Carried Away

Tough Living In Midwest, Especially Ohio

According to the National Association of Realtors, the recent large run-up in median house prices in the United States bypassed much of the Midwest, especially Ohio.  Of the 158 U.S. metro areas tracked, 20 have the dubious distinction of having a negative change in median single-family house prices since 2004.  I have listed those 20 metro areas below.  Of those 20, 15 are in the Midwest.  All of Ohio's population centers are represented in the list, even those cities not particularly reliant on industry, such as Columbus.

Metropolitan Area	Q4 2006 Single- Family Median Price	Change From Year Ago Quarter	% Change From Year Ago Quarter	Change From 2004
	($1,000)	($1,000)		($1,000)
Springfield, IL	94.9	-11.0	-10.4%	-8.4
Barnstable Town, MA	373.5	-31.7	-7.8%	-3.7
Youngstown-Warren- Boardman, OH-PA	80.0	-6.7	-7.7%	-6.0
Toledo, OH	104.8	-7.9	-7.0%	-8.7
Akron, OH	110.2	-7.6	-6.5%	-6.7
Columbus, OH	138.7	-9.2	-6.2%	-8.0
Worcester, MA	274.7	-14.8	-5.1%	-1.2
Grand Rapids, MI	129.5	-5.6	-4.1%	-3.4
Indianapolis, IN	117.1	-4.9	-4.0%	-4.6
Topeka, KS	101.1	-4.1	-3.9%	-1.0
Cincinnati-Middletown, OH-KY-IN	138.7	-5.0	-3.5%	-3.8
Cleveland-Elyria-Mentor, OH	130.9	-4.8	-3.5%	-5.5
Cedar Rapids, IA	129.2	-4.6	-3.4%	-0.3
Lansing-E.Lansing, MI	135.0	-4.1	-2.9%	-2.9
Boston-Cambridge-Quincy, MA-NH	388.0	-9.5	-2.4%	-1.7
Pittsburgh, PA	112.2	-2.1	-1.8%	-1.2
Detroit-Warren-Livonia, MI	154.6	-1.6	-1.0%	-6.4
Elmira, NY	78.4	-0.4	-0.5%	-0.4
South Bend-Mishawaka, IN	89.8	-0.1	-0.1%	-3.8
Canton-Massillon, OH	106.2	0.1	0.1%	-9.0

One of the important aspects of home ownership that is not always discussed in detail is that the effective cost of living in a house is impacted by the rise or fall of the price of the house.  To arrive at the effective cost, take the carrying cost of the house -- mortgage plus insurance and maintenace -- and add the net change in house prices.  For a person owning a median-priced house in Columbus ($147,000 in 2004), the monthly carrying cost may have been modest, but since 2004, he also absorbed a non-cash cost of $8,000 due to house prices falling, or about $270 per month.  That's a lot of money.

Meanwhile, a person owning a median-priced house in Washington, D.C. ($340,000 in 2004) paid hefty carrying costs, but received a non-cash benefit of $82,000 due to price appreciation, or about $2,700 per month.  On a net basis, he was paid to live in the Washington area.  It hardly seems fair that a place like Columbus is kicked while it's down at the same time that a place like Washington is doubly-rewarded for good times, but that's essentially what happens.

The trend over the past couple of decades has been a slow migration away from the Midwest to the South and West.  This leaves the Midwest in a precarious position.  It must work hard to increase its attractiveness.  The margin to err is small.  In particular, the state leadership in Ohio has been poor over the last decade, which put Ohio at the mercy of the kicking boot.  As a Republican, it pains me to admit that the GOP was mostly in charge during this period.

Another trend in the Midwest is a slow migration away from rural areas to suburban/urban areas.  Because of this trend, living in a rural area that is not within commuting distance of a major city is more expensive than it seems at first blush.

Note:  It's odd that immigration tends to be unpopular in rural areas, since these areas probably would benefit the most from it.  In these areas, it would be easy for an immigrant to buy a median-priced home because the carrying costs are so low.  There are some exceptions to the rule of immigration to rural areas.  The meat packing and labor-intensive agriculture industries have attracted immigrants to rural areas, for instance.

Warren Buffett Gives Away His Billions

Warren Buffett, the 2nd richest man in the world, is giving away his fortune, most -- $30 billion -- to the Bill & Melinda Gates Foundation.  As many of you know, Buffett is a disciple of the Benjamin Graham, a hero of mine and a mid-20th century professor of investing at Columbia University.

I am happy that most of his money will be going to the Gates Foundation rather than the Susan Buffett Foundation, which focuses more on pro-choice issues and gives lots of money to institutions like Planned Parenthood.  The Gateses seem to care about population growth, but are attempting to solve it by alleviating poverty and disease -- a much more progressive approarch.

Charlie Rose had a good hour-long interview last evening with the Gateses and Buffett.  It is available on Google Video for $0.99.  There's lots of substance in the interview, including the reasons why he's giving the money away rather than giving it to his children.

Washington, D.C. Growing Pains

Part 1.

Over the last 4 or 5 years, Washington has seen something of a renaissance.  Property values are way up, crime -- especially murder -- is way down, and the city's budget is in the black.  This is in part due to to the steady, practical leadership of the city's mayor, Tony Williams.  There also were some lucky breaks of which the mayor took full advantage.  For instance, the metrorail (subway) system -- conceived and started in the late 1960s -- finished construction in 2001 and is now successfully anchoring the metro area to downtown.  However, with this success for metrorail comes growing pains and challenges, and is putting me in a mood for spending large sums on infrastructure projects.

By way of background, about 5 million people live in the Washington metro area.  In the last 30 years or so, the metro area has doubled in population.  This population growth has happened entirely in the suburbs.  Indeed, over that time period, the number of people living in the city of Washington has decreased by about 20% and now numbers only 580,000.  The race riots of the 60s, high crime, and the construction of freeways to the suburbs, among other factors, led to low property values  and white and black flight from the city.

Even as the population of the city shrank, the commercial and government business in the city grew in step with the population of the suburbs.  Nowadays, about 500,000 people commute into the city for work and over 70% of all income in the city is earned by commuters from the suburbs.  Downtown D.C. north of the National Mall -- from Georgetown to Union Station -- is almost completely filled in with high quality office buildings.  From an overall perspective, the mix of residences and business in the city has shifted greatly toward business.  Judging by the city government coffers, the current mix is profitable.

Part of this profitability is due to the fact that it is becoming increasingly troublesome to commute into the city.  The bridges and freeways into the city are all stop-and-go during rush hour and any growth in commuting into the city by car just makes the trips of everyone longer.  This phenomenon is illustrated by a nice Washington Post article of earlier this year.  It is becoming desireable to live in the city to avoid this commute, which helps to drive up home prices.  Because of this dynamic, for the city government, it does not always pay to make it easier to commute into the city.

Despite this tension, I think that it would be much better for the city to facilitate the commute, if it is able to channel this growth to the city's benefit and to gain services for the residents of the city by doing so.  The residents of D.C. have no need for more freeways, but expanding metrorail as much as possible in the city would be awfully handy.

India's population will pass China's by 2030

In a November entry, I presented a chart showing the prospective population growth of the India, China, Nigeria, and the United States through 2050, as projected in the U.S. Census Bureau International Database.  According to the database, India's population was expected to pass China's by about 2032.  However, new projections from the United Nations Population Division show this crossover occurring by 2030.

Projections for China's population continue to be revised downward rather quickly.  But what should we make of these changes and the impact on the Chinese economy and society?  Some have quipped that China will become old before it becomes rich.  Indeed, the UN projects the 2050 median age of China to be 44.8 years, while in comparison it projects the media age of the U.S. to be 41.1 years and India to be 38.7 years.

By 2050, the UN expects China's population to be falling by 0.35% per annum, and we can assume that the potential workforce will be falling faster than that rate.  Quite simply, this rate of population decline will feed directly into China's rate of economic growth.  This might not be a concern for China now, when its economy is expanding at a furious clip.  But we know that the kind of economic growth that China is experiencing now will not continue forever.  Eventually, the 1% per annum (or whatever) drag on China's economy relative to nowadays will be very painful.

Congress Upsets BJP In Indian Elections

Here's a real stunner.  The BJP, which has been the lead party in the governing coalition of India, has been upset by the Congress Party.  This happened despite the fact that in the first quarter of this year, India's economy grew at a real 10% annualized rate, and under BJP care for some time, the economy has grown consistently in the real 7-8% range.

India has a slightly lower Gini score than the United States -- i.e., India's income is distributed more equally than is America's.  Given this, I expected that India would reward her politicians in about the same manner as Americans would.  For instance, in 1984, economic growth was a real 7.2% and Reagan won reelection by a landslide with 59% of the vote.  In 1955, economic growth was a real 7.1% and in 1956 Eisenhower won reelection by a landslide with 58% of the vote.  In 1935 and 1936, economic growth a real 8.9% and 13.0%, repsectively, and in 1936, Roosevelt won reelection by a landslide with 61% of the vote.

You might bring up the possibility that since India has such a large amount of poverty -- 25% of the population is below the poverty line -- voters felt that the money wasn't being spread evenly enough.  This might be true, but the U.S. response to this was entirely different.  Roosevelt was in the same or worse situation with regard to poverty and he still won by a landslide.  Maybe he just communicated better with the American people than the BJP did with the Indian people?

I guess this stark difference demonstrates that each country's voters weight their public values differently.  I hope that the Congress party doesn't force India to lurch back to its socialist roots, killing the economic progress that has been made by India in the last decade.  India's politicians must listen to the wishes of the people, and the people seem to have expressed the opinion that economic growth is not of primary importance.

A Comparison Of 2050 Population Pyramids

In a previous post, I detailed the reasons why I don't fear China's rise. One of the reasons is that China's demographics did not necessarily support such fear. As an extension of the total number of people is China's population pyramid in 2050--i.e., how many people fall within certain age ranges at a given time. China's future pyramid shows that a decreasing number of workers will have to support an increasing number of retirees (an inverted pyramid). This is the downside to China's one-child policy. It's very near-sighted as well as being unpalatable from a human rights standpoint. The economic consequences of an inverted pyramid are generally rather severe.

China cannot even out its population pyramid with immigration like the US has done, simply because there are no places that have sufficient surplus people to make a big difference by immigrating to China. While the US baby boom generation was indeed a boom, immigration has stayed fairly steady as a percentage of our population. And since the US only has some 5% of the world's population, there are sufficient surpluses from other nations to make a big difference to us. Because of this, the US population pyramid will look good.

There are other countries with healthy population pyramids, the most notable of which for our purposes here is India. India should settle into a virtuous pyramid--almost straight up and down. This should moderate the inflation that she experiences, among other things.

Source: All of these graphics are generated by the Census Bureau, International Population Database. Check out the dynamic graphics that they have for the pyramids. It's really interesting to watch the progression over time!

Why I Don't Fear China's Rise

The common perception among many Americans is that China is our next real competitor. Many fear that we will be passed by economically or militarily about the middle of this decade, due to China's enormous population. Those who fear China are correct in pointing to demographics as a major determinant of relative national power, but they might be surprised on what the demographics actually tell us on a relative basis. Here's a plot of the populations of the major countries that will be driving population growth over the next 50 years.

There are a couple of items that are striking. The population of China is already growing at a slower rate than that of the United States. Further, over the next 50 years, the total population of the US is expected to grow more in absolute terms than that of China. Indeed, the population of China will begin to decrease around 2030 and will be surpassed by India around 2035.

While China's economy currently is growing at a very rapid pace, short periods of stagnation or even depression are probable. In China, these short periods have led to political instability. For instance, only a couple of years of subpar growth led to the democracy movement and Tiananmen Square crackdown. So one possibility is that the dictatorship will collapse and a more acceptable system of government will take hold. The Chinese will have to one day face the fact that dictatorships aren't that durable of a way to run a country.

Another very real possibility is that China's growth will moderate somewhat--let's say to a rate slightly above that of the US. If this happens, then the US doesn't need to be too worried, since China's economy is only about 60% the size of the US economy (adjusted to Purchase Power Parity) and is still decidedly low tech for about 3/4ths of the population.

Lastly, India could overtake China as our main competitor. India's population and economy are expected to grow at a steady clip, with the population in 2100 about 70% higher than China's. Educated Indians speak English. India has some very good schools, top notch professionals, and an economy that is fairly transparent. I would consider this a very welcome "competition", considering that India is a democracy and shares many of our values.

In summary, any of the above scenarios could come to pass. History demonstrates that there are often bumps in the road to prosperity, so China's surpassing the US cannot be taken as a given; perhaps not even a probable outcome.

Sources and Notes: Please see my underlying spreadsheet for the raw data and chart. I used the raw data from the Census Bureau's International Database in creating the chart. The UN Population Division also has useful projections, broken out into 3 variants. Please note that in the middle variant, the US population is expected to grow at a continually slower rate. I have my doubts that immigration will be curtailed, which these variants assume. If immigration is not curtailed, then the US could have substantially higher population growth.