Look on real estate web sites for homes either for sale or rent, and you find availability at all price points.  What look like decent rentals can be had for as little as $1 per square foot per month (about $750 per month for a decent-sized one-bedroom apartment) and quite nice ones for $2 psf/mth.   For condos, there are plenty available around $300 - 400 psf (that's around $500,000 for a nice two-bedroom), and $1000 psf gets you a premium high floor place in one of the top areas or at the beach.

And they got there basically by just letting the builders build.  OK, there was a contribution of Fannie/Freddie to the overbuilding, and that may still have some depressing effect on prices.  It's not possible to know exactly how much the depressing effect is, if any.  My own suspicion is not much.  Today, supply and demand are fairly well balanced.

And then we have the Manhattan market, with the extreme special case of the West Village.  We have rent regulations persisting on the majority of rental apartments, landmarking almost everywhere and vociferous neighborhood opposition to any attempts to build anything new.  Result: there has been minimal new construction literally since World War II.  Today, there is huge demand for apartments, but there are exactly two large condo buildings under construction in about a full square mile.  One is completely sold out, although still many months from completion.  The other is called the Greenwich Lane, at 7th Avenue and 11th Street.  Here is its website.  It's got at least a year to go to completion, but has limited availability remaining.  A modest 1000+ sq. ft. two bedroom over there will run you about $4 million -- $3500+ psf.  I hope you are not expecting a view for that price.

Of course even this one building has had to face strenuous neighborhood opposition.  Below is a picture of our new Mayor de Blasio at a rally back in 2013 when he was a candidate, protesting replacement of the predecessor hospital with this condo.  

At $3500 psf, almost nobody can afford to buy these things.  With severe artificial supply restrictions, they have priced just about everybody out of the market.  But our local housing geniuses think they have the answer, which is "affordable housing."  The big news in the past week is that the City has a 25,000 sq. ft. lot available up at 11th Avenue and 39th Street (about a mile plus North of the West Village).  At current values it could be sold for market rate development for about $250 million.  But instead the local Community Board wants to require "affordable housing" to be built on the site, and instead of just selling the site to the highest bidder, they will "designate" a developer to build the "affordable" building.  With luck a couple of hundred families will get these apartments at a subsidy of around $2+ million per family.  The City will be very lucky if it gets even a small part of the $250 million it could so easily have.  

Meanwhile, look around for a rental apartment in Manhattan, and you will find that no market exists except for the very top end.  All the rent regulated apartments are claimed for life by the current occupants, and never become available.

UPDATE March 17:  Crain's New York Business reports today on a speech given yesterday by Carl Weisbrod, de Blasio's Director of the Department of City Planning.  Weisbrod of course stood up for de Blasio's plan to build 80,000 "affordable" units over the next 10 years, but also took the position that the real problem is cutbacks of federal money:

"For all our effort, even if we hit all our targets, we won't fully solve the housing crisis in the next decade unless there is a radical change in federal housing policy -- sadly an unlikely occurrence," he said.  Over the long term, the federal government has made cuts to several housing programs used by the city to create affordable housing, including funding to the New York City Housing Authority.

Funny, but in the Soviet Union they had a full-court-press effort to build nearly "free" apartments for the masses, and after 70 years of that they had 25 year waiting lists for tiny apartments.  Over at NYCHA we have hideous eyesore permanent slums housing half a million people.  A twenty year waiting list for the apartments never moves, and if you're "lucky" enough to get in you are trapped in the place in poverty for life.  And the buildings have a multi-billion dollar backlog of maintenance, and no money to pay for it because nobody pays much rent.  And all Weisbrod can think of is, more of the free federal money for more of same.  Hey Carl, how about the solution of just letting the builders build.  Sure works in Sarasota!

Full disclosure:  I actually had Mr. Weisbrod as a client 20+ years ago when he headed something called the New York State Urban Development Corporation.

With Venezuela Collapsing, They Still Can't Learn

The latest from Venezuela comes from the New York Times in a March 9 article by William Neuman titled "In Chavez, Maduro Trusts, Maybe to His Detriment and Venezuela's."  (I actually met Neuman once back when he worked for the Real Estate Section, and he is one of the few guys at Pravda whom I would trust to report a story on world economics relatively straight.)  Neuman describes a Venezuela "sinking deeper into an economic crisis," while its leader, Nicolas Maduro, doubles down on the very destructive economic policies that got the country into its predicament:

Faced with huge lines and shortages of basic items like corn flour or sugar, Mr. Maduro has jailed retail executives while steadfastly maintaining the price controls that many economists say cause the problem.

Neuman even quotes former economics officials of the Chavez regime who are critical of Maduro for not changing policies in the face of their glaringly obvious destructive consequences.  However, none of those officials say what they would do differently, or, God forbid, suggest trying a little capitalism.

Meanwhile, on the same day, a great article from Kevin Williamson at NRO on the same subject, title "The Left's Mess in Venezuela."  This one definitely merits quoting at some length:

Venezuela had a good run of it for about five minutes there, at least in public-relations terms. When petroleum prices were booming, all it took was a few gallons of heating oil from Hugo Chávez to buy the extravagant praise of House members, with Representative Chaka Fattah (D., Philadelphia) issuing statements praising Venezuela’s state-run oil company “and the Venezuelan people for their benevolence.” Lest anybody feel creeped out by running political errands for a brutal and repressive caudillo, Joseph Kennedy — son of Senator Robert Kennedy — proclaimed that refusing the strongman’s patronage would be “a crime against humanity.” Kennedy was at the time the director of Citizens Energy, which had a contract to help distribute that Venezuelan heating oil. . . .  

So Venezuela had the good fortune to be sitting on a lot of oil reserves during a brief period when oil prices were high, giving it the momentary ability to create an illusion that socialism could work.  Things were already starting to fall apart even when oil prices were high a few months ago, but when the prices fell the crisis really hit.  Williamson then gets into quoting some of the endless list of leftist fools and dupes who fell for the Chavez illusion: 

Celebrities came to sit at his feet, with Sean Penn calling him a “champion” of the world’s poor, Oliver Stone celebrating him as “a great hero,” Antonio Banderas citing his seizure of private businesses as a model to be emulated in the rest of the world, Michael Moore praising his use of oil for political purposes, Danny Glover celebrating him as a “champion of democracy.” His successor, Nicolás Maduro, continued in the Chávez vein, and even as basics such as food and toilet paper disappeared the American Left hailed him as a hero, with Jesse Myerson, Rolling Stone’s fashionable uptown communist, calling his economic program “basically terrific.”  

And it goes on from there.  Thank you, Kevin, for calling these people (or at least a few of them) out.  All I can say is, there isn't nearly enough reporting coming out of Venezuela to keep in our faces how socialism inevitably ends.  But -- with my great apologies to the sad people who have to live in these places -- thank God we at least have Venezuela, and I guess Cuba and North Korea, to keep alive human memory of what happens when you try to pursue the socialist illusion.

And the ultimate question: Is it possible for human beings to learn these lessons?   Really, I thought when the Soviet Union fell that the socialist illusion would die with it.  Boy was I wrong!  Here are a couple of recent data points:

• A month ago on February 10, IBD reported on a January 22 speech at the annual Davos confab of U.N. climate pooh-bah Christiana Figueres (she's "Executive Secretary of the Framework Convention on Climate Change"), where she said, among other things, "This is the first time in the history of mankind that we are setting ourselves the task of intentionally, within a defined period of time, to change the economic development model that has been reigning for at least 150 years, since the Industrial Revolution. . . .  This is probably the most difficult task we have ever given ourselves, which is to intentionally transform the economic development model for the first time in human history."  Everybody understood that the idea is to replace capitalism with socialism.  And you thought that the "climate change" scare was about saving the environment?
• And finally, from today's Wall Street Journal, a front page article by Bill Spindle titled "Drop in Oil Threatens Iraq Terror Fight."  First line: "Clobbered by falling oil prices, Iraq is headed over a fiscal cliff, unable to make critical investments needed to keep its oil flowing and still pay the skyrocketing costs of fighting Islamic State extremists, according to government officials."  Huh?  How in heavens name did the Iraqi government get itself in the position of being the only entity that can make investments to increase oil production in that country?  Yes, the U.S. occupation ended with the oil industry socialized in Iraq, and thus a drop in oil prices means that limited state revenues must be allocated between either enhancing oil production or fighting the existential enemy.  At the same time, perhaps by magic, the U.S. manages to be the world's number one oil producer without devoting a dime of government investment to the enterprise.  Capitalism!  Could it really be that our own government doesn't know how capitalism works and was so stupid that it poured a trillion dollars or so into liberating Iraq only to put its oil industry in the hands of a socialist state?  Yes, that's how stupid we are.  And it happened substantially on the watch of W, although with final implementation by the Obama administration.  

Literally nobody, even Republican presidential administrations in the United States, understands how or why capitalism works and socialism doesn't.  And it seems that no number of socialist disasters can teach the lesson.
 

"Diversity" Hits A Dead End

"Diversity" is one of those words that has a completely different meaning in the New York Times than anything you thought it might mean.  If you don't believe me, you will be entertained by considering an article by Elizabeth Harris that appeared on Friday March 6, headlined "Lack of Diversity Persists in Admissions to Elite City Schools." 

As background for those unfamiliar with our system, New York City has eight elite specialized high schools, the most famous being Stuyvesant (in Manhattan), Bronx Science and Brooklyn Technical.  Admission to these schools is by a test given each year to eighth graders.  Because the result is strictly determined by a test, there is no opportunity for behind-the-scenes maneuvering and racial gerrymandering as we find, for example, in admissions to most elite state universities around the country.  Somewhat remarkably, in this competition the chips just fall where they may.  The results of this year's test just came out, and 5,103 students (of a total of about 70,000+ eighth graders) were offered spots in the eight elite schools. 

And the racial breakdown of those admitted?  According to Harris, of the 5,103, 5% were black, 7% were Hispanic, 28% were white, and 52% were Asian.  (She doesn't tell us about the missing 8%.)  Recognize here that the Asians are substantially immigrants or children of immigrants, and themselves from wildly diverse communities including Chinese, Japanese, Koreans, Tibetans, Filippinos, Indonesians, Vietnamese, Hindus, Buddhists, Sikhs, Pakistanis, Bengalis, Afghanis, Iranians, Israelis, Arabs, and I could go on.  If you want to get some flavor of this, try taking the #7 subway train out to Queens some day.  So how exactly do these test results demonstrate "lack of diversity"?  Harris does not explain.  Here's the only explanation I can come up with:  We are operating with a new definition of "diversity" where the word means something like "a situation where blacks and Hispanics are represented with at least as high a percentage as their percentage of the population as a whole, and where all other ethnic groups are represented at a percentage lower than their percentage of the population as a whole."

You are undoubtedly curious as to how these high school admissions numbers compare to the racial breakdown of New York City's population overall, and to the racial breakdown of all New York City public school students.  You won't be surprised to learn that Harris does not provide most of those figures, but here is a 2013 report prepared for the New York City School Construction Authority (pdf) that has both Census data for the City as a whole (at pages 8-9) as well as demographic data for the City schools system (at pages 34-36).   Of course, even here we do not get any further breakdown of the "Asian" category.  With that limitation, here are the numbers:

City as a whole (2010 Census data): White 44%, black 25.5%, Asian 12.7%, Hispanic 28.6%.  (The Census numbers add up to well over 100% because "Hispanic" is not a race and overlaps with other categories.)  New York City school enrollment (2011/12 school year): White 16%, black 28%, Asian 15%, Hispanic 41%.

One thing immediately obvious (and that Harris totally omits) is that it's not just blacks and Hispanics, but also whites, who come out in the high school admissions competition with substantially fewer successful candidates than their pro rata share of the population.  In other words, there is no way of construing the numbers to imply that whites are advantaging themselves over the blacks and Hispanics.  Rather, it's the Asians who are highly successful, claiming slots from all of whites, blacks, and Hispanics.

Harris's summary of the reaction to the test results:

In the public school system in recent years, just shy of 30 percent of students have been black and about 40 percent have been Hispanic, and there is widespread agreement that the low numbers of these students in specialized schools is a problem.

I love that unspecific "there is widespread agreement."  Has anybody asked any of the Asians?

Then there are the reactions of Mayor Bill de Blasio and his Schools Chancellor Carmen Farina.

Mayor Bill de Blasio, whose son is a senior at Brooklyn Technical High School, the largest specialized school, said the schools should more closely resemble the population of the city.  In a statement on Thursday, the city’s schools chancellor, Carmen Fariña, said, “It’s critical that our city’s specialized high schools reflect the diversity of our city.”

Sounds to me like they are proposing naked discrimination against the Asians.  Hey Asians, how many of you know that you have now been designated as people against whom naked discrimination by the state is to be permitted and encouraged?  Your dad may speak broken English and drive a cab 12 hours a day, but already you have been deemed to have too much "privilege" and you must be knocked back by having the state impose quotas on you.

What de Blasio and Farina are proposing is very analogous to the naked discrimination practiced against Jews in an earlier generation by, for example, the Ivy League schools and large law firms.  Except in the case of the Jews, while others discriminated against them, New York City and State behaved honorably and, for example, allowed them to dominate the elite high schools for many years.  The good news is that the Jews overcame the discrimination against them, and my bet is that the Asians will too.

It's Hard To Cry Poor When You're Rich

A central tenet of the New York mindset is that we are the struggling "inner city," afflicted with extraordinary burdens of low income and poverty that they don't have in the more prosperous surrounding areas.  Therefore, we feel a strong sense of entitlement to have our high spending local government subsidized by those supposedly more prosperous neighbors.

And so last week our Mayor Bill de Blasio made the annual trek to Albany to seek to get more of the supposedly bountiful state money for the City.  Here's a report at thestate.com.  De Blasio loves to burnish his image as the spokesman for the poor and downtrodden.  As described in the linked article, de Blasio asked for more state money for the City's schools, more for its low income housing projects, more for its mass transportation system, more for its homeless shelters, and so on.  Key quote: "The moment has come for the city to get its fair share of state funding."

Well, there's a small problem here if you are an old-time income redistributor like de Blasio:  While nobody was looking, New York City got richer than the rest of the state.  And not by a little.  Here's a table of 2010 Census data on per capita income of New York State by county.  Of course, New York County (Manhattan) is by far the richest at $111,386 (yes, that would be over $445,000 for a family of four).  Do a little math with the table and you find that per capita income for the City as a whole was about $40,000 against about $31,000 for the state as a whole.  And back the City out of the State, and you find that the remaining per capita income of the non-City parts of the State was only around $25,000.  In the comparison between the City and the rest of the State, it's not even close.

Now that's 2010 data, and I can't find something more recent that is as easily manipulable to make these comparisons.  But if anything in the last few years things have skewed even more dramatically in the City's favor.  Upstate continues to languish and decline, while the suburbs have not seen the same growth as the City since 2010.

What all this means is, scrap the obsolete "inner city" imagery and get used to the idea that the City is a lot better off than the rest of the State.  Sure there are some very prosperous suburban counties like Westchester and Nassau, but even they can't come close to competing with Manhattan's wealth.

And of course the consequence is, if there is going to be redistribution going on, the City is going to be on the paying end, not the receiving end.  When de Blasio goes banging his tin cup in Albany, he never mentions the relative income numbers.  But don't you think he'd be a little careful tossing around phrases like "fair share"?  It's de Blasio who's always advocating redistribution from rich to poor.  If they start distributing strictly from richer to poorer in this state, the City stands to be the huge loser.  You have to wonder if de Blasio is even familiar with these numbers.

And further in the category of people who can only hope that nobody looks up the real numbers, the United Federation of Teachers is out with a new web page titled "Show Us The CFE Money."  For those unfamiliar, CFE stands for "Campaign for Fiscal Equity," an advocacy group that sued New York State back in 1993 on behalf of New York City seeking more state aid for the City schools on the ground that the state school aid allocation formulas disadvantaged the City.  That lawsuit dragged on through 2006, and ended with a Court of Appeals decision in 2006 that generally ordered more funding but declined to specify the exact amounts and means.  The UFT now asserts that the City is "owed" some $2.5 billion more per year.  Of course, again the problem is that in the time since 1993 the City has gone from roughly equal in per capita income to the rest of the state to far richer.  As to school spending, according to a Washington Post report in May 2014 of Census data as of 2012:

During fiscal 2012, New York City's school district, the largest in the country with nearly a million students, spent more money on each one of them than any other large public school system in the country.  New York spent $20,226 per pupil, according to updated Census data released Thursday on the finances of the country's public schools.

That $20,226 per pupil is about double the national average per student K-12 spending.  Adding $2.5 billion per year (for about 1 million students) would add about $2500 per student and bring it to almost $23,000 -- way above national norms and well more than most upstate New York districts spend.  "Fiscal equity"?  Again, if they actually applied that principle we'd be in for a big cut.

The Great MIT Economics Groupthink

If you think that smart people are somehow more capable of independent thought and less subject to falling for preposterous groupthink than you are, then you need to check out the article "Empire of the Institute" from over the weekend by Official Manhattan Contrarian Worst Economics Writer Paul Krugman.

Krugman points out that a large percentage of the pooh-bahs currently or recently running or sanctimoniously pontificating on world economic policy all got their economics Ph.D.s at the same time at MIT in the late 70s to 1980:

Ben Bernanke 1979
Olivier Blanchard 1977
Mario Draghi 1976
Paul Krugman 1977
Maurice Obstfeld 1979
Kenneth Rogoff 1980

For readers who may not recognize all the names here, Bernanke was until recently Chairman of the U.S. Fed; Blanchard has the portentous title of "Economic Counsellor [sic] and Director of the Research Department" at the IMF, from which perch he purports to advise struggling third-world governments never to cut government spending under any circumstances; Draghi is current President of the ECB; and Obstfeld and Rogoff are prominent academics at Berkeley and Harvard, respectively.

Krugman's article asks the critical question to which I am sure you are all dying to know the answer:

So how did MIT establish this unique position in academic economics applied to policy?

You can read Krugman's article (if you can stand it) to get his answer, which is complicated and filled with economic jargon.  Or you can consider my answer, which is much simpler:  These guys tell incumbent politicians exactly what they want to hear, which is that more government spending is always a good thing, and they can spend as much as they want without adverse consequences and with no need to raise taxes.  In fact, the essential message of these guys is that more government spending, even wasted spending, even spending corruptly given over to your cronies and buddies, even spending that runs up debt to an extent that can never be paid off with taxes, is a positive good that will get your stalled economy going again.  As a politician, you can get this advice from what seems like a brilliant, top-credentialed MIT technocrat, basking in the respect of his peers and a darling of the New York Times editorial page.  And the only people objecting are a few cranks like the Manhattan Contrarian -- he's telling you that you can't do anything fun while you have your hands on all this free money, and he doesn't even have an economics Ph.D.!  So whose advice are you going to take?

All I can say is, it's the incredible power of groupthink, even over what would seem by IQ or SAT scores or college grades or other comparable measures to be some of our very smartest people; indeed, groupthink seems to be especially powerful over the seemingly smartest people.  After all, to believe the extreme version of Keynesianism that these guys foist upon the world, you have to believe, among other things, that:

• Incurring government debt in unlimited amounts has no negative effects on economic performance
• It doesn't really matter for a government whether it bothers with taxes at all -- Just incur more debt!
• Diverting resources from more productive to less productive uses through government expenditure is a positive good for economic performance.

I just don't think that it's possible to believe things at this degree of preposterousness unless you have the benefit of lots of similarly-credentialed seemingly smart people all nodding at each other and reassuring each other that it all makes sense.

At the end of his article Krugman as usual claims that recent economic results around the world vindicate the theories of him and his groupthinking colleagues.  Care to give us any explanation for Venezuela, Argentina, Greece, or Cuba?  Arnold Kling at askblog comments:

Empirical macroeconomics seems to me to boil down to a pure exercise in confirmation bias.

Although not mentioned in Krugman's article, the biggest name in the MIT Economics Department in the late 70s was Paul Samuelson, famous for making millions on the textbook that taught Fallacy Keynesianism to generations of college students, and for making the most famous disastrously wrong economic prediction of all time -- made in 1943:

[W]ere the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties--then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.

Well, the war did end suddenly, government spending was promptly cut in half, and the economy took off.  You don't know that because you read the New York Times and it doesn't fit their narrative.  Don't tell Blanchard, Draghi, Krugman, et al.