The National Association of Home Builders reported that its index of current situation and future expectations rose 4 points to 25, its highest level since June, 2007. While 50 is still the dividing line between a growing industry and a shrinking industry, the improvement, which was above all forecasts, is an important continuation of a modest but positive trend.

The Mortgage Bankers Association reported a large increase in mortgage applications, though much of the activity is in refinancing. The composite index was up 23%, with new purchase applications up 10 percent and refinancing applications up 26 percent. (These are week-over-week changes.)

And in their monthly report on industrial production, the Federal Reserve’s data shows a 1 percent month-over-month and a 4.6 percent year-over-year gain in construction materials.

Stocks of home builders reacted positively to the news, with some of the biggest names (Lennar, Pulte, Toll Brothers) up 4 percent after an hour of trading on Wednesday.

Housing and employment are deeply connected:

If people have no confidence in their ability to get a job, or get a better job, whey will not move into bigger, more expensive homes even as their families grow. And obviously if people lose jobs, they often lose their homes. Furthermore, if companies are not hiring, then people are not moving to new locations and buying homes, so demand is further diminished (though that person moving would represent supply pressure in his current home market.)

Conversely, if housing is weak and people are “under water” on their mortgages, meaning they owe the bank more than they can sell their homes for, they are largely constrained from moving. This means they can’t get into a bigger, better home (even if that other home is also relatively cheap) and, more importantly, can’t take a new job which would require moving except in the rare case where the employer is willing to cover the gap between the home’s value and the mortgage due. That sort of signing bonus is obviously more likely for a small, highly sought after group of workers, whether high-level executives or people with valuable specific skills such as the best computer programmers or professional athletes.

It’s not easy to see how this vicious circle is broken. After all, weak employment causes weak housing, which in turn causes weak employment.

But expectations play a big part in both of these: Employers who think things are improving (perhaps because they anticipate a political change following our next election) will take a little more risk and hire a few more people. We’ve seen a little of that in the employment data, though much of the recent drop in unemployment (to a still very high 8.5 percent) is due to the opposite phenomenon: people with so little confidence in the ability to find a job that they simply give up. Some, including me, expect a slight uptick in unemployment as those people decide to test the waters again even as the number of new hires accelerates.

And people who are on the fence about buying a bigger home might be pushed off the fence and make the purchase if their confidence in their own employment situation improves, whether due to an increased likelihood of a raise or simply a lower chance of being fired.

Also, improving job situations and improving economic confidence will, despite the heavy hand of regulators on banks, make it easier for people to get mortgages, whether for new purchases or for refinancing. Furthermore, the huge amount of refinancing activity is a substantial positive for Americans’ standard of living. I don’t buy into the Keynesian view that aggregate demand is all that matters. Still, if American consumers have billions of dollars in their pockets rather than paying that money in higher mortgage interest payments, it must be beneficial to the economy whether because consumer spending increases or because investment capital levels rise.

I maintain my view that the economy is doing modestly well, despite the most anti-business American government since FDR, because of the American entrepreneurial spirit. Today’s housing data is the latest small sign that things aren’t as terrible as they easily could be given our president and his union thugs and radical leftists controlling the levers of power. Because of our federal government, this recovery is much slower and more shallow than it should be. And it could be torpedoed, at least temporarily, by events in Europe or possibly the Middle East. Nevertheless, we shouldn’t let political views cause us to ignore good data, which Wednesday’s numbers undoubtedly were.

Gingrich made accurate and important points that such a change would hugely benefit the country:

Now, what does it do? It gets the government out of telling you when to retire. It gets the government out of picking winners and losers. You save — it makes every American an investor when they first go to work. They all have a buildup of an estate, which you do not get in the current system.

And the estimate by Martin Feldstein at Harvard, who was Reagan’s chief counsel and economic advisors, was you actually reduce wealth inequality in America by 50 percent over the next generation because everybody becomes a saver and an investor and you have a universal investing nation.

Please read the rest of my article for the American Spectator here:
http://spectator.org/archives/2012/01/18/rick-santorum-bad-economist

The first few minutes of the debate were painful to listen to, with the moderators picking at scabs, asking the candidates to beat up on each other, but especially on Mitt Romney. The circular firing squad was nevertheless not as bad as it could have been.

The rest of the debate, I have to say, was surprisingly enjoyable except, perhaps, for Ron Paul’s long rambling answers as he tried to escape from the fact that he said we should have told Pakistan before going in to get Osama bin Laden.

The Republicans generally showed themselved to be part of the Party of Ideas, offering differences among themselves and major contrasts with our current president.

While Mitt Romney won by not losing, he made a particular mistake in handling the question of his tax returns. He all but committed to releasing them in a few months and he should not have.

Rick Perry did a pretty good job, avoiding reiterating the phrase “vulture capitalist” even when prompted by a moderator to do so. But it’s too little, too late, and still nobody can see him debating Barack Obama to a draw, much less a win.

Rick Santorum was Santorum-like which is enough for me not to support him. He made a mistake by pressing Romney on whether felons who have served their sentences and parole time should regain the right to vote.

Newt Gingrich had a very solid performance. I mostly like the guy but I have serious doubts both about his fitness to be an executive (versus a legislator or “ideas guy") and about whether he could beat Barack Obama.

And then there’s Ron Paul, polling-wise the most interesting one in the field because he polls well against Obama in certain surveys (though not as well as Romney does), yet his unfavorables are so much higher than his favorables and I simply don’t think that anyone with a serious understanding of politics thinks he could be electeed president. As I’ve said many times, I like most of Ron Paul’s domestic policy positions, but his foreign policy views (such as on killing bin Laden and on Iran’s getting a nuclear weapon) are simply disqualifying.

All in all, a good debate. And I declare the winner to be: The Republican Party.

Please listen in and feel free to join the conversation by calling the station at 303 713-8255

Some say that Romneycare, the Massachusetts state-run intervention into health insurance which was largely the model for Obamacare, makes Mitt Romney an ineffective opponent to take on President Obama’s signature “achievement” – an achievement that the majority of Americans has consistently wanted repealed since its inception.

Others argue – perhaps from wishful thinking – that Romney’s Mormon religion will be held against him (interesting how it’s usually liberals saying this will be a problem among conservatives) or that his work at Bain Capital (and the now famous picture of Romney and partners posing with money) will do him in. Some worry that Mitt Romney will not inspire enthusiasm, that he will struggle to get Republicans to contribute cash, man phone banks, and otherwise participate in the grassroots ground game critical to winning a major election. And everybody knows that Romney has changed his position on a range of issues from abortion to health care to gays in the military.

Other candidates, including Newt Gingrich, Jon Huntsman, and Rick Santorum are calling Romney unelectable – going after the “most electable” theme that has been a key early selling point for the Romney candidacy even if not made overtly by Romney himself. According to Associated Press exit polling during the recent New Hampshire primary, of primary voters who said that their “most important consideration was finding a candidate who could defeat President Barack Obama in November… Romney won 62 percent of their votes.”

In short, the web is ablaze with articles discussing why Mitt Romney’s electability is a myth. Color me skeptical of the current “unelectable” fad.

Please read the rest of my article for the American Spectator here:
http://spectator.org/archives/2012/01/16/i-think-he-can

There is no doubt that “creative destruction” is a pleasant sounding term – made famous by Austrian economist Joseph Schumpeter – describing the unpleasant fact that when businesses find ways to do something better or cheaper, they end up putting others out of business.

Please read the entirety of my article for the American Spectator here:
http://spectator.org/archives/2012/01/13/creative-destruction-properly/

More Morici mistakes.

Don
http://www.cafehayek.com/

5 January 2012
Prof. Peter Morici
Smith School of Business
University of Maryland
College Park, MD

Dear Peter:

At FoxNews.com today you write that “dollars sent abroad to purchase oil and consumer goods from China that do not return to purchase U.S. exports are lost purchasing power.  Consequently, the U.S. economy is expanding at about 2 to 2.5 percent a year instead of the 4 to 5 percent pace that is possible after a long and deep recession”  (“What Can We Expect From the First Jobs Report of 2012?“).

You frequently repeat the theme that a U.S. trade deficit necessarily means lamentably lost purchasing power in America.  I don’t now wish to challenge you again on the general question of the nature, causes, and consequences of a trade deficit.  On this matter you and I fundamentally disagree.  I cannot, though, resist demonstrating your error on a more-specific point, to wit: your erroneous identification of a trade deficit with lost purchasing power.

Suppose that in 2012 Americans import $200 billion more than we imported in 2011, but with no change in our exports.  America’s trade deficit will then rise by $200 billion.  Further suppose that foreigners lend every cent of this $200 billion to Uncle Sam, who then spends it in America.  You’ll agree that this scenario is quite realistic.

Surely, though, you also agree that this $200 billion that returns as a loan to Uncle Sam becomes purchasing power in America – purchasing power exactly equal to the increase in our trade deficit of $200 billion.

Surely you agree, in other words, that had Uncle Sam instead acquired this $200 billion to spend by confiscating it on the docks just before it was to be spent by consumers on imports, the amount of purchasing power in America would be no higher than it is if the $200 billion is spent on imports and then borrowed by Uncle Sam to finance his spending.  In the former case America’s trade deficit doesn’t rise while in the latter it rises by $200 billion – yet the effect on purchasing power here is the same in both cases.

So unless you’re prepared to argue that dollars borrowed from foreigners and then spent in the U.S. by Uncle Sam are not “purchasing power” in the U.S., you must agree that a rising U.S. trade deficit does not necessarily reduce purchasing power in the U.S.

Of course, the above example is just one of countless ways that dollars in America’s trade deficit return to America as purchasing power.  But all I need is one realistic scenario, which I’ve provided, to expose the fatal error in your analysis.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

————————————————————

I just read Ron Chernow’s biography of John D. Rockefeller, Sr., and I doubt that many middle-class Americans in 2012 would find living as he did in 1912 little more than barely tolerable.

Don
http://www.cafehayek.com/
………………

8 January 2012

Editor, Washington Post
1150 15th St., NW
Washington, DC 20071

Dear Editor:

George Will wisely draws readers’ attention to Walter Blum’s and Harry Kalven’s pioneering 1952 essay “The Uneasy Case for Progressive Taxation” (“Government: The redistributionist behemoth,” Jan. 8).  Another scholar whose writings on income differences should be, but sadly aren’t, remembered today is the late University of Virginia economist G. Warren Nutter.

Nutter in 1974 offered the following observation that should temper the tempers of at least the more thoughtful Wall Street Occupiers and other people alarmed by income differences: “Progress did not, by and large, aggravate inequities, but it made us more aware and less tolerant of them.  Sharpening contrasts in circumstances aroused our humane sentiments, sentiments that could be better afforded by virtue of augmenting affluence.  Progress shook loose the age-old endurance that man had customarily displayed for his lot and bred in its place an attitude of insatiable discontent with the pace at which remaining problems were being met.  And so we find ourselves in a society in which progress and discontent are engaged in an almost desperate race with each other.”*

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

* G. Warren Nutter, “Freedom in a Revolutionary Economy,” in Nutter, Political Economy and Freedom (Indianapolis: Liberty Press, 1983), pp. 3-19; the quotation is on pp. 15-16.