Michael Mandel: Recent Productivity Growth is a Myth
I recently heard Business Week economist Michael Mandal make a provocative point. Fortunately, it turns out that he’s put a related PowerPoint online so I can pull out some of his slides. But his basic thesis is that the current recession does not, in fact, represent a financial crisis that’s spilled over into the “real” economy; rather, he says the cause of the financial crisis is that growth in the recent past has actually been much less robust than people realized. That “looking back, the Internet Decade (1997-2007) was much weaker than we realized.” This starts with the observation that real wage growth during this period was terrible, even for college graduates:
This basic information is familiar to liberals, who spent much of this period being suspicious that capital was somehow sucking up all the gains. But then came the stock market crash:
But if the gains from Internet Decade productivity growth didn’t go to labor and didn’t go to capital, then where did they go? His thesis is that it largely didn’t exist at all. The extra money went into increased costs of health care (while wages have been flat, “total compensation” has gone up because employer-side health insurance premiums are higher) but health care isn’t actually dramatically better than it was ten years ago. Mandel doesn’t put it this way, but you can understand the situation as real, but modest, productivity gains being essentially offset by the decreasing productivity of the health care sector. Instead of really growing, we’ve just been borrowing from foreigners who were willing to invest on the theory that America was going to produce awesome innovations in the IT and biotech sectors that never really panned out:
Instead of the national balance sheet, you can look at the household balance sheet:
The good news, such as it is, about this interpretation of the crisis is that it implies that some fairly large proportion of the ongoing contraction is actually the vanishing of prosperity that to some extent was an illusion all along.
To be honest, I don’t know how plausible this really is. I’ve been alive for the past two years. It certainly looked at the time as if we were, first, facing a relatively minor recession. New housing starts were way down, due to housing having been overbuilt. This was leading to unemployment. At the same time, the dollar was falling and making US exports more competitive which was leading to a (gross) decrease in unemployment. The recession basically reflected the friction involved in this need for a shift in the real economy. But then it turned out that the same oversupply of housing that was leading to the collapse of the building trades as a source of employment was also going to cause a financial crisis. And then only after management of the financial crisis went wrong did the real economy start to get really bad.
75 Responses to “Michael Mandel: Recent Productivity Growth is a Myth”
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March 2nd, 2009 at 2:54 pm
Matt writes: “I’ve been alive for the past two years.”
I must say that I underestimated Matt when calling him a “child prodigy blogger.” He should be recognized as an “infant prodigy blogger.”
Growing up in the 1960s, the standard assumption was that the future would consist of flying cars and robot maids (cf. The Jetsons).
Ain’t happened. The Internet has been terrific for people like me, but, for better or worse, there aren’t that many people like me. Most would be better off with flying cars and robot maids.
March 2nd, 2009 at 2:54 pm
AAAAAAAHHHHHHHH!!!! This is not cheering me up. How exactly is it good news that the last 10 years of prosperity to some extent were an illusion all along? I’m not feeling the silver lining here, Matt.
March 2nd, 2009 at 2:57 pm
Keep in mind that importing millions of illegal immigrants to “do the jobs Americans just won’t do” doesn’t do much good for productivity. It just discourages the development and spread of labor-saving technologies, just as the Roman Empire never bothered with improving productivity because they had all those slaves.
Importing illegal immigrants to build heavily mortgaged exurban McMansions for parents trying to flee school districts overrun by the children of illegal immigrants was a particularly circular exercise in hopeless social policy.
March 2nd, 2009 at 2:59 pm
But if the gains from Internet Decade productivity growth didn’t go to labor and didn’t go to capital, then where did they go?
As far as I recall, they did go to labor, but only the top 10% and mostly the top 1%. Looking at median wages would not address this issue.
March 2nd, 2009 at 3:02 pm
Moreover, from a financial standpoint, the Housing Bubble was largely a bet that the rapidly Hispanicizing populations of just four states — California, Nevada, Arizona, and Florida — could somehow earn enough to pay off their huge mortgages or could find even Greater Fools willing to pay more to live in increasingly barrio-like neighborhoods was the kind of ludicrous thinking that would only be popular in a culture dominated by an orthodoxy of Crimestop when it comes to the pros and cons of the sacred subject of Diversity.
March 2nd, 2009 at 3:04 pm
Except I’m pretty sure the market is now currently underpriced. Pretty much everyone says this. Financials and fear are weighing it down. The true price is probably somewhere in between.
March 2nd, 2009 at 3:04 pm
If you look at consumption, it was up broadly over the last decade, but it was largely financed by debt, such as credit cards and home equity extractions via second mortgages.
The Grand Strategy was that the Rich would end up holding all the IOUs while the Masses would be placated with ever larger houses and televisions.
A foolproof plan! What could possibly go wrong?
March 2nd, 2009 at 3:05 pm
Shorter Steve: all those Hispanics and blacks who were running the government and the biggest banks ruined us!!
March 2nd, 2009 at 3:05 pm
“Except I’m pretty sure the market is now currently underpriced. Pretty much everyone says this.”
Okay, but are they putting their money where their mouths are?
March 2nd, 2009 at 3:10 pm
Keep in mind that importing millions of illegal immigrants to “do the jobs Americans just won’t do” doesn’t do much good for productivity. It just discourages the development and spread of labor-saving technologies
That’s a nice little line from Popeye the Racist Man, but it’s not exactly borne out by the kind of work being done by the kind of people he’s obsessed with. Want to volunteer a few examples of those “labor-saving technologies”, Pops?
March 2nd, 2009 at 3:20 pm
DuBois, you’ve gotta be kidding me about the Internet being “superficial.” That’s like saying the telephone was superficial.
March 2nd, 2009 at 3:23 pm
No, I don’t think we can blame the Chinese. Steve assures me it’s the Hispanics.
March 2nd, 2009 at 3:27 pm
Why oh why,
As far as I recall, they did go to labor, but only the top 10% and mostly the top 1%. Looking at median wages would not address this issue.
Do you know how to calculate the median?
DTM,
How has this strategy been working out in Europe? No snark intended I am actually curious how Europeans have been doing in the last 10 years relative to the United States. The left and right often argue why median total compensation has actually risen or why it has stagnated but why hasn’t either side brought in Europe?
March 2nd, 2009 at 3:27 pm
“Want to volunteer a few examples of those “labor-saving technologies”, Pops?”
Sure. Basically, take a look at LA vs. other parts of the country. In Los Angeles, there are few robot car washes because most car washes employ a swarm of illegal immigrants to wash cars manually. Which makes it hard to get your car washed late at night or early in the morning in LA because they are only open in prime hours.
Or look at the ridiculous levels of valet parking at restaurants in LA, which are particularly stupid because most LA restaurants have their own parking lots and the weather is always nice. In Chicago, valet parking is a very useful because the valets go park your car for you in the rain, and they don’t have their own parking lot so they stick it in front of a fire hydrant and then slip a few bucks to the cops. In LA, everybody makes a grand entrance by dropping your car off with the valet, who then drives it 50 feet and puts it in the restaurant’s parking lot. When you come out, you stand around waiting for five minutes in 70 degree weather for a valet to walk 50 feet and bring you your car.
On a larger scale, California’s farm productivity has lagged way behind Australia’s because of the huge “reserve army of the unemployed” (to quote Marx) available from south of the border. When Cesar Chavez’s UFW drove up wages, growers responded with productivity improvements, but when farm wages stagnated from the 1980s onward, so did productivity.
March 2nd, 2009 at 3:28 pm
Thanks for those nice charts reminding me again how woefully underpaid in comparison to my average peer I am, even among people who experienced almost no wage growth in ten years. Thanks, Matt.
March 2nd, 2009 at 3:32 pm
Myself, I’d say the stock market is overpriced. Clawback is a bitch. The speculative part of the economy is going to be in hibernation for a while. Dow36,000, the rightwing utopia, is on its way to the museum where they exhibit Mao’s Great Leap Forward and Stalin’s Stakhonovites.
March 2nd, 2009 at 3:34 pm
Sigh. The housing bubble was only the most blatant manifestation of a very simple fact: almost all of the growth of the past few decades has been fueled by debt thanks to Uncle Alan’s free money giveaway. Both individuals and corporations are now drowning in an ocean of it, and no possible action other than Weimar-style hyperinflation is going to drain this bathtub. We’re going to have the world’s worst hangover for the better part of a decade.
March 2nd, 2009 at 3:35 pm
Do you know how to calculate the median?
You don’t “calculate” the median. It just is the middle point in the data. Bill Gates can earn tens of billions of dollars and it wouldn’t change those median wages the journalist is looking at. What about average wages, have they risen?
March 2nd, 2009 at 3:49 pm
As of August 2008, 50% of all foreclosures were in just four states: California, Arizona, Nevada, and Florida. Since California’s prices were more than double the rest of the country, with a peak median price over $500k, a large majority of defaulted dollars come from what Wall Street called the four Sand States. California alone probably accounts for around half the defaulted dollars.
In contrast, Texas didn’t have much of a Housing Bubble. The best defense I can think of for Bush and Rove is that they are Texans who didn’t understand California. The eastern half of Texas has a gigantic supply of okay quality land (flat with adequate water) and very few limitations on development. So, the supply of homes seldom lags the demand, so housing prices stay low.
In sharp contrast, California has a very limited supply near the coast of superb land with a glorious Mediterranean climate, and a whole bunch of mountains and deserts with mediocre climates. It also has far more environmental and other land use laws than Texas, which slows development tremendously. So, the supply of housing in California lags well behind increases in demand, causing big price spikes.
So, Bush and Rove assumed that they could generalize from their Texas experience with immigration to California, but that proved a disastrous mistake.
March 2nd, 2009 at 3:50 pm
Why oh why,
Sorry I thought you were implying that the top 10% were causing median GDP to be inflated. What you initially said makes perfect sense although I am not sure to what extent. I still feel Matt’s reasoning is correct that neither labour (through wages) or capital received most of the benefits but wage inequality could explain some of that.
March 2nd, 2009 at 3:57 pm
I demand more robot car washes!
March 2nd, 2009 at 4:05 pm
Sure. Basically, take a look at LA vs. other parts of the country.
Basically, that kind of extrapolation is kind of dumb.
I’ll throw in a few inefficiencies of my own: grocery bagging, “greeters”, parking attendants. All jobs that in Europe are either considered surplus to requirements, or in the latter case replaced with machines. (Of course, you have tow trucks in lieu of parking attendants in certain parts of the South, but they’re usually run by rednecks.) Last time I checked, baggers and greeters weren’t the kind of jobs that bring people across the fucking border.
On a larger scale, California’s farm productivity has lagged way behind Australia’s because of the huge “reserve army of the unemployed” (to quote Marx) available from south of the border.
Oh, for fuck’s sake.
You do realise that Australian farms bring in huge numbers of people on ‘vacation work’ visas from the Old World, and have started hiring guest workers from the Pacific islands, right? Backpackers and coolies slumming in dorms are the engine of agriculture. The only difference is that Australia allows young white kids to participate.
March 2nd, 2009 at 4:18 pm
Steve,
could you not get murdered by a black gang or something – it would prove you right and make everyone else happy in the meantime.
Given how blacks are murderous savages, it shouldn’t be hard for you to do.
March 2nd, 2009 at 4:28 pm
Moreover, from a financial standpoint, the Housing Bubble was largely a bet that the rapidly Hispanicizing populations of just four states — California, Nevada, Arizona, and Florida — could somehow earn enough to pay off their huge mortgages or could find even Greater Fools willing to pay more to live in increasingly barrio-like neighborhoods
In contrast, Texas didn’t have much of a Housing Bubble
Well, Texas isn’t very Hispanic, is it Steve? Only about the same as California.
Cunt.
March 2nd, 2009 at 4:40 pm
Careful there, Matt. You’re wandering around in the neighborhood of uneconomic growth, and there be dirty fucking hippies!
March 2nd, 2009 at 4:57 pm
Another obvious problem is that demographic change has been undermining the expected growth in human capital, especially in California, where roughly half the defaulted dollars come from. It’s natural to think of California as being full of brilliant chip designers in Silicon Valley and sharp entertainment industry lawyers in SoCal, so, sure, they’ll figure out some way to pay back those half million mortgages being handed out during the Housing Bubble.
But, in reality, Silicon Valley and Hollywood are just a drop in the bucket in the New California. Take a look at federal NAEP test scores, where California now ranks near the bottom, not far above Mississippi. That tells you a lot about the earning capacity of Californians these days.
March 2nd, 2009 at 5:20 pm
Steve,
what about the hispanics in Texas? Why didn’t they buy beyond their means there?
And please get shot in the face by a black man. I’ll promise to be a racist if you have your nose shot off.
March 2nd, 2009 at 5:31 pm
James asks:
“what about the hispanics in Texas? Why didn’t they buy beyond their means there?”
That’s exactly how the Texans Bush and Rove messed up. They thought that, say, promoting zero down payment mortgages as the most important way to meet Bush’s goal of 5.5 million more minority homeowners would work out okay because there wasn’t a Housing Bubble in their home state of Texas. But California isn’t much like Texas, and Arizona, Nevada, and Florida are in-between Texas and California on the relevant dimensions.
There wasn’t a Housing Bubble in Texas because housing prices are really cheap in Texas due to a huge amount of land and very little environmental and other regulation of development. So, increases in housing supply don’t lag behind increases in demand the way they do in California. If Greenspan cuts the interest rate, up goes houses, and prices stay fairly flat.
Moreover, there was a big housing crash in Texas in the 1980s due to the oil price decline, which kept Texas down for a long time. So it was not as favored a spot for immigrants as California was in the 1980s and 1990s. Thus, according to the 2000 Census, 14% of the residents of Texas were foreign-born versus 26% of the residents of California.
March 2nd, 2009 at 5:36 pm
So, if you want to know how everybody missed this slow-motion disaster and kept pouring mortgage money into California, Arizona, Nevada, and Florida despite the obvious implausibility of their current residents paying off the mortgages or finding people who could pay off the mortgages who wanted to live next to them, just look at the unhinged reactions to my comments right here.
Slow motion disasters that happen in plain sight aren’t caused by one party or one ideology. If they were, their enemies would be hollering. No, something like this happens when the conventional wisdom has ruled dissent out of bounds.
March 2nd, 2009 at 5:37 pm
so given the Hispanic % of population in Texas is almost identical to California, what you’re saying is race had nothing to do with it, and local housing prices and history did?
thanks for clearing that up Steve. I’m sorry I thought you were a racist.
March 2nd, 2009 at 5:37 pm
No Steve, don’t start quoting Orwell; he would be disgusted with a piece of shit like you using him as an excuse.
March 2nd, 2009 at 5:47 pm
… And then only after management of the financial crisis went wrong did the real economy start to get really bad.
What was wrong with the management of the financial crisis? There isn’t a whole lot you can do after the Titanic hits the iceberg.
March 2nd, 2009 at 6:53 pm
Racial angle aside, Sailer makes a good point about the effect of low-wage labor availability on productivity growth. It’s one reason I support a high minimum wage.
March 2nd, 2009 at 8:05 pm
America’s advantage was always that it was an expensive wage, cheap land country, as was pointed out in Ben Franklin’s 1751 essay, “Observations concerning The Increase of Mankind,” where he noted that life was happier in America than in Europe because:
“Europe is generally full settled with Husbandmen, Manufacturers, &c. and therefore cannot now much increase in People… Land being thus plenty in America, and so cheap as that a labouring Man, that understands Husbandry, can in a short Time save Money enough to purchase a Piece of new Land sufficient for a Plantation, whereon he may subsist a Family; such are not afraid to marry;… Hence Marriages in America are more general, and more generally early, than in Europe.”.
Following this logic, Old Ben argued for immigration restriction.
The globalist conventional wisdom of recent years has reversed Franklin’ insight, assuming that cheap wages and expensive land are the route to national happiness.
March 2nd, 2009 at 8:11 pm
Dear James:
What I’m saying is that in states where the marginal homebuyer is typically Hispanic, they’re a lot more likely to be able to afford the mortgage if its only $150k, as in Texas, than if it’s $500k, as in California.
Bush and Rove never grasped the differences between Texas and California, so they just assumed their pro-immigration and pro-easy credit policies would work as well in California as in Texas, economically and politically (their number one political goal was to convert Hispanics to the GOP).
Thus, the world crash was set off by defaults in just four states. As Lucy and Herlitz of the U. of Virginia write in a new study of dollars lost in foreclosures as of November 2008:
“Most foreclosures have been concentrated in California, Florida, Nevada, and Arizona, and a modest number of metropolitan counties in other states. In fact, 66 percent of potential housing losses in 2008 and subsequent years may be in California, with another 21 percent in Florida, Nevada, and Arizona, for a total of 87 percent of national declines in these four states.”
March 2nd, 2009 at 8:36 pm
Matt must realize that if he agrees with the thrust of this very post, it means that he’s admitting we wacky fringe lefties were correct back then, too.
March 2nd, 2009 at 9:06 pm
I was alive during the past two years as well, and I saw trouble coming. The only difference is I spent most of those two years working for a personal bankruptcy firm instead of writing about Hillary Clinton’s veep picks. To be fair, the signs were quiet – a bunch of ARMs spurred on by the Bush administration’s “Everybody gets a house!” rhetoric suddenly reset all at once, overtime dried up at an Indiana GM factory, construction workers began to get laid off.
March 2nd, 2009 at 9:34 pm
It’s important to keep in mind that all the speeches George W. Bush and Angelo Mozilo of Countrywide gave in 2002-2004 about how we must eliminate the down payment requirement on mortgages in order to close the racial gap in home ownership … they were just seizing upon society’s sacred cow of fighting discrimination in order to justify what they wanted doing in any case. (Although Bush was dumb enough that he probably believed that not enough mortgage lending to minorities really was high up on America’s list of problems…)
Everybody should read this hilarious showcase speech Mozilo gave to the Harvard Joint Conference on Housing Studies in early 2003 in which he pledged Countrywide to hand out $600 billion in minority and lower income lending over seven years. In return for which, all he wanted was elimination of down payment requirements, quicker verification of loan applications (i.e., “stated income” loans — no pesky verifying if the incomes on the applications were real), and some relief from “predatory lending” laws.
http://www.jchs.harvard.edu/publications/homeownership/M03-1_mozilo.pdf
March 2nd, 2009 at 11:08 pm
Except I’m pretty sure the market is now currently underpriced. Pretty much everyone says this. Financials and fear are weighing it down. The true price is probably somewhere in between.
Actually the housing market is, by historical standards, still overpriced, according to Robert Shiller’s housing index.
March 2nd, 2009 at 11:26 pm
For example, there are many, many specific housing markets outside of his four states which participated in the bubble (e.g., like new exurb developments almost everywhere).
e cites 50% of foreclosures in those four states, but that also means 50% of foreclosures are NOT in those four states–again, it turns out they are scattered all over the place.
Looking up the states in Wikipedia, one finds that California, Florida, Nevada, and Arizona combined have about 21% of hte country’s population. So if they accounted for 50% of foreclosures, then their foreclosure rate was about 2.4x the national average. So yes, the problem was much worse in these states.
so given the Hispanic % of population in Texas is almost identical to California, what you’re saying is race had nothing to do with it, and local housing prices and history did?
And after opening with it all being the Hispanics’ fault, when confronted with the clear counter-example of Texas, he suddenly starts talking about land supply and regulations
James and DTM make a very good point. If the proportion of the population that is Hispanic can be proven not to be the only factor in how bad the housing bubble was in a state, it must not have been a factor at all, since no phenomena are affected by more than one factor.
March 3rd, 2009 at 1:23 am
DTM, look at this quote again:
according to a new analysis of foreclosures in 50 states, 35 metropolitan areas and 236 counties by University of Virginia professor William Lucy and graduate student Jeff Herlitz…..most foreclosures have been concentrated in California, Florida, Nevada, Arizona and a modest number of metropolitan counties in other states. In fact, they claim that “66 percent of potential housing value losses in 2008 and subsequent years may be in California, with another 21 percent in Florida, Nevada and Arizona, for a total of 87 percent of national declines.”
http://www.virginia.edu/uvatoday/newsRelease.php?id=7838
March 3rd, 2009 at 1:47 am
Here’s from the same UVa study by Lucy and Herlitz:
“Foreclosure processes in four states—California, Florida, Nevada, and Arizona—constituted 62 percent of the U.S. total in 2008.”
My 50% figure for those four “Sand States” was as of August 2008. Their 62% figure was as of November 2008.
Now, keep in mind that those are just the absolute number of foreclosures. What’s really significant is the defaulted dollar values, which are hugely driven by California, where the median price peaked at over a half million dollars. Lucy and Herlitz estimate that 87% of the decline in home values nationwide will be in the four Sand States. That’s not the same thing as the defaulted dollars, but it’s in the same ballpark.
March 3rd, 2009 at 4:36 am
What’s really striking — as some of the comments above show — is how few basic facts people know about the mortgage meltdown. For example, the enormous role of California in dollar losses is not at all widely understood. (Lucy and Herlitz found that as of 11/2008, California accounted for 34% of foreclosures and 66% of all housing value declines.)
Look at DTM above going on about “Notice pockets in places like Tennessee, Ohio, central Indiana, central Illinois, parts of Wisconsin, parts of Arkansas–not exactly all epicenters of the U.S. Hispanic population.” Swell, but “parts of Arkansas” really don’t amount to much compared to California in population or, especially, in home values.
Nor does anybody know basic facts available from the federal Home Mortgage Disclosure Act database that dollars loaned to Hispanics for home purchases increased by 691% from 1999 to 2006 (versus 397% for blacks, but only 218% for Asians and about 100% for non-Hispanic whites). Nor does anybody know that default rates on mortgages and student loans have long been significantly higher for blacks and Hispanics on similar loans. Those are all just hatefacts.
Of course, when you stop and think about it, the most likely way for the whole country to screw up royally is when everybody who is anybody agrees on something and the few heretics get demonized. Bill Clinton, George W. Bush, Barack Obama, Angelo Mozilo, and Barney Frank all proclaimed over and over that minorities weren’t getting enough mortgage money. They each had their own reasons for saying this. Mozilo wanted to get even richer off running even bigger boiler rooms. Clinton, Obama, and Frank wanted to reward their bases. Bush wanted to convert minorities, at least Hispanics, into conservative GOP-voting homeowners.
So, everybody who was anybody thought it was great idea.
How’s that working out for us lately?
March 3rd, 2009 at 5:10 am
I did not know that Hispanic immigrants lowered the Fed interest rate, brought in overseas capital to invest in the US housing market, invented derivatives to disguise mortgage risk, made billions by reselling essentially fraudulent loans, and overinflated the California housing market by snapping up $950,000 properties in Irvine.
Thank you, Steve Sailer, for ripping away the veil of non-prejudice from my eyes.
March 3rd, 2009 at 6:19 am
Re: Of course, when you stop and think about it, the most likely way for the whole country to screw up royally is when everybody who is anybody agrees on something and the few heretics get demonized
Hmm. The whole country pretty much agrees that monarchy is a bad idea, slavery is a real bad idea and women should be able to vote. I guess that means we’re screwing up royally.
March 3rd, 2009 at 7:17 am
Jesus Racist Christ,
right now I count 6 mentions of “racist”.
you people should stop panicking when someone mentions immigrants.
Steve Sailor has proposed a theory which could be just as true if the immigrants were all Caucasians.
It’s obvious that a large supply of low-wage-demand (notice how I did not say low-skill) labour makes automatisation relatively too costly.
Would anyone try to discuss that instead of playing the “race outrage!” card?
March 3rd, 2009 at 8:32 am
No one is blaming Hispanics.
Steve is blaming “anti-racist” ideology.
One of the (no one is saying the only) major factors driving the housing bubble was a belief that the relatively low rate of homeownership among Lations was a bad thing, was due to racism rather than being a naural consequence of Latinos’ current economic status, and that the banking system needed to make it easier for Latinos (and to a lesser extent, other minorities) to get mortgages.
These policies led to downpayment requirements, and a discouragement of looking too closely at a person’s credit rating, due to the fact that looking at credit ratings closely would disporportionately affect minorities. In order to avoid reverse discrimination lawsuits, such policies also led to a decline in credit standards generally.
As banks who were less careful would be given more opportunities for growth and merger than those that were more careful (because the more careful banks would be accused of not helping minority communities enough), these policies also helped to insure that the least responsible banks were the ones that grew the most and flourished the most.
This had the most effect in California, because with a limited housing supply, easier loans would tend raise the price of housing rather than increase the supply.
This is less evident in Texas, because there is more room for growth in supply, so housing prices do not accelerate as fast when mortgage standards are relaxed.
March 3rd, 2009 at 10:09 am
“This had the most effect in California, because with a limited housing supply, easier loans would tend raise the price of housing rather than increase the supply.”
Is this due to zoning? Why is housing in CA limited but not Texas?
March 3rd, 2009 at 11:18 am
whatever, whatever.
I thought the issue here is productivity.
W. Lewis in “The Power of Productivity” (2005), makes the case that agriculture in India will never mechanize as long as there are rural workers who can and want to do the job cheaply. Once they move to get industry/service jobs in cities, mechanization becomes competitive.
Importing cheap labour is a symetric situation.
Unfortunately liberals get confused by the dillema: do I ♥ immigrants or do I ♥ domestic workers more?
March 3rd, 2009 at 12:19 pm
“that theory is a crock, as many have demonstrated in the past”
This is intellectually dishonest. That certainly has not been “demonstrated.” If you read the same stuff from the same people with the same political viewpoints all the time, eventually you will come to believe it is the absolute truth… but it’s not.
March 3rd, 2009 at 3:01 pm
No, DTM, the theory is that we’ve all been so propagandized to “celebrate diversity” that we got exploited by self-interested manipulators who wrapped themselves in the flag of fighting discrimination in the mortgage market.
For example, here are excerpts from the February 2003 Harvard address by Angelo Mozilo, CEO of defunct boiler room operation Countrywide Financial, where he claims he’s going to help end the racial gap in homeownership rates, if you just give him a little help on things like down payment requirements, stated income loans, and anti-predatory lending legislation:
“Lower interest rates, the push for greater diversity in homeownership, and massive immigration into the U.S. have created both challenges and opportunities. However, despite the fact that approximately $2.5 trillion in mortgage loans were made in 2002, the gap between low income and minority homeownership, and what is classified as white homeownership, remains intolerably too wide. Therefore, expanding the American Dream of Homeownership must continue to be our mission, not solely for the purpose of benefiting corporate America, but more importantly, to make our Country a better place.
“… The overall U.S. homeownership rate, which was at 44 percent in 1940, hit 68 percent by the end of the third quarter of 2002. Historically low interest rates along with new, creative and flexible underwriting techniques are continuing to fuel a record period of growth for our industry. … And, increasingly, the sub-prime market is boosting that number and the industry as a whole. During the first nine months of 2002, sub-prime originations rose an estimated 26 percent over the same period in 2001 – outpacing the overall market. …
“It started with the New Deal, and now, we’re in a new century. But through it all, one thing has remained, more or less, constant. This constant is our challenge. And this challenge is to increase the access to affordable housing. And in order to do this, we must close the homeownership gap that still exists. …
“As President Bush said last October: “Two thirds of all Americans own their homes, yet we have a problem here in America because fewer than half of the Hispanics and half of the African Americans own their home. That’s a homeownership gap. It’s a gap that we’ve got to work together to close for the good of our Country, for the sake of a more hopeful future. We’ve got to work to knock down the barriers…”
“While the number of minority homeowners has advanced recently, climbing from 9.5 million in 1994 to 13.3 million in 2001 – an increase of 40 percent – the fact remains that it is still not at a level equal to that of white homeownership. And as President Bush pointed out, the homeownership rate for African Americans is 47 percent and for Hispanic Americans it is 48 percent, a stark contrast to the homeownership rate of 75 percent for white American households. That means there is currently a homeownership gap of over 25 points when comparing white households with African Americans and Hispanics. My friends, that gap is obviously far too wide. It has been far too wide for far too long. And when adding new factors into the equation – like an influx of new immigrants or continued reduction in the supply of affordable housing – it has the potential to become far worse.
“So tonight, I want to discuss why that gap persists and how Countrywide is trying to address it. … If we don’t get a better handle on these issues, as I will discuss, I would argue that the homeownership gap will not only remain, but there is a good chance it will widen and the homeownership rates among low income and minority borrowers will continue to be depressed. …
“One of the more obvious resolutions to the Money Gap is the elimination of down payment requirements for low-income and minority borrowers. Current down payment requirements of 10 percent or less add absolutely no value to the quality of the loan. It is the willingness and the ability of a borrower to make monthly payments that are the determinants of loan quality. Over the past 50 years, I have personally interviewed thousands of potential homebuyers and in the vast majority of cases, the barrier standing in between them and the house of their dreams was the down payment. That barrier must be eliminated by offering customized programs to those borrowers who cannot meet the current down payment requirements.
“Equally important, we must reduce the documentation required to make any and all loans; we should be able to approve loans in minutes, rather than days, and close loans in days, rather than weeks.
“… Unfortunately, sometimes restrictive regulations, fees, and codes are even intentional – established by those who don’t want affordable housing, at least not in their neighborhoods. And that should remind us that affordable doesn’t necessarily mean accessible. Although it may not be the issue it once was, discrimination still exists. And make no mistake – it has an impact on the homeownership rate of minority families. Therefore, it is critical that our governments must work to solve the issues of restrictive regulations, fees, codes and land use. …
“Just over ten years ago, we launched our formal affordable lending program called House America. Our hope was that with flexible underwriting guidelines, we would enable more people to qualify for home loans, and by having fewer credit and employment constraints, more families would achieve their American Dream. Back in 1992, we started with a $1.25 billion commitment to House America. In 2001, as part of our House America campaign to provide residential financing in under-served communities, we increased our commitment to $100 billion with a goal of obtaining that objective by 2005. I’m proud to say that in just 22 months, and not five years as originally planned, we have reached that goal.
“So I’d like to use this forum this evening to say that Countrywide is once again re-dedicating itself to expanding the dream of homeownership. Tonight, I am announcing the extension and expansion of our current 5-year, $100 billion challenge through the year 2010, with the commitment to fund a total of $600 billion in home loans for previously underserved Americans in this decade.
“Countrywide is proud to make this commitment. We’re excited about our new goal. We’re eager to reach that goal. And, I can assure you that we will reach that goal. As we had envisioned in 1992, House America offers unique loan products that have been specifically designed to meet the needs of minority and low- to moderate- income borrowers. But it also does more. It has become not just a lending program, but a more comprehensive effort that devotes considerable intellectual and financial resources to increasing homeownership among minority and low- to moderate-income individuals and families. …
“It is an effort that, in addition to providing loan products with flexible underwriting criteria such as home rehab loans, also specializes in being able to layer financing programs through participation in hundreds of down payment and closing cost assistance programs. [The IRS finally declared these to be a tax evasion scam in 2006.] House America also offers other tools to ensure that we are doing everything in our power to expand the opportunities for home-ownership. It is an effort absolutely committed to education and outreach, both in English and Spanish, both online and in local communities, both at local home-buyer fairs and at lending workshops, and with our many partners, like Fannie Mae, Freddie Mac, FHA, the Congressional Black Caucus, the National Council of La Raza, AFL-CIO, and faith-based groups across the Country, just to name a few. I want to specifically and especially recognize Franklin Raines and his entire team at Fannie Mae for providing a great deal of the resources that have made it possible for us to achieve our House America objectives. [Raines called Countrywide a "paragon" of nondiscrimination, while Mozillo gave Raines the special "Friends of Angelo" rate on his mortgage.] In 1993, Countrywide opened four dedicated House America retail branches, and now we have 23 staffed with local and diverse professionals in major metropolitan areas all across the Country.
“It is an effort that has enabled Countrywide to become the number one lender to Hispanics for the last 6 years and the number one lender to African Americans for the past 3 years. …
“Fortunately Countrywide isn’t alone – there are other mortgage lenders and financial institutions that are all making positive contributions. And the lesson we can take away from this is the following: for a long time, when it came to increasing low-income and minority homeownership, the message has always been “we should,” or “we must.” But the fact is, “we can,” and “we are.” Now, we must take the energy and expertise and the ideas and the innovation that we’ve brought to increasing the overall homeownership rate, and apply them to creating reasonable parity among homeowners. It is time, once and for all, to narrow and ultimately eliminate the homeownership gap. I believe we can eliminate the gap and it is, in large part, why I got into this business.”
LOL
March 3rd, 2009 at 8:01 pm
“This had the most effect in California, because with a limited housing supply, easier loans would tend raise the price of housing rather than increase the supply.”
Is this due to zoning? Why is housing in CA limited but not Texas?”
Zoning is a far bigger factor than geographic limitations.
Glaeser has come to believe that changes in zoning regulations may be the most important transformation in the American real-estate market since the mass acceptance of the automobile. In his view, these regulations have essentially created a “zoning tax” that has pushed prices far above construction costs. Very, very far above construction costs.
http://economistsview.typepad.com/economistsview/2006/03/before_edward_g.html
And when we talk about “immigrants” let’s not confuse an illegal alien from Mexico with, say, an Argentine doctor here on a J-1 visa…
Almost two-thirds of adult Mexican immigrants have not completed high school, compared to fewer than one in ten natives. Mexican immigrants now account for 22 percent of all high school dropouts in the labor force.
http://www.cis.org/articles/2001/mexico/release.html
March 4th, 2009 at 4:16 am
I would just add to Beowulf’s comment that there are topographical differences between California and Texas that make restrictions on development more popular in California. For example, the I-5 bottleneck between LA’s northern exurbs and the San Fernando Valley is simply the only route — proposed alternative is a 15-mile-long tunnel through earthquake prone mountains.
March 4th, 2009 at 7:00 pm
Interesting article, more than a few insightful observations.
One caught my eye… “Housing may now be undervalued.”
Probably not. It almost certainly has another 25% to drop in much of urban California, and more than that in Las Vegas. Across the board as a national average it needs to drop another ten to fifteen percent and then rise at about the same pace it did 1950 to 1970 to get something solid under it.
Residential values in many locales were another delusion, in other words.
March 4th, 2009 at 8:05 pm
Celebrating Diversity appears to be the dagger in Steve Sailer’s Dolchstoss theory of economic collapse. But there are two separate things happening here. One was the loosening of standards by the mortgage industry using the rhetoric of diversity to cover dubious financial stratetgies. The other, the CRAC stuff, is then implicated as the necessary accomplice. But CRAC really was a discrete part of this drama. If it dovetailed at all, it was mostly as a kind of fig leaf for the con artistry of actors like Mozillo.
The key development was the securitization of mortgages, which made loosened lending standards possible. It’s interesting but irrelevant that Political Correctness would advocate increased minority homeownership. Only insofar as there are demonstrable connections between that social policy and some kind of regulatory mandates can that argument be made. As DTM shows, it accounts for, at best, about 6% of these problem loans.
March 4th, 2009 at 9:41 pm
So many people are looking for a “single cause” of this crisis. There’s not a single cause. There are three causes (at least):
1. Mortgages were made to people who couldn’t pay them unless housing prices continued to go up. Some of these people were minorities, some were not. Even if disproportionately many were, that doesn’t mean they were the cause of this crisis, because…
2. The financial industry “leveraged” these loans by 30 times or more and took other risks because they were not adequately regulated. (“Leverage” is when you use assets of X amount to “back” loans of many times X. You can only reasonably do this if you think that the probability of defaults on those assets is proportionately small.)
3. The financial industry was not adequately regulated (against excessive leverage and other things) because it did not want to be, and it donated money to politicians to ensure that it wouldn’t be. This is corruption of our political class, plain and simple–both Democrats and Republicans, both Executive and Legislative branches.
Look at the size of the financial crisis and the size of the housing defaults. We have a crisis of several trillion dollars. Do we have several trillion dollars of housing defaults? The answer is no. This shows that there must be at least two factors: the initial mortgages and how they were leveraged (magnified). The latter factor is due to political corruption, not Hispanics.
On top of this, several self-reinforcing cycles developed between these factors. Here’s one: The lower the lending standards were made, the more people who could afford a house, therefore the higher the demand for housing, therefore the higher the cost of housing, therefore increased belief that housing would continue to go up, therefore the lower the lending standards were made, and then repeat from the beginning.
Because of the many factors involved and the complexity (although it’s not all that complex), it’s easy for someone with an agenda or ideological blinders on to focus in on one factor and try to explain everything via that factor. But that is not the complete picture. And policy-makers are not going to be able to prevent this from occurring again in the future if they don’t know the full picture.
Regarding whether loans to minorities played a disproportionate role in the crisis, I’m interested in that hypothesis, but if it plays a role, it’s just as part of #1 above. It’s not fair or reasonable to posit this as the sole or even main factor. Also, numbers about the total number of foreclosures in “rapidly Hispanicizing” states like California do nothing to prove that hypothesis. California is the most populous state in the union: you would expect it to have the most foreclosures because it also has the biggest population and presumably therefore the biggest housing market. What you need to prove a hypothesis that race-based policies played a factor in this crisis is data such as the number of foreclosures as a percentage of new mortgages analyzed by race, not just total numbers.
March 5th, 2009 at 3:12 am
It seems to me that Sailer is making coherent arguments and using data and actually trying to have a discussion while a bunch of nincompoops in here are just calling him names and whining. Kudos to Steve for resisting the urge to sink to the ad hominem level that his critics are at.
March 5th, 2009 at 4:50 am
DTM: I don’t know if it is a good idea to scorn Sailer. I sure know it doesn’t stop him. But I’m glad everyone is posting here. I read Sailer more regularly than Yglesias, because you can find Yglesias’ perspective anywhere, and I rarely get to see people actually taking him seriously and arguing with him. So thanks to everybody pointing out weak points for me to chew on.
March 5th, 2009 at 12:42 pm
Sailer “… Obama … proclaimed over and over that minorities weren’t getting enough mortgage money.”
Citation please! I’m not saying you can’t find one. Just taht I’ll be surprised if you do, since why didn’t it come out during the campaign, when the Right was trying to pin the economic crisis on Democrats?
March 5th, 2009 at 6:32 pm
It seems to me that Sailer is making coherent arguments and using data
…And talking about “importing” immigrants, as though they’re dry goods that we ship around wherever we like (see #3). Or perhaps it’s clearest to point out he was talking about “importing” immigrants “just as… slaves.” (OK, so by “just as” he means “performing the same function in their respective society” — but are you suggesting it’s unreasonable for people to raise their heckles at this?)
Anyhow, if you want to understand the California & Florida situation, do some investigation into what speculators were up to. Nevada I can’t speak to, though it wouldn’t surprise me to learn similar levels of rabid speculation were occurring there. Look into what “flipping” a house or condo means. And then tell me, reasonably, what proportion of the flippers were illegal immigrants…
March 5th, 2009 at 8:50 pm
On this thread at least Mr. Sailer is making logical and even reasonable arguments but with a one track mind. So for example in talking about why there was a movement to reduce downpayment requirements for mortgages he is ignoring the banks that wanted to grow the market for mortgages where they didn’t have to compete with Fannie and Freddie, the house builders that wanted to keep the bubble growing, the boosters on CNBC, the army of Fannie and Freddie haters, everybody who wanted US consumers to keep spending. In the end he seems to be blaming the people who are the main victims of the bubble for the traction of a political argument that did not even start with them but much earlier and for which reason Fannie, Freddie etc. were founded. Given that the two largest states both have large hispanic populations and had very different outcomes, it is unparsimonious to focus on immigration as the root of the problem.
On productivity he is kind of right but is essentially saying that he would rather have robots than Mexicans and would be happy to tie up capital to make it happen. It’s probably true but less palatable put like that.
The focus on test scores is hasty too. It would be entirely possible, given significant immigration, for California’s test results to be falling overall while each individual’s expected results improve. Many immigrant groups did not start with high achievement but have not proved a drag on educational attainment.