In the raucous debate over how to boost U.S. economic growth and prevent a fiscal tsunami, it is not difficult to find politicians who subscribe to one or more of the following beliefs: (1) The depressed housing market should be allowed to reach its bottom without further government intervention. (2) Making large cuts to discretionary spending is vital to future American prosperity. (3) Comprehensive tax reform must not, under any circumstances, involve the adoption of a federal value-added tax (VAT).
Three claims: each of them popular among a hefty chunk of the political class, and each of them either misguided or misleading or both.
Advertisement
Start with housing. CoreLogic estimates that more than 22 percent of all U.S. residential mortgages were in negative equity (or “underwater”) as of September, and that another 5 percent were “near negative equity.” This massive debt overhang is severely hampering investment (both residential and nonresidential), business creation (because home equity is a major source of early-stage financing), and labor mobility (domestic migration has plummeted to “the lowest level since the government began tracking it in the 1940s,” according to the New York Times). After examining every U.S. economic recovery since World War II, Cleveland Fed analysts Timothy Bianco and Filippo Occhino determined that “weak household balance sheets have been an important factor behind the slower recoveries, especially the current one.”
Indeed, economists Atif Mian of Berkeley and Amir Sufi of the University of Chicago argue that household debt represents the single biggest obstacle to a stronger recovery. According to their recent survey of economic data from 238 U.S. counties with 100,000 or more residents, those counties that racked up the most household debt (relative to income) between 2002 and 2006 are now experiencing much slower growth in auto sales, residential investment, and employment than those counties that accumulated the least household debt. For example, the high-household-debt counties have seen residential investment fall by anywhere from 40 percent to 60 percent since the recession, whereas the low-household-debt counties “have almost completely avoided a decline in residential investment.”
Thus far, the Obama administration has very little to show for its efforts to stem the foreclosure crisis. As journalist Clive Crook wrote in the Financial Times earlier this year, “The administration’s housing market policies have failed because, through bad design and pitiful execution, they have modified loans mostly by cutting interest rates and extending repayments, not by reducing debt.” That must be the paramount objective — slashing household debt.
But how to do it? American Action Forum economist Ike Brannon has suggested allowing a mortgage cramdown via the bankruptcy process. Economists Glenn Hubbard and Chris Mayer of Columbia Business School (along with Absalon Project CEO Alan Boyce) have outlined a massive refinancing scheme for homeowners with government-guaranteed mortgages, predicting that it could yield up to $70 billion in annual mortgage savings. Writing in the New York Times,Harvard economist Martin Feldstein has touted a mortgage-principal-reduction strategy that would aid most underwater homeowners and purportedly cost less than $350 billion (if all eligible Americans participated).
Time to leave DC and join the rest of us in the real world Duncan. Lots of 'brilliant' ideas and loads of references to economists and organizations, but your argument is unconvincing - as a member of the productive class I am sick and tired of carrying all of the load and the last thing I want is a VAT! Why is a conservative website giving a DC insider room to argue for a liberal dream item?
Let me get this straight: the stimulus was good and really helped the economy, we need more gov't intervention for the housing market, we need another tax because it will make things 'fairer' and it will really be done much more 'efficiently, we can really trust all of those idiots and scoundrals in DC to lower and remove other taxes when they get the VAT - all we have to do is look at how well they have done so in Europe. Right. Sounds like liberal BS to me.
Have we really gone so far down the road to serfdom that we now think that the best solution is to embrace leviathian and to double down on liberal policies? Really?
So how do we get conservative politicians to sit down with people like Becker and Barro, really learn the details of what they are thinking, learn to articulate those details, and turn them into government policy?
Unfortunately probably not until Hades freezes over.
On the other hand, one can always fantasize about presidential debates in 2016 when someone can stand at a podium and offer some real meat, some real details, rather than vague idealogical platitudes.
Another benefit of a VAT is that it would level the playing field with our trading partners. Under current trade laws, they rebate VAT to their exporters while levying it on imports from us, thereby making their exports to us cheaper while making our exports to them more expensive. Were we to institute a VAT, we would protect our workers and industries from undue cost advantages foreign governments have arrogated for themselves at our expense.
It would also tap much of the spending coming from the underground economy which currently eludes income taxes. And, properly constructed, we could restructure our tax policy towards a more pro-growth model without necessarily inducing huge net tax increases.
Bravo! This is some of the best economic analysis I've seen on NRO to date.
Though anyone can insert gratuitous links to appear thorough, yours actually are high-quality and germane.
You are especially on track with your comments about the need (or lack thereof) to cut discretionary spending. While, as a government worker, I'd be willing to take cuts to my salary as part of a final deal that cured the entitlement problem, the endless rounds of mutual back-patting when small "cuts" are made to discretionary spending ("minute" might be more like it when compared to the needed reductions to medicare) have become sickening.
Yet another garbage article that NRO editors published without even reviewing it.
The author, who obviously knows nothing about defense issues and defers to other ignorant guys. Here's what he wrote about defense spending:
"defense outlays could be trimmed without doing serious violence to national security. (Brookings Institution scholar Michael O’Hanlon has discussed how Washington could responsibly cut the military budget by $60 billion through “tighter resource management, smaller ground forces and more selective modernization efforts.”)"
That is utter garbage. No, large-scale defense cuts cannot be done without endangering the United States. That is a fact. To start with, defense spending is already at a historically low ebb - 3.59% of GDP (or 4.51% of GDP if you count spending on Afghanistan, which has nothing to do with defense, and the DOE's defense-related programs). It amunts to less than 19% of the total federal budget.
Secondly, O'Hanlon is a strident liberal from a stridently leftist organization (the Brookings Institution), so what he says should not be taken seriously. The "study" by O'Hanlon that Currie cites here is an example why. O'Hanlon says "tighter resource management, smaller ground forces and more selective modernization efforts.”
As for efficiency, that is doable and necessary, but it won't save $60 bn per year because there isn't that much waste in the annual defense budget. Not even close.
Cutting America's ground forces when they are already at their minimum needed size, and with 100,000 troops still fighting in Afghanistan, would be suicidal and irresponsible.
Yet O'Hanlon's most dangerous proposal is that of "selective modernization efforts", by which he means cancelling dozens of crucial weapon programs and completely foregoing modernization in some areas and of some types of units and weapons - thus leaving America unprepared for many missions and several types of combat. This is foolish, irresponsible, and dangerous. The military is mostly using obsolete equipment from the 1960s, 1970s, and 1980s (and in some cases, such as bombers and tankers, from the 1950s). All four Services have legitimate large modernization needs. All of their needs are equally important and all must be met. America can't afford to fund only some of them and refuse to meet the other needs. That would be an attempt to avoid reality and to pretend that modernization of some units and weapons isn't necessary when it is. The military needs a modernization ACROSS THE BOARD, not "selective modernization", and an across the board replacement of obsolete military equipment is long overdue. Foregoing some modernization programs is like asking the military, "I'm going to cut your arm or your leg - which do you prefer?" O'Hanlon's proposals should therefore be rejected.
The NRO should really be ashamed of itself for publishing this screed. William F. Buckley Jr. would've been ashamed of today's NR.
What I find most intriguing today, as one with an economics background (no PhD) and over 30 years business experience, is that economists really don't know squat – not when the game is on the line. All due respect to the very learned among us. When all is said and done, our "political economy" just doesn’t work well – not nearly well enough, almost one could argue dysfunctional.
Much of the blame of course goes, rightfully so, to our pusillanimous political elite. Yet the “dismal scientists” don’t help things much. Yes, we are "the best system in the world", yes, ours is better than socialism, and yes look at all we've accomplished from a time of rubbing sticks together and eating what we speared that afternoon. No iPads, no cell phones, no cable, no fancy medicines, no sleek cars - just nothing but life like the Engels out on the prairie in America. And though “in the land of the blind, the one-eyed man is king” too, that says nothing about the efficacy of royalty.
We just witnessed one of stupidest, most moronic political economic acts I can remember since.... well, at least for the past 3 months since the debt ceiling debate. We have grown-ups arguing about how the "optics" will work on taking money away from a nearly insolvent Social Security system, one which Democrats feign incredulity if you want to do anything to touch it. Yet, they, along with their Senate Republican accomplices, just managed to steal about $200 billion from it to give folks a short term wad of cash (I guess to pay down Christmas and buy some Chinese or European goods). An even better example of the brilliance emanating from our “political-economic” elite harkens back to the the ObamaCare debate. Therein, Democrats forced bad data on a pliant CBO. Said data merely required the CBO to pass “economic judgment” on a mind-numbingly complex, hugely significant piece of legislation which basically said, “here, we’re going to give you 10 years of revenues and 5 years of costs – now tell us if it’s economic”. Can you imagine? I mean really!! Would a 6th grade teacher accept such stupidity from her class? Of course not. But in our political economy – that’s a winner.
That this is what passes for "economics" is a sham. To that we can add constant disputes in the field as to what really works. $800 billion stimulus? Well Krugman, the "pit bull" of economic thought, will pull out his Nobel and say, ‘we need is a BIGGER stimulus’, and proceed to call former President Bush names then clamor on as if he knows anything. He and other economists in the Administration will argue for more Keynesian policies. Yet some academics are "discovering" significant defects and fallacies in some basic, underlying Keynesian assumptions. Sadly, the economics profession really can’t completely agree even on what got us out of the Depression. Most it seems, however, do agree that the New Deal delayed our recovery and made things worse, which by itself would lead one to question exactly how. And this is the group formulating our future? This is the group, along with a woefully defective and deficient Congress that is supposed to map and plan our country’s future?
Now, as a result of this newest subversion of economic rationality and the public’s long term interest, a newly confident, yet bumbling President, with a feeble old man heading up the Senate, will proclaim victory and try more such utter lunacies in the new year. Given the cowardice of Senate Republicans and the simpleminded idiocy of House GOP, it is likely they will succeed again. That the young (college age and new graduates) support such liberal progressive moves bespeaks volumes about their economic intelligence deficiency. They are the ones now who are going to have to make this up.! But, the optics are good, so let’s take comfort in the illusion while we can.
Why do we continue to go back to the same old trough and drink the same old water. I'd suggest to you that the field of economics needs to get better - MUCH better. That economics is not about the tails on risk curves nor derivative structures nor portfolio betas. It IS about economics. And those who practice it are not serving any of us nor their profession well in the cacophonous babbling they offer.
A most dangerous practice when done so in a room of petulant, irresponsible child-like adults.
This strikes me as the worst proposal I've seen in a long time. Keep a significant income tax, but only apply it to the most productive? A VAT? Some indefensible crowing about replacing our existing tax system with something equally progressive? Is that a good thing? Not that it can possibly be true. Reducing corporate taxes seems to be the only reasonable proposal, but overall, it's complicated and could never be sold. The 9-9-9 plan is simple and fair. Two qualities that would be required to pass any tax system overhall.
I'm unable to get through this Keynesian Clap-trap on my vacation. Demand does not drive the economy - supply does! Before going into the positive rebuke, though, let us not put aside the normative one: Why in the hell should those who either (1) rent, (2) paid cash, or (3) borrowed more prudently bear the brunt for those who did not?!
This sounds like "we're all in this together" social democracy crap to me! If you have a home you mortgaged for 30 years - expecting that length of stability being specious in the first place - at, say, $500,000, and now it's only worth $450,000, you may just have to eat $50,000!!
The banks would be lending more to the new would-be startups, getting rid of the need to bring back underwater property owners from the dead, if we weren't paying interest on ~excess reserves~ safely parked in the vault!
I am one who thinks we should have let the housing market crash to it's bottom. We have mechanisms for recovery. One is called bankruptcy. Individuals paid to much. Banks lent too much. They both made mistakes. Bankruptcy allows both to avoid debtors prison and go on with life.
Another issue is the upside down mortgage "crisis". Yes a lot of people are upside down. Many years ago, prior to the bubble, I knew many people who were upside down a little on their mortgage at various time. If you are upside down, you have three choices. Wait. Walk. Sell and eat it. All are viable.
Walking is legal and in my view moral. Your contract says IF you want to keep the house you must pay the mortgage. If the house is no longer worth it, the bank can have it back. That is part of the banks risk in issuing loans.
All in all, let the individuals in trouble deal with their trouble. There are adequate ways to deal with it, that are not draconian, and this allows the parties involved to bear the pain rather than society as a whole. If we had debtor's prison it would be different but we don't. We have ways to let people deal with their economic bad luck and/or foolishness without subsidizing it.
This bubble is a lot like an abcess. Let it burst and clean it out. Then we can heal.
