Check out this CNN video of Detroit’s terrific Ice House project. The two men managing the “collaboration with Mother Nature” are dousing the state-donated house with water to make a statement about the frozen housing crisis. It’s their hope that this installation art piece will reveal a solution and show that there are plenty of uses for abandoned homes, whether they’re used for recycled materials or turned into new homes.
Check out the Ice House website.
As one looks around the economic landscape I am struck by the devastation. One number stands out above all others. One in five males between the ages of 25 and 55 is out of work! That is a staggering number. The numbers are not going back to anything “normal” anytime soon according to the IMF. Financial crises followed by recessions do not return to normal levels of employment for over a decade. Why you might ask? The answer I guess is that the levels of debt need to be worked down. Everyone owes everyone money and none pay anyone. Second, the recession destroys real capital. In this situation it was housing. It will take years to work off the excesses of the housing crisis.
So what does entrepreneurship have to do with the recession? If we take what we know today, entrepreneurs and innovation play a vital role in the economy. But can they help us in the great recession? In other words, what policy should we be pursuing to move the unemployment rate below 10 percent and back into the neighborhood of 5 percent? We know that new firms are important. They create most of the net jobs. However, only a small percent, perhaps 4 percent, create almost all of the jobs in any given four-year period. And this seems to hold up in different times, different countries, and different industries.
So how do we forge a policy? Two stories are told out there. First we know that age and size are important variables. And we know that age appears to be more important than size. In other words, we should target firms based on age not size. The two stories out there are one by Zoltan Acs and the other by Carl Schramm. In a highly influential study, Acs found that the average high impact firm was about 20 years old and came in all sizes, small, medium, and large. Schramm, on the other hand, using a Census Bureau study, found that firms less than five years old created almost all of the jobs independent of size. They both cannot be right.
However, if we are interested in short-term policy solutions and not real economic growth, we should help stimulate solo self-employed. They have a start-up rate that is three times as large as firms with employees. They start easily but also go out of business quickly. So an effective policy would be to make it easier for them to stay in business longer.
A simple policy would be to cut the self-employment tax, not over 15 percent of all new solo self-employed firms to zero for three years. If they hired any employees we should cut the employer share 7.5 percent for three years also. This would greatly increase the survival rate for these new firms. Of course this is not a long-term solution because many of these firm will contribute very little to productivity, economies of scale, or wealth creation. But they will pull down the unemployment rate.
The impact on the deficit would not be great since many of these people would not have survived to pay payroll taxes anyway. Once the economy picks up the issue of long-run growth can be addressed. But in the short run, let’s get people working.
The economic crisis appears to be causing a slight but noticeable shift from the suburbs to the cities, according to an analysis of recent Census data by Brookings demographer William Frey, reported in the Wall Street Journal.
“The central-city population in U.S. metropolitan areas with more than one million people (excluding New Orleans …) grew at an annual rate of 0.97% between July 2007 and July 2008 …That compared with a growth rate of 0.90% in 2006-2007, and growth rates around 0.5% in the years between 2002 and 2005, when the robust real-estate market led to new jobs and new housing developments outside the cities, where open land is more plentiful … Population growth in the cities has translated to slower growth in the suburbs. U.S. suburbs in metro areas greater than 1 million people grew at a 1.11% annual rate in 2007-2008, the same as a year earlier and down from growth rates between 1.29% and 1.48% between 2002 and 2005.”
The combined effects of the recession, job loss, and the housing crisis have made it more difficult for many to sell their houses, in effect locking them in place and slowing rates of residential and geographic mobility. Frey points out that:
“This shows cities were reviving at the end of this decade, and they are also surviving a recession that has been a lot harsher for other parts of our landscape …Cities are big enough and diverse enough that they are able to survive these ups and downs in the economy a lot better.”
And this is especially true of the biggest and most diverse cities, like New York and Chicago, which are hubs of large mega-regions, as well as magnets like greater D.C. and Silicon Valley which continue to draw in highly skilled and ambitious people from the U.S. and the world. Large Rustbelt cities, like Detroit, continue to lose people, and rates of growth in housing-driven Sunbelt cities have slowed considerably.
The housing crisis has spread globally according to data from The Economist.
Source: The Economist.
Housing prices were down the most in the United States (nearly 20 percent), but substantial declines have also occurred in Britain and Hong Kong – two countries with large and dominant financial sectors. Prices were also down significantly in Ireland, New Zeland, the Netherlands, Denmark, and Singapore. Prices have held up in Switzerland, Italy, and France, according to this data.
The second graph charts the trend in commercial real estate.
Source: The Economist.
Commercial office rents fell by 41 percent in London and 25 percent in Mumbai and Sydney. Office rents were off by more than 5 percent in New York, Hong Kong, Frankfurt, and Sao Paolo. Rents were up in Tokyo, Moscow, Beijing, and Dubai.
Sour
Ed Glaeser has some very sensible things to say about the housing crisis:
[H]ousing should be more affordable rather than more expensive. We argue that credit subsidies, which artificially inflate prices and encourage over-borrowing, should be gradually reduced rather than increased … The goal of federal policy should be to eliminate the distortions that make housing unaffordable, not to bribe people to borrow and build.
UPDATE: Here’s his Wall Street Journal column on same:
In the current housing crisis, two sort of counter-intuitive things puzzle me:
In my close-in Portland, Oregon neighborhood there are several older houses being entirely gutted and renovated by new owners, five within two blocks of me. All for mid to high six figures I’m sure (on top of high six-figure purchase prices), plus some smaller five-figure remodels or additions. Many of the owners are younger (30s+) creative class professionals. So if there’s a fiscal crisis, where are people getting the money? And why are they doing this if the value of houses is expected to plummet?
Second, in the last couple of years there have been a half dozen new home and garden type magazines launched here, from the wonderful Portland Spaces, to the blah Ultimate Northwest, to the over-the-top Luxe Northwest, to the down-to-earth Oregon Home. They’re all part of local or national chains. But why would advertising vehicles for high end accessories be a good idea now?
It could be that these are both just poor timing, residual effects of the housing bubble – although Portland didn’t bubble like Las Vegas. Or is there something deeper going on? Is this happening elsewhere?
Wharton real estate professor, Joseph Gyourko, outlines why and how the housing crisis and single family home ownership impedes flexibility and mobility.
Housing busts and rising foreclosures can force some households to move, but others can find themselves locked into their current homes. Default-induced moves are the first mobility-related impact observed during a downturn, but they might be the most important to a regional economy. Research indicates that factors such as falling home prices and rising interest rates can also lock in homeowners, making it harder for them to relocate for jobs or changing family circumstances. Around 12% of American homeowners typically move in any two-year period; yet, families with negative equity are around half as likely to relocate. Those facing higher mortgage rates are 25% less likely to move. Most households with negative equity do not have sufficient liquid reserves to cover the costs of moving, and thus are locked into their current homes until the market recovers. Lower mobility associated with mortgage lock-in can have important effects on local labor markets, housing finance, and public policy.
