TOPICS IN POLITICAL ECONOMY

DOES THE AARP RULE THE COUNTRY?

The dictionary defines gerontocracy as “government based on rule by elders.”  After studying recent trends in household income, I conclude we have arrived at that point. Furthermore, our “elders” are essentially the lobbyists for the 37 million members of the American Association of Retired Persons (AARP).

Consider the charts below, based on the Census Bureau’s well-regarded Current Population Survey (CPS).  I have emphasized median incomes, so that an equal number of households have lower and higher incomes than the median household in that particular age group.

Steady Growth in Income. Old folk, defined as those living in households headed by someone 65 years of age or older, typically draw on savings, in addition to income, to support themselves. They have seen their incomes increase at a remarkably steady pace throughout the last 30 years.  Not even the nasty recession of 2008-2010 made much of an impact on them.

 

 

If we wanted to include Federal government outlays on Medicare in old folks' income (which the CPS does not), that would have added 65% or $524 billion in 2010 to their household income of roughly $800 billion. A more complete accounting would also include the numerous housing, nutrition, homecare, energy assistance and transportation subsidies for the elderly.

Going Nowhere.  Meanwhile, the youngest households are going nowhere on the income scales, even while many try to pay off their staggering level of college loan debt. Despite the rise in mean (average) incomes, the median real income of such households, which numbered 6.1 million in 2010, has stagnated over the past several decades.  In fact it was lower in 2010 than in 1990, a sharp contrast to the 15% gain for the old folk.  Although not shown here, between 2000 and 2010 median real incomes fell for all income groups - except for the 65+ age group, which enjoyed a 7.5% increase.

 

 

These generational divergences are an unhealthy and worrisome trend. In effect, the older generation is squeezing younger generations via the iron fist of government via Medicare, overly generous pensions for its employees, and a multitude of elderly-oriented programs.

In short, the AARP, which stoutly defends every big and little government subsidy which benefits its members is doing a great job for its constituents.  Maybe the Occupy Wall Street crowd should take its show to AARP headquarters at 601 E Street, NW in Washington, DC and ask the old folks to exercise a bit of restraint.

 

 

 

 

 

 

 

 

 

 

 

 

The dictionary defines gerontocracy as “government based on rule by elders.”  After studying U.S. trends in household income, I conclude that not only have we arrived at that point, but that our “elders” are essentially the 37 million members of the American Association for the Advance of Retire Persons (AARP).

Consider the charts below, based on the Census Bureau’s well-regarded Current Population Survey (CPS).  I have emphasized median incomes, so that an equal number of households have lower and higher incomes than the median household in that particular age group.

Steady Growth in Income. Old folk, defined as those living in households headed by someone 65 years of age or older, have seen their incomes increase at a remarkably steady pace throughout the last 30 years.  Not even the nasty recession of 2008-2010 made much of an impact on them. 

 

If we wanted to include in old folks’ income Federal government outlays on Medicare (which the CPS does not), that would have added  65% or $524 billion in 2010 to their household income of roughly $800 billion. A more complete accounting would add in special housing, nutrition, energy assistance and transportation subsidies for the elderly.

Going Nowhere.  Meanwhile, younger folk are going nowhere on the income scales, even while they try to pay off their staggering level of college loan debt. The median real income of such households, which numbered 6.1 million in 2010, has stagnated over the past 20 and 30 year periods.  In fact it was lower in 2010 than in 1990, a sharp contrast to the 15% gain for the old folk.  Among the 45-54 age group, median real incomes fell 14% between 2000 and 2010.

These generational divergences are an unhealthy and worrisome trend. In effect, the older generation is squeezing younger generations via the iron fist of government via Medicare, overly generous pensions for its employees, or free public transportation.

In short, the AARP, which stoutly defends every big and little government program which benefits its members is doing a great job for its constituents.  Maybe the Occupy Wall Street crowd should take its show to AARP headquarters at 601 E Street, NW in Washington, DC and ask the old folks to exercise a bit of restraint.

 

THE STUDENT LOAN BROUHAHA: GOOD NEWS AND BAD

The student loan "bubble" has been swelling for years, puffed up by college adminstrators, spendthrift politicians, and  misleading (self-interested?) academic analyses that promise sharply higher incomes later in life for all those with college degrees. 

This is why the current brouhaha ("a noisy and overexcited critical response, display of interest or trail of publicity") over a scheduled increase in loan interest rates from 3.4% to 6.8% is actually helpful in focusing attention on the implications of a well-meaning program gone askew.

If Congress and the President decide to keep the interest rate at 3.4%, that would reduce currently forecast Federal government revenues by roughly $6 billion between 2012-2017, according to the Congressional Budget Office. 

The Bad News. The down side to the brouhaha is that both Republicans and Democrats, with eyes on college-age voters, want to keep the rate at 3.4% (Mitt Romney has endorsed a one year extension). In other words, they want to continue to encourage young people - and their parents - to borrow for college degrees that, on average, are of questionable value. 

In a recent piece entitled "The Imperiled Promise of College," New York Times op-ed columnist Frank Bruni  observed that  "college is a luxury item with newly uncertain returns." He might have added that a measurable factor in making college a "luxury item" has been the availability of cheap student loans, a point which Arthur Hauptman, in the respected blog "Inside Higher Education," expands upon.

The Good News.   The bright side to the brouhaha is that Congress recognizes the lost revenues must be balanced by either tax increases or spending reductions if the budget deficit is not to be increased.  That is progress.

Democrats are solidly lined up behind a tax increase on either oil companies or "the wealthy."  Republicans would make up the lost revenue by defunding a new "preventive healthcare" program that wormed its way into the massive Obamacare legislation.

In other words, the student loan issue frames the question very clearly: do we pay for new legislation by higher taxes or cutting spending in some other program? Put another way, the fundamental issue is, do we wish to increase the role of government in the economy or to constrain it?

It would be commendable this fall if electioneering politicians, when discussing Federal taxes and spending, could go beyond clever sound bites and debate this fundamental issue.  And that they recognized that "good budgeting is the uniform distribution of dis-satisfaction." 

 

 

DEFICIT REDUCTION: THREE CHEERS FOR SENATOR TOOMEY

The clock is running out for Congress's "super committee" to come up with credible spending cuts and additional tax revenue to avoid disruptive meat axe cuts throughout the budget or "kicking the can" down the road, again, with very unpleasant consequences in financial markets.

There still is light at the end of the tunnel.  The good news is that forty House Republicans joined with 60 House Democrats in a letter to the Committee to urge it to  "consider all options for mandatory and discretionary spending and revenues" to reduce the deficit, over time, by $4 trillion.

In addition, some Tea Party types appear to have learned to how to add and discovered that even draconian spending cuts alone will not achieve desired goals.

The Toomey Proposal.These developments have now been followed up this week by super committee member Senator Toomey's eminently sensible proposal to raise tax revenues by almost $300 billion over the next decade.  This would be done largely by limiting tax breaks for those itemize deductions on their income tax returns. 

At the same time, the top tax rate would fall from 35% to 28% and the bottom rate from 10% to 8%. The net effect of the Toomey proposal is to raise taxes for individuals earning over $174 thousand and married couples making over $212 thousand and raise $290 billion in revenue.

Senatory Toomey's initiative follows closely the proposal developed by Martin Feldstein and his colleagues, discussed and advocated in this blog earlier in the year (April 19).

The Arithmetically-Challenged.  It is now liberal Democrats who appear to be arithmetically-challenged.  They don't understand that you can reduce marginal tax rates for upper income types and if you plug tax deduction loopholes at the same time, you can actually increase their total tax bill. Take a look at this post by a Daily Kos contributor, inspired by a New York Times article, for a sample of this illiteracy.

Let's hope that super committee negotiations will now revolve around the ratio of spending cuts to tax revenue increases. If liberal Democrats want more tax revenues and fewer spending cuts they should specify which remaining loopholes should be plugged.

Caveat: super committee members of both parties should not think they can outsmart financial markets by clever accounting tricks and dubious assumptions. Yes, the Greeks got away with it for several years, but they - and the rest of the Euro bloc - are now paying the price for that deception.

 

DEFICIT REDUCTION: A MODEST START TO THE END GAME

The Washington sausage factory labored mightily these past few weeks and, to mix meat-processing and baseball metaphors atrociously, hit a single at the last minute, before an effective Treasury default.

We got legislation upping the debt limit, a $900 billion down-payment of spending cuts (over 10 years) with promises of $1.5 trillion more, but no immediate revenue-raising measures.  Both houses of Congress passed the legislation with comfortable bipartisan majorities. We are assured of another contentious set of negotiations before the end of November on where to find that $1.5 trillion in cuts.

Messy and Modified. The deal is best described as a messy, modified "kick-the-can-down-the road"  effort, and less credible than I thought likely in mid-July. Understandably, it was not robust enough for Standard & Poor's to keep its AAA rating on long-term U.S. Treasury securities.

The "no tax increase" mantra of the Tea Party types was strong enough to rule out any deal between the Republican leadership and the White House on revenue increases for substantive cuts in entitlement programs this time.  But the odds are that such a deal will emerge in the negotiations between now and Thanksgiving, perhaps along the lines of the aborted $4 trillion dollar proposal worked out between the White House and House Speaker Boehner in early July.

The S&P Downgrade. In addition to increasing modestly the U.S. Treasury's cost of borrowing, the political implications of last Friday's S&P downgrade on American prestige around the world should help to sober up the Tea Party.  These developments ought help to convince at least a few of its members that modestly increasing tax revenues while plugging loopholes ("tax expenditures") and simultaneously reducing personal and corporate tax rates is not only possible but good public policy as well.

From now on, all eyes will be on the 12 Senate and House members of the "Joint Select Committee on Deficit Reduction" who will be at bat from now until Thanksgiving. Surely a majority of them can hammer out a sensible program to bring that man on first base all the way home.

  

DEFICIT REDUCTION: END GAME AT HAND?

"Never," some wag once wrote, "watch sausage being made or complex legislation emerge from an elected legislature. It's very, very messy."

Certainly the high-profile struggle between Republicans and Democrats in the Congress to bring the Federal deficit under control qualifies as a case in point. 

The President Joins the Game. After a very late start, President Obama has finally joined the melee.  It appears that he has now read last December's report from his own Commission on Fiscal Responsibility and Reform - and has suddenly divined that running for re-election in 2012 being able to claim credit for a substantitive and operative deficit-reduction plan would be a real plus. In this he is belatedly following in the path of numerous Republican state governors and a few Democrats, such as New York's Governor Cuomo.

The action-forcing event, something politicians always require to address seriously any major issue, is the need to raise the Federal government's borrowing limit at a time when deficit hawks are in control of the House of Representatives.  The way for a solution, however, has been prepared by literally years of comprehensive, bipartisan analysis and discussion - most prominently by the work of the Peter Peterson Foundation and its offshoots, e.g. the Concord Coalition and its nationwide roadshow, the Fiscal Wake-Up Tour, starring top Democratic and Republican policy wonks.

Despite the heated words being flung about on the issue of taxes, the brouhaha conceals impressive areas of likely agreement:  major reductions in farm subsidies, substantive changes in the design of the social security system to reduce its costs, and serious reductions in defense spending.  By some reports, roughly $2.4 trillion in such cuts over the next decade have been agreed by Vice President Biden's group of Congressional leaders.

How to Push the Ball Over the Goal Line. The end game is now being played: how much in additional tax revenue should be sought?  No serious analysis of the situation can avoid including such revenues as part of a credible solution. As I have suggested in this space earlier (April 19), the most desirable feasible solution is to limit all tax deductions (also generally known as "tax expenditures") to, say, 2% of "adjusted gross income" on personal returns. 

Combined with a comparable approach to corporate returns, this approach would raise about $1 trillion if enacted for 2012, in addition to "leveling the playing field" for persons and companies in different circumstances, a highly desirable side effect. Republicans could cite the Reagan Administration's 1986 tax reforms as embracing the same approach;  Democrats could feel satisfied that "the rich" were going to pay a lot more in income taxes, even if statutory rates are not raised.

The almost daily pronouncements from the White House and Congressional leaders must be viewed as part of an elaborate game in which multiple winners (everyone running for re-election who votes for a credible deficit reduction package that spreads pain uniformly) could emerge. Conversely, a failure to agree on such a package, combined with a U.S. Government default, would yield multiple losers.   The academic game theorists must be having a great deal of fun in analyzing the stream of statements emerging from the sausage factory.

Method in Their Madness. The most interesting analysis of the Republicans' rhetoric against "no tax increases" can be found in Ross Douthot's July 10 column on "The Method to Their Madness."  As he puts it, "past experience, present politics and future trends all suggest that conservatives should be aiming for the nearly perfect [e.g. no tax increases at all] in the current negotiation."  This is largely because they know that under current law, the Bush era tax cuts expire at the end of 2012 and that, historically, bipartisan budget deals usually deliver fewer spending cuts than promised."

It is possible that some short-term, "kick-the-can-down-the-road" fix will be the best that Congress can do this summer.  However, my forecast of the most likely outcome, as of July 12, is that an imperfect but substantive package of spending cuts and revenue raising measures will be passed by the Congress with slim bipartisan majorities, along with a just-in-time borrowing limit increase.

Anybody want to offer me odds for a friendly bet?

   

GREECE, THE DOMINICAN REPUBLIC AND THE TENNESSEE VALLEY AUTHORITY

What do Greece and the Dominican Republic have in common?

At the rate the Greek government's financial position is unraveling today, I suggest that the Dominican Republic in 1904 is an emerging parallel of sorts.

How to Lose Sovereignty. In decades prior to 1904, the Dominican government spent far more than it could raise in taxes and import duties.  It made up the difference by borrowing from abroad.  When it became essentially bankrupt, foreign creditors began looking to their own governments to enforce their bond covenants, perhaps with military forces. Spurred on by the prospect of heightened European influence in the Caribbean, Teddy Roosevelt unilaterally intervened under a broadened interpretation of the Monroe Doctrine – the “Roosevelt Corollary.”

With grudging Dominican assent, the U.S. took over the collection of customs duties, the government’s primary revenue source.  Under the U.S., the corrupt collection system was reformed. Forty-five percent of proceeds were given to the Dominican government and the remaining 55% used to service the country’s foreign debt, much to the relief of foreign bondholders.

The result, as diplomatic historian Thomas Bailey has summarized it, was that “with the sticky fingers of grafting politicos tied, customs receipts increased, debts decreased and revolutions declined.”

Greece:  More Cooks in the Kitchen. While Greece has yet to default on any currently outstanding sovereign debt, its size and economic situation make most observers predict such an event within the next 12 months.  The cast of lenders is more complex than in 1904.  In addition to foreign bank lenders and their governments, the International Monetary Fund and the European Central Bank are deeply involved.  The European Union has jury-rigged a special bailout fund.

This cast of characters has agreed with the current Greek government on one set of measures the country must take to receive further assistance: spending cuts, a €50 billion sell-off of state-owned companies and raising an additional €15 billion annually over the next four years from cracking down on wide-spread tax evasion.  Asset sales might be managed through a fund managed by “international experts.” (Unfortunately, customs duties aren’t a big revenue source for most developed countries any more, thanks to substantial tariff reductions in recent years.)

But there is substantial disagreement over whether a “soft” default should also be considered part of the solution to Greece’s problems.  This might entail, for example, reducing the interest rate or extending the maturity on existing bonds, both privately-held as well as on the €110 billion “bailout” funds advanced by the EU and others. Why shouldn’t lenders as well as taxpayers suffer from governmental incompetence?

The argument against such a move rests largely on fears of “financial contagion” and added problems for Ireland and Portugal, who are also suffering from borrowing binges.

But everyone should recognize that Greece is the champion defaulter of all times. The first recorded series of sovereign defaults took place in the fourth century B.C. on loans from the Delos Temple taken out by 13 Greek municipalities.  Since modern Greece became independent in 1832, it has spent nearly 50% of the ensuing years in a state of default or under a rescheduling arrangement with foreign lenders, according to Reinhart and Rogoff in “This Time is Different”.

“What Goes Around. . .”  In other words, “what goes around comes around.”  And now Greece, like Haiti in 1904, is losing control over taxes, spending and state-owned assets to its foreign creditors.  It’s a lesson that the U.S. Congress might bear in mind as they confront our our enormous deficit and foreign borrowings.  

For starters, let's sell the government's massive power company, the Tennessee Valley Authority.  “Do I hear $5 billion for openers . . .? “

SHALE GAS: A CASE STUDY IN LETTING MARKETS WORK

They are building a big new steel mill in "the rust belt" again - and it has very little to do with Washington's "stimulus" programs.

V&M Star is spending $650 million to build a plant in Youngstown, Ohio for making small-diameter steel pipe  - the kind that is used to transport natural gas from the well-head to transmission lines. It will employ 350 well-paid workers. The company is a subsidiary of a French pipe manufacturer.

The business case for the mill is clear.  Thanks to new technology, extracting natural gas from shale formations deep below the surface in Pennsylvania, New York and elsewhere is now economically feasible, even if well-head prices are down substantially from several years ago. And when that gas comes up, you need to get it to users, and that means you need pipe.

According to a recent Penn State University study, in 2011 in Pennsylvania alone the shale gas industry will probably produce 2.5 billion cubic feet of gas a day, about 8 times its 2009 production. The industry will drill 2,200 wells this year, increase employment by 25,000 jobs and spend over $10 billion for equipment, services and lease-holder payments.  The Marcellus shale field, where all this activity will take place, has the potential to be the second largest natural gas field in the world.

Private Perseverance.  Much of the credit for commercializing the technology involved is owed to a Texas oil and gas man, George Mitchell.  In the early 1980s, faced with diminishing reserves, he persevered over many years and multiple nay-sayers to develop a way to extract shale gas from deep underground with the combination of horizontal drilling and hydraulic fracturing ("fracking"). His area of operations, the Barnett shale in northwestern Texas, was the initial success story of using this new technology package. 

Mitchell's accomplishment is eeriely similar to the history of the first commercial U.S. oil discovery.  In the 1850s, rapidly diminishing supplies and rising prices for whale (lamp) oil had encouraged a group of East Coast businessmen to research the properties of Pennsylvania "rock oil." After a favorable report from a Yale faculty member, they hired "Colonel" Edwin Drake to drill (an innovation) rather than dig for oil at Titusville, Pennsylvania. In August of 1859, he struck oil.  Within two years wells were being completed with production levels of several thousand barrels a day.

Shale gas today is providing about 25% of U.S. natural gas supplies, and that could rise to 50% over the next two decades.  The result is a revolution in energy economics, with lower cost natural gas becoming, according to Daniel Yergin, "a highly competitive alternative to both nuclear and wind power and even to coal generation."

It now appears that the single most important development in reducing our dependency on imported oil and coal-fired electricity will be innovative technology championed by a Texas gas driller. And with substantial potential for shale gas production in France, Poland, China, and Argentina and other countries, world energy trade and politics appears headed for brand-new scenarios.  

Public Waste. Government support for Mitchell's idea was minimal. Instead, the Department of Energy threw $88 billion at synfuels, $20 billion on nuclear fusion, and is still subsidizing ethanol at a cost of $6 billion a year.  No wonder there have been repeated calls over the years for the abolishment of the Department of Energy.

The mindless throwing of taxpayer money by politicians at "problems" has much to do with the federal government's massive budget deficits. Energy policy has been a notable contributor.

An alternative way of dealing with so-called energy "crises" (we seem to have one every 5-10 years) is to let prices in the marketplace send signals to private risk-takers like George Mitchell and Colonel Drake's backers. That's certainly the lesson to be learned from the story of shale gas drilling. 

OBAMA, DEFICITS AND TAX EXPENDITURES

He came to the party late and bad-mouthed some of the invited guests. But at least President Obama's recent talk on the government's budget deficit at Georgetown University put the nation's great debate over how to resolve the looming national debt crisis up front.

There are many facets to this discussion, the most important of which is conflicting visions of the proper functions of the federal government.  Here, however, let's focus on one area where a constructive consensus is most likely to be found: tax expenditures.

Let Me Count the Ways.  The government has numerous ways in which it can subsidize different sectors of the economy: "earmarks," loan guarantees, acturarially unsound insurance schemes, etc.  However, the biggest tool in Washington's kit is "tax expenditures" - permitting taxpayers to reduce their liabilities if they spend or invest money involving the subsidized activity: for example, residential mortgage payments, charitiable donations, installing solar panels, or investing in municipal bonds.

Broadly defined, such subsidies (personal and business) are likely to cost the federal government $1.1 trillion in fiscal year 2012. (See Table 17-3 in the Office of Management and Budget's "Analytical Perspectives" supplement to the Budget.) These forms of subsidy are attractive to politicians (and all the beneficiaries) because they do not show up in the federal government's yearly outlay budget. They have long lives because they are normally not subject to periodic re-authorization. 

The President's deficit commission estimated that eliminating most of the tax expenditures affecting individuals would permit a substantial reduction in personal tax rates.  Looked at another way, instead of reducing rates, maintaining them at current levels would generate substantial amounts of additional revenue.  The same choice would arise if corporate tax expenditures were severely curtailed.

Lessons from the Past.  In other words, you don't have to increase today's statutory tax rates to generate more revenue - you only have to eliminate loopholes - e.g. tax expenditures. What counts is the "effective tax rate."  This was the deal that resulted in the widely-acclaimed  Reagan Administration's 1986 tax reform act: marginal tax rates were cut, but tax expenditures were curbed.

In 1986, tax rates on labor and capital (capital gains and dividends) were equalized, a poltically sensible step that should probably be repeated today.  Total tax revenue remained roughly steady, thanks largely to an increase in the capital gains tax to 28%. "The rich" still paid just as much as before, on average. But the disincentives to work, save and invest productively were drastically reduced, and helped spur economic growth.

Clever Politics.  Martin Feldstein, a former chairman of the President's Council of Economic Advisors, and colleagues have just released a most stimulating short paper on this issue which includes a clever proposal . They propose to make the politician's burden in reducing personal income tax expenditures/subsidies much easier: do not eliminate any individual tax break, e.g don't single out any special interest group like homebuilders or holders and issuers of tax-free bonds.  Simply limit total deductions to, say, 2% of 'adjusted gross income.'  That cap, if in effect with current tax rates, would have raised about $280 billion for the Treasury in 2011. 

Who would pay that extra $280 billion?  For starters, remember that roughly 45% of households pay no income tax - or receive a check from Washington (the "earned income tax credit"). 

The respected Tax Policy Center has calculated the impact of reducing tax expenditures under a somewhat different set of scenarios, but estimates that the top 20% of income earners would see tax bills increase an average of 10 percentage points from current levels with an average tax rate of 36%-40%. The bottom 20% of taxpayers would see an increase of about one percentage point.

Putting an absolute limit on the amount of deductions ($10,000?) would increase the upper income earners' tax bill - and might make for a deal that President Obama and Nancy Pelosi could buy into, while maintaining current statutory tax rates.

Only Half the Story.  The revenue implications of cutting back on tax expenditures are only half the story.  An equally important reason for wiping them out is to remove the distortions and deadweight on the economy that they impose. For example, the bias against renting, employer-paid "Cadillac" health insurance, and the complexity and cost of calculating personal tax liabilities.

The corporate sector's tax expenditure benefits (not detailed here) are just as glaring, starting with such gems as the subsides for corn ethanol, wind farms, and the myriad ways in which it takes advantage of municipalities' tax free borrowing privileges.

As we were reminded by the IMF and Standard & Poors right after the President's Georgetown speech, the clock is ticking on our deficit bomb. The ingredients for a credible, workable way out are now fully in hand.  It is time for Washington politicians (the Senate's "gang of six"?) to craft and deliver that program over the next few months.   

REGULATION, POLITICS AND HOMEOWERSHIP

OK, John Q. Public, you asked for it:  "Stop those greedy bankers from making crazy loans and selling them to dumb investors."

Here's the federal government's response, published this week:  233 pages of proposed regulations and their rationale from the six different regulatory agencies in Washington who deal with the financial sector.

In a world with less government intervention and fewer bail outs, financial institutions wouldn't need another 233 pages of regulation - they would be more careful to begin with. But it's not a perfect world, so we are stuck with a decidedly second-best approach.

All that careful verbiage tries to do only two things: (1) Ensure that the bankers keep 5% of the credit risk in any loans they make and then sell to others ("securitization") and (2) Exempt "qualified" residential and commercial mortgages, auto loans, and similar financial assets from rule (1).

The QRM. The most prominent features of a "qualified" residential mortgage (QRM) are the requirement for a 20% down payment and no financing of closing costs. Just like in the good old days, before the "affordable housing," homebuilding and mortgage banking lobbies managed to weaken lending standards and help set us up for the "sub-prime" financial fiasco.

Of course, the bankrupt government-sponsored mortgage giants, Fannie Mae and Freddie Mac are exempt from the new rules over the near term, which dilutes their immediate impact substantially.

So, who's out in front protesting that the rules defining "qualified" mortgages are "too strict?"  The same old faces: the Mortgage Bankers Association, National Association of Realtors, the National Association of Homebuilders and the "affordable housing" lobby.

In some ways, it's an American tradition to support home ownership. It goes back to the Homestead Act of 1862, which helped entice settlers to move west of the Mississippi with the promise of free land if they farmed it.  About 1.6 million homesteads were granted. 

Stacking the Deck Against Renting.  But the West has been tamed and settled.  The case today for the federal government to encourage people to incur large amounts of debt to buy a house instead of renting is flimsy, unless you are working for the housing lobby.  Furthermore, homebuying subsidies will cost the federal budget roughly $200 billion this year  according to the government.  Of these, the deductibility of home mortgage interest is by far the largest, on the order of $630 billion over the next five years.

In short, the struggle over what is a "qualified" mortgage is about much more than trying to make our financial system safer.  It is also about powerful special interests trying to make life easier for themselves at the expense of all taxpayers.

TALKING POINTS FOR WOULD-BE BUDGET CUTTERS

Here are some powerful arguments, in one form or another, that most serious budget cutting politicians are using these days.  Readers might pass some of them on to their own elected representatives at the federal, state or local level. 

Reducing government spending in 2011 and beyond has three primary objectives:

1. Reducing current and future budget deficits and the crippling tax burden they mandate for the younger generation. We should not burden young people with old folk's excessive consumption and mindless handouts to business enterprises. Cases in point: lucrative pensions in the public sector, ethanol subsidies, and free bus passes for seniors. 


2. Reduce the needless intrusion of legislation and bureaucrats into how we live and work in our communities.  Cases in point:  the mandated phase-out of incadescent light bulbs, the design of health care insurance, and the font size of highway signs.


3. Head off a future financial “melt down” when investors (foreign and domestic) refuse to buy government debt (Federal, state, and local) - or will do so only at crippling interest rates. Case in point: the punishing interest rates Greece, Ireland, and Portugal have to pay as a result of their financial meltdowns.

Implementation.  Two basic points here:

1. Any set of budget cuts must keep in mind the maxim "the budget is the skeleton of the state stripped bare of all its misleading ideology."  The budget-cutting exercise should establish a consensus of what core functions of government are essential, which are merely "nice to have," and which are egregious rip-offs of taxpayers.  Rip-off case in point: farmers being paid to grow nothing.


2. Pay no attention to the argument, "but my program only costs each taxpayers $1 a year."  There are lots of programs that cost "only" $150 million a year (the number of taxpayers, roughly).  In fact, the Catalog of Federal Domestic Assistance alone lists over 1,600 grant programs for you to apply to (and it excludes most foreign aid programs). If each of these averaged $150 million a year, we are starting to talk big money. 

Case in point: The Corporation for Public Broadcasting (CPB) has objected to President Obama's proposed $460 million advance appropriation for FY 2013  for itself, since it is "only" a 3.4% increase over the prior year. However, the House of Representatives has zeroed out the entire amount, presumably because they believe there is no convincing argument in the age of the internet that the federal government needs to be in the domestic broadcasting business - and it is time to get spending under control.

The best the CPB can do in its press releases is to refer to jobs "at risk" at the 1,300 or so public radio/TV stations around the country - and ask its affiliates to lobby on its behalf over the air (as my local station is doing).  Talk about the dangers of media concentration and Rupert Murdoch!

The struggle to bring government spending (and deficits) under control is similar to that waged by a few, lonely voices who decried the pell mell extension of mortgage credit to poorly-qualified home mortgage borrowers after 2005.  Let's hope the current effort has more success than than the earlier one.