29 November 2009

Musings On Religion and Demography

One of the big blind spots in American demography is religion. We have excruciatingly detailed demographic statistics the slice and dice the American population based on race, Hispanic origins, sex and age, mostly from a variety of government sources. We have far less information on religion, pieced together from a mix of eclectic private sources.

Religion As An Ethnic Marker

One result of this is that non-Hispanic whites, the plurality ethnicity and Hispanics, another large census ethnic category, look monolithic. This also heightens stereotypes about immigrant populations.

Of course, broad categories like "non-Hispanic white" or "Hispanic" are social constructions. Many people who are part of today's "non-Hispanic white" plurality, would have been considered a non-WASP minority a century ago. A Pentecostal mestizo Hispanic family from Oaxaca, Mexico may look demographically very different from a white Catholic family from Buenos Ares, Argentina with distant ethnic roots in Germany, even though both are lumped into the category of Hispanic by census definitions, in much the same way that a third generation Japanese American family may look very different demographically than a first generation refugee family from Vietnam, even though both would be considered Asian for statistical purposes.

Immigrant populations, generally, differ significantly in religion from their home countries. Immigrants from places with predominantly non-Christian populations, such as the Arab world, are much more likely to be Christians than the general populations there, in part due to religious freedom driven immigration, and in part due to missionary facilitated ties to the United States. Latin American immigrants are much more likely to be non-Roman Catholics than the general population of their Latin American homelands. Immigrant populations also tend to be more religious, generally, than domestic populations, largely because religious institutions provide cultural havens.

The biggest political and cultural divide in the non-Hispanic white population of the United States is roughly mirrored religiously, with conservative Christians on one end of the spectrum, Roman Catholics in the middle, and mainline Christians, non-Christian, and secular whites on the other. While people don't stick as steadfastly to the religion of their births as they once did, religious affiliation provides useful way for a demographer to operationalize social class divisions among non-Hispanic whites. Statistical data on college entrants suggest that the link between social class and religion for non-Hispanic whites remains strong.

The Mormon Social Model

Religious demographics also provide a way to gauge the degree to which religion actually changes how people live. Mormons take the cake in this department. Members of the Church of Jesus Christ of Later-Day Saints are more distinct demographically from the general non-Hispanic white population than almost any other large religious denomination in the nation. Few other religions come closer to offering an alternative total life script than the Mormons. In contrast, your typical Episcopalian is likely to live a life not very different from a typical non-religious American.

Part of this is a consequence of geography that makes it easier to measure the distinctions. Just about everything that is demographically distinct about Utah can be attributed to the impact of the LDS church, which counts 70% of Utah's population as adherents, but is much less common in the rest of the United States. But, the geographic concentration itself is to a great extent a historical legacy of an effort to create a distinct society. It combines social outcomes that policy makers tend to think of as impossible to have together in the mainstream social model, like young marriage ages and low divorce rates.

The Mormon model offers a lot that the rest of the nation would like to emulate. For example, stable marriages, high levels of education, low levels of child poverty, high levels of private charity, a strong civil society, low abortion rates, low levels of out of wedlock births, low levels of suicide, and low levels of the public health problems associated with alcohol and tobacco (are there any public health problems associated with caffeine consumption?).

There are, of course, other element of the model about which the nation is not favorably inclined or ambivalent. For example, large families, early marriages, high levels of intense (and heterodox) religious belief, and high bankruptcy rates.

Many of the demographic consequences of the Mormon social model are largely not severable from each other. Early marriage and low out of wedlock birth rates, for example, go hand in hand in the Mormon social model. Intense religious belief drives the willingness to break from the national social norms about alcohol, tobacco, marriage and childbearing. Large families create the economic interdependencies that help make marriages more stable, and can be a factor in making bankruptcy necessary in hard times.

A glance of the interdependencies of the Mormon social model makes it easy to understand how modernizing leaders in the Third World, like Ataturk, chose to keep not only functional parts of colonial culture, but also dysfunctional ones like Western fashion conventions. Culture is a package deal and the linkages between different parts of the package are often non-obvious. For example, while low alcohol consumption is a key to Mormon public health, high alcohol consumption is central to making the rich French diet less of a health problem for the French. According to Malcolm Gladwell's book Outliers, culture is key to explaining commercial aircraft accident rates and transitioning South Korean flight crews to English was the lynch pin necessary to reduce commercial aircraft accidents on Korea Air.

It is also worth noting that while the Mormon social model has always been distinct, different parts of it has been more notable at different times. For example, Mormon family patterns look a lot like those of typical American families in the Baby Boom. But, low levels of tobacco use among Mormons is now much less out of step with the general social norms of the United States than it was in the 1950s.

Are Mormon boys more likely to be gay?

One wonders absently if strong opposition to gay rights (Mormons were pivotal players in the fight over Proposition 8 regarding gay marriage in California and have been a major driving force in the anti-gay stances of the Boy Scouts of America) has anything to do with the hypothesis that boys with more older brothers are more likely to be gay, and that large families are much more likely to have boys with older brothers than other families. If the hypothesis is correct, gay men are disproportionately Mormon. Proponents of the hypothesis estimate that the fraternal birth order effect accounts for approximately one seventh of the prevalence of homosexuality in men. But, given the relatively small percentage of non-Mormon men who have multiple older brothers (particularly now that total fertility rates among native born Roman Catholics has fallen), a fraternal birth order effect would be excepted to account for a much larger share of the prevalence of homosexuality in Mormon men. Above average rates of of homosexuality could also help explain the attraction of polygamy in the early Mormon church (a doctrine abandoned in a bargain for Utah's statehood in the early Mormon church and later internalized into the doctrine of the largest (and dominant) Mormon denominations).

Likewise, this effect could help explain both the past importance of the celebate Roman Catholic clergy and the current shortage of clergy in the Roman Catholic Church as birthrates declined (i.e. the celebate clergy may have offered a particularly attractive life choice of young gay Roman Catholics who may have been more common when family sizes were large).

The fraternal birth order hypothesis is nowhere near definitively established. And, it isn't hard to imagine countervailing forces. For example, even if fraternal birth order matters, if genetics is another important factor in the likelihood that someone will be homosexual, and the Mormon church is not a gay friendly environment, gays may be much more likely to convert to the LDS faith (for which conversion is an important growth driver) and more likely to leave the faith if they are born into it. In a few generations (and Mormon generations are shorter than the national average), even a modest tendency in this direction could overshadow birth order effects if homosexuality has a strong genetic component. Maybe, someday, when we know a little more about the biology of human sexual orientation we may be able to answer these questions.

Disney's Grand Cultural Gambit

Disney is the behemoth of youth programing. Young children and tweens watch and talk about the programming on Disney's TV channel more than any other. Disney makes a large share of all movies available for this demographic, and captures a larger share of youth audiences. Disney's radio channel is even more dominant for tweens than their television programming. The Mouse has abundant commercial spinoffs.

Programming for kids operates on a vertically integrated, producer driven, studio system. Disney creates stars, and sometimes bands, and makes them big by putting them in its distribution outlets. Miley Cyrus, Demi Lovato, Selena Gomez and the Jonas Brothers, the Cheetah Girls and High School Musical have all been engineered by Disney in a hands on way that the nation hasn't seen since the Osmonds and the Monkees. The inner circle of Disney stars are as tight as the Rat Pack were in their day.

Disney's top down, dominant player media model creates fans and decides at a producer level where kids programming is going to go, rather than simply following the masses as an increasingly fragmented, sales driven media model for adults does.

Disney is betting the farm on cultural fusion. You don't have to listen to the Disney's radio channel (1690 AM in Denver, for those of you who don't have tweens) for long to hear it. The notion that genres like R&B, country-western and bubblegum pop should be segregated into separate musical channels has been almost entirely abandoned by Disney. One follows after the other at random like an iPod shuffle (maybe that's the way they actually do their programming). The play list may not be long, but it is diverse.

Her father, Billy Ray Cyrus, made his path to superstardom by exemplifying his country-western genre. But, the latest hit single from Miley Cyrus, "Party in the U.S.A." has followed Disney's gambit on cultural fusion to its logical conclusion. The younger Cyrus brings country music vocal styles to a song heavy with R&B musical elements.

For adults, the unified national popular culture that emerged when we had three dominant television networks, small towns had only one or two movies playing at any given time, off Broadway productions stayed in New York, and Top 40 ruled the airwaves is all but gone.

Adult media programming has broken into minute niches fueled by the proliferation of cable TV channels, digital radio channels, Internet based niche marketing, the rise of the multiplex, the appearance of art house theaters beyond places like New York and San Francisco, legal limits on media concentration and prohibitions on payola. These niches are almost tribal. Disney's Selena Gomez movie, Another Cinderella Story mocks these dividing lines in a scene where a lost glass slipper is replaced by a lost MP3 player with a distinctive playlist that stereotypical teens in pursuit of the teen heart throb try to guess (the movie also consciously includes a diversity of dance styles from tango to ballet to break dancing to R&B).

Country crossover isn't unknown on the adult airwaves. Keith Urban's hit "You'll Think Of Me" (the defining chorus lyric is "Take Your Cat And Leave My Sweater") crossed the line recently, as have half a dozen other singles, often on stations with catchlines like "The Mix." But, it's rare for those crossovers to go further from country than mild adult contemporary rock. Country crossovers don't usually venture into the predominantly inner city black world of R&B which shares little cultural common ground with it. And, crossover songs are decidedly a fringe in the adult music world, not a concept that is driving the dominant media outlets in the market. Adult country crossover is aimed at the shrinking niche audience of people who have migrated from rural America to the suburbs, at a time when urban migration has almost run its course, not a broad national audience.

For whatever reason, however, Disney has managed to hold onto the older model for younger audiences, and is engaged in trying to build a genuine melting pot supergenre. This is not simply a case of the Beastie Boys or Eminem, where white singers have made in big in a predominant black genre, in the Beastie Boys' case as farce, and in the case of Eminem, as drama. Miley Cyrus isn't genre hopping; she's genre fusing.

Will Disney succeed in its ambition to create a genre fused national culture?

One suspects that this project began out of necessity, only tangentially considered as a cultural program. There wasn't enough new, "hot" material out there for kids in any one genre to support an entire media empire, particularly if Disney wanted to display the college guidebook diversity it was striving for to cement itself as a truly national media empire.

Disney's Mouse Pack may be doing what swing (e.g. Count Basie, Tommy Dorsey, Duke Ellington, Benny Goodman, and Glenn Miller), bebop and cool jazz (e.g. Miles Davis, Charlie Parker, Thelonious Monk and Dizzy Gillespie), and Motown artists did; bringing music with very specific geographic and ethnic roots to the general public in an accessible way.

The massive money pot that Disney is riding is sure to attract new players to the youth media market, displacing its dominance sooner or later. But, Disney is riding high enough now that this will take time. The genres it has fused may fade into irrelevance for the modern Disney generation before that happens. Or, the Disney generation may hit puberty overwhelmed by the blandness of their media youth and rebel against it by harvesting the relict outposts of distinctive cultural expression that resisted assimilation. For most of recent history, the fine and performing arts have rewarded those who establish their own unique styles, not generalists.

On the other hand, the experiences of our nation's youth are far more homogeneous than it was at the dawn of the mass media age. There are niches, but in the Internet era, they increasingly aren't regional niches that are easily and naturally reinforcing. Country music and urban rock are merging in part because the artists who perform them share the same Los Angeles haunts, rather than being divided in separate citadels of media power in New York and Nashville. Kids in New York and Tennessee increasingly read the same books, attend similar schools with identical textbooks, watch the same TV and movies, and grow up with similar, largely vacuous, ideas about God. The diversified economies of Atlanta and Chicago have more in common than they once did and increasingly draw their top professionals from a homogenized national pool that was uprooted when they went to college or the military.

New country music increasingly sounds more like rock. The Sunday morning hour remains segregated, but what happens inside those churches is far less distinctive than it was when I was the age of today's Disney audience. Almost all of the Christian denominations look more like the historically black churches of my youth than they did a couple of decades ago. In the 1960s, growing up with never married parents was a predominantly black experience. Now, it is commonplace for working class kids of all ethnicities. The black middle class is far less isolated from the white middle class at the dawn of the Civil Rights movement. Invisible social lines and segregated neighborhoods still divide most black kids from most white kids in our schools, even when they are integrated, but there is a critical mass of mixed race kids who like Barack Obama and Tiger Woods, move almost effortlessly from one cultural sphere to the other. And, it takes only a small number of people who serve as a bridge between otherwise isolated social networks to dramatically reduce the number of degrees of separation between the people in them. Kids today are much more likely to have many friends of friends across racial lines than the first generation of kids in putatively desegregated schools.

The biggest advantage that Disney's bid at building a fused national culture has that its counterparts in the days of Motown and the Rat Pack didn't have is that a far larger share of the population is ideologically committed to the concept, whether or not they actually live their ideals. In the early 1960s, all but a couple of the casinos in Las Vegas and a good share of members of Congress were openly committed to racial segregation. Today, almost everyone believes earnestly in integration, except a few xenophobes driven by a fear for their jobs and the jobs of people they know, who are opposed to immigration, illegal or otherwise. We don't necessarily know how to make it happen, but for the most part, we are willing to let Disney make an attempt and overlook the fact that the world it displays often doesn't look too much like the more divided world where most of us actually live. We hope that, given a Disney script to use as a model, that a more grass roots level of integration might be an easier to achieve for our children.

24 November 2009

Price Discrimination

While in theory, some forms of price discrimination are illegal under the anti-trust laws, in practice, price discrimination explains everything, or at least, everything counterintuitive and fascinating in economics, including Black Friday and cell phone contracts.

Denver's Housing Bust Was Mild

My father-in-law and mother-in-law are in town for Thanksgiving week. They live in Las Vegas. The real estate bubble collapse there has been brutal. According to the Case Shiller index, house prices there have fallen 55.4% from their peak, the worst of the top twenty metropolitan areas it follows.

In contrast, Denver has fared second best of the top twenty cities that Case Shiller examines (only Dallas, whose housing prices are down 4.7% from the peak has had less of a housing bubble bust). Denver's house prices are down 7.7% from the peak, and have improved in 2009 compared to December 2008. Denver had already suffered the brunt of its declining housing prices by the end of December 2007.

In contrast, some cities have had significant declines in their housing prices in 2009, including Las Vegas, Phoenix, Miami, Detroit, Tampa, Seattle, Portland (Oregon), and New York City. At least one prominent economics blogger thinks that there will further declines in markets that had moderate to high magnitude housing bubbles.

Colorado also has a falling unemployment rate below 7%, while the national unemployment rates is above ten percent and rising.

The prospects of a healthy recovery are cloudy, however. One particularly troubling indicator is that the number of FDIC insured banks, nationally, that are struggling financially, or need to be shut down, continues to grow. Commercial banking managed to largely avoid the catastrophic meltdowns that were seen in the less regulated investment banking, mortgage finance and securitization industries. But, a prolonged economic malaise has started to sap Main Street financial institutions, not just Wall Street. Indeed, Wall Street appears to have taken its medicine and started itself on the road to recovery, for now.


Negative Equity

One factor that may be pushing banks into trouble at this late stage may be the delayed impact of negative home equity.

Declining housing prices have left almost one in four mortgage holders (about one in nine households) with negative equity in their homes. This, in turn, has made job hunters resistant to moving to places where the job market is better, increasing the number of people who are unemployed. Often, the negative equity situation is truly dire, "5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value." Obviously, those deeply upside down homeowners are concentrated in places that have seen the deepest housing bubble collapses.

If you have just a little negative equity, hanging on until real estate prices recover a little and you pay down more of your mortgage before selling your home, may make sense. If you can return to break even status, you can pay off your mortgage in full when it is sold. As long as you can make the payments in the meantime, you won't seriously hurt your credit rating. But, if your house is deeply upside down, the point in time when that is possible may be hopelessly distant.

In California, where home mortgages are generally non-recourse, the best solution for households with negative equity is often to simply hand the keys over to the lender once the foreclosure process has run its course, and walk away. The lender takes a loss, while the former homeowners have a foreclosure on their credit records but owe nothing. Unlike a bankruptcy, not all of a household's debts will be discharged, and the household will need to rent a place to live (few will be able to get mortgages in the post-subprime world with a recent foreclosure on their credit records). But, a foreclosure taints a homeowner's credit for only seven years and involves almost no home owner paperwork or expense, while a bankruptcy clouds one's credit for ten years and involves a considerable paperwork burden and expense. A homeowner who waits to move until the eviction notice arrives can even get several months of free housing as the foreclosure process advances, using money that might have gone towards housing to pay down credit cards and other debts.

The net result is a poor man's bankruptcy, sometimes with better results than a true bankruptcy. The mortgage debt will be discharged. Meanwhile, if the money saved on transaction costs in the bankruptcy and housing costs as the foreclosure process ticks along is used to pay down other debts like credit cards, those debt payoffs will look much better on the homeowner's credit than a discharge in bankruptcy. The entire process may also take no more time than a bankruptcy. And, the homeowner faces a much lower chance of being accused of fraud (often no representations are made at all by the homeowner to anyone in this poor man's bankruptcy), and a middle income homeowner will not be required to enter into a five year payment plan, while in bankruptcy five year Chapter 13 payment plans that devote "all disposable income" to creditors are required of many debtors who have above the median income for the state.

Increasingly, many non-mortgage debts aren't dischargeable in bankruptcy anyway, even under Chapter 13. Debts for taxes, for alimony and child support, for student loans, and for criminal penalties, for example, generally can't be discharged in bankruptcy. The "luxury purchase rule" which prevents large cash advances or luxury purchases made in the three months before filing for bankruptcy from being discharged also has much more bite than it did before the 2005 bankruptcy reforms that Congress adopted. Often, the amount of non-mortgage, dischargable debt that an upside down California homeowner (who may have paid old personal debts with prior mortgage refinancings) may be fairly modest.

Also, to my knowledge, Congress has not authorized bankruptcy judges to cramdown home mortgages, so homeowners don't have the option of filing for bankruptcy and keeping their mortgages with the principal balance reduced to the value of the home, if they keep current on payments under a court authorized plan. The unavailability of this kind of relief similarly gives homeowners in California an incentive to stop paying their mortgages, wait out the process, and then let their home be foreclosed upon.

Rents are more reasonable now than they were a couple of years ago in most of the bust markets, so once a homeowner starts paying rent, the monthly cost may be smaller or similar to what that homeowner used to pay to the bank on a mortgage (often with a high interest second mortgage on it). Renting is now roughly equal in monthly cost to owning, and low housing prices mean that rent is often cheaper than mortgages based on inflated housing prices when the house was bought. When renting is cheaper than buying, the cash flow freed up by not having to pay as much on housing each month provides another source of cash to pay down non-mortgage debts.

Why go on so about a sequence of events particular to California? Because California is a massively disproportionate share of the problem. Greater Detroit and Florida are the only non-contiguous areas that have seen comparable great housing price collapses. Most of the areas seeing much bigger housing declines than they did housing price increases since 2000 are in the Rust Belt, where the bankruptcy of two of the three big three automakers and a general recession triggered decline in manufacturing have damped local housing markets.

The California experience is not unique either. Some of the other hard hit states also appear to have non-recourse mortgages (caution, I haven't reviewed and confirmed the state of the laws in these states and I am not admitted to the practice of law in any of them):

North Carolina
North Dakota

Arizona, California, Florida and Washington have all experience major boom/bust housing markets and the existence of non-resource mortgage laws may go a long way towards explaining why these markets were hit. But, details vary. For example, this site says that deficiency judgments can be pursued in Florida, but only after a foreclosure in separate action. I don't have the expertise to know for sure what practical limits exist on the ability of lenders to obtain deficiency judgments.

UPDATE (11-24-09 at 4:45 p.m.):

•The distribution of negative equity is heavily concentrated in five states: Nevada (65 percent), which had the highest percentage [of mortgages with] negative equity, followed by Arizona (48 percent), Florida (45 percent), Michigan (37 percent) and California (35 percent). Among the top five states, the average negative equity share was 40 percent, compared to 14 percent for the remaining states. In numerical terms, California (2.4 million) and Florida (2.0 million) had the largest number of negative equity mortgages accounting for 4.4 million or 42 percent of all negative equity loans.

About 19% of Colorado mortgages have negative equity.


The most prominent exception to the pattern of areas with major housing price declinies being in non-recourse states or manufacturing driven economies also had housing price bubbles. The most prominent of these is Nevada, where a housing price bubble may have been driven by sales of California properties at a profit with proceeds invested in Nevada.

The incentives for upside down homeowners aren't nearly so clear in states like Colorado, where a homeowner has personal liability for an unpaid mortgage balance if the lender bids an appraised home value in the foreclosure sale, rather than the full balance of the mortgage. But, Colorado doesn't have nearly as many upside down mortgages as California does, and many homes that were upside down have already worked their way through the system, so those issues are less relevant here. Tightened underwriting standards for mortgages and private mortgage insurance have also reduced the availability of low downpayment loans to people with less than ideal credit that make negative equity situations more likely.

Some lists call Colorado a non-recourse mortgage state, but while there are additional steps that lenders must take in Colorado to secure deficiency judgments in the case of an upside down mortgage on a primary residence, they are relatively modest barriers in the case of a seriously upside down mortgage.

Criminal Trial For Gitmo Defendants A Safe Bet

Those who were worried that the 9-11 defendants would be acquitted by New York juries, rather than being convicted by military tribunals needn't have worried.

At least one -- and possibly all five -- of the detainees with alleged ties to the terrorist attacks of September 11, 2001, will plead not guilty in a "justification defense," arguing the attacks were responses to American foreign policy, according to a lawyer who met with one of the defendants.

Attorney Scott Fenstermaker said he met with defendant Ali Abd al-Aziz Ali at the Guantanamo Bay, Cuba, detention facility last week, and that when Ali and four other men face trial in New York, they likely will plead not guilty and then argue that the attacks were justified.

Fenstermaker, who is representing Ali in a procedural matter at Guantanamo, said he expects Ali will acknowledge a role in the 9/11 attacks, and believes Ali's goal in pleading not guilty would not necessarily be acquittal. The attorney said Monday that during his meeting with Ali at Guantanamo, "he said, 'Here's my goal,' and he wrote down the word 'death' on a piece of paper." . . . He said he cannot speak on behalf of the other four suspects, but he understands they have agreed to coordinate their strategies.

This isn't exactly a surprise. IIRC, men said they were guilty and asked for executions before military tribunals. The likelihood that the defense will involve making a political case against America, rather than a case of legal innocence, also avoids a host of thorny criminal procedure issues flowing from the initial decision of the U.S. government to detain these men as enemy combatants, rather than to move forward in the criminal justice system.

A New York federal jury may or may not hand down a death penalty as the cases are considered one by one. It is certain that Eric Holder, Jr., the U.S. Attorney General, will press charges that authorize the death penalty. It is virtually certain given the defense posture, that there will be convictions on those counts. Indeed, there is little reason to think that the defense will vigorously fight the death penalty in these cases. If there is any crime that could spur a New York jury to impose the death penalty, it is this one. And, this is one case where there is essentially no chance that a Presidential pardon would be forthcoming. President Obama has said as much.

Suppose a jury decides not to impose the death penalty. Shouldn't the will of the people of the Southern District of New York (basically the New York City metropolitan area), as expressed through the jury, prevail?

The discussion in the jury room will probably be one driven by foreign policy. Would these executions, really suicides by court, serve a valid purpose? Should we make them martyrs or not? There are arguments either way on that point. A New York City jury, as representatives of the victims where the crime impacted so many people, is particularly suited to make that choice for these men. They come from a legal culture where representatives of the victims usually have the ultimate say on the imposition of the ultimate penalty.

19 November 2009

Service Interruption

I wouldn't want to miss out on one of the most notable trends of 2009: the flu. I'll be back when I've recovered.

17 November 2009

What Is The Coast Guard Doing In Vail?

A Coast Guard plane made a hard landing at Vail, Colorado's airport today.

I find it very hard to find any legitimate reason for a Coast Guard plane to be landing in Vail in the first place.

The Coast Guard's jurisdiction encompasses the Atlantic, Gulf and Pacific Coasts, the Great Lakes, and perhaps commercial navigation on rivers like the Mississippi. Vail is about as far from any of those things as one can imagine. The Coast Guard is not responsible for maintaining law and order among the canoes and rafts of the Eagle River, and it certainly doesn't need an airplane to do so.

Admittedly, the Coast Guard might need to move planes from one coast to another now and then. But, one would think that it would use major airports like DIA for refuelings on a trip like that, rather than having a planned destination like the Eagle-Vail airport, with its notoriously difficult to land at runways. There is no indication that this was an unexpected destination involving an emergency landing.

One suspects that the trip involves transporting federal government VIPs to a vacation/conference in Vail. But, it is hard to believe that this really necessitates the use of a government owned plane, rather than commercial air travel services. If we're going to insist that automobile company executives take commercial planes or drive to Washington D.C. to ask for bailouts, it is hard to see why Coast Guard officials at any level ought to be flying offical aircraft to Vail. The President and First Lady have their air transporation needs met by the Air Force and Marines, so it is improbable that this has anything to do with Michelle Obama's visit to the state.

The Vail Daily's report states that the Coast Guard plane was in the vicinity for high alititude training. If true, the fact that the Coast Guard finds it worthwhile to do high alititude training is itself a scandal. The Coast Guard has to deal with all sorts of circumstances, but high alititudes are not among them. By definition, their missions all involve places rather close to sea level. Unless the Coast Guard has been activated for service in Afghanistan, there is really no reason for its aircraft crews to have that kind of training at government expense.

Municipal Bond Insurers Weak, Superfluous

While many municipal bonds are backed by the full faith and credit of the taxpayers in the municipality, making them ultimately very safe for investors, others, like a typical airport bond, are backed only by the assets of the government owned enterprise backing them, and thus do pose real risk for investors. The decline of municipal bond insurance is particularly problematic for government owned enterprises that want to raise money in areas or enterprises that pose significant risk of default, and the risk of default that comes with it.

One way to solve the problem is to back bonds with the full faith and credit of the government parents entity issuing them. Another is to obtain municipal bond insurance.

Remember credit default swaps (i.e. guarantees of someone else's investment security, often mortgage funds)? Municipal bond insurance is conceptually similar. The municipal bond insurance company promises it will pay if the issuing municipality defaults.

The trouble with municipal bond insurance, as in the credit default swap market, is counterparty risk. A guarantee is only is good as the person making it, and municipal bond insurance companies aren't particularly creditworthy at the moment, as a result of the financial crisis. In August:

Ambac, one of the largest bond insurers, was downgraded further into “junk” territory in July, and of the ten municipal bond insurers, only three maintain a financial strength rating of AA or higher. . . .

Since there is no economic value from bond insurance unless it results in at least an A rating for the bond, many of the insurers rated below BBB are now in “runoff” mode. In runoff, the insurers do not underwrite new business (as is the case with Ambac) and simply collect money on insurance premiums already written. Over several years, the insurer hopes that premiums will be enough to offset potential losses on all claims and then attempt to reestablish the business or simply return any excess proceeds to equity and/or bond holders.

An insurer is still liable to pay claims (i.e., a default or missed interest payment) even if in runoff, since they maintain some claims paying ability. Given the potential mountain of claims against the existing capital base (particularly from those subject to sub-prime mortgage exposure), it is uncertain whether these insurers will be able to meet future claims. A bond insurer is required to make up any missed interest payments, but principal repayment, in the case of default, is not made until maturity or until bankruptcy is resolved, whichever comes first.

Municipal bond insurers National/MBIA, Radian, CIFG and Syncora/XLCA, FGIC and ACA also weren't looking good in the August report. Only Berkshire (BHAC), Assured Guarantee (AGO), and Financial Security Assurance (FSA) were still safely in the A range for their own credit ratings. S&P gave a negative outlook to all three, while Moody's flagged AGO and FSA with a "Credit Watch Negative" rating, which isn't at all reassuring given the tendency of credit reporting agencies to be lagging rather than leading indicators of a company's growing credit distress.

The percentage of municipal bonds that are insured at all has fallen from 18% to 11% over the last year. Municipal bond insurance is essentially worthless when the underlying issuing municipality is more creditworthy than the insurer.

On the upside, municipal bonds are safer than they appear. Most are rated a notch or two below the level they would belong in if they were private corporations, based on the default rates of classes of municipal bonds. And, the House is considering a bill to create a mid-sized public sector municipal bond insurance fund to fill the gap created by the collapse of most of the firms in the industry.

Still, since bonds can always be issued with higher credit ratings and returns, it isn't obvious that the middle man of municipal bond insurance is necessary at all. About 89% of municipal bonds are issued without it. "Roughly 90% of insured bonds carry an underlying rating of A or better," so their bond ratings often don't take a hit when their mortgage insurer gets in trouble and those municipalities could issue bonds even without insurance. Only about 1% of all municipal bond issuers actually need municipal bond insurance to have access to the bond markets at reasonable interest rates, and some of those issues could turn to full faith and credit backed bonds instead to improve the credit rating of their bonds.

In short, perhaps municipal bond insurance, like subprime mortgages, is a financial product that almost never actually makes mutual economic sense for all parties involved. So, perhaps the industry deserves to die or to be reduced to a tiny niche market.

Is It Socialism? So What?

Panelists at a talk on the "Breakdown of the Public-Private Distinction" at a national meeting of The Federalist Society, a conservative lawyer and law student's group, are talking about the changes that the Financial Crisis has wrought. Remarkably, they are generally saying that the sky is not falling, even though they are concerned.

Some highlights (of a paraphrased summary):

David Leitch, Ford Motor Company

Old model: private entity regulated by public entity. E.g., Ford Motor is regulated by NHTSA.

New model: public entity as not just regulator but also part owner of private entity. E.g., GM.

Of course, the basic regulatory model has always been subject to distinctions that blur the public/private divide. There have been government-created and government-controlled corporations before. . . .

David Berenbaum, National Community Reinvestment Coalition . . .

There is basically no private mortgage industry at this time. It’s all government entities. . . .

Things are going to get worse. The option ARM bubble is about to hit, between 2010 and 2011. Mortgage payments hovering around $1200-$1300 a month are going to be adjusting upward to around $1900 a month. Many of the affected borrowers are white, middle class to affluent families. (It’s incorrect to blame the subprime mortgage crisis on lending to minorities; only a small portion of mortgages that resulted in default fall into this category.)

David Zaring, University of Pennsylvania . . .

Should we worry so much about the blurring of the public/private line?

Are government bureaucrats that different from corporate bureaucrats? Could it benefit the government to have more of a private bent?

Good news: the initial response to the financial crisis seems to have worked.

Three issues:

1. Executive compensation. Pay czar Kenneth Feinberg is reducing pay packages and trying to make them vest in a long-term way. But note that his authority extends to just seven companies that received extraordinary assistance from the government. And what he’s doing is not any more objectionable than a private equity investor holding accountable the executives of under-performing portfolio companies.

2. Resolution authority. This is striking power claimed by the government. But it has asked in various contexts before (e.g., FDIC), and constitutionally it has been upheld on numerous occasions. . . .

3. Investment management by government supervisors. The concept is that government may prevent a bank from repaying its TARP money before it achieves a certain level of capital adequacy, or government may stay invested in a company until it has maximized the net asset value on its investment. This does not seem like a radical notion.

J.W. Verret, George Mason

Government has effectively become a control shareholder in several companies — and it’s something you generally don’t want to be. More scrutiny and more restrictions come with this position. And note that you don’t need majority ownership to be a control shareholder. Government in Citigroup has under a 40 percent stake, but it is surely a control shareholder.

If you’re a control shareholder, you have fiduciary duties to other shareholders to maximize value, as well as potential liability under the securities laws. (But the government may be able to claim sovereign immunity.) . . .

Q (to Zaring): Shouldn’t we be worried about the erosion of this public/private divide?

A (Zaring): There have been some successes arising out of recent government involvement in the economy. E.g., TARP companies repaying their money to government with interest (profit for government). And there is a lot of public scrutiny of government action that will prevent abuse.

Q: What does the future hold for the economy?

A (Berenbaum): I don’t think we’re through this yet. We have upwards of 10 million at-risk consumers. Programs that help out just 1 or 2 million aren’t enough. This is why we at NCRC are interested in bulk solutions.

If hard core neo-conservative lawyers can't point at any real harms that have flowed from the "socialist" actions of the Bush-Obama response to the Financial Crisis, it is a safe bet that there haven't been any.

16 November 2009

Big Law Layoffs Strongly Regional

Large law firms reduced their staff of lawyers by about 4% between 2008 and 2009. But, there are vast regional disparities in these numbers. Big firms based in New York City (45 of the 250 largest) have laid off an average of 49% of their lawyers in a single year. Those based in Chicago (17 of the 250 largest) have laid off an average of 20% of their lawyers. Cuts at large law firms based in other parts of the United States have been far smaller. Los Angeles based firms have cut 3.2%, those based in San Francisco have cut 0.2% and those based in Washington D.C. have cut 3.8%, for example.

The largest law firms have had the biggest lay offs.

At one level, these results aren't surprising. The financial crisis can be seen as a housing bubble collapse that led to a financial industry collapse that led to the Great Recession. The financial industry part of the collapse intensely impacted investment banks, derivatives trading firms and big money center banks, while leaving commercial banking far less ravaged. The financial firms most hard hit by the financial crisis are heavily concentrated in New York City and Chicago, which are home to the New York Stock Exchange and Chicago Commodities Exchange respectively, and the law firms that represent them tend to have headquarters near their biggest clients. So, these firms are the ones that should be hit the hardest by the financial crisis.

But, since the high end of the financial markets generally don't employ that many people, in either the firms themselves, or in the law firms that they serve, compared to the total job markets in these major metropolitian areas, the lay offs are invisible in larger unemployment figures. Goldman Sachs and Lehman Brothers (the latter now bankrupt) each employed about 22,000 people worldwide, from the mailroom to the board room. Large commercial banks, in contrast, employ more than ten times as many people.

Also notably, neither the housing slump, nor the general economic slump in the economy seem to have had much of an impact on the biggest law firms.

13 November 2009

Who Faces Implicit High Marginal Tax Rates?

There are people in the United States who face marginal tax rates close to 100%.

Who are they?

Not the rich, but the working poor. For a family of three, near 100% implicit marginal tax rates impact those making between about $15,000 to $30,000 a year.

Their marginal federal income tax rates are low or zero. But, FICA taxation, the phase out of the earned income tax credit, state income taxes, and the phase out of means tested benefits like food stamps, Medicaid/SCHIP, Section 8 housing benefits, and cash welfare payments combine to give the working poor little incentive to earn more, unless it is a whole lot more.

Those with high incomes, in contrast, can often cast their income as capital gains rather than ordinary income, can often defer income, and are no longer subject to the Social Security part of FICA taxation when their income is characterized as earned income. Of course, they also aren't facing the phase out of means tested government benefits.

Conceptually, it isn't very hard to change these incentives. One can have benefits that aren't phased out at all (like Alaska's permanent fund dividend), a negative income tax (an idea that has floated around think tanks since the Nixon administration), phase out benefits more slowly, or create an exclusion for a certain amount of earned income in FICA taxation, for example.

Mechanically, it wouldn't be that hard to change the incentives. The vast majority of them are set by the federal government, and most are administered by just a few government departments (mostly the IRS, the Department of Health and Human Services and HUD). The tax code is tinkered with several times a year, and only a few sections, most of which are of little concern to most corporate tax lobbiests, matter in creating incentives for the vast majority of low income taxpayers. A handful of statutory sections and accompanying regulations govern the means tested benefits programs.

The problem is not an issue of choice (i.e. inability to know how to solve the problem or inability to recognize the problem) but of power.

The trouble is that there is really no one to lobby for the interests of the working poor. Union households typically make enough to lift them out of this working poor "dead zone." The concerns of the elderly, who have powerful representation in the form of the AARP and high rates of political participation are very different. The adult working poor and their children, in contrast, have low levels of political participation and are largely unorganized. They don't see themselves as a coherent political unit and don't have the means or the ability to advocate for themselves in a long drawn out Congressional battle. The middle class, in contast, participates more actively, if sporadically, in politics, and is suspicious of the notion of welfare for those who aren't genuinely poor, even though it may improve the incentive of those who are poor to earn more.

The rich, in contrast, frequently moan and groan about the impact that higher marginal tax rates may have on their incentives to work, despite the fact that their marginal tax rates are not meaningfully higher than those of other Americans. But, they do have the means and organization to fight Congressional battles, so their message is heard.

The only really organized political entity that disporportionately represents the working poor is the Democratic party, which has great political power at the moment. But, political parties have been so neutered by progressive reforms that tried to reduce the political corruption associated with 19th century political machines by weakening political parties, that they have become brand names rather than policy making centers. And, at any rate, few powerful Democratic party political figures have taken on the issue of implicit marginal tax rates for the working poor.

Intellectual Hazard

Moral hazard, which basically amounts to a personal incentive to do something unfair to someone else, is a familiar concept in the world of law and economics.

A new paper on the financial crisis explores a parallel concept, "intellectual hazard", which is similar to the concept of "cognitive capture" in administrative law. The people in charge of fixing problems get so used to thinking in the way that is causing the problems that they fail to see what is going wrong and don't take corrective action.

This paper identifies an important but previously unrecognized systemic risk in financial markets: intellectual hazard. Intellectual hazard, as we define it, is the complex organizations. Intellectual hazard impairs the acquisition, analysis, communication and implementation of information within an organization and the communication of such information between an organization and external parties. We argue that intellectual hazard was a cause of the Crisis of 2008 and suggest that this risk may be an important factor in all financial crises. We offer tentative suggestions for reforms that might mitigate intellectual hazard going forward.

Less charitably, intellectual hazard is the tendency of complex organizations to find ways to deceive themselves when knowing the truth would impair their short term profits or disturb the status quo.

Intellectual hazard and cognitive capture go hand in hand. If organizations deceive themselves and regulators fall for the self-deceptions, potential problems develop until they are too out of hand to be prevented.

Did Intellectual Hazard Do In The Automobile Industry?

While economic theory says that investors will shut down companies at the profit maximizing point, this isn't the way that large companies act in practice. For example, when the steel industry died in the United States, most steel companies kept operating at a loss for years and didn't stop sucking up good money after bad until they could no longer make payroll. General Motors and Chrysler did essentially the same thing, operating for several months after they couldn't get further financing from anyone but the government until the government called its bailout loans and forced them into bankruptcy.

In all of these complex organizations, one way to describe what was going on was as intellectual hazard. The companies convinced themselves that they were in the business of making steel or building cars, profits be damned.

The New York Times today, on cue, describes how the "Legendary Bureaucracy" of General Motors that was a key factor in its inability to take the steps needed to make itself responsive and effective enough to avoid financial disaster, is being unraveled, in the post-bankruptcy GM. Ironically, the owners who finally seem to have managed to get GM to cut through its red tape are none other than the governments and unions who are so often blamed for corporate red tape in the first place. A century of ownership by private sector stockholders failed to prevent this ossification of the General Motors bureaucracy.

In the case of Chrysler, similar stories have emerged in which representatives of Italian automaker Fiat that owns the new company together with government and union owners, have similarly cut through many layers of corporate bureacracy.

Is public and union ownership really more efficient than public investor ownership? Probably not, although it also isn't toxic to business efficiency, despite what champions of the publicly held, investor owned company model would have you believe. Honestly, any form of closely held company ownership combined with bankruptcy and new management probably would have done the trick.

One could theorize that the distinction between being publicly held and closely held (as both GM and Chrysler are now) was important in these bureaucracy busting reforms, because classic divide between ownership and management in a publicly held company is largely absent in a closely held company. The problem with this theory is that Chrysler spent many years as a privately held company, first as a subsidiary of Daimler, and then under the management of a private equity firm. So, empirically, this isn't a very good explanation.

A closely held company ownership structure may or may not be necessary for reform of companies like these, but it certainly isn't sufficient.

Three other possibilities make more sense.

One is that the symbolic recognition of failure that came with the respective bankrutpcies was necessary to convince everyone involved in these enterprises that the old way of doing business had failed, so that reform was needed. Before the bankruptcy, too many people had a mindset based on the default assumption of private law that existing arrangements and promises will be honored, long after that became an unrealistic expectation. Half the battle in managing a declining organization is getting those involved in it to genuinely acknowledge that it is in decline so that the steps that need to be taken to reach the best result can be taken.

A second theory is that truly independent new management was necessary to make a clean break from past practices unburdened by associations with the companies' past failures. Perhaps, even if a management team linked or descended from the old management group had proposed the same reforms, these proposals would not have had the legitimacy needed to be meaningfully implemented.

A third theory is that both companies were doomed long ago, and that as a result, there was no incentive for interested parties to change until there was some hope that the effort would pay off. Why fix something that's going to fail anyway? The trouble with theory is that the unions, bondholders and managers involved in these companies took their contract negotiations seriously and acted as if the promises that they were trying to secure from each other really mattered, right up until the very end. Not many of the people inside or deeply involved with the companies really believed that these storied companies which were cornerstones of American capitalism could really fail, even when the companies were forced to resort to government bailouts. After all, Chrysler had experienced multiple near death experiences but survived in the past.

Nothing, of course, prevents more than one theory from being correct. But, the first two, which are species of intellectual hazard seem like the most plausible explanations for what really happened than the third. And, if intellectual hazard can explain the failure to two of the big three carmakers to reform their own bureaucracies, why shouldn't it explain similar failures to make reforms in big financial companies?

Blog House Keeping

I've done some blog house keeping.

* I tweaked the font colors, because the links within the body text were sometimes hard to locate in the old font colors.

* I removed some links from the sidebar that I didn't use very often or that could easily access from other links. For example, I almost always go to the U.S. Supreme Court's website via SCOTUS blog, so I deleted the U.S. Supreme Court link.

* I added a link to The Volokh Conspiracy, as I read it irregularly and sometimes cite to it in my posts. I don't subscribe to the prevailing libertarian ideology of the blog, nor am I a Jewish neo-conservative as some of the Volokh Conspiracy crew appear to be (I am a politically left leaning secular humanist). But, that blog often mentions wonkish/law blog topics that other sources miss, and raise issues that are interesting to discuss, whether or not I agree with the take that those issues get in that forum. The discussion at the Volokh Conspiracy isn't always perfectly civil, and even the main posts are sometimes a bit wingnuttish, but there is often some civil discussion of the posts in comments, unlike many conservative blogs.

* The links in the sidebar were previously arranged into five different categories: my blogs, courts, other blogs, government, and media. These links were not always arranged in a clearly defined order within each category. Now, there are two categories: non-government, and government. Ideologically, this ends the distinction between blog and non-blog media, which is blurring. It is also simpler.

The non-government links are arranged alphabetical according to the Blockbuster rule, in which numerals go first, rather than in the order in which they would appear if spelled out. The government links are arranged systematically. First they are arranged by level of government: federal government, state government, and then local government. Within each level of government they are arranged by branch: excutive branch, legislative branch, and then judicial branch. The judicial branch links for each level of government are arranged in the order of their hierachy within the judiciary.

* I removed the statement that I am the author of a post from the post footer, along with some other extraneous material. I am the author of all posts on the blog.

* I removed some redundant headers from the sidebar.

* I've stripped out some of the tags I use less often (except for proper nouns), and sometimes changed a few early tags that were inconsistent with the way that I've been using those tags more recently, or replaced stripped out tags with the tags I would have used now. Post tagging is still not entirely consistent and is still entirely absent from most pre-2007 posts.

How Much Impact Do Zoning Laws Have?

Do zoning laws really have much of an impact?

In my experience, developers who want to build in undeveloped or blighted areas not zoned for a proposed project are often effective in securing zoning law changes. Zoning laws may stifle innovation and change in more prosperous, already developed areas. But, most of the time, that is not where developers want to build, because the cost of acquiring improved land and scraping or renovating the improvements on it area so high. Denver's recent wave of scrapes, pop tops and other infill development is an exception to the usual state of affairs, and even then, more often than not, development has gone forward until a very recent wave of downzonings.

But, then again, I've never lived in California. According to a March 4, 2009 op-ed article in the Los Angeles Times by Edward L. Glaeser, a professor of economics and director of the Taubman Center for State and Local Government at Harvard University (hat tip to the Volokh Conspiracy):

Although California is a populous state, it still has plenty of land. Santa Clara County, the home of Silicon Valley, only has about 2.2 people per acre. Even in denser places, such as Los Angeles, there is plenty of room to build.

California’s growth has slowed because the state has made it increasingly difficult to build new homes. There is an almost perfect correlation between the growth of an area and the amount of housing that is permitted in that area. California has some of the toughest land-use regulations in the country, which are often justified as environmental measures. When high housing demand is met with restrictions — not construction — California homes become unaffordable and new construction goes somewhere else.

I'm skeptical of, but fascinated by, this claim. I know that growth boundaries have had bite in Portland, Oregon, but wasn't aware that zoning laws had so much bite in California, and I'm still not convinced that they do.

One way to think about a zoning law is as a democratic veto on land use innovation. Permission for unanticipated uses will often be granted when someone comes up with a new use for land, but only after a politically appointed planning board or local government governing body approves the decision. While federal and state governments tend to pass laws with general principals in mind, municipal ordinances are frequently directed at a very small number of cases, and spot zoning is just the most notable example of this tendency.

Perhaps, California simply zones almost all of its land so that it can't be developed, but routinely approves just in time rezonings for new developments. Zoning often simply ratifies the status quo, and rezonings are routinely approved if everyone who owns impacted land agrees. This would lead to the "almost perfect correlation between the growth of an area and the amount of housing that is permitted in that area" even if rezonings are routinely approved.

It is also possible that earlier large lot subdivisions have swallowed up available land, and that the owners of the land in unblighted areas have either been unwilling, or not permitted by private land use covenants, from further subdividing their land without prohibitive transaction costs. Turning 160 acres owned by a single farmer in an unincorporated part of a county on an urban fringe into a subdivision isn't that hard to do, even if it isn't currently zoning for housing. Turning a 160 acre subdivision filled with five acre multi-million dollar ranchettes that are part of a covenant controlled development with an HOA into higher density housing is a much more formidable task, even if a dozen of the ranchette owners are agreeable to selling out. The fact that low density uses can't easily be converted to high density uses doesn't necessarily imply that zoning is the main culprit.

There are three reasons, at least, that I'm skeptical of the implied claim that command and control style land use restrictions in California are a drag on its ability to increase its housing stock.

One is that so much of California has a low population density. If buildable land were really scarce, one would expect to see the high housing densities of Manhattan, of Portland, Oregon, of San Francisco, of Tokoyo and of Hong Kong, where natural boundaries (or international borders) make developable land scarce. Los Angeles and Silicon Valley don't show the kind of densities one would expect if land were scarce and as a result land values were so high.

A second is that I suspect that county level population density figures in California are deceptive. California has counties with very large land areas that don't closely track the boundaries of urban development, and a large share of California's land has mountains or other geographical features that make it unsuitable for development.

A third flows from the housing bust in California. We know now, as many people including myself had suspected for a long time, that high housing prices in California were the product of a speculative bubble that outstripped the economic fundamentals. California has a large excess inventory of new housing whose construction was fueled by that bubble. Post-bubble housing prices are more affordable than they've been for many years, foreclosures are rampant, and California's landscape of dotted with empty, often half finished, new housing developments. This is not the mark of a housing market that has been unduly constrained by zoning and environmental laws from building new units. The drivers behind new housing development and the current brake that has been placed on new construction appears to be driven by the financial sector's follies, not state and local land use regulation. While the author argues that because of California's land use restrictions, "new construction goes somewhere else," I'm curious to ask where. Construction has not gone somewhere else. It has ground to a halt, nationwide. New construction certainly hasn't relocated to Nevada, Arizona or Florida.

None of this, of course, shows that California's zoning laws are good. It simply suggests that they may be irrelevant in the cases that drive that state's population and housing stock growth, in which case, the cause of California's economic woes (and the solutions to them) must be found elsewhere.

Vampires, Camp Style

Christopher Moore

It is possible to tell the similar stories as serious dramas (think of the most recent Batman movies), and as melodramatic campy comedies (think of the 1970s Batman TV serial).

The same applies to vampires. If you want serious (albeit saccharine) dramatic romance, you can read Stephanie Meyer's Twilight series. The second book in that series, New Moon, is coming to the big screen this month. New Moon is the best of the four books, portraying the agony of heartbreak and depression as well as more respectable classic literature, although I don't have particularly high hopes for the movie. (Yes, I'm a fan whose read most of the books twice and even an unfinished fifth book online.)

But, suppose you want a version of that kind of story full of inanity, overblown cliche, and pure campy hilarity, complimented with a healthy dose of San Francisco local color, including a modern incarnation of Emperor Norton I, a 19th century local eccentric and city legend. In that case, you have to read "You Suck!" by Christopher Moore.

Have a happy unlucky day.

University of Colorado Law Correction

It turns out that 35% of University of Colorado Law grads are unemployed at graduation, not 65% as previously reported in the press. To spread the horror, at the University of Texas today (Friday the 13th no less), one of the highlighted jobs of the week at the law school's career services office was:

"Legal Assistant/Nanny"

There is nothing wrong with a job that has both administrative and child care responsibilities, "personal assistant" amounts to the same thing, and the prospective employer deserves credit for being honest, rather than slipping child care responsibilities into a job billed as a legal assistant position.

But, in ordinary times, one would think that the best jobs available for graduates of a fairly selective law school would be better. Apparently, simply being in the same building as lawyers is the best that a graduating law student can hope for these days.

12 November 2009

Life Imitates Art: Financial Crisis Edition

It is getting increasingly hard to distinguish between the fake headlines (a la The Onion), and the merely snarky headlines with a real world factual basis, sourced to the Wall Street Journal, such as "Government Poised To Bail Itself Out."

How Public Is Higher Education In Colorado?

State Senator Morgan Carroll summarizes neatly the percentage of public funds that various public colleges in Colorado receive from the state government (not counting COF or Tobacco Funds):

•Mesa State College 20.3%
•Adams State College 16.8%
•Fort Lewis College 13.8%
•Western State College of Colorado 7.4%
•Colorado State University 3.9%
•Colorado School of Mines 3.1%
•Colorado Community College System 2.8%
•University of Colorado System 2.4%
•University of Northern Colorado 1.2%
•Metro State College 0%

COF funds are Colorado's higher education voucher program. In state undergraduate students at public and private colleges are eligible for them for up to 145 credit hours of higher education (almost five years) in all. It is currently in the amount of $68 per credit hour at public institutions and $34 per credit hour at private ones. It is not needs based, but does require an application. This works out to roughly $4,080 per year per in-state student at public colleges and $2,040 per year at private ones, for full time students.

It was devised to reduce the amount of state institutional funding received by higher educational institutions for TABOR purposes which treats institutions that receive less than 10% state funding at the institutional level as off the books enterprises not subject to most TABOR limitations.

At which colleges can I receive the College Opportunity Fund stipend credit?

The following four year public colleges:

Adams State College
Colorado School of Mines
Colorado State University
Colorado State University-Pueblo
Fort Lewis College
Mesa State College
Metropolitan State College of Denver
University of Colorado at Boulder
University of Colorado at Colorado Springs
University of Colorado at Denver and Health Sciences Center
University of Northern Colorado
Western State College

The following two year colleges:

Arapahoe Community College
Colorado Northwestern Community College
Community College of Aurora
Community College of Denver
Front Range Community College
Lamar Community College
Morgan Community College
Northeastern Junior College
Otero Junior College
Pikes Peak Community College
Pueblo Community College
Red Rocks Community College
Trinidad State Junior College

The following private colleges:

Colorado Christian University
Regis University
University of Denver

Privatization has been described as a radical step, but in truth, Colorado is already close. All but a handful are within a year or two of tuition increases from being entirely privately supported. The support percentages that institutions are receiving, moreover, seems almost random.

Alternately, if you see COF as just another form of public funding for higher education and don't see a distinction between a voucher and institutional funding, then Colorado Christian University, Regis University, and the University of Denver (all of which are religiously affliated) are public colleges in Colorado.

Iron Law of Oligarchy Alive and Well In Colorado

One of the oldest empirical economic theories is that markets naturally tend to towards oligarchy, now called oligopoly, where a small number of firms dominant a given market. Health insurance in the Colorado market is not exception.

Five firms dominate the health insurance market in the state.

The biggest five companies in the state — Anthem Blue Cross Blue Shield, United Healthcare, Aetna Health, Cigna and Kaiser Permanente — insure a combined 3 million Coloradans. The largest two, Anthem and United Healthcare, hold more than half of the private insurance market in the state.

In addition, Rocky Mountain Health Plans, a private non-profit health insurer, has a meaningful market share in Western Colorado. Anthem, Kaiser and Rocky Mountain are putatively non-profits or co-operatives. Kaiser is distinctive because it is vertically integrated - it both provides health insurance and runs the hospitals and doctor' offices that provide most of the covered services.

As recently as 2007, the health insurance market in Colorado was far less concentrated. Many smaller health insurance companies have left the market, apparently due to an inability to make a profit at market health insurance rates, many of those that remained merged, and many of the smaller companies that remain charge quite high rates.

Employers are requires to provide worker's compensation insurance in most cases, and this, rather than health insurance, provides health care for work related injuries. The dominant player in that market in Colorado is government chartered enterprise Pinnacol Assurance. It says it has a 57% market share. The rest of the players are shown here. The top five providers, including Pinnacol, have an 80% market share, the top ten have a 90% market share.

Private health insurance, worker's compensation insurance and medical malpractice insurance (discussed below), are all overwhelmingly purchased by employers, rather than by households, where automobile, renter's and homeowner's insurance, and a good share of all life insurance, is purchased.

Several public or subsidized health care systems also deserve mention. Cover Colorado is an industry subsidized option to allow the uninsurable to buy some sort of expensive health insurance plans. Medicare is a single payer provider for senior citizens (and is often supplemented by health insurance policies that cover what Medicare does not). Medicaid provide health care to the poor on a means tested basis (and subsidized nursing home care to less affluent older people and to children who buy into the program through the SCHIP program). The Veteran's Administration provides health care to certain military veterans (and the U.S. military tends to provide its own health care to active duty service members). The VA, like Kaiser, is vertically integrated; it is a health care provider as well as a health care payer, while the others are health care payment systems, not providers.

Of course, many people in Colorado have no health insurance or government program to provide health care and obtain what health care they can get from direct payment of health care providers, free or low cost clinics, and by going to emergency rooms which are required to stablize everyone who comes to them, without regard to ability to pay.

Medicare pays approximately the actual cost of care (and some providers don't take it). Private insurance companies pay a premium estimated to be about 15% to cover the bad debt and Medicaid patients that providers serve. Medicaid pays far less than the cost of care to providers (and many providers don't take it). The VA and Kaiser both have relatively low provider costs due to their vertical integration.

Most private insurers in most plans have incentives for people in the plan to use network providers who negotiate their rates with the insurance companies. Providers who provide services outside health insurance networks to insured patients typically charge a modest premium over the network rate that would be charged by a private insurer.

Outside subsidized clinics, the uninsured pay a huge premium for the same care over the price paid by those with health insurance, which is largely a reflection of the high risk providers face of non-payment for this class of patients as a whole, although it is often possible to secure discounts for payment up front in cash to bring prices down to something close to what insurance companies pay on a case by case basis.

While fewer than 20% of people in Colorado lack any health insurance, many people use the uninsured private pay system for dental care, women's health and mental health care, that is often not covered by someone's health insurance plans. Alternative medicine and health oriented witness programs are also organized almost entirely run on a private pay basis, often with sliding scales.

There are other means of obtaining health care, particularly in the very thin non-group health insurance market, but they don't have much of an impact on the market. The non-group market is essentially useless for providing pregnancy coverage, coverage for mental health conditions, and coverage for pre-existing conditions, because adverse selection/moral hazard risks are so high, and because individual health insurance plans are revocable at will arrangements, rather than long term contracts. First party medical coverage for care insurance (an optional pale shadow of Colorado's former "no fault" automobile insurance system), can also be a rational option for drivers who don't have health insurance for potential off the job accidents.

Another key insurance player in the Colorado market is COPIC which is the dominant medical malpractice insurer in the state (with market share of 90%+) which is indirectly controlled by the Colorado Medical Society and operates in practice like a consumer cooperative although that is not precisely the way that it is organized.

Unemployment Rate Cross Tabs

How does education, age, gender and race influence the likelihood that you are unemployed? A well done New York Times interactive graphic provides the facts.

11 November 2009

Veteran's Day

A Veteran's Health Bill has not been considered by the U.S. Senate by today, Veteran's Day 2009, because U.S. Senator Tom Coburn (R-Oklahoma) placed a hold on the bill, claiming that unfunded spending has to stop. Some of the people who would have been eligible to benefit from the bill received injuries in the course of their military service this week.

The cost of the bill is in the single digit millions. The annual federal budget is in the millions of millions of dollars each year. The defense budget is in the high hundreds of thousands of millions of dollars each year.

Coburn's protest is like an investment banker taking a stand to control his personal spending by refusing to buy his most well behaved child a cheeseburger on his birthday.

Does Coburn propose any revenue raising options to pay for this pittance of bill to help needy Veterans and ask his colleagues to consider this amendment? No. Does Coburn propose a spending cut to pay for this bill and then ask his colleagues to choose between them? No.

Rather than proposing a solution to a problem that he admits exists, Coburn simply says "no" to a bill that has no meaningful impact on the lack of fiscal discipline he says that is trying to address.

Another day, we can ponder the insanity of a U.S. Senate with a filibuster proof Democratic party majority that gives a Republican Senator with not a single other Senator's agreement a heckler's veto over legislation. Even Robert's Rules of Order requires a second to consider a motion. Suffice it to say that the U.S. Constitution does not require this level of deference to Senator Coburn's tantrum.

Today, it is enough to note Senator Coburn's gross disrespect for America's Veterans on the merits. He knows no shame.

10 November 2009

Penry Out, Now What?

Former Republican candidate Scott McInnis is almost certain to face off against incumbent Democrat Bill Ritter in the Governor's race in 2010. Josh Penry was pushed out of the race as big GOP donors backed McInnis.

Andrew Romanoff, one of the rising stars in the Democratic Party chose to take on Governor Ritter's Democratic U.S. Senate appointee, Michael Bennet, in a Democratic primary to decide who will face off against almost sure to win the Republican nomination Republican Jane Norton.

No one else has materialized to launch a serious more progressive leaning primary challenge to Ritter despite his lack of popularity with the base that has left him with very low poll ratings. Mayor Hickenlooper of Denver, probably the only person who could pull off a statewide Democratic primary win this late in the game (and one of the most popular politicians in the state, even outside Denver), has shown no interest in doing so.

But, is getting Penry out of the race good for Republicans? This is not clear.

[W]e think the risk in this story for McInnis is simpler--he's not the choice of the conservative base, the base's candidate is the one who got punked. By McInnis' well-heeled supporters. Anything that feeds the narrative of rich insiders making the base's primary choice for them is extremely dangerous to McInnis politically, and risks a backlash that money cannot control (see: Dede Scozzafava).

The lack of any serious Republican primaries also denies the GOP a chance to get a serious head start in getting themselves organized in the 2010 election outside the 4th Congressional District while multiple viable Republican challengers will take on moderate Democrat Betsy Markey in the conservative front range district. Romanoff's challenge, in contrast, puts Democrats statewide through the drill of organizing and activating Colorado Democrats for the 2010 primary election, no matter who wins, and this will pay dividends in the 2010 general election.

One of the lessons that the long and drawn out 2008 primary established is that primaries can be good for the political party that engages in them, even when, as in that case, they get heated. And, both Romanoff and Bennet each have a solid history of practicing civility in politics, so the kind of destructive intraparty blood feuds that could damage a political party in a primary race are unlikely to appear in race of the Democratic party nomination to the U.S. Senate in Colorado this election cycle.

DPS Weeds, Sows and Repots School Lineup

At the level of a school board in a District like Denver's with more than a hundred school programs and 70,000+ students, it doesn't work to have the board micromanage daily school operations. Its main jobs are to higher and fire senior district administrators, and to make big decisions on issues like opening schools, shutting schools down, and relocating schools to make better use of its sprawling real estate portfolio. The District has enough vacant classroom space to house almost 30,000 students and their teachers.

These decisions are made in the late fall so that there is time to implement these major changes in good order. We are currently in the 2009-2010 school year. Many of the changes will take place effective for the 2010-2011 school year, and the school choice program for the district is already well under way, with the rush to win over students well in progress, and a choice form deadline looming in January.

DPS has announced its plans. The existing school board will vote on the proposals on November 30, 2009.

Northwest Denver's Lake Middle School will undergo a complete reboot from scratch, similar to the one the the District undertook at Manual High School in North Denver. Central Denver's Greenlee K-8 is also going to be rebooted, shedding its middle school grades and getting a new focus on comprehensive literacy in its curriculum.

Programs at an elementary school and at a high school are scheduled to close, although isn't clear if this means that the schools will shut down, or just one of multiple programs currently conducted at those schools will be shut down (many DPS schools have more than one curricular programs within a single school building). An e-mail from City Councilwoman Marcia Johnson, whose District 5 includes the elementary school, makes clear that Philips Elementary School is shutting down. Philips "was recently rated the lowest performing school within DPS, and will close to neighborhood students. It will now house the Odyssey Charter School, currently co-located at Westerly Creek Elementary, where prior Philips students will have preferred enrollment. Children who live within the current Philips boundaries will be assigned to either Park Hill or Westerly Creek Elementary schools. A third Stapleton elementary school will be built to open for the 2011-12 school."

Two underperforming charter school have effectively been placed on probation.

Several new charter schools are slated to open include a foreign language immersion school and a new "Green" school. A couple of the new schools in the works, one in Stapleton and one in Green Valley Ranch, don't even have names yet.

Many schools will relocated to vacant and soon to be vacated DPS school buildings.

Lake Middle School in northwest Denver [is] the third-worst performing school in DPS and the district's worst secondary school. . . .The district . . . recommended . . . the continuation of Lake's [International Baccalaureate] program with a new principal, a new staff and a smaller group of students. The program would be halved to serve about 300 students. West Denver Prep's middle school would share Lake's campus, also serving about 300 students. Lake's current enrollment boundary would be split between the new Lake and West Denver Prep. . . .

DPS's recommendations would close programs at Philips Elementary and Skyland Community High School.

DPS would give P.S. 1 Charter School one year to develop a high-quality program or face closure. And it would require Northeast Academy Charter School to find a management organization to help it improve its academic rigor. . . .

Three schools may locate at the new Green Valley Ranch campus under construction: Denver School of Science & Technology (6-12), SOAR Charter School (K-5) and a "multiple pathways" school to help students who have fallen behind gain credits they need. The district intends to build six such schools in three years. . . .

A new K-8 will be built in Stapleton to open in August 2011 with construction costs shared by Stapleton's developer, Forest City, and DPS.

Odyssey Charter School would move from its current home at Westerly Creek Elementary to the building currently occupied by Philips Elementary.

Denver Language School — a full Mandarin Chinese and Spanish immersion charter school — would be located in the recently closed Whiteman Elementary School.

The Denver Green School would be in the recently shuttered Fallis Elementary School building. . . .

Greenlee K-8 would become an elementary school with a program focused on comprehensive literacy.

For one year, the second West Denver Prep would be in the building now occupied by Emerson Street alternative school. Emerson Street would move to a shared campus with P.R.E.P. alternative school at 2727 Columbine St.

What is the Green School?

FALLIS ELEMENTARY will be the new location for the Denver Green School in 2010-11, where it wants to stay and grow. Curriculum will emphasize project-based learning with an emphasis on environmental sustainability. Denver Green School is a DPS performance school that will serve grades K-8 at build-out, but only ECE-2 and 6th grade in its first year. By 2012-13, the school will have to co-locate its older grades with another nearby facility (possibly George Washington High School).

Denver Green School will be a boundary school, taking students from the Mayfair Park, George Washington, Rangeview, and Park Forest neighborhoods.

Thousand of students and staff will be affected by this round of reshuffling. DPS deserves kudos for finding new instructional uses for so many of its existing buildings, and for being willing to shut down some failing programs while giving other promising new initiatives a chance. It would have been easy for the Board to be far less bold, with a more mediocre result.

The bold moves are particularly notable in light of the fact that Michael Bennet's successor as superintendent at DPS (upon Bennet's appointment to the U.S. Senate) has mostly kept a low public profile. Many outsiders had assumed that this meant that this was to be merely a caretaker administration.

Neighborhood Charter Schools

Three charter schools would be required to accept all children who apply within an attendance area, just like other DPS schools do.

Those impacted are "two new West Denver Preparatory charter schools that are expected to be located within district buildings, and Manny Martinez Middle School, which is operated by the EdisonLearning charter school company and located in West High School." Four other charter schools will be examined to make a similar transition.

Now, all charter schools accept students only through the school choice process, which implicitly limits students to those whose families buy into the school's concept and aren't bureaucratically inept.

In other words, DPS is also taking the bold move of blurring the line between charter schools and magnet programs in traditional neighborhood schools.

The Bad News For West Wash Park

I live in West Washington Park, home to Byers School on Pearl Street, which previously was the home of the Denver School of the Arts. When the University of Denver closed its North Denver campus to consolidate itself in one location, DPS snapped up the old DU Music School for the Denver School of the Arts, and nothing has replaced it. The new campus is a good one for a program that was conceived from the beginning as a magnet school, and also is convenient to the growing Stapleton neighborhood. But, nothing has filled the hole in West Washington Park created when it left.

The fate of Byers School was probably sealed when the district sold the school yard, a dismal gravel covered city block caddy corner from the school itself. It is hard, although not quite impossible, to have a state approved PE curriculum without a school yard. But, the massive historic building will require tremendous renovation before it is suitable for any purpose other than education.

In an ideal world, the school might be replace the architecturally interesting, but basically generic office building that houses DPS administrative offices at 900 Grant, or serve as a new home for a community college, trade school or small college. These uses would require only more parking where there are now ballcourts.

Realistically, however, in a neighborhood with lots of apartment buildings already, it will be either scraped, or converted to apartments, condominiums or lofts. This kind of conversion project has been very successful at other former churches and schools in Denver, but this school is an order of magnitude bigger than those projects at a time when the housing market has cooled and has lots of a major high rise projects coming onto the market.

Better still would be a mixed use building. It might house a pre-school, shops, galleries, offices, residences, and even a small church or theater, all under one roof. But, even if zoning and similar regulations did make this possible, finding a developer with the vision and money to make this happen would be a long shot. The Denver Public Schools, of course, perennially struggling to get the cash it needs for capital investments in places where city is growing, need to get a good price for the property, which is one of the largest undivided parcels in this urban residential neighborhood.

09 November 2009

There's A Reason They Call It The Dismal Science

The current employment recession has seen the worst job losses since WWII, and is the 2nd worst in terms of the unemployment rate (only early '80s recession with a peak of 10.8 percent was worse).

From here.

Some broader measures of recession pain, like percentage of people who are long term unemployed, and unemployment plus discouraged workers plus involuntarily part-time workers are at post-World War II records. Many states have never seen such high unemployment. On the bright side, there is every indication that our economy is not plunging to Great Depression levels, as it looked like it might at first.

Two more general economic ideas have been bouncing around in my head in the meantime.

* One is microeconomic. Prices are set in our economy by supply and demand. The chain from raw materials to finished product can include losses, although such a chain is not usually sustainable, and widely disparate compensation relative to amount of time spent in labor. A great deal of effort has gone into understanding what drives supply curves, with economies of scale and the like receiving considerable theoretical treatment.

The economics of what lies behind the demand curve is considerably less mature. Usually, economists see demand as derived from a combination of ability to pay and utility, which individuals experiencing diminishing marginal utility as they consume anything in particular, and as they consumer more in the aggreate. But, economic theory tends to get hung up on the notion that the relative desires of consumers of goods and services differ. People have different utility curves.

Common sense suggests that people's preferrences for goods and services have far more similarity, to a considerable level of detail, than rigorous economic theories are comfortable acknowledging. The degree of consensus that people have on the relative desirability of any given set of goods and services is high. Some people are quirky and find one man's trash to be their treasure. Some people have stronger desires to have a high consumption lifestyle than others. But, there is much more variation in ability to afford to consume than the is in relative desire to consume and relative utility from different kinds of consumption. Most people would consumer more and consume higher quality goods and services if they could afford them.

This matters because it implies that (1) prices represent deeper, consensus concepts of value that go beyond mere supply and demand in the abstract, and (2) progressive taxation which assumes that the marginal needs of the rich are less intense than the marginal needs of the poor is more valid that a truly subjective theory of utility would suggest.

* The other idea is macroeconomic. It is common place to note that the American economy (and to a greater or lesser extent the economies of many developed countries), is overloaded with debt. The federal government's national debt is high. Consumer debt reached record levels, while savings have fallen leaving the unemployed and underemployed in more dire straights than they were in the early 1980s recession. Excess business debt drove the collapse of many firms across whole industries. And, foreign debt is high, with foreign countries financing an increasing share of the federal government's national debt and private sector debt. Now, public sector debt is continuing to rise, but consumers are dramatically cutting back on their debt and increasing their savings, and businesses are backing away from extreme levels of leverage.

At the consumer level, the idea is that consumers having engaged in so much debt financing consumption that they need to start consuming less than they produce so that they can pay back their debt.

Does this heuristic idea make sense at a macroeconomic level? The only way that this story of consumption can make sense at the level of the entire U.S. economy is to the extent that we have run trade deficits that are financed with borrowing from abroad, and to the extent that excess inventories have been consumed.

We certainly don't have depleted excess inventories in the U.S. economy. Every indicator points to the opposite conclusion. Newly constructed real estate lies vacant, bringing construction to a halt. Car companies are struggling to reduce their production of cars to match reduced demand for them. Manufacturing has slowed because inventories have built up. Unemployment is a measure of underutilized services. We have far more goods and services floating around in the economy than people are willing to buy. Almost all measures of U.S. economic capacity are being underutilized. Our current economy is slow not because we are unable to produce, but because we are unable to match what we can produce to what people are able and willing to buy.

A trade deficit means we are importing more than we are exporting. In the short term, this is good. We are getting something for nothing. But, in the long run, either the accounting is missing something, or we have to pay the piper. We have run increasingly large trade deficits for many years that are only starting to narrow. At first, the trade deficits merely counterbalanced previous trade surpluses, but we have long gotten past that point. Still, is the current economic funk and drop in consumer demand really driven by foreign financed debts on trade deficit creating purchases (a large share of which is oil consumption), coming due?

Most descriptive reviews of the current Great Recession don't point very strongly to demands for payment from foreign creditors of U.S. consumers and firms to be a driver of this downturn. Instead, the descriptive reviews point to a widespread domestic and domestically financed housing bubble, and to excessive, mostly domestic, overpromising and overleveraging in the complex parts of the finance sector. The complexity provides a place to look for foreign creditors placing a squeeze, very indirectly, on U.S. debtors. But, one would expect this to emerge more clearly if this was really the driving force behind the current state of the U.S. economy.

It seems more plausible that distortions in investment and housing prices driven by market failures caused the U.S. economy to invest its productive resources in the wrong things, and that the current recession is instead a classic "correction" in which we are realigning what we make in our economy with what we actually need. The problem is not so much consumer overspending, as it is excessive consumer spending in sectors like housing at the expense of consumer spending in other sectors (perhaps health care) where our needs are more urgent. This view is entirely consistent with massive excess inventories in many parts of our economy, and points to causes of the current recession driven by microeconomic distortions that are almost invisibile at the macroeconomic level, rather than macroeconomic consumer binging on a global scale.

In other words, in the pre-financial crisis boom, our increased productivity was an illusion because we were producing things that our economy didn't actually need, just as the Soviet Union did, to a greater extent, before its planned economic system collapsed.

Why care? Because different views regarding what is driving the recession suggest different solutions.

If the problem is a merely a decline in consumption, programs like the cash for clunkers and new home buyers credit make sense. We want to prop up consumption in sectors of the economy where consumption has collapsed.

But, if the problem is consuming the wrong things, however, this approach to government intervention merely sustains the pain. We ought to be pointing stimulus money at goods and services that we were underconsuming in favor of things like houses and cars before the financial crisis, rather than at trying to sustain dysfunctional spending. In this view, a big ticket, front loaded, health care reform bill may make better sense than stimulus designed to prop up construction, or the automobile industry, or other kinds of manufacturing. Yes, we need more consumption, but we need to encourage consumption of what we really need, rather than what we were previously encouraged by a broken mixed economy to spend too much on, like homes and home improvements.

The hard part, of course, is figuring out what we were spending too little upon before the financial crisis. Price bubble collapses and layoffs have made very clear what we were spending too much upon, but limits in our ability to ramp up production of goods and services that were being underconsumed as a result don't make themselves as obvious. Empirically, perhaps the most useful measure would be to look at who is not laying people off. Boosting economic capacity in those sectors would make more sense than sustaining overcapacity that the market is doing its level best to eliminate.

Further complicating this endeavor is the apparent trend that the public sector or heavily government funded sector is laying people off more slowly than many parts of the private sector. Is this because government spending reacts to the state of the economy more slowly than the private sector, or is this because we have simply been underspending on government provided or funded goods and services, like road and bridge repair?

There is a good case to make that fundamental underspending on government funded parts of the economy is driving relatively slow declines in government employment as the more financial and political causes of this trend.

The U.S. has one of the smallest public sectors in the developed world. The entire nation received a shock when a major urban bridge collapsed for want to maintenance. We have more people who aren't receiving health care than any major industrialized nation. Government services like public schools in new real estate developments typically take time to catch up with population growth, and we have experienced a long period of new real estate development. Our population is aging, and a large share of the old are heavily dependent upon government payments from Social Security, Medicare, SSI, and Medicaid; while older American have low rates of poverty due to these safety nets, those in the middle are less affluent than those in social welfare states with more generous government run or mandated pension plans.

It is also notable that public concern about overall levels of taxation in the U.S. are at a near record low. In most of recent U.S. history, a larger share of people have felt that they are overtaxed.

At any rate, in whatever form it takes, stimulus should advance the process of getting the U.S. economy into a "corrected" state, rather than retard it.