This article follows up on themes discussed here and here by adding data about the association between location and price and income. The data source for apartment prices is a multi-year data set of the Israeli Ministry of Housing and Construction. The data set tracks the average apartment price over time in 74 localities with a total population of almost 6 million. This sample of localities includes all of the large cities plus an assortment of smaller towns. Arab majority towns are not represented.

Between the years 2008 and 2013 housing prices in Israel had increased significantly. The average apartment price rose from about 100 monthly salaries in 2008 to about 130 in 2013.

price-2008-2013Figure 1

The location-associated data shows (Figure 1) that the price increase can be described well as a proportional increase of about 30% plus an offset of about ILS 200,000. Read the rest of this entry »


A new version of this.

This has a revised Analysis section discussing the zero interest rate lower bound scenario and a new section showing a parametric example of the model including an illustration of the resulting functional relationship between the money supply and production.

This post presents some additional time series regarding the matters discussed in a previous post. In addition to using the data used in the previous post, one additional series is used – average rent. This is Israeli central bureau of statistics (CBS) series number 030000.




Update (August 2015): The chart and data have been updated to include 2013 and 2014. The trend continues. The mortgage rate continues to fall (to 3% for 2014). This, together with moderate increases in the mortgage-payment-to-salary ratio (up to 82% in 2014), result in significant increases in the apartment-cost-to-salary ratio – almost 150 in 2014.

Apartment prices in Israel have gone up significantly in recent years. In the years 1996 to 2008, an average apartment cost about 100 average salaries. Within two years, this ratio has gone up to about 130. This rise can be explained to a significant extent by the reduction in interest rates, which implies that a given mortgage payment can repay higher loans. The interest rate on an indexed 20 year mortgage has fallen from about 6% in the late 1990’s and early 2000’s to about 3.5% in 2010 to 2012. As a result, despite the 30% increase in apartment cost to salary ratio, the ratio of the monthly payment on a 20 year loan for the cost of an average apartment to the average salary has gone up much more moderately – from about 70% to about 80%.


The fact that the increase in apartment prices is associated with a decrease in interest rates raises the possibility that a future rise in the interest rates (which would bring them close to historical rates) would cause a return of the apartment cost to salary ratio to its previous level.

Data sources:

  • Average monthly salary (nominal): Social security data (social security law, section 1), similar to statistical abstract 2012, Table 12.34, but more up to date, using the January 1st 2013 entry as reflecting 2012 data, etc.
  • Consumer price index (CPI): Israeli central bureau of statistics (CBS), series 120010
  • Average price of apartment owned by its residents: CBS series 020000
  • 20-year mortgage CPI-indexed interest rate: Bank of Israel data, using the “20-25 years” column for recent years and the “above 20 years” column for pre-July 2011 entries

Co-authored with Daniel Gat.

Formal analysis

June 18, 2011

Keynes is rather dismissive of what he calls ‘“mathematical” economics’. The following passage is from chapter 21 of The General Theory:

The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organised and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors amongst themselves. This is the nature of economic thinking. Any other way of applying our formal principles of thought (without which, however, we shall be lost in the wood) will lead us into error. It is a great fault of symbolic pseudo-mathematical methods of formalising a system of economic analysis, such as we shall set down in section vi of this chapter, that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed; whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep “at the back of our heads” the necessary reserves and qualifications and the adjustments which we shall have to make later on, in a way in which we cannot keep complicated partial differentials “at the back” of several pages of algebra which assume that they all vanish. Too large a proportion of recent “mathematical” economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.

There is much truth in the above, I think, and it is truth that applies not only to “economic thinking” but to any kind of thinking that relies on formalization. Statistical analysis is plagued with this kind of problems. Keynes does lay too much stress on the matter of interaction between factors. The problem with formal methods is not particularly with neglecting various effects – it is that they simply are false in various ways (neglecting various effects is only one of the sources of falsehoods). Informal methods have the same problem, of course – and in addition have problems associated with informality.

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The number of Medical Doctor degrees conferred in the U.S. has remained unchanged since 1985 – about 15,000 degrees a year. Therefore, the number of MD degrees conferred per U.S. resident has fallen since 1985 by the same rate as the growth of the population – about 25% cumulatively.

That period has also seen a significant increase in the median MD earnings, as measured by the BLS (Current Population Survey – CPS, Weekly & Hourly Earnings): In the decade between 2000 and 2010, physicians and surgeons have seen their nominal median income increase 51%, while lawyers saw an increase of 37%, and the average worker saw an increase of 30% (series LEU0254541000, LEU0254536800, LEU0252881500). The 30% increase, incidentally, represents a 2.5% inflation-adjusted increase according to the BLS.

Data source: Statistical Abstract of the U.S. 2011 edition, Table 300 (spreadsheet); 1980 edition, Table 293.

Ricardo offers us the supreme intellectual achievement, unattainable by weaker spirits, of adopting a hypothetical world remote from experience as though it were the world of experience and then living in it consistently. With most of his successors common sense cannot help breaking in — with injury to their logical consistency.

John Maynard Keynes,
The General Theory of Employment, Interest and Money, Appendix to Chapter 14

The share of military spending in the “personnel” category has dropped from around 40% in the early 70’s to around 20% today. The category that has grown most through that period has been “operations and maintenance”.

Data source: Historical Tables Budget of the U.S. Government, Office of Management and Budget, Table 3.2—Outlays by Function and Subfunction: 1962–2014. The transition quarter in 1976 was omitted as well as the year 1991 in which the “other” category was -$46 billion (in most years it is on the order of +/-$2 billion).

Macro-economic scenarios (4)

October 19, 2010

Refer to earlier posts for background: 1, 2, 3.

Baseline + taxes scenario

Assume that a certain percentage of every person’s income (in calories) is extracted by the authorities as taxes. If a person’s income is the bare minimum for existence, then their income must be increased by their employer to cover the taxed amount, if they are to continue in their jobs. If a person’s wages are beyond bare subsistence, which is almost always the case to some extent, in the sense that some additional privation can always be imagined, then some partition of the cost of taxes between the employer and the employed would have to be achieved, if the employment relationship is to be continued. In the short term, at least, it is probable that a large part of the cost of the taxes directly deducted from a person’s income would be carried by that same person.

Applying taxation to the baseline scenario, ignoring the short term effect, and assuming that farmers work at bare subsistence, the cost of all taxes fall on the landowner. Under taxation scenario A there are three tax brackets – all income up to 1500 calories per day is not taxed, income between 1500 cpd and 2500 cpd is taxed at 10%, while all income above 2500 cpd is taxed at 90%. Thus, each farmer costs the landowner 2050 cpd, leaving 50 cpd of surplus.
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