The Hunger Games: Amazon Edition

photo by SounderBruce

The New York Law Journal published commentary of mine, The Hunger Games: Amazon Edition. It opens,

Last week Amazon finally announced that New York and Northern Virginia would be the sites of its planned major expansion. While many are caught up in the excitement of Amazon bringing 25,000 high-paid jobs to both metropolitan areas, it is worth thinking through the costs that beauty contests like this one impose on state and local governments. Amazon extracted billions of dollars in concessions from the winners and could have extracted even more from some of the other cities courting them.

It is economically rational for companies to create such Hunger Games-type competitions among communities. These competitions reduce their costs and improve their bottom lines. But is it economically rational for the cities? As long as governments are acting independently, yes, it is rational for them to race to the bottom to secure a win. So long as they are a bit better off by snagging the prize than they would have been otherwise, they come out ahead. But the metrics that politicians use are unlikely to be limited to a hard-nosed accounting of costs and increased tax revenues. Positive buzz may be enough to satisfy them.

Consider Wisconsin Governor Scott Walker’s deal with Foxconn. Just over a year ago, he was touting the $3 billion state subsidy for FoxConn’s manufacturing plant. This was the year leading up to his hard fought election fight, a fight he ultimately lost. His public statements focused on Foxconn’s promise to create 13,000 jobs. While that was a lot of jobs, it was a hell of a lot of subsidy—more than $230,000 per job, more than six times the largest amount Wisconsin had ever paid to subsidize a promised job. Walker got his campaign issue, FoxConn got its $3 billion and Wisconsin residents got … had. The $3 billion dollar subsidy has grown to over $4 billion at the same time that Foxconn is slowing down its investment in Wisconsin. So now taxpayers are subsidizing each job by well over $300,000 each. Nonpartisan analysts have determined that it will take decades, at the earliest, for Wisconsin to recoup its “investment.”

Likewise, hundreds of millions of dollars are thrown at stadiums and arenas even though economists have clearly demonstrated that those investments do not generate a positive financial return for the governments that provide these subsidies. Fancy consultants set forth all of the supposed benefits: job creation, direct spending by all of the people drawn to the facility, indirect spending by those who service the direct spenders. This last metric is meant to capture the increase in restaurant staff, Uber drivers and others who will cater to the new employees, residents and visitors to the facility. But as has been shown time and time again, these metrics are vastly overstated and willingly accepted at face value by politicians eager to generate some good headlines. They also ignore the opportunity cost of the direct subsidies—monies spent on attracting a company is money that can’t be spent on anything else. While we don’t know what it would have been spent on, it is likely to have been public schools, mass transit, roads or affordable housing in many communities.

 

Millennials and Homeownership

photo by flickr@tonywebster.com

TheStreet.com quoted me in Millennials Are Accruing Less Debt, Bypassing Homeownership. It reads, in part,

Millennials are accruing less debt than their counterparts did back in 2003 — despite being saddled with large amounts of student loans — because they are putting off buying homes.

The research conducted by Torsten Sløk, a Deutsche Bank international economist, shows that Millennials, ages 25 to 35, attained less debt in 2015 than their counterparts did in 2003. The data demonstrates a 29-year old in 2003 had an average debt amount of $41,761 compared to $36,810 in 2015 or a 33-year old owed $56,859 in 2003 and $52,640 in 2015.

“It is an urban myth that the young generation today is more indebted, it is the older generations that have higher debt levels,” said Sløk in a research note. “The reason is that since 2009, it has been difficult for Millennials to get a loan. As a result, 25 to 35 year olds today have less debt than in 2003.”

Debt has been “harder to obtain” for Gen Y-ers whether they are credit cards or mortgages, said Jim Triggs, a senior vice president of counseling and support of Money Management International, a Sugar Land, Texas-based non-profit debt counseling organization.

“Millennials have not been inundated with easy to obtain credit cards like in past years,” he said. “Creditors are not on college campuses offering credit cards to college students any longer.”

While Millennials are saddled with record levels of student loans because of the skyrocketing costs of college tuition and the ease of obtaining these loans, Millennials “continue to have less credit card and mortgage debt than their parents and grandparents,” Triggs said.

The level of student loan debt is hindering borrowers ages 18 to 35 from paying for necessities such as rent, utilities and even food as 43% expressed this sentiment, according to the National Foundation for Credit Counseling’s 2016 consumer financial literacy survey, said Bruce McClary, a spokesman for the Washington, D.C.-based national non-profit organization.

“There is a staggering amount of student loan debt and it is a burden for many,” he said.

Homeownership Delays

Although Millennials have expressed the desire the own a home in the future, they are keen to keep renting in part because many of them switch jobs frequently, have not amassed a down payment or do not want the financial commitment. The zeal to pursue the “American dream” of owning a home has waned.

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The assumption that home values would rise faster than other investments has been challenged since the Great Recession, said David Reiss, a law professor at Brooklyn Law School.

“One big issue is the role that home ownership plays in wealth creation,” he said. “The bottom line is that homeownership can help build a nest egg for retirement, but long-term trends and individual decisions about homeownership will have a big impact as well.”

Homebuyer’s Guide to Rate Hike

Day Donaldson

Fed Chair Yellen

U.S. News & World Report quoted me in A Consumer’s Guide to the Fed Interest Rate Hike. It opens,

The era of cheap money isn’t exactly over, but on Wednesday, after seven years of having near zero interest rates, the Federal Reserve voted to raise the central bank’s benchmark interest rate from a range of 0 percent to 0.25 percent to a range of 0.25 percent to 0.5 percent. Economists have largely seen this as a positive development – it means the American economy is considered strong enough to handle higher interest rates – but, of course, the all-important question on everyone’s minds is likely: What does this mean for me?

It depends, of course, on where you’re putting your money these days.

Homebuying. While it’s expected that the minor interest rate hike will result in it being more costly to borrow money to buy a home, that isn’t necessarily the case. Numerous factors influence mortgage rates, from where in the country your home is located to the state of the global economy to whether inflation is believed to be around the corner. Still, there’s a pretty fair chance that the interest rate hike will lead to higher borrowing costs.

But it’s worth remembering that even if the rates go up, it’s still cheap to buy a house compared to the recent past. According to Freddie Mac’s website, the average 30-year fixed-rate mortgage currently stands at 3.94 percent. If you bought a house, say, 15 years ago, the annual average rate in 2000 was 8.05 percent.

David Reiss, a law professor at Brooklyn Law School who specializes in real estate, says he wouldn’t rush out to buy a home based on the Fed’s announcement.

“I would caution strongly against letting the Fed’s actions on the interest rate influence the home-buying decision all that much, no matter what market you live in,” Reiss says. “First of all, the mortgage market has taken the Fed’s likely actions into account already, so interest rates … incorporate some of the rise in rate already.”

Bottom line, he says: “Generally, people should be buying a home when it makes sense for their lifestyle. Expect to stay put for a while? Maybe you should buy a home. Expecting kids? Maybe you should buy a home. Retiring to a warmer clime?  Maybe you should buy a home.”

Again, the interest rate climbed 0.25​ percent, and while the Fed has indicated that rates may continue to rise, Federal Reserve Chair Janet Yellen has stressed that any future hikes will be gradual.

“Small changes in interest rates do not generally make that much of a dollars-and-cents difference in the decision to buy,” Reiss says.