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August 23, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Now That’s Rich

Posted: 23 Aug 2010 01:03 AM PDT

Our "dysfunctional and corrupt political culture" may extend the Bush tax cuts for the wealthy even though there's no good reason to do so:

Now That's Rich, by Paul Krugman, Commentary, NY Times: We need to pinch pennies these days. Don't you know we have a budget deficit? For months that has been the word from Republicans and conservative Democrats, who have rejected every suggestion that we do more to avoid deep cuts in public services and help the ailing economy.
But these same politicians are eager to cut checks averaging $3 million each to the richest 120,000 people in the country.
What — you haven't heard about this proposal? ... I'm talking about demands that we make all of the Bush tax cuts, not just those for the middle class, permanent. ... The Obama administration wants to preserve those parts of the original tax cuts that mainly benefit the middle class — which is an expensive proposition in its own right — but to let those provisions benefiting only people with very high incomes expire on schedule. Republicans, with support from some conservative Democrats, want to keep the whole thing.
And there's a real chance that Republicans will get what they want. That's a demonstration, if anyone needed one, that our political culture has become not just dysfunctional but deeply corrupt.
What's at stake here? According to the nonpartisan Tax Policy Center, making all of the Bush tax cuts permanent, as opposed to following the Obama proposal, would cost the federal government $680 billion ... over the next 10 years. For the sake of comparison, it took months of hard negotiations to get Congressional approval for a mere $26 billion in desperately needed aid to state and local governments.
And where would this $680 billion go? Nearly all of it would go to the richest 1 percent of Americans, people with incomes of more than $500,000 a year. But ... the ... majority of the tax cuts would go to the richest one-tenth of 1 percent. ... And the average tax break for those lucky few — the poorest members of the group have annual incomes of more than $2 million, and the average member makes more than $7 million a year —  would be $3 million over the ... next decade.
How can this kind of giveaway be justified at a time when politicians claim to care about budget deficits? Well, history is repeating itself. The original campaign for the Bush tax cuts relied on deception and dishonesty. In fact, my first suspicions that we were being misled into invading Iraq were based on the resemblance between the campaign for war and the campaign for tax cuts the previous year. And sure enough, that same trademark deception and dishonesty is being deployed on behalf of tax cuts for the wealthiest Americans.
So, for example, we're told that it's all about helping small business; but only a tiny fraction of small business owners would receive any tax break at all. ... Or we're told that it's about helping the economy recover. But it's hard to think of a less cost-effective way to help the economy than giving money to people who already have plenty, and aren't likely to spend a windfall.
No, this has nothing to do with sound economic policy. Instead, as I said, it's about a dysfunctional and corrupt political culture, in which Congress won't take action to revive the economy, pleads poverty when it comes to protecting the jobs of schoolteachers and firefighters, but declares cost no object when it comes to sparing the already wealthy even the slightest financial inconvenience.
So far, the Obama administration is standing firm against this outrage. Let's hope that it prevails in its fight. Otherwise, it will be hard not to lose all faith in America's future.

links for 2010-08-22

Posted: 22 Aug 2010 11:01 PM PDT

"Is Housing the Best Way for Low-Income People to Build Wealth?"

Posted: 22 Aug 2010 11:22 AM PDT

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Richard Green:

Is housing the best way for low-income people to build wealth?, by Richard Green: I was thrilled to be invited to the Future of Housing Finance conference held at the Treasury Department and co-sponsored by HUD this week. It was particularly nice to be seated next to Self-Help's Martin Eakes, whom I have admired for some time. Like Elizabeth Warren, Eakes long ago had insights into sub-prime lending that I wish more of us had taken seriously.

At the conference, Martin worried about a conversation that emphasized the need for robust underwriting standards for the mortgage market going forward. The three most important standards are loan-to-value ratio, payment-to-income ratio, and credit history. As Martin pointed out, African-Americans have less wealth available for down-payment than others (even after controlling for income), and have lower FICO scores than others, and therefore will be denied access to credit at a greater rate than others if underwriting standards are tough and uniform. Because much of the reason that African-Americans lack wealth is because they have been systematically stripped of wealth for many generations, policies that reduce access to credit disproportionately for African-Americans violate fairness.

The events of the past six or seven years show that loose underwriting does nobody any favors, either. Foreclosures are terrible things for the families who experience them and for the communities that have large numbers of them. The whole point of underwriting is to prevent default and foreclosure, and the unpleasant fact is that downpayment and FICO are predictors of likelihood of default.

In the era where almost all mortgages were self-amortizing, housing allowed families to build wealth because mortgages were a form of forced saving. Those who got a 20 year mortgage in 1960 owned their house free and clear in 1980; households gained wealth not because housing was such a great investment, but because they built equity, month after month. Housing was a particularly attractive way for those of modest means to save, because they could live in the very piggy bank they were building. In principle, however, these households could have rented and taken the difference between a mortgage payment and a rental payment and put it in another investment (a small business or the stock market). But we know that in the absence of nudges, people tend to save less.

Perhaps, then, the government could come at the savings issue more directly by giving low-income people a nudge toward saving. Suppose it developed a 401(k) type plan that matched the savings of those with below-median incomes at 2 to 1. This would encourage savings that then could be used for a down payment or a host of other investments (say a Vanguard index fund). This would cost taxpayers money, but perhaps less than mortgage programs built on thin underwriting standards. At the same time, getting people into the habit of savings could produce other social benefits as well. I am not sure such a plan is practical, but I think we do need to think about how we can help people who have been denied wealth for generations how to start accumulating assets without relying entirely on the housing finance system to do it.

We also need to ensure that when people with limited experience in such markets do participate in financial markets by buying houses, investing their savings, etc., they aren't steered toward products that are highly profitable for the originator, but not the best fit for the borrower/investor. It's my understanding that such behavior -- steering people into the wrong products -- explain part of the problems observed in subprime markets. Perhaps we need a consumer finance protection agency? And someone to lead it who understands these issues? However, it's not enough to simply provide advice about financial products. That will help, but some of this was fraud that needs to be prosecuted -- it won't stop otherwise.

"It Could Have Been Much Worse"

Posted: 22 Aug 2010 10:34 AM PDT

Gary Burtless of Brookings (link):

...The tea leaves are clear: The Great Recession will not be a second Great Depression. And, as I argue below, President Obama's stimulus package, though imperfect, deserves a great deal of credit for bringing us back to the positive trajectory we're on today. Any reasonable grader of the stimulus's effects on driving recovery and combating joblessness would give the stimulus at least a B+...


...The broken line in Figure 2 shows the trend in real personal disposable income—that is, private income plus government transfers minus personal tax payments. Federal government programs and stimulus dollars cushioned the massive blow to private family incomes. Disposable income fell less than 1 percent after the start of the recession, a stunning fact too often ignored given the severity and length of the current downturn. Reduced federal taxes and increased government benefit payments, partly funded out of the stimulus package, have kept Americans' spendable incomes from falling as fast as their private incomes. Household consumption fell in the recession, in spite of the massive swing in taxes and public transfers, but it only fell modestly. Americans were made cautious in their spending because of the drop in their personal wealth and fear of losing their jobs. But government benefits helped boost the spending of the unemployed, and lower taxes helped insulate middle class families from some of the effect of the drop in wealth. By the beginning of 2010, personal consumption spending was close to its pre-recession level.

Could the administration and Congress have done better? The 2009 stimulus package should almost certainly have been larger. The administration's own forecast implied that the gap between actual and potential national output was big enough to justify a bigger package than the one Congress adopted. The political reality, however, is that opposition to stimulus spending by conservatives in the Senate precluded a larger package. In fact, Congress passed a smaller stimulus than the one the president asked for. In retrospect, the package should also have included a much bigger allocation for new government capital spending—on roads, mass transit, public buildings, and environmental capital projects. This investment would directly provide jobs to workers in construction and capital goods manufacturing, industries hard hit by the recession. The objection to this kind of spending is that the money often funds questionable projects and is spent with too great a lag to do much good. These objections carry more weight when a recession is short and when petty political considerations play a big role in deciding which projects deserve funding. In this recession, the job market downturn is likely to last a long time, so even delayed capital spending is likely to do some good. The administration and Congress should have been able to fund capital projects based on their economic merits rather than influence peddling.

Even though the government's anti-recession policies have been reasonably successful, the public regards them with deep skepticism. A CNN poll in mid-January showed that about three-quarters of Americans believe that half or more of the stimulus spending has been wasted. Forty-five percent think "most" or "nearly all" of the stimulus dollars have been wasted. This harsh verdict is unjustified, but it affects the political climate in Washington. Congress is unlikely to pass a major expansion of the stimulus, even if the economy sinks and joblessness rebounds.

The recession has been severe. Unemployment has risen more steeply than in any other post-war recession. Two administrations and Congress put into place a number of counter-cyclical policies that have prevented the recession from metastasizing into a depression. As I have argued above, there are many indications that these policies have been successful in achieving their intended goals. Unfortunately for the policymakers who supported the policies, "It could have been much worse" is seldom a winning slogan in a political campaign.

I agree that "It could have been much worse" is not much to campaign on, and perhaps "It could have been much better" if not for Republican opposition to anything and everything we've tried to do, even things they've supported in the past, would send a more accurate message. But the main problem is that the administration has not convinced its core constituency that it is fighting for them first and foremost. Until it does, until it convinces people that there are core Democratic values that it is willing to fight for, values that cannot be compromised away even if it means legislation might fail, until the administration convinces people that it cares more about them than it does Wall Street -- a problem that started with the choice to reinstate the Clinton connections to the financial sector -- it will continue to struggle politically.

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