Search the Site

Archive for 2014

Why the CFPB’s Qualified Mortgage Rule Misses the Mark

This post grows out of two working papers (downloadable here and here) I’ve written with Joshua Mitts, a former student of mine who is now working at Sullivan & Cromwell.

Why the CFPB’s Qualified Mortgage Rule Misses the Mark
Ian Ayres & Joshua Mitts

Last Friday, the Consumer Financial Protection Bureau’s “qualified mortgage” rule went into effect.  This rule is designed to put an end to the risky lending practices that led to the financial crisis.  But a simpler rule could better assure borrowers’ ability to repay and simultaneously create greater repayment flexibility.

The purpose of the QM rule is to help assure that borrowers have sufficient monthly income to make their required mortgage payments, lessening the risk of large-scale defaults like those experienced after 2008. The rule creates a lender safe harbor for qualifying mortgages.  Lenders can still make non-qualifying loans, but must instead meet more onerous multi-factored underwriting standards. Qualifying loans reduce the risk that lenders will be held liable under Dodd-Frank for failing to make a “reasonable, good faith determination of a consumer’s ability to repay.” 


Fantasy Football For Econ Nerds

Christian Zimmerman of the Federal Reserve Bank of St. Louis has created the ultimate game for econ nerds: the RePEc Fantasy Economic league.  “The IDEAS fantasy league allows you to pretend you are at the helm of an economics department,” explains the league’s website. “Your goal is to improve its ranking relative to other departments in the league. You can do this by trading economists and by choosing which ones to activate in your roster.”  A Business Insider article explores optimal strategy:

“In real life when you build a department, you want to hire people that are prospects,” Zimmermann said. “In this fantasy league, it’s just the same. You really want to acquire people that are going to be doing well in the next 10 years.”

In other words, you want the sleeper picks. Ask yourself: Who is going to cost 1 util and then put out some game-changing working papers?

Edwards agrees that you have to look for the rising stars. “It’s a Moneyball type strategy,” he said. “Looking for undervalued economists and trying to invest, or trying to divest in overvalued economists.” 


Fighting Creative Destruction

What do you do if your product is obsolete and demand is shifting rapidly leftward?  The paper industry has a problem: digitization and environmental concerns.  To prevent further declines, the brand of paper our department uses has created a clever slogan (see the picture) — “Because it’s easier to learn on paper.”  I wonder what other examples there are of businesses using the market to maintain the demand for a product that is being displaced by technological change (as opposed to obtaining government protection, the usual route in these instances)?


The Undercover Economist Is Back

Tim Harford, who writes the Financial Times‘s “Undercover Economist” column, has appeared on our blog many times. This guest post is adapted from his new book The Undercover Economist Strikes Back: How to Run or Ruin an Economy. Harford also appeared in our podcast “Hey Baby, Is That a Prius You’re Driving?“

Perhaps the strangest currency in the world can be found on the island of Yap, in Micronesia in the West Pacific. This coin, the rai, is a stone wheel with a hole in the middle. Some rai are fairly portable—a handspan or less across, and the weight of a couple of bags of sugar. But the most valued stones are far bigger—one British sailor wrote in the late nineteenth century of a stone wheel that was four and a half tons in weight and more than nine feet in diameter. In other words, it was almost completely immovable.

Yap’s stone money used to be a serious business. The stones were quarried and carved on the island of Palau, 250 miles away. One Victorian naturalist witnessed four hundred men from Yap, a tenth of the adult male population, at work in the quarries of Palau. Getting the stones from Palau to Yap on a little bamboo boat was a difficult and sometimes lethal affair—some of the stones weighed as much as two cars. (And rai were especially valuable if someone had died on the expedition to fetch them.) The biggest stones might have been used for major transactions such as buying land or wives; more modest-size stones—a couple of feet across—were exchangeable for a pig. Even then, it would have been a lot easier to move the pig than to move the stone.


Is Your City in the Right Place?

An article on VOX by Guy Michaels and Ferdinand Rauch looks at whether towns in France and Britain are “poorly located.” The authors explain that being in the wrong place — with poor access to world markets and resources, or vulnerability to natural disasters — has dire economic and social consequences. Examining historical evidence from the Roman Empire and the Middle Ages, they found that towns in France stayed put, while those in Britain moved:

Medieval towns in France were much more likely to be located near Roman towns than their British counterparts (Figure 1). These differences in persistence are still visible today: only three of the 20 largest cities in Britain are located near the site of Roman towns, compared to 16 in France. This finding suggests that the British urban network shifted towards newly advantageous locations, while French towns remained in locations, which may have become obsolete.

They also found coastal access to be important:


A Frog in the Salad

Two years ago, we did a podcast on a dining experience Stephen Dubner had at Le Pain Quotidien. The podcast was called “Mouse in the Salad,” so you can probably guess what happened. And it looks like animals in salads are all the rage lately — The Atlantic Wire reports that a Wall Street Journal editor recently found a frog in her Pret A Manger nicoise salad. The reason given by Pret was similar to the one given by Le Pain Quotidien CEO Vincent Herbert in our podcast: it’s organic. From WSJ.com:

Ellen Roggemann, vice president of brand marketing for the company in the U.S., said that Pret A Manger’s goal of selling “handmade natural food,” often made from organic ingredients, could be partially to blame for the frog in the salad.

“We don’t use any pesticides with our greens and they go through multiple washing cycles,” she said. “An unfortunate piece of organic matter has made its way through,” she added.

In our podcast, Dubner’s friend James Altucher had an interesting perspective on how things like this happen:


MTV and Teen Pregnancy

Economists Melissa S. Kearney, who has appeared on this blog and our podcast before, and Phillip B. Levine have a new NBER paper (abstract; PDF) that looks at the influence of MTV’s reality-TV show 16 and Pregnant on teen pregnancy. Levine explained the study’s assumption to The New York Times:

Ms. Kearney and Mr. Levine examined birth records and Nielsen television ratings, finding that the rate of teenage pregnancy declined faster in areas where teenagers were watching more MTV programming — not only the “16 and Pregnant” series — than in areas where they did not. The study focuses on the period after “16 and Pregnant” was introduced in 2009 and accounts for the fact that teenagers who tuned in to the show might have been at higher risk of having a child to begin with.

“The assumption we’re making is that there’s no reason to think that places where more people are watching more MTV in June 2009, would start seeing an excess rate of decline in the teen birthrate, but for the change in what they were watching,” Mr. Levine said.

The authors found that the show “led to more searches and tweets regarding birth control and abortion, and ultimately led to a 5.7 percent reduction in teen births in the 18 months following its introduction. This accounts for around one-third of the overall decline in teen births in the United States during that period.”


Who Does Marijuana Legalization Hurt?

In our most recent podcast, “Are We Ready to Legalize Drugs? And Other FREAK-quently Asked Questions,” we discussed drug legalization.  Here’s what Steve Levitt had to say on the benefits of legalizing marijuana, as compared to crack cocaine:

So crack cocaine is a really devilish drug because it gives you such an intense high for such a short period of time that your desire is just to get high over and over and over. It’s highly addictive, and it’s really hard to function when you’re a crack addict. But what it makes me think is that this experimentation we’re doing now with policy towards drugs like marijuana, and potentially it would be expanded over time is a good idea. Because I think when it comes to marijuana, the social costs of the prohibition of marijuana are just really low. Very few people in the United States are being killed over marijuana. The gangs are not making their money off marijuana. Marijuana in some very real sense is too cheap. It’s too easy to grow yourself and so it isn’t the source of all of the ills that come with prohibition. And so, so the gains of legalizing marijuana for society are much smaller than the gains would be to legalizing cocaine if you could control how the outcome came.

But does marijuana legalization really harm anyone?  Like poor minorities, for example?  Michael Kinsley, Andrew Sullivan, and David Frum recently debated that  question, as well as legalization in general, for Bloggingheads TV.  In an accompanying blog post, Sullivan points to Reihan Salam‘s recent post on the subject:


A View for All

A student says his family owns some property in rural East Texas.  The property on a hilltop next to it overlooks my student’s pond.  His neighbor says he really enjoys sitting on his porch watching the sunset over the pond.  The student’s family doesn’t benefit from the pond’s positive externality — they have no view at all. 

His father, who was annoyed by the neighbor’s bragging, decided to stop trimming the bushes around the pond. Soon, the neighbor called up and offered to maintain the property — trim the bushes and keep the pond free of rubbish.  A clever ploy by his father to force the neighbor to internalize the externality — although I wonder whether this induced behavior represented a stable equilibrium.  (HT: SF)


Where the Exercise Is

Our latest Freakonomics Radio podcast tried to figure out what is the “best” exercise. Meanwhile, Richard Florida‘s latest post for The Atlantic Cities blog looks at state-by-state variations in exercise.  When it comes to aerobic exercise, the coasts (and Colorado) win:

[P]articipation in aerobic exercise is most prevalent along the West Coast, in the Rocky Mountain states and the northeast, and far less so in the middle and southern portions of the country.

Colorado tops the list among states, with 61.8 percent of adults meeting the standard for aerobic exercise; Oregon is second (61.1 percent), followed by Vermont (59.2 percent), Hawaii (58.5 percent) and California (58.2 percent). On the flip side, the lowest levels of participation in aerobic exercise are found in southern states – Tennessee (39 percent), Mississippi (40 percent), Louisiana (42 percent), Alabama (42.4 percent) and West Virginia (43 percent).

The trends are similar for muscle-strengthening exercise.  Florida goes on to report on the various correlates of exercise — wealth, affluence, etc.  Interestingly, fitness participation also closely tracks political and religious divides — people in red states exercise less, as do people in more religious states.


“Gayborhoods” and Heat Waves at This Year’s AEA Meetings

Jon Hilsenrath of The Wall Street Journal reports on the most offbeat papers of this year’s American Economic Association meetings.   One of our favorites — in light of our recent “Are Gay Men Really Rich?” podcast — is this one:

FIND A NEW “GAYBORHOOD” FOR BETTER HOUSING RETURNS

Janice Madden of the University of Pennsylvania and Matthew Ruther of the University of Colorado studied census tract data and the American Community Survey to examine the locations of gay male and lesbian partnerships in 38 large U.S. cities. They found that census tracts that start the decade with more gay men experienced significantly greater growth in household incomes and, in the Northeast and West, also greater population growth over the next decade than those census tracts with fewer gay men. Census tracts with more lesbians at the start of the decade saw no difference in population or income growth.

Another favorite examines the long-term outcomes of children conceived during heat waves.


The Coolest Child Care Program You’ve Never Heard Of

During World War II, U.S. women entered the workforce in record numbers — factories full of “Rosie the Riveters” producing planes and munitions for the war effort.  In response, Congress passed the Lanham Act of 1940, which administered and subsidized a large childcare system in 635 communities in the whole country except New Mexico from 1943-1946.  A new paper by Chris Herbst examines the effects of the Lanham Act; his research is particularly relevant in light of President Barack Obama‘s push for universal preschool.  “What’s intriguing about the Lanham Act is that it’s the U.S.’s first, and only, laboratory within which to assess universal child care,” writes Herbst in an email about the paper. “It may just be the coolest child care program you’ve never heard of.”  Here’s the abstract:

This paper provides a comprehensive analysis of the Lanham Act of 1940, a heavily-subsidized and universal child care program that was administered throughout the U.S. during World War II. I begin by estimating the impact of the Lanham Act on maternal employment using 1940 and 1950 Census data in a difference-in-difference-in-differences framework. The evidence suggests that mothers’ paid work increased substantially following the introduction of the child care program.