America's Debt Dilemma: Hitting the Ceiling.

"The Republican Elephant."

Thomas Nast, 1874.

Public Domain.

via Wikimedia Commons.

The Economist this week writes about America's continued struggle with the debt ceiling. As Congress and the White House continue to negotiate, America is in danger of defaulting on its debt in a few weeks, with neither Republicans nor Democrats willing to compromise. The Treasury could bypass the debt ceiling by minting a colossal commemorative coin and depositing it into the government's account at the Federal Reserve, which would allow for the payment of government expenses without borrowing from public markets. The Biden administration has a few options including invoking the 14th Amendment and issuing high-coupon low face-value bonds, to bypass the debt ceiling and resume borrowing. 

Despite the risk of litigation and the potential for market disruption, the possibility of brutal austerity as a workaround for Treasury debt payments has pushed policymakers to consider unconventional, yet ingenious plans. Treasury officials are uncertain of their ability to implement prioritization of payments and regularly sell bonds in order to pay off their debt, and if dealers decline to participate, the whole plan could be thrown into jeopardy. Faced with the risk of default, prioritizing payments to bondholders may be necessary to get both sides to reach a deal, but could have big costs. However, as almost every observer has noted, the world's biggest economy should not be managed in this manner. 

I've written previously on this, noting that the Biden administration's exploration of using the 14th Amendment to challenge the current federal borrowing limit has prompted heated debate among economic and legal advisors. Meanwhile, Kevin McCarthy is facing his first major test in leading the House of Representatives in Congress' negotiations to lift the debt ceiling, a controversial issue that requires bipartisan compromise while weighing both fiscal responsibility and the need for austerity. The ripple effects of the rise of the far-right within the Republican Party have left lasting damage to both faith in the political system and the party's overall stability. The rising tensions within the Republican Party over the debt ceiling are making it increasingly difficult to present a unified stance. To move ahead successfully, the Republican Party must find ways to address the factors contributing to its internal divisions and disarray.

Beyond Market Mantras, and the Benefit-Cost Conundrum in Policy.

Takashi Negishi, 2014

 Gov't of Japan Standard ToU (Ver.2.0)

via Wikimedia Commons. 

In a brief post today, Brad DeLong, an economist and historian at Berkeley, shared his thoughts on the importance of benefit-cost analysis in policy-making, largely agreeing with Henry Farrell's views. Farrell's argument in question is that the long-held belief that the market knows best has left government policymakers ill-equipped to intervene in the economy effectively. The focus on neoclassical economics in elite US policy schools has resulted in a lack of understanding about how markets actually work. Farrell believes that the price signal cannot convey as much information as previously thought, and some goods are not efficiently provided by market arrangements. He suggests that the assumption that government actors lack the knowledge to intervene has become a self-fulfilling prophecy. To address this issue, Farrell proposes rethinking public policy education to include not only traditional economic reasoning but also new approaches.

DeLong emphasizes that benefit-cost analysis, or "economistic reasoning," is more than just beneficial; it is essential. This approach requires policymakers to count and compare the benefits and costs of a proposed policy, helping them decide what should be done. DeLong also highlights the value of comprehensive benefit-cost analysis, which takes into account all externalities in a system. By driving shadow and real prices towards social-welfare maximizing values, this framework helps conceptualize policy goals. DeLong believes that checking whether these goals have been achieved is the only way to determine a policy's success. However, he acknowledges that benefit-cost analysis has its limitations, particularly in addressing wealth and inequality.

Despite its shortcomings, DeLong argues that considering wealth distribution and its correlation with political power is essential for effective policy-making. Ignoring this aspect could result in policies that threaten the existing distribution of power, which would make it impossible to implement any meaningful changes. In other words, technocracy can only succeed with the support of raw political power. In explaining this, DeLong turns to the work of Takashi Negishi, whose social welfare weights have been controversialy applied in a series of contexts, including the Kyoto Protocol. I had intuitivelly understood Negishi weights for a long time, but this was the first instance where the articulation of it in terms of his scholarship registered with me. I make this note todady as a marker for the future, and a recognition of a nascent idea in an earlier post. 

Economics and the Mona Lisa Smile.

"Mona Lisa."

Leonardo da Vinci.

Public domain.

via Wikimedia Commons.

The Economist this morning observes that economic forecasting has become increasingly unpredictable, with analysts struggling to accurately forecast many key international measures. Contributing to the confusion are challenges in data collection and interpretation due to Covid-19 disruptions and declining response rates to official surveys. The pandemic caused significant fluctuations in growth, complicating seasonal adjustments in economic numbers. Also, reduced response rates to surveys may have led to increased data volatility and potential bias, as non-respondents tend to be less prosperous, which could distort income statistics. The article uses the ambiguous "smile" of Mona Lisa, painted by Leonardo da Vinci via the sfumato technique, as a metaphor for the difficulty of discerning the true state of the economic environment given this unpredictable data. 

One source of confusion arises from the discrepancy between "hard" and "soft" data—objective indicators such as unemployment rates, and subjective variables like individuals' future expectations. Typically, these two classifications of data are congruent. However, at present, they exhibit a stark contrast. "Soft" measures indicate a recessionary trend, while "hard" measures suggest a reasonable economic expansion. This divergence may be attributed to the public's discontent with inflation. In affluent nations, prices continue to escalate at an annual rate of 9%.

Economic measures really matter for government budgeting, as California's Legislative Analyst's office (LAO) relies upon that data in planning future budgets. Necessarily, many of the points the Economist makes about uncertainty get resolved by the LAO in the "negative" (that is, they accept the more dire forecast). As the LAO (accurately) writes in their 23-24 budget analysis, the U.S. economy experienced rapid expansion from summer 2020 through 2021 due to pandemic-related federal stimulus. However, this growth was (as far as the LAO is concerned, and many others) unsustainable, leading to record low unemployment and supply chain challenges, causing consumer prices to rise 8% year-on-year. To combat inflation, the LAO points out that the Federal Reserve has enacted large interest rate increases throughout 2022. The LAO interprets the hard data it sees, that California is experiencing decreased home and car sales and falling stock prices, as well as weaker state tax collections, and concludes there is a slowdown in the economy. 

The LAO, though, is looking at some of the same data as the writers of the Economist, and thus notes that while overly optimistic projections could result in future shortfalls, an excessively pessimistic projection could lead to premature cuts to public services. Further, despite all the foregoing, the LAO points out that "the state can afford to maintain its existing school and community college programs and provide a cost-of-living adjustment of up to 8.38 percent in 2023-24," which would essentially meet the rate of inflation for educational funding in California. Despite the economy's sfumato, at least that is clear. 

Red States, Blue Cities, Dynamic America.

     

     

"President Barack Obama and Cabinet."

White House East Room, September 10, 2009.

Public Domain.

via Wikimedia Commons.

In today's New York Times, David Brooks discusses the trend of people migrating from blue states to red states in the US. Between 2010 and 2020, the fastest-growing states were mostly red, such as Texas, Georgia, Florida, Tennessee, and South Carolina. This growth is attributed to lower taxes, fewer restrictions on home construction, lower housing prices, and more pro-business policies. However, the growth in red states is concentrated in metro areas, often blue cities in red states. The dynamic success stories are a result of a red-blue policy mix where Republicans provide a business-friendly climate and Democrats influence education, social services, and civic atmosphere. The column argues that no political party is currently embracing this policy blend, which has proven effective in creating a dynamic and cosmopolitan society. The author suggests that the Democratic Party's growing strength in Southwestern states could potentially give rise to a new kind of Democrat that promotes this policy mix.

David Brook's career began as a police reporter in Chicago, and he recognizes the significant impact it had on his perspectives. His experiences on the crime beat shifted his views from a more liberal standpoint to a more conservative one. Brooks seems to be highly conscious of the concept of black-and-white morality, which leads him to seek a balanced approach where both sides of an argument have valid points. In essence, Brooks proposes that a third option, which incorporates ideas from both sides, is often attainable.

Here, I think Brooks misses some of the essential characteristics of how cabinet-style dynamics function, which I generally accept as a starting point for analysis of most government decisionmaking. In "The English Constitution," Walter Bagehot highlights the significance of blending old and new minds in the British parliamentary cabinet system for effective governance, emphasizing the importance of secrecy and trust in maintaining unity and functionality. By combining experienced ministers' continuity and institutional knowledge with new ministers' fresh ideas and energy, the cabinet can adapt to changing circumstances and address contemporary issues. Secrecy ensures confidential cabinet discussions and disagreements, fostering open dialogue and consensus-based decisions. Trust among cabinet members is essential for upholding collective responsibility and loyalty, even when personal disagreements occur. Ultimately, Bagehot argues that the balance of experience and innovation, combined with secrecy and trust, contributes to the effective functioning of the government.

Bagehot argues that the most dangerous person to a cabinet government is the disloyal insider. A disloyal insider can undermine the collective responsibility principle, where all ministers must publicly support cabinet decisions, even if they personally disagreed during internal discussions. By breaking this trust and revealing confidential information or dissenting opinions, the disloyal insider can weaken the solidarity and unity of the cabinet, disrupt its decision-making process, and potentially harm the government's credibility and stability. Thus, Bagehot emphasizes that disloyal insiders pose a significant threat to the cabinet government's effectiveness and overall political structure.

Bagehot's central argument highlights the importance of consensus in a government composed of both cautious old minds and and fresh energetic ones. Brooks fails to consider that a political party's drive to act stems from their shared values and the aspiration to advance them. Brooks appears to suggest that experienced and fresh minds together would embrace a logical compromise on the very shared values that unite them. However, it is more probable that both groups would view this approach as flawed and dismiss those promoting it.

Brooks doesn't offer realistic solutions for a feasible third way, and his argument appears at odds with the realities of media influence and political communication. Rather than individuals blending positions, a stronger argument would recognize that blue cities in red states play a vital role in holding their governments accountable, encouraging debate, and preventing complacency in the ruling red-state governments. By remaining committed to the nation and their democratic values, these blue cities enhance the political system's stability and effectiveness while pushing the red-state governments to improve and refine their policies. Ultimately a stronger America emerges from that dynamism, as has been noted in the Economist recently. 

A Salty Solution to Lithium Woes?

     

"Containerized Vanadium Flow Battery"

UniEnergy Technologies

CC BY-SA 4.0

via Wikimedia Commons.

The New York Times' Keith Bradsher writes today about the development in China of batteries that use sodium instead of lithium, a far cheaper and more abundant material. Sodium batteries have the advantage of keeping almost all of their charge when temperatures fall far below freezing, which is an issue for lithium batteries. Recent breakthroughs mean that sodium batteries can now be recharged daily for years, which has been a key advantage of lithium batteries.

Sodium batteries are being developed at Central South University in Changsha. Chinese companies are leading the way in commercializing the technology, and they have figured out in the past year how to make sodium battery cells so similar to lithium ones that they can be made with the same equipment.

A significant challenge, however, is where to get the sodium. While salt is abundant, the United States accounts for over 90 percent of the world’s readily mined reserves for soda ash, the main industrial source of sodium (Chinese ventures generally use expensive synthetic soda ash). Another question hanging over sodium is whether lithium will remain costly. Lithium prices quadrupled from 2017 to last November, but have since dropped by two-thirds.

As Bradsher notes, utility companies could benefit from using sodium batteries, but they face unique challenges due to the regulated nature of their operations. These companies have to plan well in advance because they need regulatory approval to recover costs and adjust prices. Furthermore, utility assets like power plants and transmission lines can last for decades. Many of the facts that need to be ascertainable for utilities to implement sodium batteries are still question marks, as there's no prior history or long-term operational record.

Batteries are an increasingly important technology and the investment is definitely news. It's a tough area for a reporter to work in because a pair of the subjects (Technology, China) have familiar tropes that can get in the way. The national security implications of battery technology, though, do appear to be ones that the United States is taking seriously, as NPR's All Things Considered reported in August of 2022 in the case of vanadium redox flow batteries. Batteries are a component of green energy, and expecting foreign direct product rules to come into effect concerning the same may be a mere matter of time.

The Nature of the Firm and the limits of Economics.

     

Ronald Coase

University of Chicago Law School

via Wikimedia Commons

https://tinyurl.com/26ffzfkp

This week's Economist includes an article by their Free Exchange columnist, regarding the "The Nature of the Firm," Ronald Coase's classic 1937 work. Despite the belief in the 1990s that economics could command a unified science of business, three decades later, it has not progressed in understanding the inner workings of firms. Neoclassical economic theory primarily focuses on markets and the allocation of scarce resources, but it does not account for the fact that much of the allocation of resources in economies occurs within firms, where employees are directed by administrative fiat rather than price signals. The theory that firms are profit-maximizers is also challenged by the reality of "bounded rationality," as no business could process all the information needed to extract maximum profit.

Economists have made strides in understanding firms through concepts such as team production, incomplete contracts, and the principal-agent problem. However, these theories still fall short of providing practical advice on corporate strategy. Economics often fails to capture the importance of corporate culture, shared values, and pride in the workplace, which are essential to a flourishing business. Moreover, economics is limited in its ability to address the specificity of business problems, as they require detailed knowledge of various fields outside the discipline. While economic ideas can offer some insights, the study of business remains an outpost that economics is unlikely to conquer fully.

It was beyond the scope of the article, but a government agency (or, as a shorthand, an "agency") can also be viewed as a firm responsible for providing public goods or services and implementing policies. Like traditional firms, government agencies coordinate resources and make decisions under the principle of "bounded rationality." The major difference is that these agencies differ in their objectives, as they aim to maximize social welfare and address market failures, rather than seeking profit maximization, but which I would note, makes the insights of the Free Exchange column even more trenchant. Further, because government agencies also face unique challenges in terms of bureaucracy, political influences, and accountability, their efficiency and decision-making processes are even less susceptible to an economics-based analysis. 

While apocryphally attributed to Twain, William S. Burroughs' advice to "write about what you know" leads me to look at my home in light of this. I note, over and over, that the critical issues my community encounters are almost always decided in an interchange and an interplay between firms and agencies. If anything, economics is something of a base meridian used to calibrate during the continuing conversations with multiple actors that are directed by fiat using bounded rationality to either pursue profit or improve social welfare, a problem only marginally susceptible to economics-based analysis. 

Almost all of the important questions instead require detailed knowledge of various fields outside of economics. Indeed, to the extent that economics is used after the point-of-reference stage, it is of limited utility by itself. The dozen other factors noted above, including but not limited to corporate culture, shared values, pride in a workplace, bounded rationality, team production, incomplete contracts, the principal-agent problem, political influence, bureaucracy, accountability, market failure, and social welfare, are generally the factors to address in any analysis of the (for lack of a better phrase) political economy of most local decision-making that I have encountered -- a nice checklist for future reference. 

Carriage Court in Santa Rosa.

"A mobile home park in West Miami, Florida"

By Dr Zak 

https://tinyurl.com/22c4uctp

In Wikipedia, CC BY-SA 3.0

https://tinyurl.com/2y9chhga 

Carriage Court, a mobile home park for seniors in Santa Rosa, it is reported today by the Press Democrat's Marisa Endicott, is being converted to an all-ages park by new management company Harmony Communities. The company claims that the change is necessary for the park to stay afloat and make a profit. However, residents are concerned about potential displacement and culture shift, as many of them rely on fixed incomes and have limited options if costs increase. The change comes in response to Santa Rosa's new mobile home rent control ordinance, which limits how much park owners can raise rent, according to Nick Ubaldi, regional manager for Harmony Communities. 

Residents are also worried about Harmony Communities' track record of litigation over evictions and rent increases. The company is involved in multiple lawsuits across the state and has a reputation for strict rule enforcement and eviction attempts. The Golden State Manufactured-home Owners League has noted that Harmony's "reputation is terrible." The director of communications for Harmony Communities identifies as a crude epithet, Heywood Jablóm, a false name and a classic sign of a bad actor. Indeed, Mariah Thompson, a staff attorney with California Rural Legal Assistance, noted that Harmony Communities will "often just see what they can get away with[.]” 

Mobile home parks, especially in American culture, are stereotypically viewed as lower-income housing for occupants living at or below the poverty line who have low social status. As Wikipedia notes, despite the advances in trailer home technology, the image survives. Residents, especially the elderly, can be targets for unscrupulous business practices. 

Here, Ubaldi is contending that an updated rent control ordinance, designed to protect senior citizens, is in fact the source of senior citizens' distress. This is an obvious attempt to reverse victim and offender, which is harmful to the democratic process, beyond the specific harm it inflicts on the residents of Carriage Court. Sowing confusion and undermining accountability only weakens the norms we all rely upon to effectively address our housing crisis, which is bad and getting worse. Ideas, like housing, are more of a public good, like a forest, than a commercial context, like a marketplace.  We all must recognize that public discourse is vulnerable to the same damage that can be suffered by the woods should the balance between individual advantage and long-term sustainability be violated callously.

The Sullivan Doctrine.

"Harbour Scene"
Dutch marine painter Abraham Storck (1644-1708).
Image source: Wikimedia Commons, Public Domain.

This week's briefing from The Economist concerns the ongoing US-China trade war, focusing on the US ban on certain semiconductor sales, that severely impacted Chinese chipmakers like Yangtze Memory Technologies Corp (YMTC), causing delays in business plans and construction of new facilities. The resulting shortage has disrupted supply chains and forced Chinese firms to become more reliant on domestic production, lowering the forecast of Chinese companies producing over half of the country's needed chips by 2030 to just 33%. The US government's "Sullivan doctrine," named after National Security Advisor Jake Sullivan, aims to maintain an American edge in foundational technologies like AI, biotech, and clean energy by restricting China's access to advanced chips involved in these areas through export controls using "foreign direct product rules" (FDPRs).

This escalating tech war has the potential to reorganize global supply chains and spill into other industries like clean technology, biotech, and agriculture. The conflict may create two mutually exclusive blocs for many products, undoing gains from globalization and harming companies and countries caught between the two rivals. The US may target additional industries with FDPRs, further intensifying the situation and prompting China to retaliate.

Despite the adverse consequences of the tech war, the international rules-based order aims to establish a free world by promoting free trade as a public good. By fostering a cooperative environment for innovation and ensuring access to resources, this encourages global economic growth and benefits all nations involved. In the long run, the rules-based order is designed to promote stability, prevent conflicts, and create a more prosperous and interconnected world. I cannot see how that system can continue without a US willingness to defend it, as today's international trade is a legacy of America's position at the conclusion of the Second World War, and its continuing and enduring commitment to the same.

Slouching Towards Utopia.

Brad DeLong 

One thing I like to do from time to time, is recommend a good book. Brad DeLong has been an economics and history professor at UC Berkeley for a long time, and I have enjoyed reading his posts. He has recently put together many of his thoughts in a book, Slouching Towards Utopia, which I am reading and recommend to anyone interested in the history of the "Long 20th Century" from 1870-2010. The Economist's very positive review of the book is here.

Brad DeLong has come up on this blog before -- here's a list of the times I've mentioned him previously:

1. Paul Krugman: "Brad, Don't Get Too Excited."
2. QE4.
3. Brooks and Krugman.
4. Nothing So Dear as #cheapmoney 
5. Le Mieux est l'ennemi du Bien.
6. @RobertJShiller and the #EMRATIO.
   

@econbartleby and @billswindell at @TheEconomist and @NorthBayNews, respectively.

As I lamented the result from St James' Park this morning, I looked for an insightful article from The Economist. A nice part of focusing on one piece is the chance to learn about the writer. Knowing these journalists grow up and live in a certain context humanizes them. For example, I ran across a piece by Motoko Rich of the New York Times a few years ago, and was surprised to find she grew up in the small town literally next door in Sonoma County.

Philip Coggan

available at https://shrtm.nu/EYpO

So, today, it's the Bartleby columnist, Philip Coggan. He's a graduate of Sidney Sussex College, one of the constituent colleges at Cambridge University. His work at the Financial Times, authorship of several books, and awards won belies his skill, but details on his person are scarce. He has a feed at Medium, though, where his words on the loss of a pet say much. It recounts how he, his daughter, and his wife said goodbye, recalling Philip's loss of his own father as a child:

"We take small pleasures from our pets. The purr of a cat as it is stroked; the excitement of a dog as it chases a ball; the occasional bursts of madness as a cat attacks a piece of string or a dog chases its own tail. They create a rhythm to the day; the morning feed, the afternoon walk, the night-time arrival of cat on bed, eager for shared bodily warmth. And there is satisfaction from a relationship that is so uncomplicated; in return for food and affection, the dog or cat will stay around. There are no arguments; no sudden estrangements. These small joys help us through the long days and nights. My cat will no longer be the first to greet me when I open the front door. How can I not be sad that he’s gone?"

Julian Richer

available at https://shrtm.nu/o5fQ

Perhaps fitting for a financial journalist with such a sense of the personal, the piece this week is his writing on the appropriately-surnamed Julian Richer.  Richer made his fortune in peddling high-end audio equipment in the UK, from stores cheekily named "Richer Sounds." Richer's parents had both worked for Marks & Spencer (for an American, think maybe Macy's), and he entered the business at fourteen.  Coggan draws attention to Richer for the unusual fact that Richer has planned to give away much of his wealth to his employees.

When asked why, Coggan writes that Richer claims inspiration from the nearly 40-year-old book "In Search of Excellence." Richer maintains (and Coggan appears to agree) that the case studies therein illustrate that top performing companies treat both customers and employees well. "Organizations that create a culture based on fairness, honesty, and respect reap the rewards ... [t]hey attract motivated staff who are there for the long haul."

Coggan does not concede that Richer's arguments are ones for general application. He notes that Richer Sounds' turnover is a mere $157 million. That about matches the four supermarkets in the little City of Sonoma. However, he points out that the UK's high street retailers and supermarkets (M&S, Asda) have sought Richer out for his insight, suggesting lessons for the business community as a whole.

The point Coggan doesn't quite tease out (and I give him the benefit of the doubt here, for the column is a brief one), is that Richer, while not running a family business, is definitely in the family business.  His folks were retailers.  His approach to employees mirrors many family businesses in my part of semi-rural California. Bill Swindell of the Santa Rosa Press Democrat made this point five years ago, with his article "All in the Family." Swindell's quote from Marcus Benedetti (Clover-Sonoma) sums it up, as the CEO of the longtime dairy said "I look at myself as a temporary steward of something I can pass on to my children."

Over the past months and years, increasingly, navel-gazing about the raison d'être of companies has been a recurrent theme in the business press. The Economist has been no different. Contemporary capitalism often feels simultaneously disconnected from place while focused on individual cults of personality, provoking something of a crisis. It has not always been thus. When so many large business organizations in the United States came into existence in the Gilded Age, the personalities involved were known to one another, and the ownership thereof was often family-based, if dysfunctional.  Discomfort with family-type structures may therefore be present for good reasons -- embarrassing, emotional strife was and is common, messy details are inevitable, and nothing saps a meritocracy like nepotism.

Business is replete with family fortunes won-and-lost, the proverbial "shirtsleeves to shirtsleeves in three generations." It is understandable then, that with family life often resembling nothing so much as a blooper reel, that businesses would have a long-deep discomfort with management principles that may very well be family-derived. What irony there is, then, in the unstated suggestion of Mr. Coggan's piece — that at the core of successful businesses, those impersonal machines of prosperity, is the resiliency, reciprocity, and, yes, care for one another upon which family depends?

@noahpinion on how Colleges affect Communities.

I tend to spot articles over time that I can tell will have some future relevance, but I can't always put my finger on it.  A good example of why saving copies of such pieces is important is here -- I didn't know what to make of that oil price article in 2012, but I certainly did by the end of 2014.

Similarly, I am linking to an article today from March, that I had thought would be part of a more complicated piece.  It's from Noah Smith, a former finance professor who blogs himself professionally for Bloomberg. The piece is interesting on its own merits because so many of us seem to think of a college as a place that educates the local population, and because, in true academic fashion, Noah points in a different direction:

"... ideas and technology leak out to surrounding businesses in myriad ways ... [a]cademics consult for local businesses. [Staff] start local businesses of their own. Companies ... hire smart people away from... campus jobs. [Colleges] provide forums for local entrepreneurs, inventors and academics to meet each other, exchange ideas and offer employment ... [h]igh-productivity technology businesses therefore tend to cluster ... in order to take advantage of the rich flow of ideas and skilled workers. That, in turn, draws smart educated people from other regions, boosting productivity and raising wages even for less-educated locals."

That the impact of an educational institution is, economically, in many respects due to the private-sector activity it influences in the surrounding economy, rather than the degreed individuals marching out the door in regular intervals, is I think a key to understanding the intuitive interest so many have in the fate and future of their local schools and colleges, beyond whether they or their children did, will, or do attend at any given time ...

@TheEconomist on #Homelessness in @SFGov.

I blog from time to time on the trustworthiness of news sources, and in general in the United States, the Economist is often considered the most reliable when surveys of the public are conducted. Before the June 5, 2018 primary in California, they took a look at San Francisco's Mayor's race. Their article touched the twin problems of the cost of housing and of homelessness, and I recommend the piece (available online here).

It's disturbing reading.  The author (The Economist eschews bylines) confronts the lived reality in terms that the reader can almost smell.  But the striking sentence to me was "[t]o voters, though, the problem seems to be getting worse ... '[but t]here’s not more homelessness than before. It’s just a lot more visible,” says [Jeff] Kositsky [San Francisco's Director of Homelessness Services]."

We all struggle in the San Francisco Bay Area to understand how wealth disparities in the nine county area can rival those on display in what the article characterizes as "poor-world entrepôts." But that the situation has become clear to so many is not in dispute, and perhaps that is the silver lining -- for we must have awareness before we can take action together.

The Return of #Cash.

Image available at http://tinyurl.com/yaxw3y5g

Just a brief note today, regarding reporters who are pointing to an economic and financial shift.  Extraordinarily low interest rates have had a significant impact on asset prices in Sonoma Valley (as I blogged about here, here, and here).  In 2015, Robert Shiller pointed out that in the San Francisco Bay Area, that most people expected annual home price increases over the next decade of 5%. However, more than a quarter of respondents thought prices would increase each year by 10% or more. Many of the second group leveraged (and profited impressively) as real property prices have continued to rise over the intervening 36 months.

S&P 500 dividend yield v. 3-month T-bill yield

courtesy the Board of Governors of the Federal

Reserve System (US), retrieved from the Federal 

Reserve Bank of St. Louis [FRED] May 15. 2018. 

S&P 500 dividend yield courtesy mutlpl.com,

 May 15, 2018. Excel data and graph available here.

Today, though, there is evidence that change is afoot, as the yield on "cash" (short term Treasuries) now exceeds the dividends on a broad range of stocks (the S&P 500).  The Financial Times' graph, courtesy of John Authers, is on the right.  I extended the graph back a bit (to 1933) just to get a longer perspective, via FRED and multpl. For about a thirty year period, dividends were generally always higher, until some point in June of 1963, when the rule flipped. Cash was king, more or less constantly, for the following ~2,335 weeks, until February of 2008. There are periods where these two measures briefly "invert" from the norm in both eras (e.g. 1959 for dividends, 2002 for cash), but it's unusual.

What does it mean? Stanford economist Bob Hall (who continues as chairman of the academic panel that dates American business cycles) notes that, economic syncopation being what it is, “[t]he next recession will come out of the blue ... just like all of its predecessors.” However, the Economist has pointed out previously that this economic cycle is already running exceptionally long at ~105 months, and it is now more than a year past the average of the last three (the longest ever, March of 91-March 01, was 120 months).  Meanwhile, valuations continue to be particularly rich (the Shiller PE is at 32.33, in excess of the '29 crash and only matched by the dot-com bubble). My sense is that the financial columnists pointing to this data are wondering how "out of the blue" a contraction could be at this point. Which is an interesting point to consider, when one reflects on the power of narratives in financial markets.

@SVHSDragons @SVUSD1 #SonomaValley College Readiness Going Up.

It's a day of sorrow, and for the acknowledgment of tragedy for Sonoma Valley's school district. But it's important to remember that great work is being done overall in our public schools.

Per Person Income vs. College Readiness, California Counties.

Sources and methods available here.

PDF version available here.

In particular, this year has been a strong one for SVUSD, because both governmental and commercial measures indicate our schools are having increasing levels of success.  For instance, US News & World Report found that Sonoma Valley's College Readiness Index, at 36.7, is now exceeded by only three Napa-Sonoma area schools: Maria Carrillo, Casa Grande, and Roseland University Prep.

This result is confirmed by State measures of performance, as the graph on the right shows. In general, Sonoma County rates poorly given what's expected for a county of its wealth. It is one of the clearest and worst under performers.

But Sonoma Valley is different.  SVUSD does 40% better on preparing students for college than the rest of Sonoma County. Sonoma Valley now outperforms Napa as well. SVUSD deserves a lot of credit for turning in such a strong result.

One of the best things about working for the past couple of years with the District's trustees, our very strong Superintendent, and so many dedicated principals and teachers, is that it gives some context concerning the regular and sustained progress being made.

What Do Bubbles Look Like, Pt. 3.

Today, I'm revisiting a post from last November, and a followup from March of this year. I had blogged about a property for sale on Austin Avenue, in the Prestwood neighborhood of Sonoma. The asking price was $2,295,000; the house was a little under 1,900 square feet. There was some disbelief at the listing, given the property had sold in November of 2010 for $407,500. But it duly sold for $2 million. 

Zillow advertisement, May 24, 2016.

image available at http://tinyurl.com/zae624d 

I'd speculated that this market could continue for another summer, and perhaps even two. Today is just a small update; I was browsing Zillow for unrelated reasons and saw the image at the right. 348 Patten, which had sold for $725,000 in November of 2013, is now at $2.8 million; Zillow estimates the house is for sale for about $994 per square foot.  To put that in perspective, the most expensive zip code in the USA (10007, also know as Tribeca, New York) has prices per square foot of about $2,829 (yes, the source is Business Insider, but bear with me).  Atherton, at #2, is $1,669 per square foot, and there are four more above $1,000 (33109, Fisher Island in Miami, $1,586; 92662, Balboa Island in Orange County, $1,443; 90401, Downtown Santa Monica, $1,304; and 02108, Beacon Hill in Boston, $1,290). The next on the list is actually below 348 Patten, and that 92118, Coronado, in San Diego, at a mere $866 per square foot. 

Board of Governors of the Federal Reserve System (US)
Multiple Series
retrieved from Federal Reserve Bank of St. Louis [FRED]
May 23, 2016, available at http://tinyurl.com/p4cmzyv

The one thing that all those locations have in common is access to an extraordinary job market; whether it's downtown Manhattan, Palo Alto, Miami Metro, The OC, LA's Westside, or Greater Boston, there is a nexus of price and productivity evident in each instance. Sonoma, though, is much different; the economy is orders of magnitude less intense.  Perhaps the most striking contrast is the property Zillow listed immediately below; a George Ranch home, 4,500 square feet, on 8 acres, with 5 bathrooms, for (only?) $2.3 million. 

I've turned from time to time to the graph on the right as an illustration of where markets have been moving since June of 2009. Since I first posted this graph, the situation has actually gotten more extreme. I continue to think that prices may hold up through the summer, but expecting real estate to continue to appreciate along this trend line increasingly strains credulity.

What Do Bubbles Look Like, Pt. 2.

Today, I'm revisiting a post from last November. I had blogged about a property for sale on Austin Avenue, in the Prestwood neighborhood of Sonoma. The asking price was $2,295,000; the house was a little under 1,900 square feet. There was some disbelief at the listing, given the property had sold in November of 2010 for $407,500.

As was expected, the property didn't sell, and was reduced in price in January of 2015, but only to slightly less than $2 million. And that's where it sold, on March 12th of 2015, for $907 per square foot. That amounts to about a 200% return on the investment, given the 14 months and three weeks the property was held. The turn of events produced a certain amount of amazement and head shaking; talk of a bubble would frequently follow.

Board of Governors of the Federal Reserve System (US)
Multiple Series
retrieved from Federal Reserve Bank of St. Louis [FRED]
August 11, 2015, available at http://tinyurl.com/p4cmzyv 

I kind of fell into a trap of presuming that rapid appreciation automatically meant a bubble exists.  However, I wanted to get an idea of what asset prices in Sonoma look like contrasted with other assets.  And once again, I turned to the St. Louis Federal Reserve Bank's excellent data analysis tool, FRED, to give me some perspective. 

The electric blue line through the center of the graphic is the Case-Shiller Home Price Index for the San Francisco Bay Area. I indexed it on the trough of the last US recession, June of 2009.  I also put in the same index for Cleveland (the dark blue dashed line) and Las Vegas (light blue dashed line). 

I chose Cleveland as a comparison because its residential real property prices were basically increasing at a modest fixed rate for years, which is what you'd (more or less) expect of a heavily regulated market dominated by government lenders.  Las Vegas, in contrast, is one of the more heinous examples of the real estate bubble; the pronounced rapid rise around 2006 is clear.  Prices in Cleveland have now been declining-to-flat for nearly a decade, and while Las Vegas has seen a recent increase, the change is nothing like 2004-06. But in San Francisco prices have nearly returned to their peak.

There's something of an obvious culprit, of course.  While the increase in house prices is remarkable, the increase in stock market prices is even more striking.  White the sharp rise in gold-and-oil prices (the yellow and black lines, respectively) during Obama's first term are clear, those markets have gone through serious corrections in the last 24 months.  But the NASDAQ's rise (solid green line) continues unabated, and unlike the dot-com era, the broader markets have followed (the dashed green lines are the S&P 500 and the Wilshire 5000).  

Sticking the label "bubble" on this situation, though, requires clearing one more hurdle. Bubbles aren't just mispricing, where people think something's valuable and, after time, it becomes clear they were wrong. Instead, bubbles, as Noah Smith nicely explained in a column back in March, depend on greater fool speculation–that someone else will pay an even higher price for the same asset tomorrow.

When it comes to home prices in the San Francisco Bay Area real property market, no less an authority than Robert Shiller himself argues such extravagant expectations (and market inefficiencies) are indeed what's driving prices, creating the potential for a Minsky moment. His point (distilled) is that the lack of short selling and the difficulties associated with increasing supply are behind the problem:

"In San Francisco, for example, we found that while the median expectation for annual home price increases over the next 10 years was only 5 percent, a quarter of the respondents said they thought prices would increase each year by 10 percent or more. That would mean a net 150 percent increase in a decade. These people are apparently not thinking about the supply response that so big a price increase would generate. People like this could bid prices in some places so high that eventually the local market will collapse. Yet the smart money can’t find a profitable way to correct such errors today ... [t]he bottom line is that there is no reason to assume that the real estate market is even close to efficient. You may want to buy a house if you love it and can afford it. But remember that you cannot safely rely on 'comparable sales' to judge that the price is fair. The market isn’t efficient enough for that."

Presuming that we are in a bubble, the hard question is, when do we expect it to end? For a way to think about how to answer that question, I point to the Economist.  In an article from last year, the newspaper noted that this particular economic cycle is already running long at 74 months; if it continues through May 2017 it will pass the average of the last three. Prices may very well hold in Sonoma so long as the expansion continues. Thus we may see a seller's market in the Valley of the Moon for another summer, and perhaps even for two.

It always seems odd to me, however, that given the regularity of booms and busts, that we all still struggle to remind ourselves that this time isn't any different, and these conditions will end as all such expansions do.  It is a truth Stanford economist Bob Hall (chairman of the academic panel that dates American business cycles) reminds us of when he points out that, economic syncopation being what it is, “[t]he next recession will come out of the blue ... just like all of its predecessors.” Perhaps we can take some comfort from our pattern of failing to constrain our expectations, even after three and a half thousand years of this stuff, and recognize it as a part of the human condition.

Knowledge of the problem, though, doesn't mean we should be sanguine about the consequences for individuals exposed to the volatility.  The family home is the primary asset of the vast majority of households. It is worth remembering that during each of the last three recessions, as the graph above shows, prices for San Francisco residential real estate have fallen. Sometimes, the collapse has been rather spectacular. It's food for thought, I imagine, for those in the Bay Area who are expecting ten percent appreciation per year for the next decade or more ...

@SVUSD1 @svhsdragons 2015-16 Budget "Best 3 Year Projection in Years."

The Sonoma Valley Unified School District had the first read of its 2015-16 budget on Tuesday night, presented by John Bartolome, the District's Chief Business Official.  John, for those of you who don't know him, is a graduate of Purdue University, helps out faithfully with the Sonoma Valley High School Wrestling Team, and apparently is one hell of a golfer.  He also had the chance, with this budget, to give Sonoma Valley Unified some of the best budget news it has ever had. I got the video courtesy of SVTV, which is very much appreciated. The video runs about 20 minutes, but I recommend it to anyone interested in a succinct picture of how things now look after the past half-decade of cuts.

John does a very nice job of explaining what's taking place; there's some terminology that can be confusing. To make sure nobody gets lost, LCFF stands for "Local Control Funding Formula," which is the new (reformed) method of financing public schools in California.  It was supposed to be phased in to its planned level through 2021–that is, schools weren't planned to be fully funded in California for another half a decade.  But, given the improvement in California's budget, school funding under LCFF has reached 70% of the 2021 figure. 

There's some discussion of deficit spending.  The district "planned" to run a deficit in the last year, and has done so for several years; that was due probably to the conservative projections made on funding.  When the local economy takes it in the teeth, that's what reserves are, of course, for, and the level of State funding has gotten to the point where the budget is essentially balanced as of 2017-18, which is a very significant change from years past.

There's also some discussion in the presentation of the concept of "Basic Aid," which is a special system under the line of legislative responses to Serrano v. Priest that allows some Districts to receive more funding than others due to their very high levels of property tax received.  During the most recent economic mess, State funding fell so low that Sonoma Valley actually became a Basic Aid district–which is expected to end in the next year.  Not a bad thing, as John points out, but instead more of a sign of the consequences of an economic recovery (... or of another speculative bubble). 

The Fall of Measure A, and Roadway Congestion Pricing.

In the wake of the defeat of Sonoma County's Measure A yesterday, I started thinking about what other alternatives are available to mitigate Sonoma County's roadway issues.  As many of the readers of this blog are aware, Measure A was a quarter-cent sales tax in Sonoma County intended to fund pavement improvements.  The stories in the press before the election focused on the low quality of Sonoma County's roads, and indeed there's ample evidence of the problem. Sonoma County is generally considered to have the worst Pavement Condition Index of any county in the San Francisco Bay Area. That's saying something, as the region isn't known for the quality of its roadways.

However, the Sonoma County Board of Supervisors' proposed solution, a sales tax, always seemed strange to me from a policy standpoint. Sales taxes are regressive, and aren't closely tied to the use of the roadways. Gas taxes have historically been used to fund maintenance (let alone improvement) because the use of the roads was (loosely) tied to the amount of tax paid. Of course, that system in the United States has been failing for decades. Improved fuel economy has delinked miles travelled from the amount of tax paid. But there's also another problem with fuel taxes. 

That problem turns on the primary complaint of voters when it comes to matters such as these.  It isn't actually the quality of the roadways. Instead, it's typically roadway congestion. For, as no less an authority than Harvard psychology professor Daniel Gilbert has noted, "[d]riving in traffic is a different kind of hell every day."  So, while charging users for miles driven isn't a bad solution, charging them for driving those miles at the most congested times in the highest traffic areas is generally best. It provides revenue to improve the roads not based on the damage done to the road, but instead on the inconvenience imposed on all the other voters for inefficient timing of one's travel of the right-of-way. 

I concede, without argument, that, for the moment, for Sonoma County, trying to introduce a comprehensive system of congestion charges is asking too much. While Sonoma Valley's per-square-foot real estate prices may be approaching those of London or Singapore, that doesn't means the voters are yet ready for Zurich or Stockholm style road pricing. But there is lower hanging fruit whose benefits could be substantial.

 Highway 37/121 Juncture

Heavy Traffic in dark black

available at http://quickmap.dot.ca.gov

Take, for instance, the junction of Highways 37 and 121 in the southeastern corner of Sonoma County. As many are aware, the traffic in the afternoon heading from Sonoma County into Solano County, where 37 shrinks from two lanes to one, produces epic traffic jams. The problem isn't inter-Sonoma County traffic– instead it's the commuters trying to reach Solano County. For residents of Sonoma Valley returning home from San Francisco, it's a regular annoyance. For a tourist destination like the City of Sonoma, it's a foot on their economic windpipe. The Press Democrat has reported on the problem before, and motorists have even started petitions asking for help with the situation.

The nasty congestion at 37 is a classic example of the overuse of a public good (a free highway). Since each driver need not pay any fee to use the roadway, commuters over-exploit Highway 37. Each motorist gets a small benefit from traveling the road, and many are motivated to maximize their use by traveling it every workday, becoming reliant on it. Yet the costs of their use are imposed on the residents of Sonoma County, whose use (and the use of their tourists) is less (often, much less) intense.  Pretty frequently, the problem snowballs around 3 PM, until the resource collapses, in the form of a traffic nightmare. 

The irony of all this is that the builders of the roadway were well aware of these kinds of problems.  Indeed, Highway 37 was originally built as the "Sears Point Toll Road," managed by the Golden Gate Ferry. The imposition of tolls is an obvious solution to the tragedy of the commons–frequent users pay a higher price.  But when the State of California purchased the roadway in 1938, the tolls were eliminated. 

Now, that was probably a decent idea during the Great Depression. Collecting tolls in that era was much more disruptive than billing the FasTrak equipped cars of today, and spending on roads to improve the general welfare was politically uncontroversial. But the technical problems of toll billing have long been resolved, as the improvement in traffic on the Golden Gate Bridge heading into San Francisco since mandatory electronic toll collection began in March of 2013 illustrates. And the overall impact of congestion charges worldwide has been positive, from London to Singapore.

Toll Monitoring Station, Singapore. 

Photo Courtesy Michele Simoni

available at http://www.ivt.ethz.ch/docs/students/sa389.pdf

User fees imposed on Highway 37 from Sonoma to Vallejo (a step toll is preferred) would improve the ability of tourists to reach upvalley destinations in a timely fashion. Such a solution is consistent with the history of the roadway. It helps resolve the primary concern of the voters, congestion, while avoiding politically impractical roadway expansion.  It provides revenue to resolve the pressing policy problem, roadway maintenance. And it promotes efficient use of a public good. At a stroke, it uses technology to help resolve a series of different thorny problems. 

This kind of a solution isn't limited to the junction of 37 and 121. The politics of such a solution at  San Antonio Creek are somewhat different (the commuters causing congestion there are residents of the County, those at 37/121 generally are not).  But if the remedy proves practical at Sears Point, there are other locations where such congestion pricing would make a great deal of sense (for instance, upon entering Sonoma Valley ...).  

Before yesterday's vote, congestion pricing in Sonoma County was largely a mere gedankenexperiment.   But after the failure of Measure A, it's another matter entirely.  As Ernest Rutherford was fond of saying, "[w]e've got no money, so we've got to think." In that vein, I suggest it is going to have to be creativity, then, rather than higher taxes, that Sonoma County will have to rely upon to resolve its long term traffic problems.

Freshman Teams, Student Performance, and the Case For SVUSD's Master Plan.

So, it's my birthday today, and those of you that know me will be unsurprised that my gift to myself was speaking at "Career Day" at Adele Harrison Middle School in Sonoma. I always find it rewarding to talk with students about their plans for the future. But this year, and in this instance, I had just that little extra bit of a reason to be positive. Because I've been spending some time reviewing the consistently increasing performances delivered by students just like those I spoke to today when they reach Sonoma Valley High.

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Data courtesy Sonoma Valley Unified School District.
Framework from Elaine M. Allensworth,
Julia A. Gwynne, Paul Moore, and
Marisa de la Torre, "Middle Grade Indicators of
Readiness in Chicago Public Schools.”
available online at http://tinyurl.com/myq87ag

On the right is a graph tabulated from freshman grade information at Sonoma Valley High since 2006. But first, a bit of background.

Recent research shows that middle school attendance and GPA, when combined, are the single best predictor of high school GPA. Qualitatively, most (public) high schools grade students similarly; however, similar students perform differently depending on school, with some schools improving performance up to .5 of a grade point – and with most of those benefits received by the students between a 1.0 and a 3.0. Those student who manage to reach or exceed a 3.0 in high school increase both their chances of attending college, and graduating from college, the higher their GPA moves.

The study really caught my eye because, beginning in 2011, Sonoma Valley High School created their Freshman Teams, small communities of incoming students with shared schedules. To the extent that the context students enter high school can affect performance, should the Freshman Teams have been functioning positively, an improvement of approximately .5 of a GPA would be expected, with the primary benefits impacting students who would have earned between a 1.0 and a 3.0.

And lo and behold the graph shows exactly what I'd hoped when I started looking at this data. Since the program was instituted in the 2011-2012 school year, Sonoma Valley Unified has moved the majority of its students into the college-potential category as of the end of freshman year, nearly doubling the number in the top tier. Attendance improvements were positively correlated with GPA improvements. Further, as would be expected, the biggest GPA change impacted students between a 1.0 and a 3.0, with essentially a third of the students expected to fall into the range moving into the college potential or college probable tiers.

That wasn't all -- at the same time this was going on, the number of students taking accelerated coursework (math & language) nearly doubled.  Sonoma Valley High gives the students no break on grading for their initiative in choosing a harder schedule – there is no bonus weight assigned to their GPAs for this effort.  So not only are the students earning better grades, but they've been doing it taking harder classes at the same time.  

The students I saw at Adele will now more likely than not be in a position to pursue college when they attend Sonoma Valley High in the years to come. The full handout (with the citations and backup) is here.  And the question this data makes me ask myself is: will we give these students the schools and the facilities that their performance deserves?

Can we execute on our school district's Master Plan?

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Poll, Sonoma Index-Tribune

screenshot taken February 12, 2015.

The voters of Sonoma have long been the heroes of their own community's schools, not leaving that role to the State of California.  The electors of the Valley, time and again, have fully committed to public stewardship of our educational infrastructure. As parents (and grandparents), our lived experience shows the enormous benefits to health, safety and education that have always accrued from carefully spending the money necessary to develop the structures, fields and facilities worthy of a Valley as successful as Sonoma.

The men and women of our community have always counted on their educators and trustees to manage — cautiously — the development of our school campuses.  We want our District to be neither the family shopping only for the day's needs at 7-11, nor the one gone Costco crazy.  Instead, we hope they'll be like a mom and dad sitting around the kitchen table, carefully deciding on the nutritious groceries they'll buy for the week ahead, before they go to the store.  For like that family, we as a community know we'll face expenses to maintain our District, and we'll have to frugally weigh options, one against the other.

I think this is the moment that we find ourselves at that table. For notwithstanding the emergence of a second dot-com bubble to our south, interest rates remain at historic lows because investment and demand in America remains depressed.  These conditions were not seen for seventy years, and it is quite possible they will not be seen again for another seventy.   As prudent shoppers, now is the time to write our list of the purchases we know we're going to need — the framework for accelerating our students into the balance of the 21st century that lies ahead.

The green eye shade of the accountant, and the graphs of the economist make the dry case for improving our schools — that action now can reap outsized dividends, consequences we will see in the improved living standards and enhanced productivity of our entire community. But it is our concern for justice that should ultimately resolve questions in favor of an investment in our shared future.  It is no accident that I started this section with a rewrite of the first sentence of David Copperfield, Dickens' story of individual perseverance despite an undisciplined heart. Our shared belief is that America is defined by the notion that the condition of your birth does not determine the outcome of your life, a truth voiced by both Paul Ryan and Elizabeth Warren. Whether Republican or Democrat, liberal or conservative, our covenant with our future selves is that education will remain the key to unlocking the American Dream.

However, it is our common fear that each element that leads to such success is eroding before our eyes. We find ourselves in a time where educational opportunity in the United States has become inverted. We are one of only two members of the G20 that spends more on richer students than poorer (the other is Turkey). We cannot rely on the State of California to resolve these issues for us. Our Governor is backing away from California's School Facilities Program.  The State is essentially leaving Districts like ours on their own in providing for future school facilities and modernization.

This is where the case for implementing the District's master plans, now,  for all of the campuses, finds real traction. As Winston Churchill said, "we shape our buildings; thereafter they shape us."  The voters of Sonoma have a once-in-a-generation opportunity to shape the future of the Valley for decades to come — and there is no one else ready, willing, and capable of doing so. We can put in place the scaffolding our students, the voters of tomorrow, will need to succeed.  

We have an opportunity to make educational equality more than a dream.  We have a chance to make it a reality.  

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So despite being another year older, I found in the faces of our students reason for optimism.  But I also found a challenge and a call to action.  Rare indeed are opportunities such as the one available to the voters of Sonoma today. It is my hope, and indeed I believe we can make it our shared goal as a community, for us all to pull together to create the infrastructure to match the performances being delivered by our teachers and students.

And so I say to the students who gave me a resounding cheer today when their principal told them all it was my birthday, that we can see that they are doing their part.  And that I hope that, as voters, that we will now be able to do ours.