Friday, December 12, 2014

Pledgeable Vanguard accounts

When I see houses, I see collateral.

It's good for regular people to have access to some good collateral. Without good collateral, it's very costly to respond to income shocks, emergency spending needs, or an awesome business idea. You may have to resort to credit card borrowing or even payday lenders. So this is one point in favor of owning a house: it gives you a way to accumulate collateral--so emergency borrowing isn't insanely expensive--while also providing you with housing services and a way to accumulate wealth with a little leverage.

But a house is a really weird asset! Is it really optimal to have housing be the only source of collateral for regular people? I have wondered this for a long time. If housing is the only source of good collateral, I'm going to devote a lot of saving to the accumulation of housing when it might be better if I could devote that saving to more diversified assets with higher returns. But I don't have an easy way to use my Vanguard account as collateral. I don't mean for margin trading, which is way beyond my risk tolerance. I mean I want to be able to use my portfolio to take on some uncallable debt. Unlike a house, my Vanguard account is intentionally structured in a way that minimizes exposure to idiosyncratic risk. It seems like it would make pretty good collateral, particularly over a multi-year period. We could even stick to real estate and focus only on the REIT fund if you think stocks are too risky or whatever. But, to my knowledge, there's no way for me to pledge my Vanguard portfolio. The closest thing I can think of is the rule about taking out loans against a 401k, which is very costly.

So, for regular people, financial assets are not pledgeable. Why?

Joshua Brown reports on an "exploding" trend among wealth management providers:

Wealth management clients of the wirehouse firms keep millions of dollars in their taxable brokerage accounts, predominantly invested in stocks, bonds, and mutual funds. Advisors at the firm are encouraged to convince their clients to borrow against these holdings. Clients are offered an ultra-low interest rate, typically between 2% and 5%. And they can borrow between 50% and 95% of their portfolio’s equity (cash) value, with the bond-equity mix of the account being the primary determinant of the loan’s size.

The only rule is that clients cannot use the loaned funds to purchase additional securities, like a margin loan. Instead, these borrowings are meant to allow clients to smooth out cash flow at a small business, fund the purchase of artwork and real estate, or refinance higher-rate loans like mortgages. The beauty of securities-based lending is that these are not underwritten loans nor do they require extensive due diligence because the assets are already sitting there at the firm and public securities are thought to be extremely liquid.

This is what I'm talking about! So it's a thing, but apparently it's only available to really wealthy people. Moreover, Brown describes a bunch of other problems with it. Apparently the loans are typically callable, so the lender can liquidate the collateral at will. And there are likely some systemic risks associated with the way this is being done (sort of like, you know, home equity borrowing).

So this isn't quite what I'm looking for. Housing will still carry a large liquidity service yield. If I want to accumulate a lot of collateral, it means accumulating a lot of housing inventory--maybe even more housing inventory than I need. Practically every homeowner I know holds more housing inventory than they need. That's like owning a stock but throwing away half of the dividends. But it's a pretty natural outcome when housing is seen as the best mechanism for accumulating wealth and collateral (obviously that's not the only reason people accumulate extra housing). I would rather live in a house that provides exactly the amount of housing service I need--and put my excess savings in other assets whose production I can capture in its entirety. That strategy would be less costly if my Vanguard account were pledgeable.

The aggregate consequences are less clear. Brown argues that the current trend toward collateralizing financial assets for rich people causes systemic risk. But if financial assets became pledgeable, maybe people would live in houses that are less leveraged. The net effect on systemic risk isn't clear. It might also free up resources that are currently tied up in unproductive spare bedrooms, providing more savings for productive assets. Maybe the quantitative magnitudes on that notion are pretty small. But the point is: It's not obvious to me why we have a system that so dramatically favors housing as collateral.

UPDATE: My friend Jared Larsen points me to some details about a similar service provided by Charles Schwab. The minimum credit line is $100,000, so it will still be mostly available to the well-to-do. You can borrow up to 70% of the value of the collateral. The line is subject to collateral calls, and CS can sell your collateral without your consent (or even awareness). This is available in taxable accounts. So I find this pretty interesting--the thing I'm asking for is available, more or less, but I wish it were available at smaller dollar amounts.

Wednesday, December 10, 2014

Tabarrok on business dynamism

Last week's Cato growth forum included a session on declining business dynamism, which included presentations by John Haltiwanger, Amar Bhide, and Alex Tabarrok. Alex focused on the question of whether we should care about this. See his MR post here; some key points he makes:

1. More regulated industries are not less dynamic (he shows this by plotting a measure of industry-level dynamism against a measure of regulatory burden).

2. Entrepreneurship is not necessarily good. Poor countries are full of entrepreneurs of necessity. They have no better options.

3. Old firms are very entrepreneurial. The good ones are constantly reinventing themselves. Think of Ford, Zara, or Apple.

4. Increasingly, what matters is global dynamism. Looking at national statistics is not enough.

Point 1 has made everyone's job very difficult. It is very hard to find a smoking gun in terms of policy. That said, we should not overinterpret Alex's result. In most of the work on this topic, people look within industries because regulatory burden is not the only way industries differ. My prior is that, in many industries, other differences swamp regulatory differences. I would be more persuaded by time series evidence--for example, have the industries that have seen large changes in regulatory burden also seen large changes in dynamism (of the appropriate sign)? Davis and Haltiwanger describe evidence on the effect of certain labor market regulations, like occupational licensing and various worker protections, but as they say more work is needed.

Point 2 is a good one, and in my work with John Haltiwanger, Javier Miranda, and Ron Jarmin, we mention this frequently. This was also Noah Smith's first reaction--declining mom-n-pops doesn't hurt productivity. But as we show in more recent work, it's not just low-productivity entrepreneurs that are going away. We are seeing fewer high-growth firms.

I like Point 3. I know there is work being done on this avenue, including by us. What if creative destruction is being brought inside the boundaries of older firms? In terms of Alex's exposition, what we would want is some reason to think that the reinvention he mentions is going on more now than it was 30 years ago. A related hypothesis is the notion that startups get acquired soon, so their high growth happens inside other firms. I should also note that almost all of the good data on firm growth are based on employment, because that is easy to measure (at least for privately held firms). So that matters too--what if firms are more dynamic now but it shows up somewhere other than employment? At least among public firms, though, we do see these trends (speaking of gross job flows) in sales data as well as employment.

Point 4 is good too. I know people are researching this point as well. There are a few ways to think about it, so I think it's a question with an answer.

Sunday, December 7, 2014

Feynman on living standards

I started to say that the idea of distributing everything evenly is based on a theory that there's only X amount of stuff in the world. . . . But this theory doesn't take into account the real reason for the differences between countries--that is, the development of new techniques for growing food, the development of machinery to grow food and to do other things, and the fact that all this machinery requires the concentration of capital. It isn't the stuff, but the power to make the stuff, that is important. But I realize now that these people were not in science; they didn't understand it. They didn't understand technology; they didn't understand their time.

From Surely You're Joking, Mr. Feynman, page 283 in my paperback copy. What would Feynman think of this physicist? (I don't know).

Monday, December 1, 2014

My five favorite books of 2014

image source


Here are 2013 and 2012. As usual I will limit myself to books that were published somewhat recently. My favorites, in no order:

1. Dam Nation, Stephen Grace (2012). This book is truly superb. I mentioned it here. This is a history of water in the western US, a topic I find endlessly fascinating (see posts). It is short and readable.

2. Junkyard Planet, Adam Minter (2013). I mentioned this here. This is a very readable, very interesting description of the global scrap industry. The story is told as a series of anecdotes, primarily in the US and China. This book is very engaging--it will not bore you.

3. Ninety Percent of Everything, Rose George (2013). This is an extended anecdote about the shipping industry. Basically the author rides on a container ship. I found it immensely entertaining and informative.

4. Capital, Thomas Piketty (2014). My review is here (yes, I did read the whole thing). This book's fans were often confused about which claims were empirical and which were speculative. FT/McKinsey awarded Capital for being an "epic analysis of the roots and consequences of inequality," which makes me wonder if anyone at FT or McKinsey actually read the book (very little "roots" analysis and zero "consequences" analysis). The book focused entirely on the world's richest 20 percent, and it largely ignored both the literature on the consequences of inequality and the literature on optimal taxation. But I liked the book--data firehoses provide huge benefits to economics. Between the data and the instructive nature of its omissions, Capital is a very valuable contribution to the economics and policy debate--and I found it to be quite readable.

5. Big Ideas in Macroeconomics, Kartik Athreya (2014). My review is here. Unlike Noah Smith, I found this book extremely useful and believe it should be required reading for any person who wants to engage in debates about methodological issues in macroeconomics but does not want to learn the math. It is not a casual read, but those who aren't willing to give it a shot should rethink their confidence level on macro methods topics. I also highly recommend the book to grad students who want more intuition for the models. It is also a great literature review. This book deserves far more attention than it has received.


I did not read House of Debt; I am already pretty familiar with the authors' excellent research, and I find it reasonably persuasive. Due to their blogging efforts, though, I have assumed that Mian and Sufi include a lot of the wrong complaints about the macro field that always drive me nuts, so I decided to pass on it (you spend three years writing a het agent job market paper then see how you feel when someone says macroeconomists ignore distributions). I hate that selling a book in econ apparently depends on telling readers that everyone else in the field is an idiot.

I am in the middle of Geithner's book; it is mostly fine, but I think we all have financial crisis play-by-play fatigue (though I will definitely read Bernanke). I also have a hard time with memoirs--they feel so folksy, yet I can't help but imagine the ghost writer behind the scenes. I do plan to read Fragile by Design but may not get to it for a few more months (I have been working through Caro's LBJ series and want to make some more progress soon). I am also tentatively planning to get to Martin Wolf's book. I find plenty of older books that I want to read, so I don't always keep up with new releases very well.

Wednesday, November 19, 2014

BED: 6.9 million jobs created, 6.5 million destroyed in Q1 2014

This is not a great report. From the BLS:

From December 2013 to March 2014, gross job gains from opening and expanding private sector establishments were 6.9 million, a decrease of 440,000 jobs from the previous quarter, the U.S. Bureau of Labor Statistics reported today. Over this period, gross job losses from closing and contracting private sector establishments were 6.5 million, a decrease of 94,000 jobs from the previous quarter.

This release incorporates the BED annual revisions, but I am not seeing any changes.

I like this data series, with some caveats.* If you're not familiar with this series, note that gross flows are large relative to net flows. Roughly speaking, think of the Great Recession as involving about 8.5 million net job losses. Entering and expanding business establishments create at least half that many jobs even in terrible quarters, but a recession is characterized by even larger numbers of jobs being destroying by shrinking or closing establishments.

I like to slice the data by extensive margin (opening or closing business establishments) and intensive margin (expanding or contracting business establishments). Figure 1 reports the flows of employment associated with opening and closing establishments, and Figure 2 reports actual numbers of establishments that opened or closed (click for larger images).

Figure 1

Figure 2

Reallocation at the extensive margin dropped pretty noticeably in early 2014. Most of the drop was driven by a decline in entry. This helps explain some other economic data we saw in early 2014.

Next, the intensive margin. Figure 3 reports employment flows from expanding and contracting establishments, and Figure 4 reports establishment counts for these categories (click for larger images).

Figure 3

Figure 4


At the intensive margin we see a slight decline in reallocation, but clearly the overall numbers are being driven by the entry margin. There was a collapse in new establishment formation in early 2014.

This is not a great report, but it's too early to assume that we are starting a bad trend. The jobs from entry number has fallen to levels we saw in 2012, which weren't terrible at the time. But I would say that those who think a revival in new businesses is right around the corner will have to keep waiting.

Now some usual thoughts: gross flows give us an idea of where jobs are being created and destroyed, which fleshes out the net job numbers that are more popular (and timely). For policymakers, it matters whether job market problems are being driven by establishment turnover or job flows in existing establishments. In my (hasty) view, these latest numbers suggest cause for minor concern about the entry margin.

More broadly, these data help dissuade us from thinking in representative agent terms, which is what the net numbers incline people to do. It's tempting to think that net numbers tell us about the experience of most businesses, but in reality there is a lot of heterogeneity among firms and reallocation proceeds at a high pace. In my view this complicates macro analysis somewhat, rendering simple "aggregate demand/supply" heuristics somewhat tricky.

Some previous BED posts are here.


*The BED are quarterly data provided from the BLS based on state UI data. They are released with a lag of about 8 months. Like the BDS (the dataset I usually use here), the BED basically covers the universe of private nonfarm employers; unlike the BDS, the BED is available at higher frequency and is released more quickly. BED has other drawbacks compared to the BDS, such as a more limited ability to track firms.

The BLS effectively expanded the sample definition in the first quarter of 2013. The 2013q1 observation was the most obviously affected, as it reported all establishments that were added to the sample as establishment openings. For openings data, I have replaced the 2013q1 observation with the average of 2012q4 and 2013q2. I haven't dug into the data enough to know whether users can manually correct for this over the longer run. See BLS discussion here, on the bottom of the page ("Administrative Change Affecting...").

It is also important to note that these numbers are seasonally adjusted, and any guess at net numbers based on the difference between two seasonally adjusted series is very, very rough. Non-SA numbers are available on the BLS website.

These numbers track business establishments, which are different from firms. Costco is a firm; your local Costco store is an establishment. Most firms consist of only one establishment. The BED is not ideal for tracking firms, as it has limited ability to correctly link establishments to the firm level.

Tuesday, November 4, 2014

Business opinion and the representative firm

Here's Paul Krugman:

Business leaders often give remarkably bad economic advice. . . . Success in business does not seem to convey any special insight into economic policy. . . .
National economic policy, even in small countries, needs to take into account kinds of feedback that rarely matter in business life. For example, even the biggest corporations sell only a small fraction of what they make to their own workers, whereas even very small countries mostly sell goods and services to themselves.

The suggestion that business experience conveys no special economic policy insights is, frankly, totally absurd. It's way too easy for economists to say "Only we economists can truly understand the economy" when there are people who interact daily with capital and labor markets, forecasts, pricing, and policy. But Krugman has a good point about considering feedback, which is not likely to be something that business people are used to doing.

But the biggest problem, which Krugman does not mention, is that people who run businesses are inclined to think (or at least say) that the best economic policy is the one that helps their business. A recent example that comes to mind is Dow Chemical's ongoing effort to secure a ban on natural gas exports. Since it would be bad form to write an op-ed openly arguing that policy should be made to privilege your personal interests, we have Andrew Liveris (the CEO) making up some bad economics to portray the idea as being in the "national interest." The op-ed is a fantastic specimen. It has the usual misguided obsession with manufacturing and some standard sloppy counterfactuals about job creation. I really love the part where he blames 1990s energy price volatility on letting energy markets be driven by "legislation instead of market forces" in the context of his request for anti-market legislation. But this selfless champion of the public interest is spending big money to secure the policy.  Liveris probably has a better understanding of economics than his arguments would suggest, but he will always advocate policies that help his company (like any good CEO).

This problem generalizes because the data on firm dynamics tell us that there is no representative firm. Everyone knows this, but the representative firm intuition is really hard to shake--particularly in political dialogue. There is no business person or union or advocacy group whose interests are representative of "business" or "workers," let alone representative of the economy as a whole. In a given month, the net jobs number is just a residual object, the difference between jobs created by business expansions and jobs destroyed by contractions. It's a very small number compared with the gross flows, which means that there is massive heterogeneity among firms.

Firm dynamics also makes a lot of arguments quantitatively silly. Liveris cites a BCG study finding that some sort of manufacturing renaissance will create 5 million jobs (whatever that means); he also claims that high gas prices in the 1990s destroyed 300,000 jobs. But every quarter, US establishments both create and destroy 6 to 7 million jobs. Every month we have hires and separations in the vicinity of 4 million. The forces that cause daily, pedestrian reallocation absolutely dwarf anything you can accomplish with a specific policy, whether it's immigration policy or natural gas export policy. With so many jobs being destroyed by idiosyncratic shocks, it's hard to justify any policy that is designed to protect a few hundred thousand jobs in a specific industry.

So I think that when a prominent business person prescribes policy, we should first ask how likely it is that their prescription is based on their own narrow interests. Then, we should ask if their narrow interests have any hope of being representative of the Social Planner's problem. If they're talking about a couple million jobs over a few years, chances are that the Social Planner just wouldn't care.

Friday, October 24, 2014

Homeownership and student debt

I really like this article on student debt and homeownership because it covers a few things that I think about often.

Soft entry-level housing demand has fanned fears that rising student loan burdens may be crimping home purchases.

Fears among whom? I think I may buy a home in the next few years, so I'd love it if something "crimps" home purchases, perhaps making prices lower for me. This illustrates a broader point about housing, which is that coverage of housing markets is typically written in terms of the interests of people who like high house prices--home builders, incumbent home owners, and realtors. Recall that the housing crisis wasn't a crisis for everyone; I know people who bought houses at the bottom of the market. They didn't mind that home purchases were "crimped" at the time.*

But new data suggests that student debt may lead young adults to defer homeownership rather than skip out on it entirely. Moreover, the housing market may face a greater drag in the long run from weaker homeownership among adults that don’t attend college, especially if income prospects don’t improve for those who don’t go.

So the housing market faces "drag" if homeownership rates decline. This claim is probably true, but it's a bit misleading. People have to live somewhere--even non-homeowners. Homeownership rates only affect the amount of new housing sold to the extent that renters and owners live in different types of housing. If I don't buy housing, Blackstone will. Maybe it shifts composition toward smaller houses and apartments (though with other amenities), and probably it affects the fortunes of realtors, but as long as people are forming households we're going to need to build residential structures. And if there's a household formation issue, let's call it that instead of worrying about homeownership specifically.

More generally, like most popular dialogue the unstated assumption here is that homeownership is "good". Someone tweeted about the American Dream when linking this article. I'm already on the record suggesting that the American obsession with homeownership is a little weird.

Here's a chart from the article:



So the difference in ownership rates between college grads with debt and college grads with no debt is minuscule compared to the difference in ownership rates between college grads and non-college grads. Grads with debt take a bit longer than grads with no debt, but by age 28 the debtors look more like other college grads than non-grads.

Homeownership and student debt are similar in that they both receive a ton of political attention (and subsidies), and they both are mostly about rich people. Speaking relatively, poor people don't own houses and don't go to college. I have heard many people say that financial crisis policies should help homeowners instead of rich bankers, but I never heard anyone say that financial crisis policies should help renters instead of rich homeowners.** Similarly, populists are on a crusade to help people struggling with student debt, that is, people who are likely to have high lifetime earnings.

That's not the only way that homeownership (which is often just homeborrowership) and student debt are similar. I'm not convinced that there is a student debt crisis, but it does strike me as odd that a popular response to the "problem" of too much student debt is to make student debt cheaper. Similarly, I've read that the financial crisis was caused by too much housing debt, and the best solution for that problem is to subsidize housing debt using the old Uncle Sam Put. As crisis response tools these may be fine--unless we're in a dynamic game.


*I'm being slightly too cavalier here, since (as I've written before) pecuniary externalities matter in this market; and of course there are the demand shock arguments.
**I realize that the good arguments for helping homeowners were about demand spillovers (Mian & Sufi stuff), which is fine. I also realize that the stimulus packages included lots of help for low-income people--generally, our countercyclical policies are heavily weighted toward the poor. I'm just focusing on the rhetoric from a specific debate here, i.e., the rhetoric suggesting that we should help poorer rather than richer people.