July 15, 2011 8:40AM

The CAP-AEI Fannie Mae Food Fight

It’s probably never wise to inject oneself into the middle of a food fight, but since I think both sides actually have something right and something wrong, its been a worthwhile debate to follow. That is the ongoing debate between Peter Wallison at the American Enterprise Institute and David Min at the Center for American Progress (at least we can all agree we love America) on the role of Fannie Mae (and Freddie Mac) in the financial crisis. If you can’t guess, Peter says Fannie/​Freddie caused the crisis, David says they didn’t.

David makes an interesting point, one I’ve actually argued, in his latest retort. That is, this wasn’t exclusively a housing crisis/​bubble. Other sectors, like commercial real estate, boomed and then went bust; other countries, with different housing policies, also had bubbles. True from what I can tell. I will also add that the U.S. office market actually peaked and fell before the housing market, so we can safely say there wasn’t contagion from housing to other parts of the real estate market. 

But the problem with this argument, at least for David, is that it undercuts the Dodd‐​Frank Act, which he has regularly defended. The implicit premise of Dodd‐​Frank is that predatory mortgage lending caused the crisis, so now we need Elizabeth Warren to save us from evil lenders. But how does predatory lending explain the office market bubble? Do we really believe that deals between sophisticated parties, poured over by lawyers, were driven by predatory lending practices? Do we also believe that other countries were also plagued by bad mortgage brokers? Again, I think David is right about the problem being beyond housing, but he can’t have it both ways.

What is the common factor driving bubbles in commercial real estate, housing, and foreign real estate markets? Maybe interest rates. This was a credit bubble after all. Especially since the Fed basically sets interest rate policy for the world. It is hard for me to believe that three years (2002 – 2004) of a negative real federal funds rate isn’t going to end badly. This is what I think Peter misses, the critical role of the Federal Reserve in helping blow the bubble. But Dodd‐​Frank does nothing to change this. 

Now there are a ton of things I think both still miss. We could argue all day about what a subprime mortgage is. I think the definitions used by Wallison (and Pinto) are reasonable. There is also a degree, a large one, to which David and Peter are just talking past each other. For instance, there is something special about the U.S. housing market that transfers much of the risk to the taxpayer. In contrast, the bust in the office market didn’t leave the taxpayer to pick up the tab. That has to count for something, unless one just doesn’t care about the taxpayer. 

There are a few other issues that make Fannie/​Freddie uniquely important in the crisis, but I lack the space to go into them here. Instead, I’ll wrap up by saying that their role in the overnight repurchase (re‐​po) market is under‐​appreciated and their ability to essentially neuter the Fed was critical in keeping the bubble going. What’s for dessert?

July 5, 2011 9:05AM

CAP Leftists Have Accidental Encounter with the Laffer Curve, Learn Nothing

The big-government advocates at the Center for American Progress recently released a series of charts designed to prove America is a low-tax nation. I wish this was the case.

The United States does have a lower overall tax burden than Europe, which is shown in one of the CAP charts, but that doesn’t exactly demonstrate that taxes are low in America. Unless, of course, you think weighing less than an offensive lineman in the NFL is proof of being skinny.

But the one chart that jumped out at me was the one showing that the United States collects less corporate tax revenue than other developed nations. The CAP document states, with obvious disapproval, that “Corporate income tax revenue in the United States is about 25 percent below the OECD average.”

The obvious implication, at least for the uninformed reader, is that the United States should increase the corporate tax burden.

But here’s some information that CAP didn’t bother to include in the study. The U.S. corporate tax rate is more than 39 percent and the average corporate tax rate in Europe is less than 25 percent.

So let’s ponder these interesting facts. CAP is right that the U.S. collects less tax revenue from corporations, but even they would be forced to admit (though they omit the info from their report) that the U.S. corporate tax rate is much higher. Let’s see…higher tax rate-lower revenue…lower tax rate-higher revenue…this seems vaguely familiar.

Could this possibly be an example of that “crazy” concept of (gasp!) a Laffer Curve? To be sure, it is only in rare cases, when tax rates get very high, that researchers find that high tax rates lose revenue. In most cases, the Laffer Curve simply implies that higher tax rates won’t raise as much money as politicians want.

But have our friends at CAP inadvertently identified one of those cases where a tax cut (i.e., a lower corporate tax rate) would “pay for itself”?

There certainly is strong evidence for this proposition. In a 2007 study, Alex Brill and Kevin Hassett of the American Enterprise Institute found that the revenue-maximizing corporate tax rate is about 25 percent (click chart to enlarge).

Media Name: corporate-laffer-curve.jpg

Somehow, I suspect this wasn’t their intention, but I want to thank the statists at CAP for reminding us about the self-destructive impact of high tax rates. 

For those who want to learn more about the Laffer Curve, these three videos will make you more knowledgeable than 99 percent of people in Washington (not a big achievement, I realize, but the information is still useful).


June 8, 2011 8:52AM

The Constitutional Case for Marriage Equality

On June 12, 1967, the U.S. Supreme Court struck down bans on interracial marriage in more than a dozen states in the case of Loving v. Virginia. Today, the highest court in the United States may soon take on the issue of marriage equality for gay and lesbian relationships. Attorneys David Boies and Theodore B. Olson are hoping the case of Perry v. Schwarzenegger will further establish marriage as a fundamental right of citizenship. Also featured are John Podesta, President of the Center for American Progress, Cato Institute Chairman Robert A. Levy and Cato Executive Vice President David Boaz.

Watch the full event from which many clips were pulled here and Robert A. Levy’s presentation here.

April 19, 2011 10:29AM

Tuesday Links

By George Scoville
February 16, 2011 3:52PM

Homeownership Before the New Deal

The latest canard offered for keeping taxpayers on the hook for mortgage risk is that, without such, homeownership would limited to the wealthy. Sarah Rosen Wartell of the Center for American Progress stated before the House Subcommittee on Capital Markets, “The high cost, limited availability, and high volatility of pre‐​New Deal mortgage finance meant that homeownership was effectively limited to the wealthy.” Congressman Al Green repeated the point. As I’ve generally found Sarah to be one of the more reasonable CAP employees, and that this is fundamentally an empirical question, I would have expected her to offer some evidence to support such a claim. Alas, she did not. So I will.

According to the US Census Bureau, at the turn of the century in 1900, the US homeownership rate was 46.5%. I’m pretty sure that even Sarah wouldn’t claim that close to half of US households in 1900 were “wealthy.” Interestingly enough, homeownership after the first 10 years of the New Deal was lower than before the New Deal.

While 46.5% is about 20 percentage points below the current rate, the population in 1900 was considerably younger, and one thing we do know is that homeownership is positively correlated with age. In 1900, 54% of the US population was under the age of 25, a reasonable cut‐​off for homeownership. Today, that number is 35%. I don’t think it would be a stretch to say the greatest driver behind the homeownership rate over the last 100 years has been the aging of the US population, probably followed by the increase in household incomes (homeownership and income are also closely correlated).

Hopefully this will put to rest the myth that FDR and the New Deal gave homeownership to the masses. The fact is that homeownership was fairly widespread long before the New Deal. I await the next myth from the Fannie Mae apologists. If they are wise, they will try one that isn’t so easily falsified.

January 12, 2011 5:28PM

How the Term ‘Tax Expenditure’ Leads to Bigger Government

The Center for American Progress has a new weekly feature examining “tax expenditures” in the Internal Revenue Code. As I’ve written before, there ain’t no such thing as a tax expenditureOr a tax subsidy. Targeted tax breaks are bad because, on balance, they expand government’s control over the people. But they are not “expenditures” or “subsidies.” Using either of those terms implies that the money not collected by the IRS because of a targeted tax break actually belongs to the federal government, rather than the people who earned it.

The Left would love to convince everyone that, as the Center for American Progress writes, “Tax expenditures are really just federal spending programs administered by the Internal Revenue Service.” If everyone believes that this is really federal spending, then when Congress eliminates those “tax expenditures” maybe no one will notice that Congress is actually extracting resources from the private sector.

That very deception appears to be the aim of the Center for American Progress’ new feature. Their first “Tax Expenditure of the Week” is the exclusion for employment‐​based health insurance. They use the “tax expenditure” concept to argue that ObamaCare’s 40‐​percent “Cadillac tax” on high‐​cost health plans is actually a good thing:

The tax exclusion for employer‐​sponsored health care benefits is the largest tax expenditure and one of the most important. The Patient Protection and Affordable Care Act takes steps to make it more targeted and cost effective in the context of overall health care reform. Other tax expenditures should be similarly evaluated and considered in the context of the policy goals they serve.

See? ObamaCare doesn’t raise your taxes. It reallocates a tax expenditure. George Orwell, call your office.

(To be clear: I favor eliminating all targeted tax breaks, even the personal and dependent exemptions, and having everyone pay the same low, low, low rate. Eliminating tax breaks for health care is essential for bringing medical care within the reach of low‐​income people. But the exclusion for employer‐​sponsored insurance is a particularly sticky wicket, such that reform will need to happen in two steps. Here’s the first step.)

December 8, 2010 3:03PM

War on For‐​Profit Colleges Reeks Even Worse

As I’ve pointed out repeatedly, though the sector is no doubt rife with waste and home to some dirty‐​dealers, attacks on for‐​profit colleges are almost certainly driven by politics and ideology, not educational concerns. Were it otherwise, all of higher education would be taking a beating for its bankrupting waste and widespread failure.

A recent symptom of anti‐​profit witch‐​huntery was the misrepresentation of GAO reporting on what “secret shoppers” found while visiting select for‐​profit institutions. At the time the findings were released I thought the main problem was that members of the media and Sen. Tom Harkin (D‑Iowa) — who has been leading the crusade against for‐​profit schools — were using the results to smear the whole proprietary sector when the GAO was clear about examining a nonrepresentative sample of schools. Unfortunately, it turns out the GAO might actually be in on the demonization.

On November 30 — without making any announcement that I could find on its website — the GAO released a modified version of its report, and according to a comparison between the old report and new one by the Coalition for Educational Success, the new version contains several changes that cast its for‐​profit targets in better light than they first appeared.

One vignette, for instance, originally said that a school’s admissions representative told an undercover applicant that she “should” take out maximum federal loans even if she didn’t need all the money. The change says the representative told the applicant that she “could” take maximum loans — a pretty big difference.

Another section went from only reporting that a representative told an applicant that the school has graduates making $120,000 to $130,000 in a job that, according to the GAO, typically makes less than $70,00 a year, to reporting that the representative also informed the applicant that she “could expect a job with a likely starting salary of $13-$14 per hour or $15 if the applicant was lucky.” $15 an hour translates into about $30,000 a year, and completely changes the tenor of the vignette.

According to Stephen Burd of the Center for American Progress, career colleges have been self‐​servingly crying – or at least whispering — foul over the GAO report for months now. Burd has been a leading for‐​profit basher, but I’d have been inclined to give only limited credence to concerns about dirty pool, too, until this latest revelation trickled out.

Now, though much needs to be determined about why the myriad changes to the report were made, I wouldn’t be terribly surprised to learn that people at the GAO have actually been in on the crusade to demonize proprietary colleges. I also, unfortunately, won’t be surprised if no one pays attention to any of this, and the shameless, responsibility‐​dodging war on for‐​profits continues unabated.