Bob Carlson

April 17, 2014

More on Rising Rents

Filed under: Housing — Bob @ 5:20 pm

Yesterday I linked to a New York Times article about rising rents nationwide. The key issue to consider is how policies can be changed, if they can, to make more affordable housing available instead of having most new construction being for luxury housing. It’s a difficult issue, because housing isn’t like a lot of other markets, especially commodity markets. Here’s a very thoughtful, well-reasonable article on the topic.

This, ostenibly, is why we have things like zoning codes. The welfare-maximising population of San Francisco may be higher (and possibly much, much higher) than the population which maximises the welfare of those already living in San Francisco. So the city devises a set of regulations that effectively make current residents monopolists, able to artificially limit supply and raise price. Society as a whole is slightly worse off; San Franciscans are slightly better off.

But in fact, the structure of local politics tends to magnify rent-seeking, generating enormous social costs. The benefits and costs of population growth occur in a way that practically guarantees highly restrictive building rules. The (large) potential benefits to would-be San Franciscans accrue to people who have no political power within San Francisco. The gains to San Franciscans from population growth are distributed very broadly; when a new building project allows more people to live in San Francisco, everyone in the city derives a small benefit from that growth—from the larger market size, greater opportunities for professional networking and knowledge spillovers, and so on. But the congestion costs associated with that new project are highly concentrated on the people living in the immediate vicinity of the new construction. There is a population level at which new growth entails net costs for all San Franciscans. But residents of San Francisco will limit new growth long before it reaches that level, because there will always be a strong constituency to block projects.

We therefore get highly restrictive building regulations.

This Says Stocks are Cheap

Filed under: Asset Allocation — Bob @ 12:20 pm

It’s easy to find charts and ratios used to argue that stocks are somewhere between fairly valued and extremely overvalued. But have you seen the one that indicates stocks still are cheap. Unlike most other measures, it incorporates both inflation and earnings. It’s known as the Rule of 20. You can find the explanation here.

It’s important to note that, no matter what flavor of earnings you use, the Rule of 20 can be tricky. Nicholas Colas, chief market strategist at ConvergEx Group in New York, wrote brilliantly about the topic way back in 2012 when people were already puzzling about the prolonged period below 20. He pointed out that early 1982 — “the greatest entry point for U.S. stocks in several generations” — had a score well below 20. But, as Colas pointed out, a score of 70 based on as-reported earnings in 2009 was a great time to buy, too.

“As with many equity market ‘Rules,’ what really matters is what happens at the extreme ends of the continuum,” he wrote.

A Developing Rent Bubble?

Filed under: Housing — Bob @ 8:20 am

Since the housing bust, more people have opted for renting than buying their homes. Also, tighter lending standards make it harder for people to buy homes. The result is that rents have been rising far more rapidly than home prices. In a number of areas, according to this report, the increase in rents has been substantial and perhaps historic. Demand for rental units is outstripping supply. People either can’t live where they really want to or have to make other compromises. While there’s a lot of supply coming on the market, it looks like it isn’t enough to satisfy all the demand. Also, a lot of the new units are expensive rentals, not those that are affordable to middle income people and those less fortunate.

It looks like another unintended effect of the Federal Reserve’s zero interest rate policy. The policy boosted asset prices, delivering more wealth to the wealthy who own a lot of assets. So, they now are able to buy more assets, including luxury apartments and housing. The demand for high-end units drives out affordable units. The effects are global. The Fed’s policy (along with that of other central banks) pushed money outside the U.S. as well, boosting incomes and wealth in other countries. The wealthy in other countries want to use some of that new wealth to buy real estate in the U.S.

But a seemingly insatiable demand for luxury condos in Miami, created in part by wealthy Latin Americans, has caused land prices to soar, making affordable housing projects harder to build anywhere close to downtown. Moving farther out is cheaper, but the cost savings on housing can be quickly wiped out by transportation costs. A 2012 study by the Center for Housing Policy found that Miami was the most expensive metropolitan area in the country when housing and transportation costs were combined.

In many markets, buying a home is considerably cheaper than renting, and Miami is no exception. But many people are shut out of buying because their income is too low, they don’t qualify for a mortgage or they are burdened by other debt. In 2008, a quarter of rental applicants were still paying off student loans, according to CoreLogic, but as of last fall half of them were doing so.

Steve Gunn, 25, the marketing director for a Miami real estate brokerage firm, said he could certainly afford an apartment on his salary of $52,500 — if he weren’t paying more than $800 a month in student loan debt. Instead, he commutes 90 minutes to work. From his mother’s house.

April 16, 2014

More on Preventing Tax Refund Fraud and Other Problems

Filed under: Income Taxes — Bob @ 5:20 pm

If you’ve been following this blog, you know that I think the IRS should create its own tax return filing system, which some people call return free filing. Heavy lobbying by software companies prevent this from happening, costing taxpayers and consumers billions of dollars annually. Here’s more proof. It details how software industry lobbyists convince people to write op-ed columns and letters to the editor against the IRS’s return-free filing system and other innovations. Here’s another perspective on the problem.

So, where did the letters and op-eds come from? Here’s one clue:

Rabbi Dorff says he was approached by a former student, Emily Pflaster, who sent him details and asked him to write an op-ed alerting the Jewish community to the threat.

What Pflaster did not tell him is that she works for a PR and lobbying firm with connections to Intuit, the maker of best-selling tax software TurboTax.

“I wish she would have told me that,” Dorff told ProPublica.

The website of Pflaster’s firm, JCI Worldwide, had listed Intuit among its clients, but removed it after ProPublica contacted them. Pflaster said Intuit had been listed by mistake, but added that the firm does work for the Computer & Communications Industry Association (CCIA), a trade group of which Intuit is a member. Pflaster also said her firm has reached out to multiple groups and encouraged them to share information about the “flaws” of return-free filing.

Irrational Appliance Buying

Filed under: Cash Management — Bob @ 12:20 pm

Most people act against their own financial interests. That thought runs counter to the assumptions of modern economics, and a lot of people probably don’t agree with it. But the field of behavioral economics proved the point over and over. The latest study covers the simple task of buying a water heater. Two economists studied buying habits and found that most people are short-term thinkers. Even when they were told clearly that buying an energy-efficient heater that is more expensive initially will save them more money in the long run, they opted for the less expensive, less efficient water heaters.There’s nothing rational about that. The article implies that there’s a role for government in these findings, perhaps directing people what to buy or limiting their options. The problem with that is government doesn’t always act rationally or in the best interests of citizens.

But Allcott and Sweeny’s work calls into question whether the Energy Star label encourages consumers to buy the least expensive (in the long run) product. The economists embedded themselves with a “large nationwide retailer” that sells about 45,000 water heaters every year. They studied the buying habits of roughly 20,000 potential customers who called about water heater purchases, examining how sales of energy-efficient models were affected by heavy incentives like $100 rebates for customers and $25 sales incentives for salespeople who sold energy-efficient models. They found that even with the rebates, which often increased the typical customer’s return on investment to 28% t0 37%, customers overwhelming chose to buy a water heater with a lower sticker price.

Consumers have an irrational bias against high upfront costs, even when they are aware that the cost of the product will be cheaper in the long run.

The Great Refund Rip Off

Filed under: Economy — Bob @ 8:20 am

Each year the government (i.e., taxpayers) lose billions of dollars to fraudulent tax refund schemes that usually involve identity theft. In the past I’ve pointed out that all this could be avoided if the IRS were to establish its own online tax filing system and link it to its database of information reports that third parties file. But it isn’t allowed to, apparently because software companies effectively lobby Congress to protect their franchises. Throughout the government, at all levels, agencies have their own online filing and payment systems. It would cost a lot of money for the IRS to create one, but it would move its antiquated software system out of the 1960s and save far more in refund fraud than it costs. In addition, taxpayers whose identities are stolen wouldn’t have to endure all the problems that came from ID theft, and taxpayers wouldn’t have to pay for tax return software each year.

Yet, we go on under the old system. Here’s a review from someone who was on the inside of the IRS fighting the schemes and his ideas of what to do about it.

The Justice Department’s Tax Division, where I was a federal prosecutor until earlier this year, calls the crime “stolen identity refund fraud.” It costs the federal government billions in lost revenue each year, and its individual victims the nightmare of scrutiny and red tape that comes with a federal investigation. If the problem continues unabated, Treasury estimates the IRS will lose $21 billion in fraudulent tax refunds over the next five years. That’s more than twice the Environmental Protection Agency’s annual budget.

April 15, 2014

Why Do We Eat?

Filed under: Health — Bob @ 12:20 pm

Here’s an interesting essay on the science and psychology of why people eat. As you might have guessed, a lot of eating doesn’t have much to do with hunger or the need for nutrition. A lot of other forces are at work, and understanding those forces is a key to maintaining a desirable weight.

Even the most weight-conscious, eating-savvy individual may find himself weakening under the constant onslaught of environmental cues telling him to eat, eat, eat. “Our environment is absolutely filled with highly pleasurable foods that are also high in calories, high in fat, relatively cheap,” Lowe said. Each time we give in, we increase the amount of self-control we need not to eat the next time. In an environment in which food is a perpetually available temptation, the costs of constantly resisting are high. There are only so many times that you can let a platter of pigs in blankets pass by before you take one.

Making this worse, if we break down and have a snack—and if it happens to be something that we like—we not only become slightly more hungry in the first minutes of eating but we will grow hungry again sooner. In a series of imaging studies, Lowe and his colleagues observed the brain both when it’s anticipating tasty food and when the food is consumed, and found a disturbing pattern. The first few times people eat a new, pleasurable food, their brain’s reward systems light up—both when they are about to eat and after they’ve done so. Over time, however, something shifts. “If you keep doing this repeatedly, over days, what starts to happen is the strength of the reward response to the actual consumption of the food slowly diminishes, but the reward response to the signal, the cue predicting the food, grows stronger,” Lowe said. In other words, our pleasure centers get excited by the promise of a delicious morsel, but no longer by the consumption.

Everyone Needs an Estate Plan, and It’s Not About Taxes

Filed under: Estate Planning — Bob @ 8:20 am

Mickey Rooney passed away last week. He was a fabulously successful movie star in his prime and continued to perform most of his life. He was pitching products through infomercials the last few years. Yet, he apparently died with few assets to his name. This report alleges that he was abused and his money pilfered by one or two stepsons. The stepsons accuse each other of causing the problems. The story makes clear that an estate plan is about more than taxes. Essential parts of an estate plan are powers of attorney that decide who will control your finances and make health care decisions when you aren’t able to. I’ve also recommended in Retirement Watch that there be checks and balances in the plan. For example, copies of all financial statements should be available to someone you trust who isn’t likely to collude with the person having the power of attorney, such as a long-time friend, accountant, or other person you trust.

In February 2011, after a complaint was filed by Rooney’s attorneys on his behalf, a Superior Court judge granted L.A.-based lawyer Michael Augustine temporary conservatorship over the actor and his estate and ordered Chris Aber, Rooney’s personal assistant of 30 years, and his wife, Christina Aber, to stay at least 100 yards from the actor. Rooney’s attorneys alleged that Chris Aber “threatens, intimidates, bullies and harasses Mickey” and refused to reveal Rooney’s finances to him, “other than to tell him that [he] is broke.” He and his wife were also alleged to have withheld medications and food from Rooney, leaving him “extremely fearful that Chris will become physically threatening against Mickey and may even attempt to kidnap Mickey from his home.” The paperwork and subsequent filings suggested that Aber gained access to Rooney’s finances through his work as a “producer” at Densmore Productions Inc., a production company Rooney formed in 1998, whereupon Aber issued himself majority stock, named himself treasurer and began pilfering substantial amounts of money.

April 14, 2014

El-Erian Finally Speaks

Filed under: Uncategorized — Bob @ 5:21 pm

Last week PIMCO’s Bill Gross openly asked, in an interview, for his former associate Mohammed El-Erian to explain his departure from the firm. El-Erian complied on Friday with an interview in The Wall Street Journal. (Subscription might be required.) El-Erian said he wanted  to travel less and spend more time with his family. In addition, the different styles he and Gross have used to work well together but stopped doing so in 2013, he said.

Mr. El-Erian wouldn’t say whether he has spoken to Mr. Gross since leaving Pimco in March, but he said he was surprised his departure has received so much scrutiny.

“I really didn’t expect all the media attention that transpired after I announced my departure,” Mr. El-Erian said. “It was a very difficult personal decision, but it was time for me to do something different.”

“I now have the privilege of having a lot more flexibility with a number of part-time jobs that I’m very excited about,” he said. “And I am spending a lot more time with our daughter, and loving it.”

An Answer to Persistent Pessimists

Filed under: Economy — Bob @ 12:15 pm

Pessimistic forecasts have been around for as long as I can remember. They seem to attract a lot of people and gather steam. The problem is, they’re usually way off base, though they seem very logical. Here’s a good review of some audaciously wrong forecasts from the 1970s that were very popular. Do you remember that we were going to run out of oil in a few years? That overpopulation doomed Asia to low economic growth? That the Soviet Union’s economy soon would pull even with the U.S. economy? There are other examples.

There are common threads running through these mistaken projections. One is the extrapolation of recent trends far into the future. History doesn’t proceed like a straight line on a graph; sometimes the lines bend.

Another is the assumption that progress means ever-larger states and increasing superintendence by international elites.

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