Stimulus Package Is Welfare, Not Tax Cuts

The Bush administration’s propaganda sheet on the ridiculous stimulus package claims that it includes $100 billion in individual “tax rebates” or “tax relief.” The sheet goes on to claim that the relief is “not federal spending that would have little impact on the economy.”

In fact, the $100 billion is simply extra spending; it is a giant one-time welfare program. To pay for it, the government will borrow an added $100 billion, which will impose $100 billion of higher taxes on future generations.

Suppose there was a Democrat in the White House and she proposed $100 billion in cash hand-outs to families. She could structure it exactly the same way as Bush has, but call it a “Family Food and Health Care Supplement.” The minority GOP would probably denounce it strongly as wasteful welfare, which it would be.

But, as we have seen dozens of times since 2001, because the political operators in the White House call themselves Republicans and conservatives, many members of the Republican party appear to be going along with this nonsense.

The $50 billion business tax relief (capital expensing) is a little different. As a temporary break, it makes no sense. If businesses just pull some of their 2009 investment into 2008 to get the break, it just means we’ll have an investment slump next year. All we will have done is, once again, screw around with corporate business plans instead of making permanent reforms to help companies compete in the global economy. 

I’m a supporter of making capital expensing a permanent part of tax law. But enacting expensing temporarily, as we did a few years ago, just makes politicians think of it as a gimmick to be enacted every two years before an election.       

Background on Mortgage Markets

I asked colleague Alan Reynolds a question about mortgages today, and he replied with what I think are some useful points that usually don’t appear in the crisis-obsessed media. Here are what Alan believes are the rough stylized facts:

  • Most foreclosures are prime, not subprime.
  • Half of subprime mortgages are fixed, not ARMs.
  • The vast majority of recent subprime loans were for refinancing, not buying. As house appraisals went up, some just borrowed all the phantom equity and spent it.
  • About 96% of all mortgages are paid on time. Most of the rest are late, but not in default.
  • The main reason for default is that home prices fell in some areas, leaving more owed on the mortgage than the house is worth.
  • Serious delinquency (2-3 months late in payments) is much more common than foreclosure, partly because deals are being renegotiated. The media often confuse numbers of late payers with numbers of actual defaults.
  • Most foreclosures of ARMs happened before the rate adjusted, not after. Often within one year. This was often due to borrower fraud – lying about income and assets. When the house or condo could not be quickly flipped at a profit, those with zero down just stopped paying.
  • Very few subprime borrowers qualified for the lowest teaser rates – most paid about 7% or so from the start, so far as I can tell.
  • The adjustments on ARMs are limited, and with rates now falling some adjustment will be down rather than up.

Finally, Alan notes that there is a lot of misinformation out in the media about mortgages, much of it coming from the Center for Responsible Lending which, in turn, received a lot of cash from John Paulson who just made $3-4 billion by shorting mortgage-backed securities during the panic and hype about “subprime.”

Carter, Reagan and the Poor

My colleague Tom Firey is right on the mark with his nearby blog post dissecting a recent Paul Krugman column on the supposed myths of the Reagan economic record. Allow me to pile on.

Krugman wrote in a January 21 column for the New York Times that the economic record of President Reagan was one of failure. The Reagan years did encompass a recovery from a steep recession, he acknowledges, but then, “By the late 1980s, middle-class incomes were barely higher than they had been a decade before — and the poverty rate had actually risen.”

Let’s bore in on the poverty numbers and the operative phrase “a decade before.”

As everyone knows, Reagan was in office for exactly eight years, from January 1981 to January 1989. To compare his last full year in office (1988) to “a decade before” would take us back to 1978, a period that would include the last two years of Jimmy Carter’s single term. Those two years, it turns out, were absolutely brutal for America’s poor.

The last half of Carter’s tenure was marked by double digit inflation, record high interest rates, and a sputtering economy that fell into recession in the first half of 1980. That stagflationary mix caused the poverty numbers to soar. From 1978 to 1980, according to the Census Bureau, the number of Americans living below the poverty line rose by 4.8 million and the poverty rate jumped from 11.4 to 13.0 percent.

The poverty rate continued to climb under Reagan as the nation labored through a steep recession in 1981-82, a recession largely caused by the Federal Reserve Board’s efforts to slay the Carter-era inflation. After peaking at 15.2 percent in 1983, the rate declined steadily through the rest of Reagan’s time in office. By his last year in office, the poverty rate was exactly the same—13 percent—as it was in Carter’s last year in office. That’s nothing to crow about, but neither is it an increase or an obvious sign of failure.

To compare the last year of Reagan’s presidency to 1978 has the effect of saddling the Reagan record with the last half of the Carter presidency—a neat statistical trick worthy of the current presidential campaign season.

There Krugman Goes Again

In his Monday columnNew York Times writer Paul Krugman claims to (borrowing the headline) “Debunk… the Reagan Myth,” arguing that Ronald Reagan’s economic policies “did fail.” (The column does not mention that Krugman worked for Reagan’s Council of Economic Advisers in 1982–1983.)

In fact, Krugman devotes precious little space to examining (or debunking) Reagan’s economic policies or their performance. The column is mostly a lament that Americans view Reagan positively and that Democrats have not challenged (and may even share) that opinion.

Krugman’s criticisms comprise just seven of the column’s 37 sentences (and three of the seven are throwaway lines). Here they are verbatim:

For it did fail. The Reagan economy was a one-hit wonder. Yes, there was a boom in the mid-1980s, as the economy recovered from a severe recession. But while the rich got much richer, there was little sustained economic improvement for most Americans. By the late 1980s, middle-class incomes were barely higher than they had been a decade before — and the poverty rate had actually risen.

[T]here wasn’t any resurgence [in productivity growth] in the Reagan years.

Like productivity, American business prestige didn’t stage a comeback until the mid-1990s….

In short, Krugman makes four criticisms: Reagan’s policies resulted in (1) stagnant middle-class incomes, (2) an increase in the poverty rate, (3) stagnancy in productivity growth, and (4) stagnancy in “American business prestige.”

Are those claims true and do they show that Reagan’s economic policies “did fail”? Let’s look at the data. (Hyperlinks connect to the relevant federal data sets.)

MIDDLE-CLASS INCOME   To determine the course of middle-class income over Reagan’s presidency, let’s examine the U.S Census Bureau’s Current Population Reports on median real income over time. That is, let’s look at inflation-adjusted family income and household income for families/households that are in the exact middle of all U.S. families/households.

From 1981 to 1988 (which roughly corresponds with Reagan’s tenure), median real family income grew 11.1 percent while real household income grew 10.3 percent. Those growth rates are in the top third of the 30 eight-year periods from 1968–1975 to 1998–2005.

To be fair, Krugman did not speak of middle-class income over Reagan’s tenure, but instead compared middle-class incomes of “the late 1980s” with the decade before. So we look at the data again and find that, in 1986, despite two recessions (1980, 1982) in the intervening years, median family income was 10.7 percent higher than a decade ago and median household income was 10.3 percent higher. The following year, median family income was 11.8 and 11.0 percent higher than a decade before. (The gains were smaller in 1988.)

In contrast, income growth during Bill Clinton’s administration only eclipsed Reagan’s 1986 and 1987 numbers once: at the height of the tech bubble in 2000, family income was 12.3 percent higher than a decade previous (however, household income was lower than Reagan’s 11.0 percent). Further, the George W. Bush administration eclipsed those numbers in three straight years — in 2001, 2002 and 2003, both family and median income gains over the preceding decade were higher than the best Reagan or Clinton numbers. Curiously, Krugman does not credit G.W. Bush with being more successful, economically, than either Reagan or Clinton.

POVERTY   Krugman is correct that the poverty rate was higher at the end of Reagan’s term than it was “a decade before” in 1978. However, the poverty data show much more that Krugman doesn’t discuss.

In 1978, 9.1 percent of families and 11.4 percent of individuals in the United States were living below the poverty line. The year marked the penultimate in a previously unprecedented span of years (beginning in 1972) where the poverty rate for families fell below 10 percent. However, both rates began climbing in 1979, preceding the onset of the twin recessions of 1980 and 1982. Poverty topped out at 12.3 percent for families and 15.2 percent for individuals in 1983.

From there, though, poverty under Reagan moved downward steadily, reaching 10.4 percent for families and 13.0 percent for individuals in 1988. Both rates fell further in the first year of the George H.W. Bush administration. However, neither rate would be that low again until 1997, the year after welfare reform passed Congress. The poverty rate for families would not duck below 10 percent again until the last two years of the Clinton administration and the first three years of the George W. Bush administration.

PRESTIGE   On this point, I cannot challenge Krugman. He gives no evidence to support this claim, and I know of no data sets that measure “prestige.”

PRODUCTIVITY GROWTH   Krugman is correct that the data show productivity growth under Reagan was around 1.4 percent a year, not much higher than the previous period 1973–1979 (1.2 percent) and a little less than the subsequent period 1990–1995 (1.5 percent). Those numbers are all considerably lower than the 2.8 average annual increase for 1947–1973 and the 2.5 percent for 1996-2000.

Krugman does not mention the productivity rate for 2000–2006; at 2.7 percent, productivity growth is even higher under the George W. Bush administration than it was in the best of the Clinton years. Again, curiously, Krugman does not credit G.W. Bush with being even more successful economically than Reagan or Clinton.

This raises a question: If the average productivity growth rate increased over the last five years of the Clinton administration, and that growth continued (at a slightly higher rate) through the first five years of the G.W. Bush administration, then does policy (or politics) have much to do with productivity? The recent spurt in U.S. productivity seems the product of cheap computers and Americans’ special talent for using them, not the machinations of Washington, D.C. More broadly, significant increases in productivity growth have much more to do with stochastic innovation than White House actions (except, perhaps, Al Gore’s creating the Internet).

KRUGMAN CONSIDERED   This leads to a broader question: How much credit can any president take for economic growth that occurs during his presidency?

To be sure, Reagan deserves some credit for improving on the economic trends of the 1970s, but credit should also go to Gerry Ford and Jimmy Carter for taking the first steps toward deregulation, and to Paul Volcker and the Fed for tamping down inflation. Likewise, the economic success of Clinton and George W. Bush owe some debt to Reagan (and, in W’s case, to Clinton) and much to Alan Greenspan (not to mention Silicon Valley). If the United States successfully combats the current economic slowdown, the credit should go to Ben Bernanke and his Fed colleagues, not to any stimulus package cobbled together by the White House or Capitol Hill.

Economic policies are intended to have long-term effects (though those policies can have some immediate effects). But economic conditions are only partly the product of economic policies — they are products of many different decisions by many different economic actors, most of whom are not elected. Politicians receive far too much credit and blame for current economic conditions.

Krugman’s claims about the Reagan record are misleading and, in the case of middle-class income, outright false. But more significantly, the concept underlying Krugman’s column is facile.

Creating A National Mortgage Scandal

Details are murky, but Senator Dodd appears to want to spend many billions on a new federal agency to buy-up undefined “distressed” mortgages at less than their original value.

Suppose Mr. Jones has a $300,000 mortgage on a house now worth $250,000. The new agency would offer to pay off the loan for $250,000 and then let Jones stay in the house with a new $250,000 mortgage that would then be guaranteed by the Federal Housing Authority (which ultimately means the U.S. taxpayer). FHA would debase its customary lending standards.

If banks and mortgage service companies are willing to write-off a large part of the value of some mortgages, why would we need to put U.S. taxpayers at risk? Why couldn’t each borrower simply negotiate a new contract, as hundreds of thousands have already done (though usually for a lower interest rate rather than forgiveness of principal).

If a home owner or speculator like Mr. Jones could get a smaller mortgage through a government agency by not making payments and threatening to default, that would create a huge moral hazard. His neighbors would resent his special treatment, and threaten to default on their loans too.

Since everyone would rather have a smaller mortgage than a larger mortgage, there would be rationing problem of deciding who is or is not worthy for such special treatment. Such priorities are likely to be based on political considerations rather than sensible economics or risk management.

Since Mr. Jones is already seriously delinquent on the current mortgage, he may well have a history of not paying other bills and therefore a poor (subprime) credit rating. There is no good reason to expect that he will not also default on the new FHA mortgage. Risky loans still remain risky, but because of the FHA guarantee that risk would be shifted to taxpayers.

This scheme would convert a localized mortgage problem into a national mortgage scandal.

Welfare-Warfare Conservatism

The New Republic runs an article on the New York Times’ decision to hire Bill Kristol, and provides the short list of candidates for the spot:

[L]ast fall, [Times publisher Arthur] Sulzberger and Times editorial-page editor Andrew Rosenthal prepared a list of some 25 conservative writers. According to a person with knowledge of the search, the names included Washington Post columnist Charles Krauthammer, The Atlantic’s Ross Douthat, senior fellow at the Council on Foreign Relations Max Boot and three Weekly Standard staffers: senior editor Christopher Caldwell, associate editor Matthew Continetti, and the magazine’s editor and founder, Bill Kristol. On December 30, Sulzberger selected Kristol, who gave up his column at Time magazine for the Times appointment.

This is really pretty striking. Every author mentioned is an ardent supporter of the welfare-warfare state, with admittedly varying emphases. Douthat’s focus, for example, has been on attempting to craft a European Christian Democrat-style conservatism that fuses political sops to social conservatives to economic populism (read: “expanding the welfare state”) in an attempt to buy middle class votes. Max Boot and Charles Krauthammer, by contrast, have focused more on urging the United States into pointless and massively destructive foreign wars, the first of which has already killed more Americans than 9/11 and sucked half a trillion dollars from taxpayers’ pockets.

I’m loath to predict political outcomes. Maybe as a political matter this sort of thing will sell. But abandoning conservative economic principles in the pursuit of political success and simultaneously indulging the worst jingoist excesses of neoconservatism is a positively revolting platform. Looking at the slate of candidates for the Republican presidential nomination, maybe this new welfare-warfare fusionism has legs. But it certainly doesn’t offer very much to libertarians.

Bull’s Blood and Revolution

The scene is Central Europe. It’s 1990-something. After a bicycle tour of the Czech Republic’s Bohemian countryside, Jim Harper and his girlfriend have traveled into Hungary and a town called Eger, two hours by train northeast of the capital.

In a small valley not far out of town, there are dozens of underground wine cellars where vintners store and sell the local wine, Egri Bikaver, also known as “Bull’s Blood.” As the evening winds on and the cellars close, visitors concentrate themselves more and more tightly into the remaining open cellars. The wine and proximity make for good conversation and new friendships.

Late on, this particular evening, as our table edged toward overstaying, one of our group stood up and sang his country’s national anthem. He was Estonian.

It was a very long song. I’d like to say otherwise, but his singing wasn’t all that good. And he was quite overly serious about it. With the song going on so long, and the wine having its full effects, the scene edged toward the comical.

Since that evening, the Bull’s Blood wine and our Estonian friend have provided touches of mirth and memory that interesting travel will. The Estonian singer has been the subject of some affectionate joking, I’ll admit.

That’s a little bit regrettable, because I now know that there’s more to the story. Watch the trailer here.

Estonia’s Mart Laar was the winner of Cato’s Friedman Prize for Advancing Liberty in 2006.