Arnold Kling  

Morning WaPo

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NCH Watch... Great Out the Gate?...

Two items caught my attention.

1. A front-page story on the prospects for requiring higher down payments on mortgages. The story is all about how horrible this would be. It makes extensive use of quotes from an organization called the Center for Responsible Lending, which is an Orwellian name. The story does not say that "responsible lending" produced a housing bubble and a crash, resulted in millions of foreclosures, and wiped out the savings of millions of other borrowers who did not turn in the keys to their lenders.

I wish that the Post would have balanced their reporting by including some of my testimony. Or quoted from my written testimony.

2. In the Outlook section, Maya MacGuineas looks at the prospects for a long-term budget that avoids a fiscal crisis. She discusses the Ryan plan and the Bowles-Simpson plan.

It seems that the center and the right are engaged on this issue, but the left has become self-marginalizing. When your fiscal Titanic is headed toward the iceberg, most people want you to propose a plan that changes course. Merely screaming "Don't turn right!" is not sufficient.


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COMMENTS (21 to date)
Daniel Kuehn writes:

I can somewhat sympathize with your second point, because I do agree that we need to grapple with tax reform and entitlement reform, but I'm not sure you're accurately capturing the view of "most people".

The center-left and left is not talking about a Ryan-type plan because they are focusing on the iceberg immediately in front of us, while Ryan is focusing on the iceberg several miles off. "Most people" think this is reasonable, and I think a lot of us consider Ryan to be the oddly detached and irresponsible one.

I think "most people" aren't even sure to what extent Ryan is serious about this and to what extent he is making a symbolic move because he knows it won't pass.

J Oxman writes:

DK,

Politicians want to get re-elected. The reason the Dems aren't talking about a Ryan-type plan is the same as why many Repubs aren't either - they think the cuts will cost them votes.

Almost no politician has a long-term view. Ryan does, as evidences by his continued adherence to the basic principles laid out in his "roadmap" plan.

I think it some strange that you think the short-run and long-run icebergs are different. In fact, they are the same thing- out of control government spending.

I think it also telling about your sympathy for one story over another that you think Ryan is the cynical politician here and the others are trying to do a good job for the taxpayers.

Is it not much more reasonable, given the incentives of politicians, to think most of them do not want to reduce government spending? Think of how much more influence larger government buys the individual politician, not to mention bureaucrats.

In my view, it is nonsense to think the average politician wants to reduce spending. Does the average CEO want to shrink his company?

Zac Gochenour writes:

There's also an above-average article on development in India highlighting political obstacles.

effem writes:

Why does the budget debate continue to revolve around spending cuts? There are two ways to balance a budget - cut spending or raise revenue.

Simply closing tax loopholes that shouldn't exist would easily dwarf the proposed spending cuts. For example, why do private equity managers pay income tax as carried interest (LT cap gains rate?).

Second, overall tax revenue as a % of GDP is at a record low I believe. Some well-crafted tax increases seem reasonable. For example, perhaps we should further tax big polluters - utilities, oil/gas - to compensate for externalities. They simply can't move to another jurisdiction as their assets are in the ground.

Third, the US "owns" the largest consumer base in the world. Once companies threaten to move offshore we back down immediately. Perhaps we should rethink the basis of taxation from where your "assets" (I use quotes because the asset in question is often no more than just a patent) are located to where your customer is located. If you want access to the US consumer base then you need to pay a fair US tax rate regardless of where you are domiciled.

We talk a lot about balance on this blog. Taxes as a % of GDP are at a record low and corporate profits as a % of GDP are at a record high. That is not in balance. I'm all for cutting wasteful spending but it seems to me that the draconian spending cuts some propose will leave the middle class to shoulder the burden of our tax policy that allows too many entities to sidestep their fair burden.

Daniel Kuehn writes:

J Oxman -
I wish I could have the faith that you do in politicians. I have my doubts that any of the 535 members of Congress have an actionable concern about the long-term budget. You seem to trust that at least one does.

They do marginally better at dealing with more immediate concerns, for the reasons you highlight - the question is, do they do a good job at it?

I never said he was cynical, but I think that's plausible. I'm not sure if he's sincere or not, but the timing of his plan is interesting. We're in the middle of an annual budget fight, and he introduces a long-term plan that looks like he is trying to break the budget stale-mate. In fact, his plan and the current budget fight have little to do with each other... but that's not how it plays with the pundits. So I think there's a very real chance that he is being more political and symbolic than serious here, yes. You shouldn't be so naive to dismiss that possibility.

I think the average politician probably doesn't want to turn Medicare into a voucher program or privatize Social Security. That's a fair enough assessment. But "reducing spending" plays very well on the campaign trail (much, much, much better than "our debt to GDP ratio is only about 60% so I'm going to increase the deficit to deal with some immediate problems" plays on the campaign trail).

Daniel Kuehn writes:

This is a point that I am regularly surprised by with libertarians - this simultaneous ability to (1.) decry politicking and just saying what will get you elected, and (2.) declare that certain politicians like Paul Ryan or Ron Paul are above all that and have our best interests at heart. This despite the fact that "tough talk" about the budget - even though we're not in a budget crisis at all right now - has been the quintessential election-winning strategy for the entire history of the republic.

Look, I support Barack Obama. Not everything he's done, but I think he's done a half-decent job and as politicians go I'm happy to say I support him. But I'm under no illusion at all about his political motivations, and it's quite clear that that motivation has lead him to and a will lead him to make policies that are good for Barack Obama rather than good for the country.

What I can't comprehend is why it's so hard for people that are fans of guys like Ron Paul or Paul Ryan to think like this. It's not clear to me at all that Paul Ryan is a serious person, and that statement should not be as shocking as it is to some people.

effem writes:

Arnold, as a follow up to my last post I think it would be very interesting if you could look at corporate profits in a few posts. I'd be curious to get your perspective.

I'm guessing that you are inclined to see record profits as a sign of a job well done by corporate America. I agree, that is one conclusion. However, perhaps we should also consider how tax/Fed/political/trade/currency policy are all skewed towards large corporate interests. Corporate capture of major institutions seems to be breaking down some of the very foundations underlying belief in free markets. Yet so many academic/political careers have been built on championing free markets that many are reluctant to consider that they make not work as currently structured in the US.

For those policy makers whose normal inclination is to get government "out of the way" this presents a major dilemma. By doing so you simply further open the door for corporations to extract more rent via subversive means.

When the "free market" isn't working properly what is a libertarian to do?

Chris Koresko writes:

effem: Why does the budget debate continue to revolve around spending cuts? There are two ways to balance a budget - cut spending or raise revenue.... Simply closing tax loopholes that shouldn't exist would easily dwarf the proposed spending cuts.

I'm under the impression that trying to fix the problem by increasing revenue has been pretty clearly shown to be impractical. The problem is that it's actually very difficult to increase the fraction of GDP collected by the Federal Govt above about 18%. It has been at this level, with a few short-lived deviations, for most of a century now, despite quite large variations in tax rates and policy. Apparently, the economy adjusts very quickly to tax changes in a way to effectively negate their effect on revenue.

The reason to get spending back down is that there is an anti-correlation between government spending and private investment, and a positive correlation with unemployment. Keep the fraction of GDP consumed by the government near its current stimulus-bloated levels, as the Obama plan would have us do, and you can expect to see slow growth and high unemployment persist for the foreseeable future. This will reduce the size of the economy (and the size of the federal revenue stream) over the long run, which basically makes every economic problem more severe.

So we need to get spending down to at least close to 18% of GDP. And we need to do it pretty quickly, since our large debt load leaves us dangerously exposed to even a modest-seeming rise in short-term interest rates. Right now we're spending, what, 20% of revenue on that interest. Let the rate rise a couple of percent, as it could easily do if lenders decide we don't have the discipline to control our spending, and we'll get to see what a real budget crisis looks like.

Arnold had gone through the numbers. They are scary. Any politician who ignores them and pushes for keeping or expanding our current government spending is just not responsible.

PS: I believe you are right that the current federal revenue as a fraction of GDP is unusually low right now. If you look at the curve, it's like a mirror image of federal spending: revenues drop just as spending rises. Hint, hint.

Maniel writes:

@FM – “Why does the budget debate continue to revolve around spending cuts? There are two ways to balance a budget - cut spending or raise revenue.”
Excellent point; if indeed that were the real problem, I expect that even Libertarians (like myself) might consider tax hikes. However, balancing the budget is not the problem – it is just a symptom of the power of the federal government to spend beyond the means of the private sector to finance that spending. With Treasury issuing debt and “Gentle Ben” at the printing press, our decision makers have been able to vote to make everyone “happy.”
In the end, the problem for our government is the same one that you and your family have: you must determine what you need and what you can afford. Yes, you can pay by credit card, but those bills do come due; the real issue is what your budget can handle. All of your purchases are a draw on your income and savings. Likewise, all federal spending is a draw on the resources of the private sector. The decision of whether to finance that spending by destroying private sector jobs (taxation), lowering our children’s standard of living (debt), or devaluing our currency and our savings (inflation) is just a detail. Happily, there is hope. Precious little that the federal government does is of any real value; I’ll give you National Parks and, possibly, immigration (which we do quite poorly). So cutting the budget will be a lot like losing weight; it might be painful at first, but the more we lose, the better we’ll feel.

hsearles writes:

"It seems that the center and the right are engaged on this issue, but the left has become self-marginalizing."
Many on the left are still convinced that the right's engagement with the budget is just a scare tactic to turn public opinion against the welfare state. Most of them have yet to even take the first step on the process of reform by admitting this will become an actual crisis if not acted upon.

Those few that have actually realized the issue go straight to knee-jerk reactions like end corporate welfare and cut defense spending. Even though such policies may very well need to be incorporated into any attempt to really wrangle with the debt, they still live in the fantasy-land where it is the military and subsidies to big business, rather than so-called "entitlement spending", that is driving the debt.


To Daniel Kuehn:
"The center-left and left is not talking about a Ryan-type plan because they are focusing on the iceberg immediately in front of us, while Ryan is focusing on the iceberg several miles off."
And what iceberg are you referring to? All I have heard from the left is to raise taxes on the rich, cut the defense budget, and to end corporate subsidies. While two of these three are fine policies, they are not really focused on any future iceberg, but, as I said above, more knee-jerk reactions. Ergo, I must confess I do not know what this "iceberg immediately in front of us" is.


"This is a point that I am regularly surprised by with libertarians - this simultaneous ability to (1.) decry politicking and just saying what will get you elected, and (2.) declare that certain politicians like Paul Ryan or Ron Paul are above all that and have our best interests at heart. This despite the fact that "tough talk" about the budget - even though we're not in a budget crisis at all right now - has been the quintessential election-winning strategy for the entire history of the republic."
I have not seen any libertarians have anything more than lukewarm praise for Paul Ryan and all of them at the same time noted the many deficiencies of his Path to Prosperity. What they have praised him for is the political courage to actually be concerned with the run-away spending on entitlements before it becomes a crisis. Indeed, not once have I seen [i]anyone[/i] assert that Paul Ryan is above politics.

Ron Paul, on the other hand, if there is any politician who actually places the interests of America above concerns for reelection. I cannot think of a single program that Ron Paul has supported in Congress for reasons other than his belief that they are in the best interests for the country.

Skippy writes:

People focus on spending cuts because out of control spending is the chief problem. Spending per capita, inflation adjusted has increased by something like 50% since 1998. It's not hard to do the calculations. I used very easy to find data on population in 1998, projected population in 2013, federal budget in 1998 and projected federal budget in 2013.

Do the same thing with collected tax revenues in 1998 vs projected revenues in 2013, divide by respective population counts and adjust for inflation etc. and you see an INCREASE in per capita tax revenues of around 13%. There are some caveats here- the times chosen are such that it is probably TOO generous to the "too low taxes are the problem" folks. 1998 was a very solid year for tax receipts, and when the tech boom collapsed a few years later so did those revenues. One other thing, I'm not trying to say that the bush tax cuts increased revenue because of laffer curve issues or anything, the increase in tax revenues would be higher if the bush cuts weren't implemented. The growth in per capita revenue is likely purely attributed to economic growth.

People always say "so were times so terrible under Clinton or first term Reagan tax rates?" yet never grasp the flip side- were children dieing of cholera in the streets when real spending per capita was at the (significantly lower) Clinton era levels? I think not.

Cut spending.

Hunter writes:

As it turns out, the best thing the Titanic could have done (aside from not speeding in the dark through iceberg-infested waters) would have to been to hit the iceberg straight on. The last moment attempt to avoid the iceberg is what tore a gash so long that the ship was doomed.

Which is totally irrelevant to the point you were making, but there you have it.

effem writes:

I'm still not sold on spending cuts as step 1 of the budget process. That may work when the country is healthy - but it is not. We have concentrated wealth (along with power) to an unbelievable degree. Spending cuts hit a lot harder when people are already suffering.

On the other side, the wealthy continue to get wealthier partially thanks to Fed/govt policy. The value of the subsidies are enormous - negative real interest rates, bank bailouts, implicit guarantees, stock-price targeting by the Fed, etc.

I am personally on the "winning team." I work on Wall Street and see it all first hand. If you think for a minute the wealth being created is tied to value-creation you are flat out wrong (although it is in some cases, obviously).

It pains me to think that because my industry (and others) have captured the system, avoided the taxes (guys like me pay only cap gains rate on $millions of earnings), and been on the receiving end of Fed/govt policy that we now have to cut someone's health care. I simply don't see how anyone can sign up for that in good faith.

I'm trying hard to find the other way. The best I can come up is that the government needs to "roll back" some wealth in the same order that it promoted it. Even if we are stuck at 18% of GDP for revenues (which i doubt we are), where that 18% comes from is a big deal.

I say close the loopholes, get rid of the major deductions, stand up to corporations, shrink the military...and only then, if there is still a shortfall, start cutting services to the ever-poorer lower/middle classes.

Steve Sailer writes:

The Center for Responsible Lending, like the Center for American Progress of Matthew Yglesias et al, is largely a creation of shoddy mortgage barons Herb and Marion Sandler. Wikipedia reports:

Herbert Sandler is the former CO-CEO (with his wife, Marion Sandler) of Golden West Financial Corporation and World Savings Bank.

... Golden West was sold in 2006 for $24 billion to Wachovia Bank. The acquisition was completed in October 2006. The Sandlers owned about 10% of the company at the time of the sale, making their share of the sale price worth about $2.4 billion. Of this the Sandlers gave $1.3 billion to the Sandler Foundation.[3]

[edit]Philanthropic work

The Sandlers helped found and are among the largest benefactors of the Center for Responsible Lending, a nonprofit, nonpartisan organization fighting predatory mortgage lending, payday loans, and other products that prey on consumers;[4] the Center for American Progress, a progressive think tank; ProPublica, an investigative reporting newsroom; and the American Asthma Foundation.

http://en.wikipedia.org/wiki/Herbert_Sandler

Mercer writes:

"It seems that the center and the right are engaged on this issue, but the left has become self-marginalizing."

Ryan's plan is to start reducing Medicare spending after ten years. He wants to eliminate the parts of Obamacare that would restrain Medicare spending. He also plans to cut tax rates which would lower revenue unless you believe in supply side voodoo. If this is the right's plan they are engaged to make the fiscal crisis worse.

8 writes:

Even from the comments here, I don't think the left grasps the financial hole the country is in nor the new globalized world that we live in. There are ways I could see tax increases working, but it would involve ditching the WTO along with a host of other policies that no one is even talking about.

There are some wealthy doing well...they are in the financial sector and benefiting from the federal and Fed decision to offset private sector deleveraging with public sector borrowing. Therefore, tax increases are against the government's own stimulus policy and have the knock on effect of hurting every sector of the economy, unless you are talking about just financial taxes, but in that case you're not closing any budget gaps. With China, India, Brazil, etc. ready to attract U.S. business, it is no longer as easy to look internally when devising domestic tax policy.

Based on the numbers, I believe the U.S. economy took a "permanent" hit in 2008, or rather a decade of bubble economics imploded and revealed a lost decade. Every optimistic scenario, from Paul Ryan on down (yes, I think he's way too optimistic) assume a full recovery by 2015 at the latest.

I'm 100% avoiding politics when I say that, in my opinion, if nothing is done SS and Medicare will be cut far beyond any proposal currently on the table. If conservatives or libertarians really want to kill them off, just go along with the Democrats and wait.

Tracy W writes:

Daniel Kuehn - there are some politicians who do act for what they think is the long-term good of their country, not short-term advantage.

In NZ, both Roger Douglas and Ruth Richardson were under no illusion that their reforms would be popular. Roger Douglas was notorious for replying to his caucus, when someone commented on the political unpopularity of some policy "What are we here for? For NZ, or just to get re-elected?" And when he lost his position as Minister of Finance, he left the government. Roger Douglas is the one who killed off tax deductions, subsidies, including the NZ tax deductions for health insurance and mortgage-interests, and cut off new entrants to the public servant pension fund and insisted it be fully funded. The Labour government also introduced ITQs into the fishing sector, something the Canadian government didn't do, leading to a collapse in the Newfoundland cod fishery.

Ruth Richardson cut government spending and reformed the labour market. When she lost her position as Minister of Finance, she saw through her Fiscal Responsibility Bill and then left the government.

It does happen, occasionally.

Daniel Kuehn writes:

hsearles -

The near term iceberg I was refering to was the depression that we're currently sitting in. At a 60% debt to GDP ratio, I'm not going to concede that Ryan is more serious about our problems by focusing on long-term debt. Long-term debt is absolutely a problem, but we have more immediate ones. Arnold, I think, is wrong to say that "most people" think Democrats have dropped the ball because they recognize this.

re: "I have not seen any libertarians have anything more than lukewarm praise for Paul Ryan and all of them at the same time noted the many deficiencies of his Path to Prosperity."

J Oxman above said that Ryan is one of the few politicians with a long-term view that consistently adheres to principle. That isn't something that I would say with confidence about a single politician in Washington - even the ones I tend to sympathize with. You're right, favorability for Ryan isn't total - but you can take a look at the Pauls too. Oxman is defensive too - he thought I was saying Ryan was "cynical". I never said anything like that. I'm not sure to what extent Ryan is serious about the long-term (he may be - whether he's serious or not I'm at least glad he started the discussion), but I don't think there's any reason to believe he's cynical or in any other way malicious.

effem writes:

8, I disagree on the effectiveness of tax increases (although I admit I am no expert). For decades now we have backed down from any increases to corporate taxes for fear they would flee. Well, they have fled.

Consider the following:
1) We "own" the largest customer base in the world. Certainly we could construct some sort of taxation that reflects access to the American consumer. If you want to sell your product here you will have to pay a fair tax rate, regardless of where you are domiciled. No company would give up access to the American consumer - not a single one. But yes, we would have to radically rethink how we structure taxation.

2)There are many industries that simply cannot move - real estate, resources, retail, etc. Take resources - why not levy an additional tax on oil/gas production when prices are very high (>$100 oil).

3) There are various industries that impose large negative externalities (oil, CO2 emitters, banks - since we have to bail them out every 20 years). At the very least there should be additional taxation to compensate the American public for these externalities.

4) Every developed country is going through budget issues. Perhaps the major developed country governments should coordinate taxation such that it eliminates the ability of corporates to play governments off each other.

5) We should eliminate the Fed's ability to lend to any entity that is not domiciled in the US without congressional approval. That seems reasonable.

I'm not a fan of taxation just for the sake of it. But when I see corporate profits at a record and a struggling middle/lower class, it makes me think a lot harder about where we should be trying to extract money from than the simple knee jerk reaction of "cut spending."

mark writes:

Thanks to Steve Sailer for passing on the info about the link between Center for Responsible LEnding and Golden West. GW was one of the main feeders of the mortgage crisis. They specialized in no-doc and Pick a Pay (i.e., pay what you feel like, we'll just, ahem, add the part you don't pay to the principal). Now that connection is something the New Yorker should be writing up.

Babinich writes:

Daniel says: The center-left and left is not talking about a Ryan-type plan because they are focusing on the iceberg immediately in front of us

You're kidding right? The left cares not one iota of spending cuts.

POTUS' reply yesterday (04/13/11), prompted at the least minute by POTUS staff urging the President to respond to Ryan, was not about leadership but all about campaigning.

Apparently, with the budget deal only saving us 352 million the esteemed leader of the House has a lot to learn about leadership too.

Iceberg = spending

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