Archive for the ‘Current Politics and Thrift’ Category

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The Irrelevancy of the Paradox of Thrift

February 11, 2009

USThrift Blog is back from a long winter’s nap and the birth a new little Wilcox.

This post has been published by Forbes. It argues that American households are not stifling economic recovery by saving too much and that public policies designed to increase consumer spending are misguided.

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A Progressive Consumption Tax

November 13, 2008

One of the most persistent questions I get when I write or am interviewed about consumption taxes is how to make them progressive. In most people’s minds, this is either difficult or impossible. Consumption taxes, it is assumed, must be regressive because poorer people spend more than wealthier people on the necessities of life. The tax will hit them harder.

The belief that a consumption tax must be regressive arises from the, very understandable, notion that a federal consumption tax must be levied like a state sales tax. In other words, it would be a point-of-sale tax that would be paid at the time an item is purchased. Some politicians, Mike Huckabee being the most recent example, have advocated this form of taxation. It has its advantages, but one large disadvantage to this particular incarnation of the consumption tax is that it is indeed difficult to make progressive. But there are other ways to accomplish a consumption tax and to do so without moving towards a more regressive tax system.

Here is the most straightforward way to accomplish this. It is similar to the “Unlimited Savings Allowance” proposed by Senators Domenici (R), Kerry (D) and Nunn (D) about a decade ago. Allow all Americans to designate an account or set of accounts “Unlimited Savings Accounts.” These accounts, much like other tax-sheltered vehicles, could contain anything (stocks, bonds, CD’s etc.). But, unlike retirement accounts, there would be no restrictions on when or how much money one could put into these accounts nor restrictions on when or how much money one could withdraw.  At the end of each tax year the financial service provider at which your account(s) is held would be required to inform you, and inform the government, your total net contributions or net withdraws from the account. Net contributions could be deducted from your income taxes and withdraws would be added to your income taxes. Because there are no restrictions on additions to or withdraws from these accounts everyone would put all of their savings under this tax shelter — there would be no reason to do anything else. Only money that you did not save would be taxed under the current income tax system. You can make the marginal tax rates on that income as progressive as you would like; set the top tax bracket to 50% or more if that makes sense. My point is not to suggest what that rate should be, but to point out that you can engineer a de facto consumption tax that is highly progressive, high regressive or anything in between.

Are there any problems with this? Not huge problems, but as with any fundamental tax reform you have to think some things through carefully. The biggest issue to solve with this type of tax system is how to treat borrowing. Allowing individuals to borrow and at the same time contribute to this account would lead to some savvy, but socially counterproductive, tax strategies for individuals. But this is a problem that can be solved.

Moving to consumption taxes would encourage savings, discourage conspicuous consumption, increase economic efficiency by building a domestic base of investment capital……and could be done without increasing tax burdens on the poor.

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How the Government Discourages Savings

November 11, 2008

This post was picked up by Forbes and they have asked me to pull it from my own blog site, at least temporarily. You can follow this link to the published version at Forbes.com.

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The Miami Mortgage Co.

November 3, 2008

Just to the left of a Skyline Chili poster, and just under a cardboard moose head, my office wall displays a simply-framed piece of paper. The header on the paper, typeset with a formal font and black ink, reads “The Miami Mortgage Co.” The handwritten contents of the note are reproduced below

The Miami Mortgage Co.

                                          Miamitown, Ohio  9/7  1921

This is to certify that Arthur Knose has purchased the John Fourger house at Harrison, Ohio for the sum of $1800.  Three hundred to be paid on delivery of the deed $1500 to be carried by the Company. $25 has been paid on this bill.

The Miami Savings and Loan Co.

Amos Pickens, Sec’y

Arthur Knose was my maternal grandfather, and this paper is part of the mortgage contract for the home he bought in the town where he raised his family and where I too spent my early years. The contract is simple, unambiguous in its terms, and the mortgage security it represented was no doubt held by The Miami Savings and Loan until the day my grandparents paid it in full.

There are new lessons to be learned from this old piece of paper.  The widespread practice of securitizing mortgage contracts has generated some important social benefits. It has allowed banks and credit unions to more easily manage risk and in so doing helped create a low mortgage rate environment. The American dream of home ownership has been helped in no small measure by securitization. But it has also had a potent downside. Securitization created anonomity between borrow and lender in the mortgage market. Amos, and his company, aren’t lending to Arthur anymore. Bank X orgininates the loan to Ron, packages it with other mortgages and sells it to who knows who in who knows where, who resells it to somebody living somewhere. Who’s on first?

This anonimity matters because it makes it nearly impossible to renegotiate the contract, even if it is clearly in everyone’s interest if that happens. No one wins when a home is foreclosed upon; not the bank, not the town in which the house is located, and certainly not the person from whom the house is taken. If my grandfather ran into hard times, he knew who held his mortgage and they knew him.  In all likelihood they could work out a deal. Everyone could be made better off through an understanding of the idiocyncracies of the particular situation and a little communication.  This ability to understand, and communicate effectively, on a one-on-one basis is lost in the current marketplace for mortgages.

The contract on my wall also has sub rosa moral quality to it. My grandfather would have known Amos. Arthur Knose would have rather been shot full of arrows than have not paid this debt. I can’t even imagine him uttering the word “brankruptcy,” let alone seeking shelter in it.  The social and moral contract would have been very real for him. Who would be hurt if you walked away from your mortgage? You don’t know and neither do I, but my grandfather knew. And this knowledge led to more stable financial relationships.

We should not return to the days when all lending institutions held all of their mortgages on their books. That would be both impractical and unwise. But, as the upcoming election fades in the rearview mirror and we begin to take a tough look at reforming many of these financial markets that have caused us so much distress of late, we should seeks to balance the good from the past with the realities of modern markets. One place to start would be to analyze the social welfare effects of a requirement that those financial institutions which originate mortgages hold some proportion of those mortgage assets on their books — not 100%, not 0%.  I don’t know the correct proportion to balance the advantages of securitization with the advantages of reduced anonomity. But it sounds like a solvable problem to me. It is also not the kind of regulation that would lead to the Potemkin battles between the left and the right. Much like Arthur Knose and Amos Pickens, there is a broad common ground here where we can all be made better off.

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Barack Obama for President

October 28, 2008

[The version of this blog post appearing on Forbes.com can be found here]

I’m a conservative. I’ve spent my money and my time in support of Republican candidates. I also support Barack Obama for president.

Modern conservatism is deeply rooted in ideas and political philosophy, in rational discourse and pragmatism. John Stuart Mill matters to conservatives. Friedrich Hayek and Milton Friedman matter as well. They matter not only because of their conclusions about the limited role of government power in a free society but because they were aggressive questioners, carefully dissecting problems to uncover potential solutions.

The American version of modern conservatism began as an intellectual revolt against the excesses of government emerging out of the New Deal era. The prevailing liberal view of the time was that government could engineer a more just and equitable society by elevating its role in the day-to-day activities of citizens. Proponents believed the benefits of collective decision making outweighed the increased restrictions on individuals’ liberties that such social engineering required.

The modern conservative movement, through rational discourse and appeals to empirical research in economics, pointed out that reducing these individual freedoms had negative consequences far in excess of the commonly held view. Yes, you could decrease poverty among low-wage workers by mandating a minimum wage, but you would also increase unemployment among the young and those of color. Yes, you could use the power of taxation to redistribute income, but this could dramatically shrink the wealth available to the entire society.

Conservatives used to ask the tough questions and did not accept simplistic solutions. That is why it is deeply disappointing to me, both personally and professionally, that John McCain has run a campaign that is so antithetical to rational discourse about public policy. His campaign has been about glib answers to complex problems. His choice for vice president was political malpractice.

He has catered to a wing of the Republican Party that believes everything will be all right–if only the government gets out of the way. No matter the problem, that is the only acceptable solution. To suggest that research about or thoughtful analysis of a situation might, in some cases, point in a different direction is apostasy.

For these Republicans, simply the act of doing policy analysis must mean that you are a liberal. They know that real Republicans, and real men, don’t need to think things through. I do not respect these people. They have dragged a proud movement that had much to offer our country down into the mud of ignorance.

And yet the reason I now support Obama is only partially due to McCain’s decision to embrace this base form of populism. It also stems from a growing respect for Obama’s thoughtfulness, which reveals itself when he’s faced with difficult questions. I do not agree with all elements of Obama’s tax policy, but I certainly get the impression he has thought about it a whole lot more than McCain.

In a world that will certainly throw many unexpected, unknowable problems at the next president, I don’t really care if I agree with all of their policy decisions. I want a smart, thoughtful person who can adapt his ideas to the facts on the ground. I don’t want someone who retreats to ideology because he cannot–or is not inclined to–think through the complexities of the problem at hand. Barack Obama is not afraid to talk about complicated solutions to complicated problems. He is a skilled critical thinker. John McCain, unfortunately, has not left the same impression on me.

I also believe that Obama will not end up being the orthodox liberal many have warned against or hoped for. He is not from Cambridge, Mass. He is from Illinois. His economic advisers, both formal and some informal, are from the University of Chicago, a school known for its free market philosophy; he also taught there.

The institutions with which you associate, after all, do affect your thinking. That life experience, combined with his inquisitive mind, will lead him out of the liberal underbrush when the House of Representatives inevitably proposes some hard-left legislation. I genuinely believe the people who are likely to be most disappointed with Obama are the far left wing of the Democratic Party.

I will not celebrate when Obama is elected president next Tuesday, but I will smile a little–and hope that my beliefs about him are correct.

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The Politics of 401(k)’s

October 14, 2008

The winds of political populism are never far from the surface of American politics. They can come from the right (Huckabee) or the left (Edwards). I believe they will increase in the coming years. My immediate concern is that, in a country that does little to create incentives to save, populist politicians could easily make the problem worse.

To the extent that Americans do save they often do so through employer-sponsored retirement plans, 401(k)’s and other tax shelters similar to these vehicles. These plans are a huge political target, and would be easy to exploit in order to foment class warfare and generate some extra revenue for the Treasury.  To the aspiring populist politician I offer the following language that you can use at your next campaign stop in Toledo.

My fellow Americans, our country is facing many problems. We desperately need to make strategic investments in energy, in education, in health care [short dramatic pause] to make sure the American worker remains the most competitive and productive in world. We owe it to our children to make sure we stand up to the tough decisions now so that they aren’t faced with insurmountable problems later.

My friends, some Americans have benefited more from the gifts of this country than others. Some are able to retire comfortably at an early age because they worked for large corporations and had access to generous retirement plans. We gave them a break when they put money in these plans, they did not pay taxes on it, and they are now living better off than many of us.  Fairness dictates that those who benefited from this loophole in the tax system pay their fair share.

Today I am proposing that anyone who has accumulated more than one million dollars in a 401(k) plan be subject to a one time 10% windfall retirement tax on that money.  They have benefited from the system. Now it is time for them to support the country that allowed them to accumulate this wealth.  To the 95% of Americans who don’t have this much money in these tax loophole accounts I will never propose additional taxes on your money. You will need that to secure your own retirement.

Not only do I think the kind of language I’ve written above is plausible in coming years, I think it is likely.

How do we avert this? Perhaps we cannot. But getting more people involved in tax-deferred savings plans would help. The more people you have involved, the more obvious it is to a broader cross-section of the electorate that any type of windfall tax on this money would be unfair. Expanding access to small businesses would move us in the right direction, as would the ability to divert tax refunds directly into tax-deferred savings accounts. Mr. Obama’s recent proposal (yesterday) to allow tax-penalty-free withdraws from these accounts would not help. Not only would it encourage people to draw down their retirement savings, it would make that money seem less like retirement savings and more like ordinary income. To the extent that the public views it as ordinary income it makes it far psychologically easier to believe taxing these “rich” people is fair. Even the threat of this kind of populist-inspired taxation is a serious disincentive to savings.

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The Open Wounds of Class Warfare

October 12, 2008

The checkout line at the grocery store is generally an uneventful place. I’m usually moving as quickly as I can to get home and rarely hold conversations with anyone. My thoughts are focused squarely on domestic issues at that point, my work concerns have largely vanished. This Thursday was different. The person bagging the groceries in my line, perhaps to the chagrin of the store manager, was speaking in loud tones to anyone willing to listen. His voice could be heard not only in the line I was in but at least three lines in either direction. He was mad, and I mean mad in a way that kind of freaks you out if you are standing in the line in which he is working. He was mad because he had lost a substantial amount of his retirement money in the market free fall, and he was letting anyone within earshot know that he believed the criminals responsible for this loss should face the long arm of the law.

This feeling was echoed in several blog comments I received based on my “Bailout Envy” post and blog reference in an article that ran a few days ago on Yahoo! Finance . For the first time since I started this blog, I decided to reject some comments — their language unfit to print. A reasonable characterization of their position is that I should be ashamed of myself for coming to the defense of Wall Street executives and that the U.S. prison system should be enlarged to handle the inflow of financial services employees who should soon be residing there.

In both the case of the grocery store employee, and the comments (some posted others not) to my blog, the open wounds of class warfare are evident. The anger is palpable. 

Some banking executives deserve to go to jail. I have little doubt that this will occur. At the same time it is so incredibly convenient, so grossly unfair, to blame the entirety of what has happened on banking executives and mortgage brokers. Many of these people, just like you and I, saw and understood what was happening in only a very partial way at best. Perhaps they should have understood, but that is a tall order in such a complicated market. Let the first person who has never failed to mention a defect in the used car they were selling cast the first stone.  

The cold, tough reality here is that these banks would have never been able to profit from these loans if Americans had not, en mass, made a headlong rush into purchases they could not afford, debt they could not handle. It is easy to blame bank executives. It is somewhat harder to blame the people we know in our lives who took out mortgages based on highly speculative bets on home price appreciation, to blame those who used their houses as piggy banks — taking out home equity loans to finance their current consumption. And it is the most difficult of all focus our anger back towards ourselves, our individual failings. We are all to blame, collectively and individually. Our banks, our neighbors, and many of us lived a life of cheap credit and easy money — a life we could not afford. The demon lies not in the guilded towers of Wall Street, but in our ourselves.