The Meltdown Cometh, Part II: New home sales plunge unexpectedly in November

A recent article from Money magazine should have anyone who recently purchased a house or increased their debt load concerned, particularly those who have loans that do not have a fixed rate such as most home equity loans.

Why should someone care about the housing market if they aren't planning on moving right now? Well, because a good deal of consumer spending over the last few years has been driven by perceptions of an increase in home equity. People felt wealthier so they saved less of their income and in many cases borrowed against their home equity. Most people who have looked at the housing market, particularly in major urban centers like LA, SF, NYC, Boston, Seattle, Denver and other places have commented that the recent escalation in asset prices is remarkably similar to that of the stock market at the end of the 1990s.

Good ol' Maestro Greenspan has been telling us not to worry, (after all he did such a great job with the stock market buble so we should probably listen to him right?) that there is no reason to think fundamentals don't support the rise in house prices. But it defies logic to think that housing prices hadn't risen precipitously fast in recent years or to fail to recognize that so much of this increase has been driven by the Fed's efforts to revive the economy by setting the FedFunds rate at unprecendented low levels. Low interest rates make the monthly payments on a home, the key factor affected how much house people buy, much more affordable. At their lowest, fixed 30 yr rates reached about 5%. On a $300,000 home that's a monthly payment of about $1,600. If rates go to 10% (nearer their historic average) the monthly payment rises to over $2,600. It hardly takes a genius to see that the Fed's recent moves to increase short term rates will put upward pressure on mortgage rates, meaning that people will be able to afford less house, and hence, will be willing to pay less for housing.

The economic implications for this are of more serious concern than just pushing down home prices. If a fall in the housing market dampens consumer spending (after all, declining house prices mean less home equity to borrow against), then the economy goes with it. One possible benefit is that declining consumer spending will reduce the American appetite for debt and for foreign goods, but I wouldn't count on our trade situation improving soon. So together with the fall in the dollar, Americans will soon find themselves much worse off. And if an increase in home equity loans and other interest rates puts too much pressure on that record debt over-hang of American consumers, we could see an increase in personal bankruptcies. And we know how personal catastrophes can snowball in recessionary environments. At least those of us who studied history in school do . Did you George?

Is Economic Liberation the Same as Liberation from Economists?

Two Princeton scholars (and former teachers of mine) Daniel Kahneman and Alan Krueger have come up with a new metric for measuring how happy people are. Their new research tool aids the study of national well-being. The typical measure of such well-being is per capita GDP - or, income per person. But anyone who has travelled somewhat, and particularly those who have lived abroad, realize that there is a good deal of difference between GDP per capita, the cost of living, and quality of life.

I particularly recall one moment in New Zealand a decade ago when I was traveling around the country by myself and I stopped in a small town to get a bite to eat. I was sitting on the hood of my car, eating a sandwich I had picked up at a local bakery when I saw some children walking by between the ages of 10 and 14. They were in their school uniforms and walking in groups of 2, 3 and 4 or occasionally walking solo. They were obviously heading home for a lunch break or perhaps school had let out early. No adult was nearby and they were walking home on their own - a thought unheard of in most American neighborhoods. But what struck me more than anything else was how childlike they appeared. They were children -- while in America the same kids would be struggling to grow up as fast as they can, vying to look and act like adults with their cell phones, their dramatic love lives, their clothes... Striving to get past childhood -- something that is rightly recognized and protected as a precious gift in so many other cultures.

Several months ago, the New York Times reported on the Kingdom of Bhutan, which has thrown out GDP as a measure of progress and instead crafted a measure called Gross National Happiness. Of course, economists being wedded to consumer sovereignty, there were plenty of them lining up for the reporter to mock the standard saying things like "I don't know how you measure happiness." "Better to let people decide that for themselves." "You don't want to impose your standards of happiness on others." But the questions raised by this measure are good ones and worth pondering, particularly as we approach the holiday season and New Year and find ourselves assessing the quality of our lives. My guess is that the millions of people who feel empty inside and experience spiritual poverty would cry out for a new measure of their well-being that goes beyond the quality of their car, the number of their TV's, the fastness of their fast food, or the square footage of their house.

Does this mean we are less happy than others in other countries? Of course not. But instead of spending all our time in policy discussions that are dominated by how we might structure things so that people can buy more things, maybe we should spend a little more time thinking about how we might structure things so that people are able to have lives of dignity and value which place an emphasis on protecting the things that mean the most to people. Family. Friends. Free time. The quality of their lives. Maybe Democrats might even discover a way to reconnect voters to the issues that concern them most and the ways they might best achieve their goals.

You can read about the Kingdom of Bhutan by looking at this piece that was done by Frontline. You can read about the Princeton study here, and at the NSF website, here.

Make Your Christmas Shopping an Extension of Your Political Life

Someone has organized a Buy Blue Campaign which is supposed to support retailers who support Democrats, but conveniently, allows people of both voting persuasions to peruse an extended list of retailers and decide where they will and will not shop. If your tastes run toward this sort of thing, you can shop knowing your merchant supports the same things you do, no matter if you are Democrat or Republican.

This is fun

If you have two minutes, check this out. It's a nice little animation about what to do if you are feeling Democrat and Blue.

File this under:The Pot Calling the Kettle Silver

Today's Wall Street Journal (subscription required) has a front page story that is dazzling for its chutzpah. For several weeks now we have been reading that the dollar's fall in value and possible pending collapse is due to Americans' excessive proclivity to spend money they do not have. The American people's net savings rate hovers around an appalling 2%. As Martin Wolf remarks in a recent issue of the Financial Times: "US gross external liabilities are some 11 times export earnings, while net liabilities are about three times exports. The latter figure is similar to those of crisis-hit Latin American economies such as Argentina and Brazil." If the dollar does collapse it could usher in a worldwide recession of Hoover-esque proportions. Just trying to get U.S. consumption down and savings up threatens a significant recession.

And the Wall Street Journal's take on what ails the world economy? It's the Europeans Stupid! They save too much money and don't spend enough, because, get this, they have national policies that encourage this sort of thing. GASP! SHOCK! HORROR!

I suppose we should call these the temerity files.

The Deductibility of Employer Provided Health Care

Brad DeLong and Andrew Samwick have both been having some discussion of the vague outlines of Bush’s health care proposal. You know, the one that involves dumping all employer provided health care plans and tossing everyone out into the free market on their own to purchase catastrophic health insurance while paying the up-front costs of care out of their own pocket?

When we last looked at this issue, Bush was proposing to finance tax cuts for investment income by eliminating the deduction for employer provided health insurance. Right now, many of us collect health benefits from employers that can be worth up to $10,000, without paying a dime of tax on what is essentially income (compensation for our labor). In technical terms, this income is excluded from taxes rather than being deductible (as Samwick points out).

It’s always a hoot when economists first turn their attention to a policy issue. Samwick writes, "The deduction exists because there is a notion that the government ought to encourage people to get health treatments that they need."

This is typical of a functionalist way of thinking about policy. But it makes sense from an economist’s point of view. If people are presumed to be optimizing and maximizing all the time, then they are doing so instantaneously every second of the day. The second a policy ceases to be desirable, one changes it. So the original reasons a policy passes are irrelevant. If a policy is still in existence today it must be explainable in terms of today’s policy objectives. I guess the idea that policies, not just wages, might get sticky got thrown out with the whole "rational expectations" thing. Typical of a macro-economist.

In point of fact, if we take a historical-institutionalist approach, we can trace the excludability of health premiums from income taxes to World War II. During that time, price and wage controls limited how much and how fast employers could raise employee incomes. So unions negotiated health benefits for their workers which fell under the radar of the wage ceilings. And Washington looked the other way to keep people happy. This policy then became institutionalized (the whole subject would make a great research paper about how social policy becomes institutionalized but Jacob Hacker and Paul Pierson probably have already written it) so that changes have pretty much been seen to be off the table. You think Social Security is the Third Rail of American politics? That would make the tax excludability of health benefits and home mortgage interest payments (which have survived every tax reform effort since 1945) the Black Hole of American politics. But who knows, maybe after the election, the Bushies are feeling lucky.

That said, tax deductibility is a major policy problem for a number of reasons. For one thing, it’s economically inefficient. Always better to give people cash over in-kind benefits. It’s also pretty unfair since employer provided health insurance is compensation that is fully deductible but people who get health insurance on their own have to do so with after tax dollars and only a portion of their premiums are deductible. And of course, there is that fact that tax deductions are regressive because they are worth more to those in the higher tax brackets. But most importantly from the perspective of this humble progressive, tax deductibility blinds people to how much they are already paying for health care.

One of the things Democrats used to spin around on their heads over in the 1990s was how to protect themselves against charges that a national health insurance plan would represent a tax increase. But they generally missed that such a policy might actually represent an overall economic saving for most people. Howard Dean used to talk about this kind of thing pretty well in the campaign. It’s one thing to cut taxes, but if your other policies are taking money out of people’s pockets, they are actually worse off. The idea that a person could be financially better off with a tax increase that also results in a substantial income increase escapes most people.

But in the early 1990s when I was working on the issue, we estimated that a 7% payroll tax could probably raise the money needed for some kind of a national health plan (after another decade of health cost inflation I have no idea what that rate would be now). If a family of four making $100,000 were to have to pay this tax it would come to $7,000. Ouch you say! But if the employer is currently paying $10,000 for a family plan for the employee and no longer has to do that, the money would get returned (in economic theory) to the worker in the form of a higher wage. It is almost certainly true that blue collar wages have been so flat for so long because rising health care costs annually eat a large chunk out of what could otherwise go to a wage increase. Of course, in the short run, most employers would see the foregone cost of health insurance as a cost-savings and a profit increase. But most economists look at the money paid for health benefits as money that would other go towards employees since it is part of the overall costs of employing workers. So in the longer short-run (or the shorter long-run - Keynes’ admonition about the long run being truer than ever these days) this money would come back to workers in the form of higher wages. That’s a net savings of $3,000.

But most Americans might not see it this way because most never see what employers pay for health care. My own employer is kind enough to tell me that the University’s current contribution is about $320 a month and I pay the rest (about $450) out of my salary. But if you asked most people how much their employer pays for their health insurance they would look at you like you asked them who won the War of the Roses. And most people don’t think of this money as their money, as their income. The hypothetical worker we described above wouldn’t say that his income is $110,000. If you asked him how much he makes, he would say, $100,000. He would forget to add in how much his employer pays for health insurance, for dental insurance, for disability insurance, for life insurance, for contributions to a pension plan or 401K, all money that represents the costs of employing him.

Addressing the tax deductibility of these things might help people to realize a number of things. Just how much these things cost. Just how much money they actually make. And perhaps people might realize that when a company defaults on it’s pension obligations, it is essentially stealing money from workers that they had been promised under a contractual agreement and which many of them have worked a lifetime to accumulate. One works for a company and one gets compensation in return. But the divergence between actual, economic compensation and what people think is their level of compensation allows for all kinds of shenanigans that typically end up costing working people real money. But asking for a rational American tax policy is like asking for peace on earth.

Democracy For America. That would be a good idea

Howard Dean today gave what his website billed as a major speech at George Washington University. It looks like he wants the DNC job. Or this is the first salvo of the 2008 campaign. I sure hope it's not a campaign for DNC Chair. For one, I would like to see him run again in 2008. And for another, I agree with Ed Kilgore of the DLC (which is funny since he probably doesn't want to see him run in 2008), that Dean would be better served reforming the Democratic Party from outside. That said, it sure would be nice to have a DNC Chair who actually could serve as a spokesman for our Party for the next 4 years. We certainly need one who can speak and be heard. You can read the speech here.

The Crazy World of Our National Media: Pt II

File this one in the folder Brad DeLong calls, "Why Oh Why Can't We Have a Better Press Corps?" Or maybe it's the answer to the question.

I was watching one of our local news stations (in Denver, Colorado) last night. My wife likes to get some news and only has time to catch it late in the evening, but also likes to be in bed by 10 so we generally watch the WB2 local version that comes on at 9 pm. Last night, about 10 minutes into the news, after all the 'really important stuff', the newscaster reads the following story (which is paraphrased below):

"A cocker spaniel died today after it disturbed the nest of some bees. It was stung over 100 times. The incident took place in California."

This was on the local news in Denver. Hmmmmmm...

Should I draw comfort from the fact that apparently, this story drew national attention?

"Pinto's story and anticipated recovery garnered national media attention, but his condition worsened after the family returned home Monday night with Pinto wrapped in a blanket and placed him on the couch." (Karen Robes, Long Beach Press Telegram)

"Dog Attacked By Some 20,000 Bees Dies" KABC TV Los Angeles
"Dog Dies After Attack By Swarm of Bees" NBC6 South Florida
"Dog Dies After Attack By Swarm of Bees" ABC 7 Denver

A Small Suggestion

Source: Shawn Baldwin, New York Times, Nov 30th 2004 page A1
Here's a thought. Maybe the Iraqi police and national guard ought not to dress in the uniforms of the American army. It kind of makes it easy for insurgents and others to accuse them of being American stooges, doesn't it? Can't we find some other uniforms without pilfering the clothes-bin at Iraqi Republican Guard headquarters? Maybe a sewing club could sticth them something in green or dusty grey? And maybe we can get them some other helmets while we are at it?

The New York Times: Merck Offering Top Executives Rich Way Out

So Merck executives push a drug they probably know causes serious heart problems for 5 years, their actions result in the devaluing of the stock, likely billions in potential lawsuits, not to mention the probability of numerous deaths. And today's New York Times tells us "Merck Offering Top Executives Rich Way Out"

It sure would be nice if Democrats decided to get behind corporate governance reform one day. The Merck board decided to vote special payments of up to three years salaries and bonuses if Merck is taken over by another company -- a likely prospect given the current levels of the stock. This amounts to theft from stockholders (and potential plaintiffs I suppose) of value they currently own that gets transferred to executives. One argument for such bonuses might be that you want to attract competent executives. But enacting this policy now for executives who are already attracted amounts to a windfall for bad management decisions. Does it increase the likelihood good executives will stay at Merck? I dunno. Do these guys really seem that good?

Analyst's recommendation: Dump the stock