There's been a tendency, every spring since the start of the Lesser Depression, for the business community to express, hopefully, that "this will be the year things turn." The first post I wrote noting this theme was on March 8, 2013. I thought this morning that, two years later to the day, I'd revisit the question.
I've been keeping an eye (thanks to Brad DeLong) on the Civilian Employment-Population Ratio from the St. Louis Fed for some time. It is generally the best measure of labor market conditions. If the economy rallies strongly, this is the ratio that should change substantially.
In March of 2013, the ratio was at 58.5. As of February 2015, it's at 59.3; the graph is on the right. There's essentially been no movement.
At the same time, though, the Shiller P/E Ratio, as of February 13, 2015, passed its pre-financial crisis high. This past week, the NASDAQ closed above 5,000 for the first time since the dot-com bubble. There is some local evidence of a speculative real estate bubble. Shiller himself recently released a new edition of his "Irrational Exuberance," where in the preface he expresses surprise at the events that have followed “the bursting of the speculative bubbles that led to the 2007-9 world financial crisis”:
"[E]vidence of bubbles has accelerated since the crisis. Valuations in the stock and bond markets have reached high levels in the United States and some other countries, and valuations in the housing market have been increasing rapidly in many countries."
So the data is there to support a narrative of asset price inflation unsupported by fundamentals, rather than the hopeful mantra of Main Street.
It is, of course, the why of this situation that is so puzzling to so many. If the economy presents meager prospects, shouldn't prices adjust to reflect? It is always tempting to fall back on Thomas Sargent and simply say that in an economic equilibrium, people are satisfied with their choices, and to add Herbert Stein's observation that "[i]f something cannot go on forever, it will stop." But Shiller himself offered a potential explanation on why this phenomenon recurs, and I found that his point resonated, and so I link to his piece in the New York Times from last month:
"When there is unusual uncertainty about the future, and if not enough new business initiatives can be found to increase the supply of good investments, people will compete to bid up existing investable assets. They may go so far in bidding up prices that even though the assets may have horrible prospects, people will still want to hold them because they feel they have to save somewhere."
Over the past few years, I've heard from time to time in conversation the desire to take advantage of "cheap" fixed-rate money, before inflation sets in.
Board of Governors of the Federal Reserve System (US)
10-Year Treasury Constant Maturity Rate [DGS10]
retrieved from Federal Reserve Bank of St. Louis [FRED]
January 30, 2015, available at http://tinyurl.com/kmtq4sl
On the right is a graph (it's actually a composite of some screenshots) from the Federal Reserve Bank of St. Louis. I've marked when I was born, and when I graduated from high school. At my birth and graduation, the yield on the 10-Year Treasury was nearly identical (~7.5%, ~33 basis points apart). Between those dates, the yield was almost always higher, often much higher; since then, it's almost always been lower, mostly much lower. As of 30 January 2015, the yield is 1.64%.
Everyone carries a memory of economic history in their head. As Owen Zidar points out here, it changes more slowly than the speed of circumstances. Brad Delong has consistently argued for the necessity of all of us to "mark our beliefs to market." He maintains a list of prominent economists and institutions who've argued inflation was the foremost concern facing the U.S. economy since 2007 -- and not for the purpose of congratulating them.
Like the economists Brad lists, our formative memories were constructed during a different time. Inflation expectations became anchored. But there are few atheists in foxholes during combat, and for similar reasons, I suspect that inflationistas in debt are rare during deflation -- for falling prices routinely bankrupt entrepreneurs. There is oftentimes nothing so dear as "cheap" money.
Back in November of 2012, I ran across this article in the Economist, arguing that the United States was on pace to become the world's largest producer of oil by 2020, and would be able to produce enough energy to be self sufficient by 2035. I recall thinking how dramatic a change that would be -- and I saved the PDF, meaning to blog about it.
I wasn't quite sure what to say, though. But spending a little bit of time in Calgary really focused the issue for me. The Alberta business section of the Globe and Mail is on the right (the oil price was also front page news). I've linked to the main article here.
The recent oil price slide will probably completely eliminate the Canadian federal budget surplus. That creates serious problems for a government that has fixed expenses (salaries, pensions, debt service) but falling revenues. Most of the world at this point has, or soon looks to have, the same problem as Canada.
A nice way to understand this situation is to read a brief blog post of Paul Krugman's from October 15, entitled "1937." He noted that markets are signaling that "once again the big risk is deflation or at least very sub-par inflation." He measured deflation in that post by looking at the market for Treasurys, specifically the 10-year, showing the yield had fallen below 2%, potentially a sign of recession, deflation, or both.
When I tucked the Economist article away for future reference in 2012, I never would have thought that a falling nominal oil price could be a bad thing. Today, though, I'm not so sure.
The San Francisco Chronicle gets my attention today. On a fairly regular basis, the paper features a particular piece of real estate for sale somewhere around the San Francisco Bay Area.
Today, they're publishing about a property on Austin Avenue, in the Prestwood neighborhood of Sonoma. The asking price is $2,295,000. The house is a little under 1,900 square feet.
You can see the location here. One nice thing about Zillow is that it will show you the recent sale history of the property. I took a screenshot of that, and that's on the right, too.
The Zillow history shows that William Grecian tried to sell this property back in November of 2010 for $445,000; he couldn't find any takers. He dropped the price to $420,000 in April of 2011, but still didn't find a buyer. He dropped the price another $12,500 -- and that's when Laura and Richard Tackett made their offer, for $407,500 on July 15, 2011.
Zillow.com "826 Austin Ave, Sonoma" screenshot taken Nov. 19, 2014 available athttp://tinyurl.com/krxbtzh
Laura and Richard held the property for 872 days. On December 3, 2013, they listed it for sale at $648,000, a 59% price increase. Laura and Richard figured the change in the real estate market meant that they'd just made an investment with approximately a 20% annual rate of return. Of course, Richard and Laura were wrong; the property didn't sell for $648,000.
Instead, it sold 17 days after listing for $730,000.
More like a 26% annual return.
The property was purchased by an LLC, which is more or less the general practice in California with real estate projects that are expected to appreciate significantly. The registered agent for the LLC is Patrick Doyle of Petaluma, who's a general contractor and is the manager of the LLC. The Deed of Trust on the property (which I checked) reveals the equitable owners. The Deed of Trust is a public record and if anyone's particularly excited to find out who put up the money for this deal, feel free to head to the County of Sonoma's Recorder's office -- they're open 8-5 Monday through Friday.
The LLC listed the property for sale on November 5, 2014. The LLC held the property for 320 days. I can't calculate the annual rate of return, because the calculator I use presumes that the values change monthly; here, the ∆ in the price is so substantial that the number of days included can change the implied rate of return. But it looks like about a 215% presumed annual rate of return.
There are a great many things I could say about this situation. I'm going to hold those observations, and I think I'll revisit this blog post in a couple of years (months?), perhaps updating it with the transaction history of the address.
At this point, though, I do want to draw attention to the comments about the house on the Chronicle's web site.
One poster thought the property looked like a good "flip."
Another wrote that "I can't believe anyone would pay over 2 million for this toy house."
"It's time to do away with workplace policies that belong in a 'Mad Men' episode. This year, let's all come together – Congress, the White House, and businesses from Wall Street to Main Street – to give every woman the opportunity she deserves. Because I firmly believe when women succeed, America succeeds."
The City of Sonoma has an eight member Planning Commission, entirely composed of middle-aged men. The six voting members from the City all live in expensive homes on the "East Side" (the average value exceeds a million dollars). The Commission has become a class-and-gender monoculture that's failing in its basic role of providing predictable evaluations of the viability of any given project with the voters, because its members no longer represent the community -- the essence of representative democracy.
Change won't come easily. There are many in Precincts 1801 and 1805 that, like me, if asked, are inclined to turn down the opportunity to serve. It's no accident that they would -- the system's built-in hostility to those perceived as "outsiders" shunts away potential representatives with a different view -- diverting them to places like the City's Cultural and Fine Arts Commission, which has ended up being composed of eight women. The selection process -- appointment -- encourages those motivated to participate to curry favor with elected politicians -- a craven process at best -- rather than to get to know their neighborhood, the essence of the metis our governmental system depends upon.
The problem's getting out of hand. The City faces expensive litigation that might have been avoided if the Planning Commissioners had been able to give voice to the concerns that led to the Council blocking AT&T's cell tower. Developers like SunLever can't count on the Planning Commission's approval to mean much of anything when the City Council's overruling unanimous decisions. And Measure B was a not-veiled-at-all effort to hamstring the ability of the Planning Commission to approve any hotels, a clear-cut vote of no-confidence from half of the electorate.
This post is devoted to explaining why allowing the situation to continue is outrageous. If this post makes you upset, that's a feature, not a bug. A body of unelected individuals, serving lengthy terms, that rarely (if ever) are subject to supervision or direction from the council (let alone frequent replacement) isn't democracy in action, and it isn't serving the best interests of the community. When we establish a system that depends on a process of currying favor, we shouldn't be surprised when it gets dominated by wealthy, middle-aged men. But Sonoma County's a different kind of a place - it's a place where women win elections. The appointment process has produced a dramatically unbalanced group, and it should be changed. Promptly.
Because when women succeed, Sonoma succeeds.
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It's been an interesting ten weeks since Measure B went down to defeat, as illustrated by two sets of events. The first is the City of Sonoma's turning down AT&T’s request to install a cell tower, and the second's a "meeting" called by Owen Smith of the SunLever Companies, regarding the old Sonoma Truck and Auto site on Broadway.The loss by AT&T was surprising -- the proposal had won 7-0 at the Planning Commission level, and AT&T went so far as to seek reconsideration of the decision, which was denied (expensive litigation is now expected.) The meeting by the SunLever Companies was perhaps even more unusual -- the potential developer told participants he was "open to any reasonable idea" for the parcel -- the opposite of the choreographed presentation usually made to the public for what are preconceived projects.
And in the midst of these two issues, a third point, a quote from the Mayor, came to mind. Tom Rouse (the only member of the City Council to vote to allow AT&T's cell tower) argued that the City should trust the unanimous decision of the Planning Commission. "We have a commission we put our trust in," he said, and "I must believe they did their homework."
Watching an elected leader deferring on the weighing of private rights versus public goods, trusting in an unelected commission to make decisions about the balance and character of the community, caused me to raise an eyebrow. In general, that sort of decision making is at the core of why people run for a City Council seat -- they're personally engaged with the facts, motivated by a sense of duty to serve their constituents even where their individual interests are not at issue -- and that such leaders aren't therefore prone to defer to the decisions of unelected appointees whose relationship with the voters can be tenuous at best.
Yet in a certain sense, I feel like Tom's not entirely wrong -- he should be able to rely on the Planning Commission. But he can't. And then I realized why SunLever feels the need to go directly to the public rather than develop a proposal first ... and why AT&T (and indeed the Mayor) were surprised the cell tower went down to defeat. And it turns on the makeup of Sonoma's Planning Commission.
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Who planning commissioners are, as most every voter agrees regardless of what the voter knows about embodied cognition, is directly relevant to the execution of their duties. Their names are posted on the City's web site, and unless one of them is concealing a very significant secret, they're all men. Further, where the different commissioners live is anything but hidden -- their addresses arefreelyavailableontheweb.
I've run the map on the right before; it is the map of the precinct returns for Measure B. Those precincts in favor of hotel construction are in silver (gray). I've gone and highlighted the lots where each of the six Sonoma residents who are voting members of the planning commission live, and have added flags so that the locations are clearer. I also mapped the location of the residence of Tom Rouse (his flag is the yellow one).
As can be seen, every one of the six voting planning commissioners from the City lives in the portion of the town that voted to allow hotel construction; none live in the west, or “green” side of town.
"The Magnificent Seven,"
Image available at http://tinyurl.com/ml2uldv
I also grabbed the Zillow valuations for each of the properties. The average value of a planning commissioner’s home in the City of Sonoma is $1.277 million (and one is over $2.5 million). I note that the Mayor's $1.462 million home is on 5th St E, and that he and the City's voting planning commission members are thus effectively the "Magnificent Seven" -- middle aged men living in expensive homes on the East Side of Sonoma.
But it wasn't until after hearing the President's State of the Union speech last night that I decided that I really should publish something about this. Because criticizing the Planning Commission solely on the basis of the neighborhoods its members are drawn from is an instance of me pulling my punch. Because the really atrocious part of this situation is that not a single member of the Planning Commission is female.
It's not hard to see why Tom Rouse felt he could trust the Planning Commission -- they pretty much all look and live exactly like he does. But elections in Sonoma aren't solely decided by the policy preferences of the East Side of Sonoma, and the City Council doesn't measure decisions solely based on their acceptability in Precincts 1802, 1804, and 1813. The Planning Commission is an excellent vehicle for assessing projects to the degree it represents the community -- the essence of representative democracy -- and the unpredictability of the AT&T outcome and the uncertainty surrounding SunLever's project are evidence of the fact that the Planning Commission is failing in its basic role of providing predictable evaluations of the viability with the voters of any given project, due to the fact that it has become a class-and-gender monoculture.
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This situation has been a long time in the making. Planning commissioners can serve three terms -- a two year term, followed by a four year, and then another two year term. Commissioners are rarely removed once appointed, and the ability of the City Council to take action to make the Planning Commission reflect the community is limited by the current status of the City's code.
But municipal codes can change. And millionaire middle-aged men aren't the only occupants of the City of Sonoma. Reform could include adding commissioners, changing the composition, or moving to a system where council members each appoint a commissioner (or two) to serve coterminously (as Sonoma County does). But none of these would address the core problem that reform should be designed to address.
There is no substitute in democracy for personal engagement with the facts. Developing that kind of local knowledge means abandoning the influence-oriented appointment process we have in favor of the kind of institution that encourages metis -- democracy. There is every reason to shift to direct election of planning commissioners on a per-precinct basis.
Precinct elections encourage Commissioners to get to know their neighborhoods. Such elections recognize the importance of the two-way relationship between our representatives and our government's professional staff -- that oftentimes it is our representatives who will explain our government's policies to us, rather than merely supervising the conduct of those decisions by the experts we hire in specific policy areas -- a function of elected officials that will only gain in importance with the burgeoning of smaller-scale "social" media. Frequentprecinct elections (these should be two year terms) are a natural stepping stone for Commissioners to move to higher office, because it causes them to learn how to conduct smaller elections and develop campaign teams-- and developing qualified candidates by providing them a zone of proximal development is an important characteristic of any political system -- for we must recognize that we are constantly engaged in the process of developing our own leaders.
For the development of those leaders, the nurturing our leaders, is why elections are really the solution to the problem we face. As David McCuan, the Sonoma State political scientist, has noted before, female candidates in Sonoma County typically do 5 to 8 percentage points better in elections than men. This is not a point that should surprise anyone -- there's a reason that Nicole Mann came from Rohnert Park ... or the New York Times national education reporter is from Petaluma ... or that the Maria Carrillo High women's soccer team is often the best in America. Because when it's not about influence or favor, when it's on the merits, our voters reward the self-evident ability and achievement on display.
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I can see how this argument would lead one to conclude that the City should change the Council itself to precinct elections. This has come up in other cities in Sonoma County before. The charter process is a burdensome, overwrought solution that's looking for a problem; a Council elected by the City proper encourages a broader view of problems, that allows an important second pass in any process of decision making, and one of the key reasons that direct elections work best at a lower level. We want the Council to consider the common good, and Commission decisions are always subject to the retained power of the Council to overrule the Commission.
Pragmatically, electing commissioners is a process that could be done at the General Election on November 4. The Council should act, to ensure that the planning commission proceedings are a fair prediction of what will occur at the Council. The appointment process has produced a dramatically unbalanced group of middle-aged men living in expensive homes nearly next door to each other. Cronyism has resulted in the exclusion of women from the decision-making process, to the detriment of our community. This situation should be brought to an end. Now.
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"Nothing in life that's worth anything is easy."
-SFCCory Remsburg.
I quoted Obama to start this post, and I end with a link to the video of the key part of the speech. Because the quote was the applause line of the night. When Nancy Pelosi stands to clap, and John McCain smiles in agreement ... when Dianne Feinstein rises and leads the standing ovation, it's clear that on a federal level, the unique characteristics of California, where Malala Yousafzai becomes Janet Yellen, should and very well could have the same power nationally as they can in our little town.
Reforming Sonoma won't come easily. Nothing worthwhile is, which was the second applause point of the evening, for Sergeant First Class Cory Remsburg. But it is high time we take the action necessary to reform our small, broken, but important political system here in Sonoma. All it takes is the same commitment to achievement, merit, and democracy that, increasingly, is defining the Golden State's model. And the audience that is watching stretches far beyond the bounds of our own familiar shores ...
"[E]vidence of bubbles has accelerated since the crisis. Valuations in the stock and bond markets have reached high levels in the United States and some other countries, and valuations in the housing market have been increasing rapidly in many countries."
