The Book No One is Reading

Quick shot before today’s longer post: we have a new champion for the book that everyone buys and no one reads. Three guesses as to what it is and the last two don’t count.

Obamanomics On the March

The economy contracted almost three percent in the first quarter, the worst quarter since the end of the Great Recession. Maybe it’s a blip, but that is a scary number. I’m sure the Obama defenders will blame it on the cold weather but I’m pretty sure we had cold weather in the past. Eventually, this will be Bush’s fault. Or “austerity”.

This is horrible news, whatever your politics. While I oppose Obama, I want the country to do well. But we may be staring down a double dip recession.

Update: Before the liberal spin master get in, keep in mind that we just remade a quarter of our economy with Obamacare. Seven million people changed insurance or bought insurance. The idea that this has nothing to do with the GDP strain credulity.

The Latest Triumph of Obamanomics

You remember the “Summer of Recovery”? That was back in 2010 when the combination of fiscal stimulus and Obama frisson was supposed to get the economy moving again. Since then, we’ve been waiting and waiting for a full recovery, bumbling along at 2% growth with job creation barely keeping up with population. But I’m sure an economic boom is just around …


The Commerce Department said on Thursday that the nation’s overall output shrank at an annual rate of 1 percent in the first three months of the year, revising downward its initial estimate from late April, which showed a very slight gain for the period. It is the first quarter in three years in which the nation’s output of goods and services has contracted.

The figures are bad news for the White House as well as for Democrats running for Congress in November’s midterm elections. Although there’s still time for growth to rebound before then — and recent data on hiring has been more encouraging — little room remains on the runway for an economic takeoff this year.

This is being blamed on the unusually cold winter. That’s not a ridiculous explanation but it’s not enough to explain everything. Gross Domestic Income fell a whopping 2.3% which could indicate that further revisions will be even worse.

Yeah, I know. Austerity! Republicans! Libertarians! Uh … no:

It has been six years since the financial crisis. Federal government spending is still around 21 percent of GDP, up from 19 percent in 2007, and the Federal Reserve still has a very expansive monetary policy. Under those circumstances, a quarter of negative growth is pretty unsettling.

Exactly. The “austerity” we’ve enjoyed has been a huge increase in FY2009 followed by flat spending. It has included a massive quantitative easement from the Fed. You simply can not look at all that and call it austerity, no matter how much Paul Krugman stamps his foot.

The “Do Nothing” Congress Cuts Both Ways

We’ve been hearing for the last couple of years that the Republican congress won’t do anything (with “do anything” defined as “unilaterally cave in to the President’s entire agenda”). But doing nothing cuts both ways. It’s not like the Democrats are proposing a raft of great laws that would save our country. And in many cases, they are opposing them for stupid reasons:

A high-profile Senate bill that would dismantle Fannie Mae and Freddie Mac suffered a blow this week when key Democrats decided not to support the legislation, likely wiping out its chances of advancing to the floor this year.

The bill has enough votes to pass the Senate Banking Committee, which plans to consider the measure next week. But the bill’s sponsors — Sens. Tim Johnson (D-S.D.) and Mike Crapo ­(R-Idaho) — failed to win over the committee’s liberal Democrats and secure a larger majority.

Without more support, Majority Leader Harry M. Reid (D-Nev.) is unlikely to move the measure to the full chamber, and its chances of gaining traction next year are unclear. The setback comes despite bipartisan support for the bill on the committee and suggests that the effort to revamp the nation’s housing finance system could stretch on for years.

The bill would gradually unwind these two behemoths and shift the risk back to the private sector, where it belongs. This has run into a firestorm of opposition from groups that want the GSE’s to loan more money to low-income groups as well as people who want to re-inflate the mortgage market and the derivatives market.

The liberal intelligentsia had been desperately trying to pretend that Fannie and Freddie — who controlled the lion’s share of the imploded mortgage market — had nothing to do with the financial crisis. They are wrong about this, cherry-picking the data that support their cause. But they are wrong on a more fundamental level as well.

The fundamental error is that encouraging poor people to buy houses is a bad thing. Not just bad for the economy, not just bad for the markets, not just bad for any of the reasons usually cited. It is bad for poor people. Buying a house for anyone is a marginal investment at best, unless it comes with a lot of land. I bought my house because I value the things that come with home ownership — stability, responsibility, possession — and because it is a form of forced savings. I also have a good credit rating so my loan was cheap. But unless you’re investing in rental properties, a home is a solid investment, not a great one. And it’s a terrible investment if you have poor credit, move a lot, have a shaky job situation or aren’t very good with money — traits that are very common among the poor.

Look at what happened during the financial crisis. Thanks to efforts to get the poor to buy houses, they had almost all of their wealth tied up in housing. When the bubble popped, it destroyed what little wealth the poor had:

The chart above splits U.S. homeowners into net-worth quintiles, and plots housing as a fraction of all assets for each quintile in 2007. For the poorest homeowners, houses were by far the most important thing they owned going into the Great Recession, making up almost 80 percent of their total assets. Another way of saying this is that the poor held very few financial assets such as stocks, bonds or mutual funds. On the other hand, housing was a much smaller part of the overall asset portfolios of the richest households — less than 20 percent.

So the poor were much more vulnerable to a crash in housing prices in 2007 than the rich were. In fact, it was even worse for the poor because they used so much debt to purchase their homes. Above, we also plot mortgage balance as a fraction of home value in 2007 for each of the net-worth quintiles. For example, if a household owned a home worth $100,000 and had a mortgage of $80,000, then the household would have a mortgage balance that was 80 percent of the home’s value.

Leverage can be a very dangerous thing for borrowers when their home values plummet. Continuing the example above, if someone has a $80,000 mortgage on a $100,000 home, and the home drops in value by 20 percent to $80,000, then the homeowner loses $20,000, or 100 percent of their equity in the home. Home prices fell 20 percent, but the homeowner lost 100 percent. That’s the effect of leverage!

The so-called “ownership society” encouraged this behavior under the belief that housing was a magical money maker that would turn poor people into rich people. Rich people own homes; therefore owning homes must make your rich. But it doesn’t and it never will. Owning a house is not a path to sudden riches. It is, at best, a sound investment if you have the means, the stability and the discipline.

Not that Fannie and Freddie have learned from their experiment in sucking away what little wealth the poor have. Just today, the overseer of the GSE’s announced that he wants to expand their role in the markets, to encourage people to buy houses and to not lower the caps on their mortgages. This is being done to “stimulate the economy”. But we’ve been down this road before. The only things that got stimulated were Wall Street crooks and mortgage sharks. Everyone else ended up getting “stimulated” right up the keister.

Enough. End this madness. End the GSE’s. Let’s not go down that road again thinking that this time, it will be different. If the President and his sycophantic media want Congress to “do something” I suggest they start right here with a bi-partisan effort to finally end this failed experiment.

At Least He’s Honest About It

Building on Alex’s post on income inequality, I note that Mathew Yglesias published this over at Vox. Yglesis advocates for raising the top marginal rate on salaries above $10 million to 90% and the inheritance tax of estates over $10 million to 90%. His argument is that the Laffer Curve is largely bunk and there is no evidence that raising incomes that high would seriously hurt the economy, at least if it were confined to the upper strata of income.

Let’s put aside a few things. Let’s put aside that France tried to raise the top tax rate to 75% and it was a disaster. Let’s ignore that even when that marginal tax rate was 97%, it didn’t stop rich people from being rich*. Let’s ignore that while many economists dispute where the peak of the Laffer Curve is, no one thinks its near 90% or doesn’t exist. Let’s ignore that when you add in state, local and Medicare taxes, this would mean a marginal rate of over 100%. Let’s ignore that previous efforts to tax the evil stinking rich have often resulted in a game of rich person whack-a-mole where they just get income from different sources. In the 90′s, the Democrats put a cap on the amount of CEO pay that could be categorized as a business expense. The result was that CEO’s started getting paid in stock options, which contributed directly to the tech bubble.

No, we’ll put Yglesias’ economic illiteracy aside. Instead I want to applaud him. Because he admits that a 90% marginal rate will bring in little if any revenue. What he argues is that this would stop corporations from paying such huge salaries and therefore pay more to lower level employees. Or something. And high taxes on estates would stop people from inheriting massive wealth. Or something. His argument is that this would address growing income inequality. No word on whether he also thinks cutting the legs off of tall people would help short people dunk basketballs.

I’ve said before that raising taxes on the wealthy isn’t really about revenue. Increases in the marginal rate would increase revenues, although not as much as tax reform would. But that’s a side effect. A huge amount of the motivation for raising taxes on the rich is redistribution. As Barack Obama himself said, it’s about spreading the wealth around. So at least Yglesias is admitting what we all know.

Of course, this won’t go anywhere. Despite the best efforts of the wealth redistributors, the American people don’t want a 90% marginal rate. There is broad support for the rich to pay more, but not at this level. So, in the end, Vox is running an article that is just about as grounded in reality as the most fantastic libertarian fantasy.

(*It’s a funny thing. Jjust as wealth and income inequality are coming back into vogue thanks to Picketty’s new book, I am growing more and more suspicious of it. I am beginning to suspect that the “equality” of the mid-20th-century was a product of how we measure it, not a real phenomenon. Rich people don’t get rich by letting the government take their money; they find ways to shelter it. The 97% marginal tax rate we enjoyed until the 1960′s came with a lot of shelters so that very few people actually paid it — and often it was someone who’d made a new fortune and was trying to raise themselves up into the ranks of the rich. The 97% rate was mainly a way of beating down rising stars so that the rich would remain pure and blue-blooded.

Liberals understand this to some extent. When conservatives point out that capital gains revenue boomed after the tax rate cut, they correctly reply that the taxes reaped from ordinary income fell by a greater amount. The rich just changed how they were getting paid. I suspect the supposed happy valley of income equality was similar but don’t have the resources to do the research.

I am also growing dubious of using income and wealth as pure measures of inequality. It makes things convenient for economists, but doesn’t necessarily tie to reality. Housing and food, relative to income, are much cheaper now for poor and middle class people than they used to be. Most of the working class can now afford homes; they used to almost all rent. Measures of leisure time show that the poor and middle class have more of it than they used to. Just to take examples from my own family: one set of grandparents were middle class. They had a maid, as almost everyone in their social stratum did. No one has maids anymore because they are paid too much (and, it should be noted, other opportunities have opened up to the working class). On the flip side, my other grandfather worked two jobs and had a working farm just to stay functionally poor.

I suspect we are focusing too much on money measures and not enough one thing in life that really matters: time. This is one of the big reasons that I suspect Picketty’s trendy book — like Das Kapital before it — will eventually be unravelled by better minds.)