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Commercial Real Estate Watch

Posted in Debt Markets, Real Estate Markets by teslik on August 13, 2009


The chart above, from MIT’s Center for Real Estate, traces the Moody’s/REAL commercial property index, or CPPI, an index of commercial investment property prices in the United States. As you can see, prices are falling quite sharply. The AP reports commercial property mortgage defaults are climbing at an “unparalleled pace” (and the Fed is feeling the pain alongside private investors). The AP piece adds that the delinquency rate on securitized debt backed by commercial property rose to roughly 3 percent in the second quarter, and that banks hold about $3.5 trillion of commercial real estate loans. Let’s hope this isn’t shades of U.S. housing markets circa 2007.

Paul Romer’s Charter Cities: Parsing the Counterarguments

Posted in Development, Economics by teslik on August 11, 2009


Paul Romer’s charter cities idea, which I outlined last week, has prompted some interesting debate among high profile economics bloggers. I wanted to outline the scope of what has been said, because I think the idea is sufficiently intriguing that delineating the nuances and counterarguments will be a useful process.

Discussion of Romer’s idea falls under two main questions: first, whether Romer’s idea will work, and second, whether it is morally or politically advisable.

Will it work?

Analysis of the viability of Romer’s plan also falls into two categories:  The question of whether governments will be able to implement it, and the question of whether governments will be willing to implement it.

Ability to Implement:

Will Wilkinson questions whether governments would be able to establish charter cities, assuming that they want to:

Why won’t the bad rules that have impeded endogenous development also impede the adoption of a higher-order rule-reforming rule? I don’t really see the loophole that Romer needs to get started.

In other words, the same bad rules that gum up the process of trying to implement good economic policy could implement the process of trying to establish charter cities.

Arnold Kling invokes Bruno Leoni to point out a different potential problem—the feasibility, or infeasibility, of implementing laws in a top down way that may run counter to preexisting culture. Romer, says Kling,

makes it sound as though we can take rules “manufactured” in, say, Canada, and export them anywhere in the world. Leoni would say that instead most law is embedded in social customs In fact, my daughter who just spent the summer in Tanzania, says that the custom of seeing law as something that ought to be obeyed is not nearly as natural there as it is here.

Alex Tabarrok says the fact that charter cities would be “built on uninhabited land with plenty of immigration from the charter nation” helps to mitigate Kling’s concern.

Willingness to Implement:

Tyler Cowen, meanwhile, doubts whether governments would be willing to attempt charter cities:

I fear that Hong Kong is a cautionary tale… Due mostly to the pressures of nationalism, the world’s most successful development experiment was ended without a second thought.  And its initiation was backed by brute colonial force.  Which country is most likely to allow another country to manage part of its territory in a new experiment?

Tabarrok counters this argument as well, saying “we shouldn’t think of what happened in 1997 as China taking over Hong Kong but rather as the final element of Hong Kong taking over China.”

(For what it’s worth, Romer himself raises the possibility that some countries might interpret bilaterally constructed charter cities as a form of colonialism. He rejects this line of reasoning, however, saying: “The thing that was bad about colonialism, and the thing that is residually bad in some of our aid programs, is that it involved forces of coercion and condescension. This model is all about choices, both for leaders and for the people who will live in these places—and choice is the antidote to coercion and condescension.”)

Is it Moral?

Here the question essentially whittles down to one of realism versus idealism.

Will Wilkinson, in the same post linked to above, outlines the idealist argument before tepidly rejecting it:

What the example of Hong Kong communicates is that authoritarian, illiberal, undemocratic regimes need not feel threatened by semi-independent city states with working “liberal” market institutions. It says to rulers that their countries can get rich without granting their subjects real freedom.

Wilkinson questions whether Romer supports this message, or whether he simply thinks that faster growth in charter cities will eventually lead to liberalization in the countries that founded them.

For his part, Wilkinson supports the latter conclusion (though it makes him uneasy), but eventually wonders whether charter cities, though they appear to require liberalized governments to support authoritarianism, might actually be a clever form of democracy promotion:

I’m convinced that it would probably be better for both the liberty and welfare of the Burmese people, for example, if the junta tried to go the Singapore/China market authoritarianism route rather than hold free elections and establish a democratic government. I’m not happy with this conclusion. Unlike many of my libertarian friends, I do not think democracy is incidental to liberty. But suppose it turns out that democracy is incidental to economic growth — that it is correlated with but unnecessary to growth. Suppose further that illiberal rulers will welcome isolated experiments in the institutions of growth as long as they don’t come bundled with democratic institutions. If economic liberalization eventually has liberalizing political spillovers, promoting democracy directly could turn out to be self-defeating. Could it turn out that liberal democrats do the most for liberal democracy by promoting market authoritarianism?

Kling goes through a similar analysis, reacting to Wilkinson’s term “real freedom.” He concludes, in as many words, that the most real form of freedom is choice—and thus that the charter city model, by giving citizens a choice of economic models, does provides freedom, even if it also increases the sustainability of authoritarian regimes. He posits:  “If you lived in North Korea, which would you rather have–the right to vote or the right to leave?”

Mapping Exchange Rates

Posted in Currencies by teslik on August 7, 2009


I discovered a very cool site called Google Earth Library that compiles links to Google Earth maps with overlays of different demographic, political, or economic data. The image above is a screenshot of their U.S. dollar exchange rate map (the topographical “height” of each country represents its currency’s exchange rate against the U.S. dollar). I’m wondering if there’s some way you could map a time-progression of how the “heights” of different countries have evolved over time–that would be particularly useful in this context. Anyway, if you have Google Earth installed on your computer, you can open and explore the map here. I would also encourage checking out the site more generally, they’ve got lots of cool maps.

Credit Card Disclosures

Posted in Credit Cards by teslik on August 7, 2009

This is from a few months ago, but I just came across it. An op-ed from the NYT suggests credit card disclosures should look less like this:


And more like this:


Here’s the mock-up:


Paul Romer’s Charter City Model

Posted in Development by teslik on August 6, 2009

cityscapeUpdate: After reading this post, check out our follow-up examining the arguments that have been made against Paul Romer’s charter city idea.

Stanford’s Paul Romer, in a new Ted talk, presents an idea for overcoming politically entrenched rules that derail economic development.

He starts with a question:  Why do teenagers in African country X  have cell phones – a relatively advanced technology – but not electricity – a much more basic one?

The answer, Romer says, is bad rules. For instance, the electric company in country X might operate under a rule where it has to sell electricity at a very low subsidized rate. It therefore cuts services because it is losing money on every unit of electricity it sells. The president of X, seeing the distortionary effects of this pricing dynamic, might be inclined to change this rule, but might also face opposition from companies and consumers, who protest to keep the bad rule in place because it keeps their electricity cheaper.

This is the age-old dilemma of politics getting in the way of policy. The challenge, Romer says, is to try to develop a framework for changing stubborn rules. You can’t simply do it by mandate, as becomes readily apparent to the president of X, because political pressure will get in the way.  So how do you get around bad rules?

Romer proposes an idea that essentially writes existing sovereign politics out of the picture. He recommends thinking on the scale of the city and developing new special administrative regions with good rules that can be expected to attract investors, businesses, and inhabitants alike. Such charter cities would be “opt-in,” as it were. The preexisting civic structure, bad rules and all, would be left to operate in parallel, and people and businesses and investors would choose to participate in the charter economy only if they decided the opportunities there were more valuable than, say, a lower electricity bill under the subsidies of the old system.

Romer’s strategy is more complicated than I can do justice to in a few paragraphs. But one basic takeaway is quite simple—governments would often be better off trying to create avenues around political roadblocks than trying to push through them. I’m curious what applications this basic idea might have in the United States, where economists commonly complain about the impossibility of getting good legislation pushed through Congress intact.

Addendum: This blog post provides good background on Romer’s research and his plans for spreading and eventually applying the charter cities idea.

Predicting the Next Fed Chairman

Posted in Charts, Prediction Markets by teslik on August 6, 2009

Intrade’s prediction market, which a month ago put Ben Bernanke’s probability of holding onto his Fed chairmanship in 2010 at less than 50%, now puts it over 80%. See chart below:


Intrade’s market guesses that the most likely candidates to replace Bernanke, were he not to keep his post, are Janet Yellen and Larry Summers.

Rebuilding the Economics Field

Posted in Economics by teslik on August 5, 2009


Robert Skidelsky has contributed a thought-provoking response to the FT’s “arena debate” on how to rebuild the stature of economics as an academic field. Skidelsky notes that even Queen Elizabeth has taken economists to task for not doing a better job of foreseeing the economic crisis. He then outlines what, to his mind, went so wrong, and concludes with three paragraphs of recommendations for the “reconstruction” effort:

The reconstruction of economics needs to start with the universities. First, degrees in the subject should be broadly based. They should take as their motto Keynes’s dictum that “economics is a moral and not a natural science”. They should contain not just the standard courses in elementary microeconomics and macroeconomics but economic and political history, the history of economic thought, moral and political philosophy, and sociology. Though some specialisation would be allowed in the final year, the mathematical component in the weighting of the degree should be sharply reduced. This is a return to the tradition of the Oxford Politics, Philosophy and Economics (PPE) degree and Cambridge Moral Sciences.

Beyond this, the postgraduate study of macroeconomics might with advantage be separated from that of microeconomics. Courses in microeconomics should concern themselves, as at present, with the building and testing of models based on a narrow set of assumptions. Their field of applicability lies in those areas where we have reliable views of the future. Macroeconomics, though, is an essential part of the art of government, and should always be taught in conjunction with subjects bearing on this.

The obvious aim of such a reconstruction is to protect macroeconomics from the encroachment of the methods and habits of the mathematician. Only through some such broadening can we hope to provide a proper education for those whose usefulness to society will lie as much in their philosophical and political literacy as in their mathematical efficiency.

This reminded me of the ethics oath a group of Harvard Business School students recently signed. I wonder what the chances are of a similar movement arising at one of the leading graduate schools of economics?

Chart Candy, 08/05/09

Posted in Charts, Credit Cards by teslik on August 5, 2009

From Synovate, a market research firm, via TIME’s “Curious Capitalist” blog, here is a chart showing the volume of mailings from credit card companies, by quarter, since Q4 2005. The author of the post notes that the precipitous decline of mailings seems to have tapered off. The question for everybody annoyed about their cluttered mailbox is: will recovery be U-shaped or V-shaped or L-shaped?

credit card mailings2

Source: TIME, Curious Capitalist blog, “Are Credit Card Companies Getting their Groove Back?” August 5, 2009 (LINK)

Chart Candy (2), 08/04/09

Posted in Charts by teslik on August 4, 2009

From CFR’s Geo-Graphics blog, which I highly recommend, here is a look at the total commercial paper outstanding, from 2003 to the present.


Source: Council on Foreign Relations, Geo-Graphics Blog, “Commercial Paper,” August 4, 2009 (LINK)

Chart Candy, 08/04/09

Posted in Charts by teslik on August 4, 2009

From Krugman’s NYT blog post referenced in this morning’s roundup.  The black states are the worst hit by unemployment:


Source: New York Times, via Princeton (LINK)