Actuaries are supposed to provide honest guesses about future cash flows, but according to an article in today's NYTimes, that hasn't always been the case when it comes to NYC pension programs. Apparently an actuary hired by city public employee unions has admitted his work was heavily skewed in favor of finding low future costs for program expansions, and thus akin to "voodoo."
To make matters worse, the article states that once public employees receive a benefit, the New York State Constitution prohibits tampering with it. This creates a far more grave problem that that facing U.S. Social Security, whose benefits are not guaranteed by the U.S. Constitution.
Tuesday, June 3, 2008
Monday, June 2, 2008
Present Discounted Value and Real Estate
Last week, a writer at the Times described his changing view of buying versus renting by making reference to the "real estate market's version of the price-earnings ratio," or the price of a unit of housing divided by the annual total rent for an equivalent unit.
This is a useful summary measure because in equilibrium, it should be equal to 1 / [1 - 1/(1+i)], where i is the annual (nominal) interest rate on a mortgage. This is because the price of a housing unit should equal the present discounted value of its income stream, a.k.a. its rent. If you own housing, you're "paying yourself" the rent by enjoying it. (Or you could rent it out yourself.)
The math of present discounted value suggests that in equilibrium, the price of housing, P, should be equal to
P = R / [1 - 1/(1+i)]
where R is the annual rent. Or equivalently,
P/R = 1 / [1 - 1/(1+i)]
Suppose i = 7.5%. Then P/R should be about 14.3. Suppose you live in New York and rent at $2000 per month. Then the purchase price of that unit should be about $344,000. If P exceeds that, renting is a better deal.
Sound low? We've assumed that the rent, R, stays the same over time. If R were rising, as it probably is in most markets, say at some rate r, then the equation becomes:
P/R = 1 / [1 - (1+r)/(1+i)]
And you might expect to see a P/R ratio around 19.5 or so. The deductibility of interest payments also lowers the after-tax interest rate you actually pay, to something below i.
This is a useful summary measure because in equilibrium, it should be equal to 1 / [1 - 1/(1+i)], where i is the annual (nominal) interest rate on a mortgage. This is because the price of a housing unit should equal the present discounted value of its income stream, a.k.a. its rent. If you own housing, you're "paying yourself" the rent by enjoying it. (Or you could rent it out yourself.)
The math of present discounted value suggests that in equilibrium, the price of housing, P, should be equal to
P = R / [1 - 1/(1+i)]
where R is the annual rent. Or equivalently,
P/R = 1 / [1 - 1/(1+i)]
Suppose i = 7.5%. Then P/R should be about 14.3. Suppose you live in New York and rent at $2000 per month. Then the purchase price of that unit should be about $344,000. If P exceeds that, renting is a better deal.
Sound low? We've assumed that the rent, R, stays the same over time. If R were rising, as it probably is in most markets, say at some rate r, then the equation becomes:
P/R = 1 / [1 - (1+r)/(1+i)]
And you might expect to see a P/R ratio around 19.5 or so. The deductibility of interest payments also lowers the after-tax interest rate you actually pay, to something below i.
Student Loan Ailments
The Times reported today on the credit squeeze faced by borrowing students at colleges further down the food chain, presumably another result of the general credit crunch brought on by the subprime crisis.
Last summer, a similar article discussed huge debt burdens among students who had taken out private loans.
The big question is whether increasing reliance on private bank loans mixed with fluctuations in interest rates, or maybe unfortunate choices brought on by risky or myopic behavior, changes behavior or outcomes. Much research like this working paper by Jesse Rothstein and Cecilia Rouse finds impacts of debt on post-graduation choices. Is there also a matriculation or dropout effect?
Last summer, a similar article discussed huge debt burdens among students who had taken out private loans.
The big question is whether increasing reliance on private bank loans mixed with fluctuations in interest rates, or maybe unfortunate choices brought on by risky or myopic behavior, changes behavior or outcomes. Much research like this working paper by Jesse Rothstein and Cecilia Rouse finds impacts of debt on post-graduation choices. Is there also a matriculation or dropout effect?
Friday, May 23, 2008
More anecdotes on gas prices and transit behavior
Another day, another story about high gas prices inducing changes in economic behavior, whether it's spending less overall on gas or the likely concomitant changes in commuting and other transit behavior.
The unfortunate thing is that by and large it is individuals with relative low income who are reported to have changed their behavior because of the rising relative price of oil. A higher gas tax back when the price was lower would have had the same asymmetric impact, but with a tax the U.S. government could have at least used the tax revenue to compensate the hardest hit.
Were the oil shocks of the 1970s coincident with changes in transit behavior? If yes, were the effects permanent or transitory?
The unfortunate thing is that by and large it is individuals with relative low income who are reported to have changed their behavior because of the rising relative price of oil. A higher gas tax back when the price was lower would have had the same asymmetric impact, but with a tax the U.S. government could have at least used the tax revenue to compensate the hardest hit.
Were the oil shocks of the 1970s coincident with changes in transit behavior? If yes, were the effects permanent or transitory?
Thursday, May 22, 2008
Is education recession insurance?
The CUNY Chancellor states that college experience is "recession insurance" because folks with some college experience are less likely to be unemployed than those without.
I think this observation is based on cross-sectional data: You survey everyone at a point in time, and it turns out that those with more education are less likely to be unemployed.
But that's not really the answer to the relevant question here, which is if you have more education, does that provide protection from becoming unemployed at some future date? Does education lower the probability of becoming rather than being unemployed?
What's the difference between these concepts? Economists categorize unemployment by three types of cause: cyclical, structural, and frictional. The first is what we mean when we talk about a recession. The second and third refer to underlying disincentives or other impediments to working, which are relatively low in the U.S., and the normal churn in a job market where millions of jobs are created and destroyed each year.
It is easy to imagine how education might insulate you against any combination of these three causes, and how it may not insulate against any particular one. Recent research in macroeconomics has identified the difficulty of finding a job as the key motive force behind rising cyclical unemployment during recessions, and not increased layoffs or quits. One would expect that more education should improve the chances of being newly hired, but I'm not sure that's true.
I think this observation is based on cross-sectional data: You survey everyone at a point in time, and it turns out that those with more education are less likely to be unemployed.
But that's not really the answer to the relevant question here, which is if you have more education, does that provide protection from becoming unemployed at some future date? Does education lower the probability of becoming rather than being unemployed?
What's the difference between these concepts? Economists categorize unemployment by three types of cause: cyclical, structural, and frictional. The first is what we mean when we talk about a recession. The second and third refer to underlying disincentives or other impediments to working, which are relatively low in the U.S., and the normal churn in a job market where millions of jobs are created and destroyed each year.
It is easy to imagine how education might insulate you against any combination of these three causes, and how it may not insulate against any particular one. Recent research in macroeconomics has identified the difficulty of finding a job as the key motive force behind rising cyclical unemployment during recessions, and not increased layoffs or quits. One would expect that more education should improve the chances of being newly hired, but I'm not sure that's true.
Tuesday, May 20, 2008
Some cities in population decline
The NY Times reported last week on deaths exceeding births in some U.S. cities, notably Pittsburgh.
Two local friends of mine used to live in Pittsburgh, before emigrating to New York --- where they had a child!
The causes of population decline can frequently be economic in nature, and they probably are in this case. Pittsburgh is not a place where more people die than anywhere else, or where something in the water prevents conception.
Some cities and counties, for example in Florida, deaths exceed births more because of in-migration of the elderly rather than the out-migration of the young.
Two local friends of mine used to live in Pittsburgh, before emigrating to New York --- where they had a child!
The causes of population decline can frequently be economic in nature, and they probably are in this case. Pittsburgh is not a place where more people die than anywhere else, or where something in the water prevents conception.
Some cities and counties, for example in Florida, deaths exceed births more because of in-migration of the elderly rather than the out-migration of the young.
Monday, May 12, 2008
Fuel costs, mass transit, and obesity
A link on Paul Krugman's blog led me to this NY Times article on increased transit use during a time of rapidly rising gasoline prices.
Some of my recent research has examined public transit usage, walking, obesity, and health care expenditures. To the extent that transit use increases walking and reduces obesity, users save additional money just by being healthier.
Some of my recent research has examined public transit usage, walking, obesity, and health care expenditures. To the extent that transit use increases walking and reduces obesity, users save additional money just by being healthier.
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