Skeptonomics

I just got around to reading an important paper, “Current Account Patterns and National Real Estate Markets” by Joshua Aizenman and Yothin Jinjarak. Looking at a sample of developing and developed countries over the period 1990-2005, they find the current account deficits are the main explanatory factor for real estate appreciation. (It would be clumsier but more accurate to say real real estate appreciation, since prices are deflated by the GDP deflator.) Their work is careful, and their empirical model accounts for 70% of the variation they study. Running a current account deficit results in higher real estate values, especially in countries with more developed credit markets, but this effect is somewhat reduced where there is less country risk. The authors control for the appropriate confounders, such as interest rates. In fact, external balances play a bigger role than interest rates in real estate markets, a surprising result.

This is consistent with the position that I’ve taken on this blog, that the inflow of funds to finance our current account deficit renders the US susceptible to asset price bubbles, and that the runup in housing values was just one (but a very big) manifestation of this. If I’m right, and if the housing channel is being shut down, some other bubble is indicated.

Problem: McCain will define himself as tough and resolute in foreign policy, committed to defending us vulnerable Americans from the wolves near and far. Implicitly, and perhaps explicitly, this will paint Obama as weak, confused and incapable of assuring our safety. This is a matter of images, not reality, of course, but that’s how elections work.

Analysis: Obama’s counter-image is that he will restore America to respect around the world, rebuilding alliances and replacing bellicosity with diplomacy. Against this backdrop, McCain’s foreign policy would take on the hue of Bush, continued. One challenge Obama faces is how to convey this impression visually and viscerally. Fear and retaliation are easier to package than cooperation.

Solution: Obama should undertake a foreign campaign trip this summer, publicly appealing to American voters overseas, including both civilians and military expats. He could explain that America is itself now globalized, with its citizens scattered across the continents. His trip could then be portrayed as a campaign swing like any other. But holding enthusiastic mass rallies across Europe and Asia especially, Obama could deliver exactly the we-are-the-world images that would give emotional resonance to his political stance. Honestly, I don’t see what McCain could do to diminish the power of this strategy.