Relevant and even prescient commentary on news, politics and the economy.

Connie Mack on Mortgage Deductions and Borrowing Forever

Deborah Solomon of the New York Times interviews former Senator Connie Mack on tax reform:

Q: Can you tell us about the report the tax-reform panel will be filing on Nov. 1? It’s been reported that you’re hoping to reduce some popular tax breaks, including the deduction for home mortgage interest from a $1 million cap to somewhere in the $300,000 range. Are you worried that could hurt the middle class and discourage people from buying, say, a $500,000 house?
A: It depends on how you define middle class. I don’t think that there would be a large percentage of middle-income families that would have a $500,000 house.

Just as I was to scream come out to my neighborhood (Los Angeles), Ms. Solomon does this for me. The Senator comes back with the notion that President Bush wants to cut taxes – and this is where the interview really turned south:

Q: Well, the U.S. government has to get money from somewhere. As a two-term former Republican senator fromFlorida, where do you suggest we get money from?
A: What money?
Q: The money to run this country.
A: We’ll borrow it.
Q: I never understand where all this money comes from. When the president says we need another $200 billion for Katrina repairs, does he just go and borrow it from the Saudis?
A: In a sense, we do. Maybe the Chinese.
Q: Is that fair to our children? If we keep borrowing at this level, won’t the Arabs or the Chinese eventually own this country?
A: I am not worried about that. We are a huge country producing enormous assets day in and day out. We have great strength, and we have always adjusted to difficulties that faced us, and we will continue to do so.

Did I mention that the former Senator is a Republican who was picked to head the tax reform commission?

Update: Kevin Drum covers this as well and one of his readers noted the same transcript problem cited by MJ.

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A New Fed Chair

Initial reports suggest that Bush is going to make an announcement this afternoon nominating Ben Bernanke to be the next Chairman of the Board of Governors of the Federal Reserve System.

This is actually a pretty good choice, I think. (Full disclosure: he was one of my professors in grad school, so I accept the possibility that I might be biased on this.) Bernanke is a superb macroeconomist, a nice guy, and, despite his current position as chair of the CEA (a position that has historically been filled by highly respected academics with only minor partisan leanings), he is not a sharply partisan or ideological person.

Credit one to Bush for making a sensible pick in this case.


UPDATE: I was going to add a bit more commentary about this good choice on Bush’s part, but Mark Thoma has beaten me to it. So all I’ll add is: “What Mark said.”

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A Grim Milestone

I rarely comment on the Iraq debacle on this blog, but I feel that this week’s events require me to do so. Today or tomorrow, most likely, we will pass a very grim milestone: the total number of Americans killed in Iraq will reach 2,000.

This milestone will undoubtedly make some minor headlines, and serve as a reminder that American soldiers are being killed in Iraq at a rate of close to 1,000 per year.

But I hope that this milestone does more than serve as a brief reminder that Americans are dying in Iraq. Combined with this week’s likely indictments of senior Bush administration staff over their involvement in the aggressive p.r. campaign they waged to promote the invasion of Iraq, I hope that this country has a long-overdue public reexamination of the original rationale for the invasion in the first place.

Such a reexamination is irrelevant, some will argue; the fact is that the US did invade Iraq, the US is there now, and what matters is how best to move forward from here.

But this view of the situation is an unsubtle oversimplification. Yes, it is important to figure out how to best meet our objectives, given the situation that we are actually in. But it is impossible to do that without understanding what our objectives are in the first place. And in order to understand our objectives in Iraq, it is only logical to consider our government’s objectives when it first decided to invade. Have those original objectives been met? Have they changed? If so, what are our current objectives, and why were our original objectives not sufficient?

In addition, it is crucial that we understand to what degree the decision to invade Iraq was a purely optional judgment-call by Bush, rather than a decision that was reluctantly arrived at due to overwhelming evidence that indicated the necessity of such a course of action. The Fitzgerald investigation will probably shed considerable light on this question.

As I have argued extensively before, it is becoming more and more clear that Bush’s decision to invade Iraq was not the result of the careful deliberation of compelling evidence. Instead, it was the result of Bush’s choice to go with his own judgment, despite the evidence at the time that his gut feelings were wrong.

The decision-making process that lead to the Iraq debacle adds to more recent evidence that Bush’s gut instincts are a poor guide to presidential decision-making. As today’s NY Daily News reports:

Bush is so dismayed that “the only person escaping blame is the President himself,” said a sympathetic official, who delicately termed such self-exoneration “illogical.”

A second senior Bush loyalist disagreed, saying Bush knows “some of these things are self-inflicted,” like the Miers nomination, where Bush jettisoned contrary advice from his advisers and appointed his longtime personal lawyer.

“He must know that the way he did that, relying on his own judgment and instinct, was not good,” another key adviser said.

Since the Iraq decision, Bush has continued to make decisions based on instincts instead of evidence and good advice… with results that are just as bad as ever.

It is important that we understand that our president makes decisions based on his gut feelings, and that his gut feelings are generally poor guides to policy-making. Unfortunately, in the type of democracy that we have in the US it is almost impossible to remove a president from office for poor decision-making (unlike in a parliamentary system, where a head of government like Bush would probably have already been sacked and replaced this year). But if we understand that the president has relied on unscrupulous advisors for counsel, and his own bad instincts for guidance, then we can at least try to curb his power to inflict further harm on the country.

Finally, it is worth marking this week’s grim milestone for perhaps the most important reason of all – to simply recognize and honor the two thousand Americans that have now sacrificed their lives to help us achieve our goals in Iraq (murky though those goals may be), and to remind us that hundreds of thousands more will risk their lives in the same way in coming years.

For all of these reasons, I hope that this week’s milestone helps inspire some reflection, some debate, some questions, and that it does not passed unmarked.


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This Week’s Housing Data

This week’s news will probably be dominated by Wilma and Fitzgerald. And the top economic story will likely be Q3 GDP. But I’ll also be looking at the Existing Home Sales and New Home Sales reports for further clues of a housing slowdown.

Expectations are for strong volumes for both existing and new home sales. The consensus estimate is for an annual rate of 7.2 million existing homes sold, just below the record of 7.35 million in June and the still strong 7.29 million units in August.

As a reminder, existing home sales are reported at the close of escrow, usually 30 to 60 days after the contract is signed. New Home Sales are reported in the month the contract is signed, so New Home Sales are a more up-to-date indicator of activity in the housing market.

For new homes, the consensus estimate is for an annual rate of 1.25 million homes, slightly better than for August. Although sales volumes will probably still be strong, it will be interesting to see if inventories have continued to rise. For existing homes, inventories hit 2.856 million in August, the highest level since 1989. And for new homes, inventories set a record of 480 thousand units in August.

California has lead the housing boom, so the following articles might offer clues to the impact of a slowdown. The San Diego Union Tribune reports: California lost 23,700 jobs in September, but statewide construction hiring was still strong:

The construction sector saw the largest gain in August, up by 3,300 jobs on a seasonally adjusted basis. … For the year, the construction industry has added the most jobs, 58,500, or an increase of 6.8 percent.

Although construction was still strong statewide, San Diego, the first major area to see a housing slowdown, saw construction layoffs: Construction layoffs could signal trend

“There might be some seasonal reasons for the construction losses, but the decline could be a sign that our overall employment growth is slowing,” said Alan Gin, economist at the University of San Diego.

Gin said the construction layoffs are one more sign that the housing boom, which has created jobs for builders, mortgage brokers and real estate agents, is winding down.

“The number of home sales is down, price appreciation on most homes is not as great as it used to be, and it’s taking longer to sell homes,” Gin said. “That could mean less growth in construction work.”

There were signs of trouble in other employment sectors as well.

Financial services cut 200 jobs last month, largely related to real estate and mortgage operations.

A few hundred jobs is somewhat insignificant, except it might indicate a trend change.

Here is an interesting update and first hand account of local conditions: Washington, DC Area Update

My best wishes to everyone in south Florida: please stay safe! CR Calculated Risk

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Index the Minimum Wage at $6.50

Kevin Drum unloaded on Scott McClellan and President Bush for their opposition to raising the minimum wage from $5.15 to $6.25:

Whoa, Nelly! Sure, it’s been eight years since the last increase to the minimum wage, but even so an increase of $1.10 over an 18-month period might “price people out of the job market.” Yeah, that’s the ticket. It might price them out of the job market. That must be a helluva job market President Bush has bequeathed us. It’s a shame he’s not part of it.

The Almanac of Policy Issues reminds us that one proposal would have raised the minimum wage to $6.65:

Congress is currently considering raising the minimum wage by $1.50, from $5.15 to $6.65 per hour in three installments. Congress last enacted legislation in 1996, increasing the minimum wage by 90 cents from 1996-1997. The minimum wage was first enacted in 1938 as part of the Fair Labor Standards Act (FLSA). It is enforced by the U.S. Department of Labor’s Employment Standards Administration. Initially just 25 cents per hour, the minimum wage has been raised several times in the decades since. In real (inflation-adjusted) terms, the minimum wage reached its peak in 1968, when it was worth $6.92 in 1998 dollars.

They also provide a short summary of the arguments for and against increasing the real value of the minimum wage. The Economic Policy Institute has a nice issues guide, which has all sorts of cool charts including the history of the nominal value of the minimum wage, this wage relative to the average hourly wage, and a chart of the real value in terms of 2004 dollars, which we show here.

This chart shows that the real value of the minimum wage peaked in 1968 at $7.25 and was near $7 in 1980. With the nominal value unchanged throughout the 1980’s, the real value of the minimum wage was eroded to below $5 by a rising price-level before its nominal value was increased from $3.35 to $3.80 in 1990. Its current nominal level of $5.15 was set in 1997, which increased its real value to $6. The real value currently is just over $5 and if the nominal value is not increased before 2007, the real value will fall to $4.77 (I’m assuming prices in 2007 with be 8% higher than they were in 2004).

The proposal that the Senate rejected would have raised the minimum wage to a real value of only $5.80 in 2007. The Democratic proposal to set the minimum wage at $6.65 by 2007 translates into a real value of $6.15. So let’s compromise and have the real value indexed at $6 per hour in terms of 2004$, which mean a 2007 nominal value of $6.50. But President Bush might argue that increasing the real value of the minimum wage would cause an increase in unemployment – right?

Then again – we have heard a lot of nonsense about macroeconomics from this White House. The highest real value of the minimum wage occurred during the same year that we had a very low unemployment rate. The most recent increase in the real value of the minimum wage preceded the economic boom during the second Clinton term. And despite the decline in the real value of the minimum wage during Bush’s first term, the labor market has been weak. The state of the labor market depends more on overall macroeconomic policies. Alas, this Administration is clueless as to how to restore full employment – assuming that they even care about the labor market.

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Responsible Budgeting v. Big Government Conservatives

Mark Kleiman reads David Brooks and explodes:

David, it’s not a matter of “not fully coherent” or lack of an “unorthodox management style”: its that every single thing his administration has turned its hand to, except lying to win elections, it’s trashed! Bush and his people suck at vision, suck at making reasonable plans, suck at implementation, suck at planning, suck at intelligence and predicting, and suck at leadership. Cutting taxes and spending like a drunken sailor isn’t some new kind of conservatism, it’s an old kind of lunatic irresponsibility, the sort of thing the Bavarians put Ludwig in a soft room for. Sending the army and marines off undermanned and ill-equipped to be wrecked in the desert because Cheney had a pole up his rear end about Iraq isn’t a shining new conservatism, it’s criminal negligence. Stuffing the only government we have, and now the Supreme Court, with people who can’t get through a day on their new jobs without spectacular blunders isn’t a lack of unorthodox management, it’s plain old really bad management! Farm bill, steel bill, FEMA, socialsecurityAbramoffMiersToraBoraonandonandon, a tornado of bad ideas and botches.

It seems Brooks has dusted off the Fred Barnes oxymoron about Bush being a big government conservative. Brooks and Barnes must ascribe to the free lunch view taught at National Review University – that view being we can have more government spending and lower tax rates too. Mark Thoma skipped that lecture preferring to attend the latest lecture from Paul Krugman.

Fiscal conservatives might prefer the comments from Senator Mark Pryor:

Pryor said Congress and the Bush administration must return to an era of “responsible budgeting” and be less inclined to advocate tax cuts for special interests as a remedy for economic ills. “We simply must do a better job of putting the needs of all Americans over the wants of a privileged few,” the senator said.

What does responsible budgeting mean? What it does not mean is the tendency of the DeLay Republicans to shortchange education, health care, or assistance for the poor in order to fund more pork barrel spending. As Alice Rivlin said last year – we should spend smarter, not more. Responsible budgeting also means that we cease dumping huge deferred tax liabilities on our kids.

Update: Michael O’Hare sent me a nice email saying the “blame” for the rant at Mark Kleiman’s blog should go to him. Actually, I need to give Michael the credit for this high quality rant.

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Floating Exchange Rates are Neither Manipulation nor a Tax

Mark Thoma’s Snow Falls Silent in China links to an interesting article from Edmund Andrews. As John Tamny steals Mark’s title (“Snows Falls on China”), he writes:

A frequently cited anecdote about England’s economic decline in the ’70s is the irony of countless Rolls Royces moving through the streets of London. At the time, savings and investment were so heavily taxed that it made more sense to consume. Investment income was taxed at 98 percent, so while fancy autos sold very well, job-creating businesses were starved for capital. The English experience is particularly relevant given Treasury Secretary John Snow’s tour through China last week in which he “extolled the virtues of the average Chinese buying ‘more stuff.’” … Not only would a 40 percent upward manipulation of the yuan be deflationary, it would also do nothing to change the real value of goods that the Chinese ship to our shores. Money is merely an easy medium that allows people to exchange their surpluses. Snow’s currency plan for China would only serve to decrease that nation’s economic growth, while the prices of Chinese goods here would eventually adjust to the very currency manipulations that Snow decries. Regardless of the yuan’s value vis-a-vis the dollar, Americans will continue to avail themselves of goods that are not in their economic interest to make.

Where to begin? Has Tamny figured out that those buying luxury cars in the U.S. are spending their tax cuts provided by Bush’s fiscal irresponsibility, which has reduced our national savings? Has he figured out that saving and investment as a share of GDP in China is quite high?

I guess I missed the part about Secretary Snow advocating tax increases in China. All I seem to recall is that the Treasury Secretary had been advocating floating – or market-determined- exchange rates. And I beg to differ with Mr. Tamny as to whether the relative price of goods would change if the yuan were allowed to appreciate. Now I love to Bush bash with the best of them, but on this one – I’m defending Sec. Snow’s call for a floating yuan.

Tamny also shows he has no clue what Lord Keynes wrote:

As opposed to the Keynesian notion that parsimony subtracts from economic growth, in fact it stimulates economies by virtue of capital being made available to entrepreneurs eager to create the innovations that continue to improve living conditions, and which do so irrespective of country borders.

Keynes may have advocating short-term stimulus in times of weak aggregate demand, but he would disagree with Tamny’s colleague as to the need of permanent fiscal stimulus.

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The Globalization of Inflation

In this week’s issue The Economist wonders to what degree one country’s rate of inflation is no longer determined by local forces, and instead is determined by global economic forces:

With energy and labour becoming conspicuously dearer, any inflation model based on a mark-up of prices over costs should be flashing red. Yet in the past year core inflation has not budged. How come?

Stephen Roach, chief economist of Morgan Stanley, suggests that thanks to globalisation, the inflation process has changed over the past three decades in a way that has significantly weakened the link between domestic cost pressures and inflation.

…This probably reflects two things. First, the integration into the world economy of China and other emerging economies with vast supplies of cheap labour has curbed the bargaining power of workers in developed economies. These workers therefore find it harder to secure higher wages when inflation picks up. And second, fiercer global competition has made it more difficult for firms to pass increases in wages through to prices. Instead they must absorb them in their profit margins.

…This suggests that in forecasting inflation central banks now need to pay less attention to domestic shifts in unemployment and capacity utilisation and much more to the global balance between supply and demand. The BIS’s research shows that since 1990 the core rate of inflation has become less responsive than it used to be to changes in the output gap (a measure of economic slack) in all the main developed economies except Britain. The ups and downs of inflation increasingly reflect the global balance between supply and demand.

It’s a plausible theory in some respects, but I also have my doubts about it. If it is indeed true that, due to increased global competition, firms can’t raise prices to pass along costs, then the increases in oil prices and wage rates of the past year or two should be reflected in sharply lower profit margins, as the article mentions. Yet corporate profits have grown rapidly, despite the equally rapid rise in oil prices.

While this is by no means conclusive evidence, this does seem to suggest that firms are indeed enjoying reasonably good pricing power in the face of increased input costs, despite trends in globalization.

More generally, I wonder whether there really is a big mystery about why core inflation rates have not started rising in response to higher oil prices. As I mentioned the other day, there is a simple plausible answer to the question: it may simply be the case that the labor market in the US, and demand more generally, is not strong enough to cause a wider upturn in inflation. Whether or not you believe this depends substantially on how close you think the US economy is to its potential output – a question to which there may be no clear-cut answer, as PGL has discussed.

Personally, I think that the US labor market is still fairly weak, and that demand is not particularly strong, so I think that one probably does not need to resort to the “inflation is global” hypothesis to explain why higher oil prices have not fed into broader inflationary pressures. But it’s an issue worth thinking about.


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Borrowing as an Alternative to Deficit Financing?

One of my complaints about our replacement governor in California is that he loves to talk about deficit reduction but is unwilling to raise taxes and incapable of significantly reducing spending – although the slate of propositions he has put on the ballot are designed to reduce our investment in public education and to reduce the pension benefits of public employees. At one point early in ARNOLD’s reign of Bush free-lunch financing, a local newsperson said that we had reduced deficit spending by issuing more government bonds.

Of course, this comment was stupid but read what Don Young (Alaskan Republican Congressman) said when he proposed issuing disaster assistance bonds:

“We must find a way to meet the inevitable needs that will arise after future disasters,” he said. “We cannot continue deficit spending.” Money from his proposed disaster recovery bonds would supplement the dollars already in the federal government’s disaster relief fund, Young said … Young rejects an alternative source of disaster relief, the recently passed $286 billion highway act. Critics have called on Congress to revoke $450 million that Young steered to two proposed bridge projects in Alaska through the highway act, along with billions in similar earmarks to other states. Young said last month that the critics can “kiss my ear.”

And I complained about Thomas Nugent earlier!

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