Steve Oliner shows that it takes too damn long to build things in California

The set-up:

Recent research, which I conducted with Jonathan Millar of the Federal Reserve Board and Daniel Sichel of Wellesley College..... presents the first comprehensive estimates of planning times for commercial construction projects across the United States. We analyze roughly 82,000 projects nationwide for which planning was initiated  between 1999 and 2010, using data obtained from CBRE Econometric Advisors/Dodge Pipeline. The projects in the dataset include office buildings, retail stores, warehouses, and hotels. About 95 percent of these projects involve the construction of a new building; the remainder are additions or alterations to an existing building or conversions to a new use.

They find that average planning time in the US for a commercial building is 17 months.   But the longest planning times are in California and the Northeast.  Planning times in some California MSAs are about a year longer than the national average.  This makes California's economy less nimble than others.

This is not about whether or not there should be strong rules to protect the environment--California needs such rules.  This is about making rules straightforward and predictable, and allowing economic agents to behave quickly within the rules.  My hypothesis is that it is California's clumsy implementation of planning, more than anything else, that puts it at a needless disadvantage relative to Texas.

It's the G.

After I saw the weak 4th quarter GDP number reported this morning, I went to the National Income and Products Accounts website, where I found that in the 4th quarter, government expenditures and investment has declined by 6.6 percent on a seasonally adjusted annualized rate and that defense spending had dropped 22.2 percent, again, on a SAAR.

Can this possibly be correct?  I am wondering if there is some anomaly in the data.

An update of my tinker-toy model of housing starts and GDP

We had pretty robust growth in housing starts in December:

A few months ago, I suggested that we could have second quarter GDP growth of 2.9 percent.  I am now revising that to greater than 3 percent growth (the point estimate is 3.2 percent).  We'll see how things turn out....

What is strategy?

Parafrazing Webster we define strategy as the science and art of business command exercised to meet the competition on market under advantageous conditions. Its goal is to integrate competitors into business planning in order to alleviate competition and thus capture outstanding profits. Implementating clever strategies is the future of effective management.

Every industry goes through three distinct stages that call for different managerial focus. Lets take an automotive industry for example. With automatization of production car became a commodity. It was produced en masse, as a completely undiferentiated product. It was built to satisfy the most basic and obvious need of efficient transportation. Marketing and strategy were mostly implicit. The focus was on operating effectiveness. Lowering costs increased market and helped to retain healthy profit margins. At the same time it was a sufficient condition to beat the competition.

After second world war car manufacturers shifted focus to improvements in design. New car models and model types such as Chevrolet motoramas penetrated the market. Cars should now be comfortable and able to fulfill the needs of adventure and exploration. They also became a personal statement. New american prosperity and low-costs of fuel and production spawned the market differentiation. Good marketing became sufficient condition to beat the competition.

Then in seventies Japanese competitors entered the US market. With new management techniques and favorable national industry structure they moved the productivity frontier. Their cheap low-class  models penetrated the lower segments of the market where car was perceived more as a commodity. Furthermore Japanese operating efficiency was so big that later on they were able to compete even in higher segments where they presented cars that were cheaper and of better quality than their competition.

Now operating efficeincy and marketing are necessary conditions to achieve profitability. Production is more and more pushed to developing countries with cheap labour. Almost every big player in industry now has joint ventures established in China. Now strategy is taking front position in management focus as a sufficient condition for profitability. It is paramount for companies to limit market segments they are going to serve. This choice must be supported by cluster of activities and capabilities that are self-enforcing. If they are selected on the basis of fundamental factor, cultural and knowledge advantages even sucessful mimicking (which is hard to achieve) is rendered useless.

The best example of succesful strategic player in automotive industry is BMW. They aim to premium customers.  They have an outstanding organizational structure of personal networks which fosters innovation and responsiveness, a customized production system that enpowers workers creativity and incredibly strong R&D and marketing departments supported by best engineering cadre.

Mercedez on the other hand did not manage to retain congruency between its market image and product. Once known as the most reliable car in the world it didn't keep up with the promise in the time when electronic components add up to 20% of the car value. As a consequence Mercedes is steadily losing sales while BMW now dominates market share in premium class and operates profitably even in the times of economic downturn.

I didn't think Phil Mickelson's Tax Rate Could be > 60 percent

From the Tax Foundation:

Mickelson lives outside of San Diego so he is subject to one of the highest tax rates in the country, but it doesn’t appear to be quite that high.  Gerald Prante and Austin John total up all the top tax rates on wage income in the 50 states and they do find California has the highest at 51.9 percent:

"For example, the 51.9% top METR [marginal effective tax rate] for wage income in California for 2013 under the Fiscal Cliff scenario is equal to the 39.6% federal income tax rate plus the new 13.3% top state income tax rate in California minus the deductibility of state taxes against one’s federal taxes (5.27%) plus the marginal tax rate effect of Pease returning (1.18%) plus the current 1.45% Medicare employee tax plus the new 0.9% tax on Medicare plus the current 1.45% Medicare employer tax which we assume is borne by workers in the form of reduced after-tax wages. The sum of these tax rates, which equals 52.6%, is then divided by 1.0145 (1 + Medicare employer tax) because by assuming that the incidence of the Medicare employer tax is borne by workers, we must add back the employer contribution to the worker’s income. The final METR figure is thereby 51.9%."

It’s not clear how Mickelson is getting to 62 percent, since there is no other income tax at the local level in or around San Diego. 

Do higher marginal tax rates lead superstar athletes to play less often?

Let's think, for a moment, about why people want more money:

(1) To buy stuff.

(2) To keep score.

(3) To accumulate power.

Perhaps there are others, but these seem to me to be the big three.

OK, so there seem to be two kinds of athletes in the world (with respect to consumption):

(I) Those with entourages.
(II) Those without entourages.

It takes an entourage for superstar athletes to spend all the money they make--it would otherwise be hard to spend an eight figure money quickly enough (people can even afford private jets at those incomes).

So let's think about those with entourages.  If their taxes go up, they will actually have to work harder to keep their entourages.  That should mean they play more, not less.

For those without entourages, the marginal utility of consumption must be zero--this is the implication of not being able to spend all your money.  So their incentives must arise from reasons (2) and (3).

Scorekeeping is independent of taxes.  If an athlete wants to say he/she has the most winnings, they will have an incentive to play more games.

That leaves power.  Higher marginal taxes reduce the ability of high income people to accumulate power, which may mean they work/play less.  I don't know that this is entirely a bad thing. 

Morris Davis gives a talk where he shows that fewer American homeowners think they are underwater than actually are

Morris--along with Erwan Quintin--calculates median house prices by MSA using the American Community Survey from 2006-2010.  Because the ACS samples all houses, the change in price from year to year is largely not biased by the change in composition of the housing stock (the only change comes via new construction and home improvements--and the US had little of either from 2008-2010).  As such, the calculation, which is based on what people think their house is worth, is in some ways superior to house price indexes, which inevitably suffer from composition bias, even when their designers make admirable efforts to mitigate such bias.

In his talk, Morris showed that people thought the value of their houses went down substantially less than Case-Shiller implies.  Where Case-Shiller or people are right is not particularly important to mortgage performance, because people will not default if they think their house is worth more than their house.  Those who are forced to move for economic reasons might find themselves unpleasantly surprised, and may wind up selling (now) through a short-sale.  But it is possible that the reason many underwater borrowers are not walking away is that they think they are not under water.