Tag Archives: mortgage

The Case against Subsidizing Housing Debt

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SINGAPORE (May 30, 2017)– At the end of the first quarter, according to the Federal Reserve Bank of New York, American consumer debt for the first time exceeded its previous peak (in dollars).  That peak was in the 3rd quarter of 2008, just as the global financial crisis hit.  Although car loans and student debt have been rising especially rapidly, housing debt remains more than 2/3 of the total ($8.6 trillion out of $12.7 trillion). Continue reading

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8 Policy Recommendations for Newly Elected Members of Congress

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On December 3, 2014, I participated in a panel of Harvard University’s Bipartisan  Program  for  Newly Elected Members of Congress.   After establishing that the median US household has not shared in recent strong economic gains, I went on to consider policy remedies.

I offered the Congressmen eight policy recommendations.  Some will sound popular, some very unpopular; some associated with “liberals”, some with “conservatives.”   I would claim that they all have in common heavy support from economists, regardless of party – even the very unpopular ones.

  • Enable universal pre-school education
  • Spend on infra-structure
    o   For now, the spending could be financed by Treasury borrowing: 1% is a very attractive interest rate!
    o   For the longer term:  Finance roads and bridges by putting the Federal Highway Trust Fund on a sound footing.
    o   That means restoring real gas taxes to their past levels and putting the tax rate on an upward path over time.  Very unpopular of course.  But the best time to start this process is now, when gas prices are falling and inflation is low.
  • Take steps today to put social security on a sound footing for the long term
    o   We spent the last three years getting fiscal policy exactly backwards
    o  The US fiscal problem, measured for example by the path of the federal debt, is in future decades, not today.
    o  We hurt the economy during 2011-2013 by cutting spending and raising taxes and have done nothing to address the big future deficits in social security and medicare, exactly the opposite of what we should have been doing: allowing deficits while the economy has been weak, while taking steps to address entitlements on a long-term basis.
    o   Specific policies to put social security on sound footing:
    * Raise the retirement age (while accommodating blue collar workers);
    * and slow the rate of growth of dollar benefits for future retirees.
    *  At the same time, make payroll taxes less regressive:
    * Exempt low-income workers.
    * Raise the maximum-income threshold (from $118,500).
  • Reverse the long-term rise in household debt: housing, auto, and student loans
    o  Reduce especially the heavy policy tilt toward getting American families up to their eyeballs in mortgage debt that they can’t afford (which mainly drives up housing prices, without much raising home ownership rates for the middle class).
    o  Require a serious minimum down payment
    o  Require that mortgage-originators keep “skin in the game.”
    o Curtail tax deductibility of mortgage interest, which benefits the well-off (the deduction generally gives households earning $65,000 a year less than $200 in tax savings.
        * Reduce deductions at upper end (like Rep. Dave Camp’s proposal to cut from $1m to $500k)
         * Especially stop subsidizing mortgages that are used for something other than purchase of residence (i.e., second home or “cash out” home equity line of credit).
    o  Car-dealers should not have been exempted from the Consumer Finance Protection Bureau.
    o   Most college educations are still a good deal, and worth going into debt for if that is the only way a student can go.
    * But some enterprises are bad deals.
    * Government should expand student grants and loans, but require that the college or university have a decent record regarding rates of graduation and employment.
  • Tax reform
    o   We can’t afford to cut tax revenues.
    o   But we can reduce the most distortionary tax polices (those that most discourage work or encourage harmful activities) and raise a given amount of revenue in a less distortionary way.
    o   For the corporate tax system, that means cutting the overall tax rate some, but making up the lost revenue by eliminating wasteful exemptions, like oil subsidies.
    o   For household taxes, I have in mind:
    * Expanding the Earned Income Tax Credit, especially for young single workers who miss out;
         * and eliminating the payroll tax on lower-income working Americans (currently their marginal tax rate is often higher than anybody’s; currently 63% of taxpayers pay more in payroll taxes than income taxes);
        * but making up lost revenue by curtailing distortionary deductions (e.g., mortgage debt).
  • Allow fracking
    o   in every state, while allowing individual communities to opt out.
    o  Actually encourage it by expediting LNG export facilities.
    o  But regulate fracking carefully, e.g., to prevent methane leaks.
    o  It is good for jobs, manufacturing, national security and even — if carefully done — the environment (because natural gas is cleaner than coal).
  • Resume US global economic leadership:
    o   Pass Trade Promotion Authority (for WTO, TPP & TTIP)
    o   Pass IMF quota reform
  • Do No Harm:   Avoid going back to the dysfunctional fiscal policy of the past.  The uncertainty created by the morass of cliffs, shutdowns, debt-ceiling standoffs (Figure 5) together with the reality of the sequesters, held back growth by at least 1 per cent per annum during 2011-13.  (“The Cost of Crisis-Driven Fiscal Policy”  MacroAdvisers, Oct. 15, 2013.)  One reason growth has been stronger lately is that 2014 is the first year in the last four when Congress has not impeded growth very actively.
    o Dysfunctional fiscal politics hurt the economy in 2011-2013, not just directly (e.g., through the sequester), but also indirectly through the risks for business created by policy uncertainty.  (See Figure 5.)

Figure 5: Economic Policy Uncertainty




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A Return to Saving?

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“Is the recent Return to Saving temporary or permanent?” asks the National Journal .

The famous Paradox of Thrift holds now more than ever: what is good for the individual, and for the economy in the long run — high saving — is bad for the economy in the short run.  During the current worst-post-30s recession we need a boost to demand.   In the longer run we need more saving.

Americans could not have gotten the timing worse. During the three expansions of 1983-2007 the economy grew well, and by the end of the period the first baby boomers had reached their peak earning years. Yet households’ saving rates declined, falling almost to zero in 2005-07.  Meanwhile, the government ran record deficits, reducing national saving even more (in the 1980s and 2000s; the late 1990s saw surpluses). It is ironic that the pro-capital orientation to the Reagan tax cuts of 1981-83 and the Bush tax cuts of 2001-03 was largely sold as an incentive to increase saving and investment, and yet household saving fell sharply subsequent to both policy changes — to say nothing of national saving. The increase in the after-tax return to saving did not lead to a “return to saving.”

The saving rate was so low before the financial crisis that it had nowhere to go but up, even if the timing has been awful. Incidentally, that the first substantial increase in American saving rates in 30 years has come in response to the worst recession in 70 years should put a nail in the coffin of macroeconomists’ practice of lavishing attention in their models on the mathematics of intertemporal optimization.   (But it probably won’t.)

Presumably the magnitude of the current economic dislocation is teaching many blind-sided individuals the value of precautionary saving. We certainly will need further increases in saving as soon as the recession is over. But have we seen a major permanent change in Americans’ anti-saving culture? I fear not. Even now, it does not occur to people that it is desirable to pay cash for auto purchases or other consumer durables, or eventually to pay off their mortgage when possible. Even now, it does not occur to politicians to change the pro-housing bias in the tax law, by eliminating the tax-deductibility of mortgage interest for example.

Moreover, the very first baby-boomers have now started to retire. Increasingly, the higher saving rate of those who see retirement looming ahead (some of whom now “have religion”) will be counteracted by the dis-saving of those who do retire.

The same thing will probably happen in other countries.  Indeed, in Japan, which reached the retirement bulge first, the saving rate fell correspondingly. Europe and China will probably follow. I declare the end of the “global savings glut.”  Real interest rates will have to rise.

[Readers wishing to post a comment are encouraged to go to the versions on the RGE Monitor site or the Seeking Alpha site. ]  

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