Archives: 10/2012

Over Half of Foreclosures Now ‘Repeats’

A fundamental question with both the Bush and Obama approaches to the mortgage foreclosure crisis is to what extent are policies simply putting off the inevitable?  Are “permanent” solutions being offered, or are we just recycling the same borrowers through one foreclosure after another?  Recent data from Lender Processing Services (LPS) sheds some light on the question.

The most recent LPS data, covering to the end of August 2012, shows that for the first time, over half of foreclosures are for borrowers that were previously in foreclosure.  Now there are several ways to read the chart below.  On one hand, first-time-ever foreclosures are at their lowest levels since 2008, and in fact have been on a steady decline since the middle of 2009.  That is good news.  The pipeline of new foreclosures is decreasing, a reflection of both improving labor and housing markets (or at least not getting a lot worse).  The bad news is that foreclosures are increasing because of the same borrowers who have been delinquent for years.  I was recently told that the average time to foreclosure for Chicago, for instance, is over 1,000 days.  The LPS data also highlight that the largest increase in repeat foreclosures has been in states that use a judicial foreclosure process, providing further evidence that such a process generally does not change the final outcome, but simply delays it.

If there is one policy lesson we should take away from the foreclosure crisis, it is that delaying the inevitable makes the problem worse.  Had these borrowers finished the foreclosure process the first time around, housing prices would have adjusted quicker and the housing market would have been on the road to recovery quicker.  These families also would not have been stuck in “limbo” and would have been able to move on with their lives.  While some have argued that delaying these adjustments was appropriate, it is far from clear to me that longer periods operating under “false” prices will lead to better market outcomes.

What Would a President Romney Do on Trade?

Perhaps I shouldn’t take campaign promises too seriously. But candidates say things, and my natural reaction is to assume they mean them. I have been proved wrong before, and perhaps I’m falling into the same old trap, but I’m going to assume Governor Romney means at least a little of what he said on trade in last night’s debate.

Based on what he said, I’m going to talk briefly about what a President Romney would (might?) do on trade.  Let me focus on two issues:  Trade with Latin America, and China’s alleged currency manipulation.

Trade with Latin America

Last night, Governor Romney said:

I’m also going to dramatically expand trade in Latin America. It’s been growing about 12 percent per year over a long period of time. I want to add more free trade agreements so we have more trade.

This all sounds great. He is saying positive things about free trade. Excellent.  But what does he mean?

Latin America runs from Mexico down to Argentina. So far, we have trade agreements with:  Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Peru. So who’s left? Venezuela is obviously not a great candidate. And Argentina isn’t either – they’ve been quite protectionist and inward-looking recently. So what major trading partners are we talking about?  Brazil is the most obvious one. But U.S.-Brazil trade frictions are said to have played a big part in killing the proposed Free Trade Area of the Americas in the 1990s, and those frictions are still pretty high today, with, among other things, Brazil complaining about U.S. monetary policy driving down the value of our currency (see below for more on currency issues).

I’m all for free trade with Latin America, and I’m happy to hear Romney supporting it.  But in practice, it’s not clear how much can be achieved.

China’s Alleged Currency Manipulation

This issue has been discussed ad nauseam already, but let me make a quick political point. Here’s what Romney said last night:

China has been a currency manipulator for years and years and years. And the president has a regular opportunity to – to label them as a – as a currency manipulator but refuses to do so. On day one, I will label China a currency manipulator, which will allow me as president to be able to put in place, if necessary, tariffs where I believe that they are taking unfair advantage of our manufacturers.

My colleague Dan Ikenson explains here why Romney shouldn’t follow through with this, and I agree. But what I want to focus on is what he will do, because, as is probably obvious, politicians don’t always do what they should!

It seems to me that Romney has dug in pretty deeply on the issue of labeling China a currency manipulator. I can’t see how he can step back from that without some major embarrassment.  As a result, I think that, if elected, he will do something on day one that can be characterized as “labeling China a currency manipulator”. (He has mentioned an executive order, but it’s more complicated than that, as the Secretary of Treasury needs to be involved, too).  But the dirty little secret here is that labeling China a currency manipulator just triggers consultations on the issue.  Which is why, actually, I think Romney is pushing this – he knows it doesn’t mean much.

But then you’ve got the issue of imposing tariffs on China as a response, presumably by instructing the Department of Commerce to change its method of calculating countervailing duties, so as to provide for extra duties on Chinese goods based on the currency practices.  This would be a more serious action (and would probably violate WTO rules), one that would have a direct impact on prices of Chinese imports (it would raise them!).

But look at the language Romney uses here.  He says he will do this “if necessary”.  Here, then, he leaves himself wiggle room.  He can take some time to negotiate with China, study the issue, and ultimately decide that the tariffs are unnecessary.

For whatever that’s worth, which may not be much, that’s my guess as to how the Romney team is thinking about this issue.

Romney’s Misplaced Obsession with Chinese Currency Manipulation

More than anything else, Mitt Romney’s zealous determination to pin a scarlett “CM” on the Chinese government’s lapel has defined his trade platform.  And that draws an unfavorable contrast for Romney, since President Obama’s repeated decisions not to label China a currency manipulator make him look the more cautious, circumspect, risk-averse business executive that Romney portrays himself to be.

In any event, the currency issue is very much last decade’s battle.  By continuously harping about it, Governor Romney evokes tales of old Japanese soldiers, left behind on South Pacific islands, still fighting WWII well into the 1960s.

As I noted in this piece on Forbes yesterday, if Romney is elected he will  have to renege on this silly commitment (substantively, at least), and change focus:

If Mitt Romney believes in “free trade,” his focus with respect to China should be on correcting that government’s failures to honor all of its commitments to liberalize and on the misguided efforts by U.S. policymakers to thwart legitimate commerce between Chinese exporters and American consumers.

Is Secession a Good Idea?

I’m not talking about secession in the United States, where the issue is linked to the ugliness of slavery (though at least Walter Williams can write about the issue without the risk of being accused of closet racism).

But what about Europe? I have a hard time understanding why nations on the other side of the Atlantic should not be allowed to split up if there are fundamental differences between regions. Who can be against the concept of self-determination?

Heck, tiny Liechtenstein explicitly gives villages the right to secede if two-thirds of voters agree. Shouldn’t people in other nations have the same freedom?

This is not just a hypothetical issue. Secession has become hot in several countries, with Catalonia threatening to leave Spain and Scotland threatening to leave the United Kingdom.

But because of recent election results, Belgium may be the country where an internal divorce is most likely. Here are some excerpts from a report in the UK-based Financial Times.

Flemish nationalists made sweeping gains across northern Belgium in local elections on Sunday, a success that will bolster separatists’ hopes for a break-up of the country. Bart De Wever, leader of the New Flemish Alliance (NVA), is set to become mayor of the northern city of Antwerp, Belgium’s economic heartland, after his party emerged as the largest one, ending about 90 years of socialist rule. …The strong result recorded by the Flemish nationalist is likely to have an impact across Europe, where the sovereign debt crisis, which has seen rich countries bail out poor ones, has revived separatist sentiment throughout the continent. Flanders, which is the most economically prosperous region of Belgium, has long resented financing the ailing economy of French-speaking Wallonia, and Sunday’s victory will strengthen its demand for self-rule. Lieven De Winter, a political scientist at Université Catholique de Louvain, said that Mr De Wever’s victory was a clear step forward for separatists who had long been campaigning for secession from the southern part of the country.

Purely as a matter of political drama, this is an interesting development. We saw the peaceful split of Czechoslovakia into the Czech Republic and Slovakia about 20 years ago. But we also saw a very painful breakup of Yugoslavia shortly thereafter.

Belgium’s divorce, if it happened, would be tranquil. But it would still be remarkable, particularly since it might encourage peaceful separatist movements in other regions of other nations.

I think this would be a welcome development for reasons I wrote about last month. Simply stated, the cause of liberty is best advanced by having a a large number of competing jurisdictions.

I’ve opined about this issue many times, usually from a fiscal policy perspective, explaining that governments are less likely to be oppressive when they know that people (or their money) can cross national borders.

Belgium definitely could use a big dose of economic liberalization. The burden of government spending is enormous, consuming 53.5 percent of economic output - worse than all other European nations besides Denmark, France, and Finland. The top tax rate on personal income is a crippling 53.7 percent, second only the Sweden. And with a 34 percent rate, the corporate tax rate is very uncompetitive, behind only France.

Sadly, there’s little chance of reform under the status quo since the people in Wallonia view high tax rates as a tool for extracting money from their neighbors in Flanders. But if Belgium split up, it’s quite likely that both new nations would adopt better policy as a signal to international investors and entrepreneurs. Or maybe the new nations would implement better policy as part of a friendly rivalry with each other.

So three cheers for peaceful secession and divorce in Belgium. At least we know things can’t get worse.

P.S. Brussels is the capital of Belgium, but it is also the capital of the European Union. Don’t be surprised if it becomes some sort of independent federal city if Flanders and Wallonia become independent. Sort of like Washington, but worse. Why worse? Because even though Washington is akin to a city of parasites feasting off the productive energy of the rest of America, Brussels and the European Union are an even more odious cesspool of harmonization, bureaucratization, and centralization, richly deserving of attacks from right, left, and center.

‘Dems and GOP Agree, Government Needs More Money’

That’s the (fair) title of this blog post over at National Journal’s Influence Alley:

The federal government needs more money. That’s one thing both parties can agree on, Republican and Democratic lawmakers said Tuesday. The rub, of course, is how to get it.

Reps. Peter Roskam, R-Ill., and Allyson Schwartz, D-Pa. said at a National Journal panel on Tuesday morning that there’s no question that more revenue is needed. Democrats say they can raise the money by letting upper-income tax cuts expire, while Republicans say economic growth alone will help raise the cash.

“We need more revenue,” said Roskam, the House GOP’s chief deputy whip. “If you can get the money to satisfy obligations, that’s an area of common ground.”

Let’s hear it for duopoly, eh, comrades? Without it, we might suffer political parties that question whether those government “obligations” are wise, or necessary, or constitutional; or that point out governments don’t have needs, people do; or that reject the premise that politics is an exercise in deciding who needs what; or that argue for eliminating entire spheres of government activity. Can you tell I’ve just watched a presidential debate?

Lifting the Cuban Travel Ban Is Good for U.S.

This morning the Cuban government announced reforms of its 52 year old travel ban. In mid-January, the Cuban government will cease requiring exit visas and invitations from foreign nationals so Cubans can leave. It’s unclear how the new plan will be applied in practice. The Cuban government’s announcement might not be as welcome as people hope, but this is a substantial change in rhetoric. My colleague Juan Carlos Hidalgo wrote about how such an approach would affect Cubans here.

Assuming the travel ban is mostly or entirely lifted, this policy change will also affect Americans in numerous ways.

First, the United States has a unique immigration policy for Cubans. Known as the “wet foot/dry foot policy,” if a Cuban reaches American soil he or she is allowed to gain permanent residency within a year. If a Cuban is captured at sea, he or she is returned to Cuba unless they cite fears of persecution. This means that most Cubans who want to leave, with the exception of violent or other criminal offenders, will be able to stay in the United States if they are able to make it to American soil. No other nationality in nearly a century, except the Hungarians in the 1950s, has been subject to such a generous policy.

Because of their unique legal-immigration status, the Cuban-born population living in the United States was excluded from estimates of unauthorized immigrants and very few of them are likely in violation of any immigration laws.

Second, the United States is the number one destination abroad for Cubans. Additionally, nearly 60 percent of Cuban-Americans were born abroad compared to less than 40 percent for all other Hispanic groups. Cubans tend to be older, more likely to own homes and businesses, more geographically concentrated in Florida, more educated, wealthier, and have fewer children than other Hispanic immigrant groups. They are overwhelmingly positive for the American economy.

Third, Florida has been the main destination and beneficiary of Cuban immigration since the 19th century century. Ybor City, a section of Tampa, owes its birth and development to Cuban and Spanish-born entrepreneurs like Ignacio Haya and Vincente Martinez Ybor who made the city a cigar manufacturing powerhouse by the early 20th century. For generations, Ybor City was known as “Little Havana.”

In addition to the tobacco trade, Cuban-American entrepreneurs in Ybor City also specialized in legal services, accounting offices, real estate development companies, and advertising. Restaurants have probably had the biggest impact on the habits of Americans. The Columbia Restaurant, currently Florida’s oldest restaurant, was opened by Cuban- born Casimiro Hernandez in 1905. It started as a small corner cafe serving authentic Cuban sandwiches and café con leche and has since expanded to seven other locations.

The situation was similar in Miami where Cubans excelled at opening small businesses and revitalizing large sections of the city that had begun to decay. Ever since the earliest Cubans came to America, they haven’t wasted any time in their pursuit of the American dream.

Fourth, Cuban immigration to Florida has not lowered the wages for Americans working there. According to an authoritative peer-reviewed paper written by Berkeley labor economist David Card, the sudden immigration of 125,000 Cubans on the famed Mariel boatlift in 1980 increased the size of Miami’s total labor market by 7 percent and the size of its Cuban workforce by 20 percent.

For non-Cubans in Miami with similar skills, wages were remarkably stable from about 1979-1985. A massive and sudden increase in labor supply did not lower wages for Americans or increase their unemployment. Miami businesses rapidly expanded production to account for the influx of new consumers and workers and Cuban immigrants started businesses with a gusto, thus creating their own employment opportunities.

Cuba’s reform of the travel ban could reignite Cuban immigration. In 2011, roughly 40,000 Cubans gained legal permanent residency and refugee status in the United States. That number could increase dramatically if the Cuban government truly got out of the way and let its people move toward relative freedom and economic opportunity.

Beginning in mid-January, assuming U.S. policy does not change (an unlikely scenario given that neither political party wants to upset the politically influential Cuban community in South Florida), we could witness a large new wave of Cuban immigration to the United States.

Despite entertaining movies like Scarface, the long run consequences of the Marial boatlift have been good for Americans, Cuban immigrants, and Florida. Cuban-Americans reveal a pattern of success and achievement similar to other contemporary immigrant groups and those in our country’s past. Immigrants are more successful in the United States than their former countrymen left behind. American capitalist institutions are the main cause of this, but it’s also because immigrants are overwhelmingly committed to economic advancement and the hard work that takes.

If Cuba truly lifts the travel ban, it will be a blessing for all Cubans.  Many of them will likely immigrate to the United States, which will also be good for us.

E-Mail Privacy Laws Don’t Actually Protect Modern E-mail, Court Rules

In case further proof were needed that we’re long overdue for an update of our digital privacy laws, the South Carolina Supreme Court has just ruled that e-mails stored remotely by a provider like Yahoo! or Gmail are not communications in “electronic storage” for the purposes of the Stored Communications Act, and therefore not entitled to the heightened protections of that statute.

There are, fortunately, other statutes barring unauthorized access to people’s accounts, and one appellate court has ruled that e-mail is at least sometimes protected from government intrusion by the Fourth Amendment, independently of what any statute says. But given the variety of different types of electronic communication services that exist in 2012, nobody should feel too confident that the courts will be prepared to generalize that logic. It is depressingly easy, for example, to imagine a court ruling that users of a service like Gmail, whose letters will be scanned by Google’s computers to automatically deliver tailored advertisements, have therefore waived the “reasonable expectation of privacy” that confers Fourth Amendment protection. Indeed, the Justice Department has consistently opposed proposals to clearly require a warrant for scrutinizing electronic communications, arguing that it should often be able to snoop through citizens’ digital correspondence based on a mere subpoena or a showing of “relevance” to a court.

The critical passage at issue in this case—which involves private rather than governmental snooping—is the definition of “electronic storage,” which covers “temporary, intermediate storage of a wire or electronic communication incidental to the electronic transmission thereof” as well as “any storage of such communication by an electronic communication service for the purposes of backup protection of such communication.” The justices all agreed that the e-mails were not in “temporary, intermediate” storage because the legitimate recipient had already read them. They also agreed—though for a variety of reasons—that the e-mails were not in “backup” storage.

Some took this view on the grounds that storage “by an electronic communication service for the purposes of backup protection” encompasses only separate backups created by the  provider for their own purposes, and not copies merely left remotely stored in the user’s inbox. This strikes me as a somewhat artificial distinction: why do the providers create backups? Well, to ensure that they can make the data available to the end user in the event of a crash. The copy is kept for the user’s ultimate benefit either way. One apparent consequence of this view is that it would make a big difference if read e-mails were automatically “deleted” and moved to a “backup” folder, even though this would be an essentially cosmetic alteration to the interface.

Others argued that a “backup” presumed the existence of another, primary copy and noted there was no evidence the user had “downloaded” and retained copies of the e-mails in question. This view rests on a simple technical confusion. If you have read your Gmail on your home computer or mobile device, then of course a copy of that e-mail has been downloaded to your device—otherwise you couldn’t be reading it. This is obscured by the way we usually talk: we say we’re reading something “on Google’s website”—as though we’ve somehow traveled on the Web to visit another location where we’re viewing the information. But this is, of course, just a figure of speech: what you’re actually reading is a copy of the data from the remote server, now residing on your own device. Moreover, it can’t be necessary for the user to retain that copy, since that would rather defeat the purpose of making a “backup,” which is to guarantee that you still have access to your data after it has been deleted from your main device! The only time you actually need a backup is when you don’t still retain a copy of the data elsewhere.

Still, this isn’t really the court’s fault. Whether or not this interpretation makes sense, it at least arguably does reflect what Congress intended when the Stored Communications Act was passed back in 1986, when there was no such thing as Webmail, when storage space was expensive, and when everyone assumed e-mail would generally vanish from the user’s remote inbox upon download. The real problem is that we’ve got electronic privacy laws that date to 1986, and as a result makes all sorts of distinctions that are nonsensical in the modern context of routine cloud storage. Legislation to drag the statute into the 21st century has been introduced, but alas, there’s little indication Congress is in much of a rush to get it passed.