We’re from the Government, and We’re Here to Help You Buy a House

There has been some good analysis of this week’s much-hyped agreement between the U.S. Treasury Department – which facilitated the meeting, we are told, but didn’t use any form of coercion – and mortgage lenders to bail out assist homeowners in danger of being slammed with a much higher monthly payment on their subprime mortgage come January. But there are some elements of the deal that haven’t been greeted with much skepticism – or, indeed, haven’t been reported much at all.

For starters, Treasury secretary Henry Paulson insists the agreement won’t cost taxpayers money. What he really should have said is that it won’t cost federal taxpayers money. But it might cost state taxpayers money. The White House will push Congress to let state governments issue tax-free bonds to fund programs that help homeowners refinance their mortgage. Those bonds have to be paid off by taxpayers some day. I usually like federalism, but this is not the sort I’ve grown to love.

Another part of the deal is to allow the Federal Housing Administration to expand its programs and help refinance 200,000 mortgages. As Paulson reminded reporters, the administration is asking Congress to increase the ceiling on the amount of FHA loans and lower the down-payment requirements to below the current rate of 3% of the home price. And here I was thinking big loans that were handed out with little or no money down were part of what got us into this problem in the first place. Silly me.

Nor is it really clear that the administration’s approach here won’t actually cost federal taxpayers money, either. The proposal allows the FHA to charge loan insurance premiums based on risk, like private lenders do. Currently, all FHA mortgage holders – at a high-risk of default or not – are charged the same amount.  You realize this is a much-needed change when you discover that currently the FHA is running deficit of $143 million because so many of its loans have gone bad and the premiums it collects from all loans isn’t enough to cover the losses. But, as Bloomberg News reports, the post-refinancing default rate of the subprime loans that the White House now wants the FHA to play with could be between 40 to 60 percent.  Taxpayers might get stuck paying for these loans after all.

The implicit theme of these proposals is that Uncle Sam might just be better at this mortgage business thing than the private sector. I guess it might be tiresome to insert a joke here about the U.S. Postal Service, eh?

Scientists to World: Cut Greenhouse Gases Now! World to Scientists: Zip It!

Yesterday, 215 scientists released a petition in Bali - site of a global confab to talk about whether and how we should talk about a future treaty to reduce greenhouse gas emissions - that “begs” the world to cut greenhouse gas emissions in half by 2050. I was quoted in an AP story on the matter to the effect that scientists are in no position to intelligently dictate such a policy. And as expected, some in the blogosphere howled.

I do not believe in leaving public policy to “guys in white coats” - in any discipline. And that’s not necessarily a proposition that vitiates against environmentally-friendly public policy. Climate scientists do not have the training to tell us whether the costs associated with reducing greenhouse gas emissions are less than, equal to, or greater than the costs of business as usual. And that’s something you would want to know before signing off on greenhouse gas emission reductions. When climate economists have explored that matter, they find little to support such emission reductions even if we accept the prognostications about the future coming out of the IPCC.

Likewise, economic calculations about the same are heavily predicated on how you feel about future costs and benefits. If you believe in valuing dollars and lives in, say, 2150 as much as you value dollars and lives today, then it’s hard to accept IPCC reports and not conclude that GHG emission cuts pass a cost-benefit test. If you apply a discount rate of, say, 3, 5, or 7 percent, then it’s hard to accept IPCC reports and not conclude that GHG emission cuts don’t pass a cost-benefit test. But how you value the future is subjective, and economists have no objectively “better” preference regarding that matter than you or I.

Many have argued that we should value our great grandchildren’s lives and money as much as we value our own. Fine - there is nothing objectively wrong with that belief. But if you do, hand in your Rawlsian membership card. That’s because you’re endorsing a policy that will transfer wealth and well-being from the relatively poor (us) to the very rich (them). That is, even if the Stern Review is correct about the economic costs of climate change, real per capita income in developing countries will be higher than that of the developed world today by 2100. Moreover, if you value the future every bit as much as you value the present - and thus embrace, say, a 0.1% discount rate - then simple math suggests you ought to be saving just about everything you earn.

I do not believe that “the experts” in any field should be dictating climate policy because there are plenty of important value judgments built in to those policies and experts however defined have no objectively better values than you or I. I do believe, however, that any serious reflection on the ethics of reducing greenhouse gas emission will find that the case for such a policy is harder to make than you might think, even if you accept what the IPCC is telling us.

Supreme Court and GITMO (Part 2)

Because of widespread interest in yesterday’s Guantanamo case, the Supreme Court released the audio of the oral argument.  Since Justice Anthony Kennedy is considered to be the deciding vote in what will be a 5-4 decision, I thought the most interesting and perhaps pivotal moment came at the very end of the oral argument.  If you have any interest in this debate at all, click on the audio link above and then skip to the good part at the 1 hour, 21 minute mark and just listen to the final three minutes. 

Justice Kennedy asks a question and attorney Seth Waxman begins his response, explaining the “Kafkaesque” procedures that are supposed to be a “substitute” for the writ of habeas corpus.  But then Waxman’s alloted time expires! Had the late Chief Justice William Rehnquist been presiding, he would have immediately pounded his gavel and thanked the attorneys–even if Waxman had been in mid-sentence.  Very strict about the clock, among other things. Fortunately, Chief Justice John Roberts was presiding–because he allowed Waxman an extra minute to complete his powerful closing argument in response to Justice Kennedy’s question.

Previous coverage here.  Podcast here

More Cheerful Evidence of Tax Competition

Gordon Brown’s greed for more tax revenue is probably going to backfire. Britain’s “non-doms” bring considerable prosperity to London, but the Financial Times reports that there already is evidence that they are moving to Switzerland - and taking the UK’s hedge-fund industry with them - because of the Labour government’s compulsive desire for bigger government:

Scores of London-based hedge fund managers are moving part of their operations to Switzerland in readiness for a proposed UK tax crackdown on non-domiciled residents, according to Kinetic Partners, an investment management consultancy. London has become a popular base for the industry, with the city’s 950 or so hedge fund firms managing about 80 per cent of European hedge fund assets. But according to David Butler, founding member of Kinetic, at least 40 per cent of the founders of the consultancy’s 300-plus hedge fund clients are non-domiciles and they are reportedly getting increasingly jittery about the likelihood of a harsher tax regime. … From next April, non-doms who have lived in the UK for more than seven years will face a £30,000 a year levy if they choose to keep their offshore income and gains out of the tax net. However, a greater threat to the hedge fund industry comes from proposals to crack down on offshore trusts that also allow non-doms to escape tax on their investments. “Remove this [exemption] and the general view that is starting to prevail is that £30,000 is the thin end of the wedge,” said Mr Butler. … “There will come a time when people are using the UK just for their finance and back office operations. The key value operations will move offshore.”

This is why tax competition is so important. Politicians (at least some of them) are learning that the geese with the golden eggs can fly across the border. This means that there is growing pressure to lower tax rates and reduce the tax bias against saving and investment. So long as international bureaucracies such as the OECD and European Commission do not succeed in their efforts to cripple tax competition, more and more governments will implement better tax policy. Not because they want to, but because a competitive global economy is forcing them to do the right thing.

Food Fight

My post mocking Senators Harkin and Murkowski for micro-managing school menus has triggered a bit of chatter. Matthew Yglesias and Ezra Klein saw a reference to the post on Andrew Sullivan’s site and they both argue that somebody should monitor what kids eat. But they completely miss the point. The debate is not about whether kids should be allowed to eat junk food all day. As a parent, I worry about what kids will eat without appropriate guidance (heck, I worry about what I eat in the absence of adult supervision). Instead, this is a federalism issue. Should these decisions be made by parents and local school boards, or by headline-seeking politicians in Washington? The good news is that at least one presidential candidate is saying no to federal food police:

Fred Thompson wants the government to keep its hands off your dinner plate. …”I’m telling you, I don’t think that it’s the primary responsibility of the federal government to tell you what to eat,” Thompson said to applause when asked if his health care plan included any details on preventative care, a priority for Democratic candidates. “The fact of the matter is we got an awful lot of knowledge,” said the former Tennesse senator. “Sometimes we don’t have a whole lot of will power, and I don’t know of any government program that’s going to instill that.” Thompson, ever a fan of small government, said healthy living should be the responsibilities of families first.

Based on these sentiments, Thompson presumably does not want Congress micro-managing school cafeteria menus. But what about the other GOP candidates? Ron Paul surely is on the right side. Does anybody know where Giuliani, McCain, Huckabee and Romney stand on this issue?

A “Bombshell” on Iran

It has taken me about 36 hours to digest the implications of the new National Intelligence Estimate (NIE) on Iran (.pdf), but I have finally come to some preliminary conclusions. The NIE is, in the words of Washington Post columnist David Ignatius, a “bombshell,” that was “as close to a U-turn as one sees in the intelligence world.”

How to explain this U-turn? Beyond the increased focus on collection from both human sources and intercepted communications, a focus that produced a windfall of new information that, according to a senior official, “unlocked stuff we had, which we didn’t understand fully before,” Ignatius offers some additional insights:

The most important finding of the NIE isn’t the details about the scope of nuclear research; there remains some disagreement about that. Rather, it’s the insight into the greatest mystery of all about the Islamic republic, which is the degree of rationality and predictability of its decisions.

For the past several years, U.S. intelligence analysts have doubted hawkish U.S. and Israeli rhetoric that Iran is dominated by “mad mullahs” – clerics whose fanatical religious views might lead to irrational decisions. In the new NIE, the analysts forcefully posit an alternative view of an Iran that is rational, susceptible to diplomatic pressure and, in that sense, can be “deterred.”

“Tehran’s decisions are guided by a cost-benefit approach rather than a rush to a weapon irrespective of the political, economic and military costs,” states the NIE. Asked if this meant the Iranian regime would be “deterrable” if it did obtain a weapon, a senior official responded, “That is the implication.” He added: “Diplomacy works. That’s the message.”

Who knew? (Hint: Ted Galen Carpenter and Justin Logan, among others.)

Bravo to the intelligence community. Analysts have been singled out (I think unfairly) for criticism on Iraq, but they are to be commended this time around. Some of the credit goes to Director of National Intelligence Mike McConnell and his chief deputies who, according to the lead story in today’s Washington Post, “compelled analysts working on major estimates to challenge existing assumptions when new information does not fit.”

As Ignatius notes, such advice is consistent with that of Sherman Kent, the godfather of U.S. intelligence analysis, who warned “When the evidence seems to force a single and immediate conclusion, then that is the time to worry about one’s bigotry, and to do a little conscientious introspection.”

I am reminded of a comment by John Maynard Keynes, one that has been quoted so often that it has become clichéd: “When the facts change, I change my mind. What do you do, sir?”

Were that question to be posed to George Bush, that most incurious of modern presidents, it appears we already know the answer, at least based on the President’s public remarks. As the Post reported, “Bush defended his approach [toward Iran] during a televised session in the White House briefing room, saying ‘our policy remains the same’ regardless of the new intelligence.” This would seem to confirm that the President does not employ intelligence to inform policy.

But former CIA officer Robert Baer offers a different, and more hopeful, take: while the President will continue to talk tough, Baer says, military action is off the table. Baer suggests that the President himself pushed the NIE to the surface as cover for a 180-degree turn in U.S. policy, and to face down the hawks who are calling for war.

Let’s hope Baer is right.

More Tax Harmonization in Europe

In an unfortunate development, Luxembourg has finally surrendered to demands from other European governments and agreed that online retailers in the tiny duchy should be deputy tax collectors for other European nations. This means that shoppers in countries with high value-added taxes no longer will be able to buy goods and services and benefit from Luxembourg’s 15 percent VAT. This episode is illustrative of the anti-tax competition mentality in Europe, but America faces the same danger. Politicians from high-tax states want to impose a similar scheme (see here and here) in the United States. The International Herald Tribune has the sad details:

Plans to apply sales tax in the country in which services are consumed, rather than the location of the company that sells them, are the latest assault on Luxembourg’s ability to act as a tax haven. …With its low rates of sales tax, or value added tax, Luxembourg has attracted many of the biggest names in online sales, including companies like Amazon.com, Skype and PayPal. Luxembourg levies VAT at 15 percent, the minimum allowed under EU rules. But most EU countries have a higher rate, making the small but prosperous duchy an attractive location for companies offering electronic services. …Until Tuesday, Luxembourg had blocked proposals to levy sales tax at the place of consumption, saying the change would cost it €220 million, or $324 million, a year, equivalent to 1 percent of its economic activity. Taxation matters require unanimous agreement within the EU, but a country like Luxembourg - which has a population of only 429,000 - finds it difficult to withstand pressure from other countries if it isolated. …The deal was welcomed by larger countries, which stand to increase their revenue.