Pethokoukis

James Pethokoukis: Covering the nexus of Washington and Wall Street

Pethokoukis

9 reasons why America might go over the fiscal cliff

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Veteran political analyst Pete Davis offers up a list of possible impediments to a deal on avoiding the fiscal cliff:

1. President Obama insists on a tax rate increase on those earning $250,000 or more, and House Republicans balk;

2. President Obama and Democrats refuse to accept revenue increases that won’t be scored by CBO, i.e. that depend upon tax reform and/or upon an assumed increase in economic growth;

3. President Obama insists on a Making Work Pay tax credit to replace the lost 2% payroll tax cut for working Americans that Republicans won’t accept;

4. House Republicans insist on entitlement cuts that Senate Democrats won’t accept. Certainly, Senate Democrats see Social Security as completely off the table, and Medicare cuts will be difficult to achieve because most of the easier cuts were used to pay for ObamaCare;

5. Everyone wants to repeal the $109 b. sequester, but Republicans may object if it’s not “paid for;”

6. Democrats want bigger defense cuts than Republicans will accept;

7. Discretionary spending can be shaved a bit more, but not much more without incurring Democratic opposition;

8. Republicans may refuse to accept a debt limit increase that is not “paid for.” A one-year hike would cost about $1.2 tr. There’s no way they could pay for that.

So what’s Davis’s best guess on what happens?

– 60% chance nothing happens, and we go over the cliff in January;

– 40% chance of a modest, pre-Christmas “downpayment” deal “with procedures to deliver tax and entitlement reform … expect to be underwhelmed.” And if he were to offer a 9th impediment, it would be this:

One big final impediment will remain after a deal is announced — The House may not pass it. In July, 2011, House Speaker John Boehner (R-OH) thought he had agreed to a deal with President Obama which his colleagues would support, but House Republicans rejected it. He was put in the embarrassing position of having to return to the bargaining table to cut a smaller, kick the can down the road deal, with the Super Committee that failed, and the $109 b. sequester that no one wants. I’m sure he’ll be a lot more careful this time around to whip his support before finally signing off on a deal. Anything the House Republican Caucus will pass is unlikely to attract more than a handful of Democratic votes, even if President Obama supports it. Boehner will not get united House Republican support for any deal. He may need Democratic votes to pass it, and Nancy Pelosi (D-CA) is unlikely to supply them. That’s the problem.

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Pethokoukis, Economics, Taxes and Spending

4 reasons why we can’t bring back the 91% tax rate

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Paul Krugman's Strange Ireland Prediction

Photo Credit: Prolineserver (CC BY 2.0)

Paul Krugman wants to go back to the future:

America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda then and now, it prospered. And we can do that again.

Krugman is too smart a guy to really believe this. Perhaps by making the case for a 91% top tax rate, President Obama’s tax hikes won’t look so extreme. But whatever the politics, the economics of Kurgman’s plan are terrible

1. The 1950s and 1960s were affected by a host of unique factors, not the least of which was that they came right after a devastating global war that left America’s competitors in ruins. A National Bureau of Economic Research study described the situation this way: “At the end of World War II, the United States was the dominant industrial producer in the world. … This was obviously a transitory situation.”

2. As former Bain Capital executive Edward Conard notes in his new book, Unintended Consequences, the size of the U.S. labor force was constrained during those decades by both the 1930s baby bust and casualties from the war. So a surge in jobs and a restricted supply of labor produced fat wage growth. Hoping for a return to that era is futile, Conard concludes:

The United States was prosperous for a unique set of reasons that are impossible to duplicate today, including a decade-long depression, the destruction of the rest of the world’s infrastructure, a failure of potential foreign competitors to educate their people, and a highly restricted supply of labor. For the sake of mankind, let’s hope those conditions aren’t repeated. It seems to me anyone who makes comparisons between today’s economy and that of the 1950s and 1960s without fully disclosing their differences is deceiving their readers.

3. Even most liberal economists think the high-end for US marginal tax rates is 70% or so. And a new study from AEI shows even that estimate is almost certainly too high since it a) assumes the rich won’t respond to higher rates by changing work habits or engaging in tax avoidance, b) it assumes zero long-term impact on behavior by sharply higher rates, c) it assumes Americans prefer want government to take as much income as possibly from the rich and redistribute it to the non-rich.

4.Look at the natural experiment that just happened in Great Britain. Its Independent Fiscal Oversight Commission—which reviews all of the budgetary assumptions—just ruled that cutting the top rate of tax from 50% to 45% was revenue neutral, implying the revenue maximizing rate is in that range.

Sorry, Mr. Krugman, your dream of confiscatory tax rates will have to remain just that, a left-of-center fantasy.

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Pethokoukis, Economics, Taxes and Spending

New study shows why heavily taxing the rich won’t work

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Image Credit: White House Flickr Stream

Image Credit: White House Flickr Stream

It’s strange when you think about it. Not only is President Obama pushing the largest round of tax hikes in almost a generation, but those increases would come during the most anemic economic expansion since World War Two — or maybe ever in American history. Still, the White House appears not at all concerned that raising the tax burden and hiking marginal tax rates would make a sickly economy even weaker. Nor is Team Obama concerned, apparently, about the risk of raising the long-term tax burden at a time when demographic changes will begin making it harder for the US economy to grow as fast in the future as it has in the past.

How can Team Obama be so preternaturally carefree and nonchalant about its taxapalooza? (Not to mention Paul Krugman who would like to return to ultrahigh, 1950s tax rates.)

One big reason is research from two highly respected — and left-of-center — economists, Peter Diamond and Emmanuel Saez. (Diamond is a failed Obama nominee to the Federal Reserve Board in addition to being a Nobel Laureate, while Saez is perhaps best known for his work on income inequality with Thomas Piketty.) In their paper, “The Case for a Progressive Tax,” they contend that the top federal income-tax rate in the US could more than double to 73% from 35% today without hurting economic growth. To put it another way, the US is nowhere close to the top of the Laffer Curve, where higher tax rates start lowering tax revenues. If Diamond and Saez are correct, raising the top marginal rate to roughly 40% (actually closer to 43% when you account for other tax code changes), as Obama wants to, is no problemo.

Diamond and Saez summarize their findings in an April op-ed for The Wall Street Journal:

Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s. To reduce tax avoidance opportunities, tax rates on capital gains and dividends should increase along with the basic rate. Closing loopholes and stepping up enforcement would further limit tax avoidance and evasion.

Diamond and Saez, shorter: Let’s use an “all of the above” tax hike strategy to create a tax-hike “straitjacket” of higher rates and fewer tax breaks for wealthier Americans (and small business). The approach is the clear model for Obama-style tax reform.

But a new American Enterprise Institute analysis, published in Tax Notes, of the Diamond and Saez research suggests Obama might want to rethink his tax-hike strategy — or at least his cavalier attitude toward the potential risks it poses to US economic growth and job creation. In their paper “Should the Top Marginal Income Tax Rate Be 73 Percent?,” Aparna Mathur, Sita Slavov, and Michael Strain say they “do not believe that the [Diamond-Saez] model can be used prudently as the basis for the real-world public policy problem of determining the socially optimal top marginal income tax rate.”

Conducting the sort of deep dive that economic policymakers and pundits rarely make, Mathur, Slavov, and Strain highlight a number of questionable assumptions and choices made by Diamond and Saez:

1. Diamond and Saez assume that high-income taxpayers react to tax hikes more or less like lower-income taxpayers, meaning not so much. While there is no consensus here, studies focusing on high-income individuals tend to find much higher estimates of short-term responsiveness than studies of lower-income households. It makes intuitive sense: Wealthier taxpayers have a greater ability to alter how much they work, in what form they get their income, and fashion tax- avoidance strategies. “We do not believe that in the real world the top tax rate should be set under the assumption that tax avoidance and evasion behavior can be dramatically changed,” Mathur, Slavov, and Strain write.

2. Diamond and Saez assume sharply raising tax rates has zero, zilch, zippo long-term impact on taxpayer behavior and the economy since, well, those effects are hard to measure. But economists agree those long-term effects are important. America benefits greatly from people who take risks and make career choices in hopes of striking it rich. “Significantly reducing that possibility by hitting those individuals with extremely high income taxes is of first-order importance in determining the optimal top tax rate,” Mathur, Slavov, and Strain argue.

3.  Diamond and Saez have created a model — admittedly a lovely and elegant one — with a built-in bias that says more equality is better than less equality. Or, in other words, government should maximize the revenue it collects from high earners since they value each additional dollar of income less than lower-income earners. “Because the social loss from taking money from the rich is assumed to be zero and the social gain from giving money to the non-rich is greater than zero, society’s goal is clear: The government should take as much money as possible from the rich and redistribute it to the non-rich,” Mathur, Slavov, and Strain write. But is this really the role Americans want their tax code to play? The AEI economists:

Gregory Mankiw, a Harvard economist and former senior economic adviser to President George W. Bush, has said: “My sense is that people are rarely outraged when high incomes go to those who obviously earned them. When we see Steven Spielberg make blockbuster movies, Steve Jobs introduce the iPod, David Letterman crack funny jokes, and J.K. Rowling excite countless young readers with her Harry Potter books, we don’t object to the many millions of dollars they earn in the process. The high incomes that generate anger are those that come from manipulating the system. The CEO who pads the corporate board with his cronies and the banker whose firm survives only by virtue of a government bailout do not seem to deserve their multimillion dollar bonuses. The public perceives them (correctly or incorrectly) as getting more than they contributed to society.

A better criterion, according to Mankiw, would be: ‘‘People should get what they deserve.’’

Diamond and Saez’s academic work is filed with caveats and explanations not found in their work for public consumption, which is far more black and white. And to some degree that’s understandable. But a deeper reading leads Mathur, Slavov, and Strain to this conclusion:

Diamond and Saez ignore long-term behavioral responses, assume more equality is a better social welfare function, assign no social value to the marginal dollar of consumption for the rich, and use a short-run behavioral response predicated in part on less evasion and more enforcement to compute an answer of 73 percent. Consequently, we can be pretty sure that the answer is significantly less than that. Further, we find the suggestion that the government should take more than half of a citizen’s income in taxes to be unpalatable.

Cranking up taxes on the rich isn’t the free lunch or cure-all that liberals so desperately desire it to be. And anyway, the revenue-maximizing tax rate isn’t the same as the growth-maximizing tax rate. America needs a tax code that pays for the amount of government it wants in a way that is as efficient and least harmful to economic growth as possible while also broadly reflecting society’s sense of equity. Using a $15 trillion economy to run a precarious, ideologically-driven experiment to find the exact tax-rate tipping on the Laffer Curve of the current tax code — and thus temporarily avoiding politically risky entitlement and tax reform — is a terrible way to pursue public policy.

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Pethokoukis

By the way, Sandy or no Sandy, economy on a bad storm track

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111612econ

Here is economist Michael Englund of Action Economics in a new research piece titled: “An Ominous Recession Signal from U.S. Industrial Production:

The 0.4% U.S. October industrial production drop led by weakness in the manufacturing and business equipment components provided an ominous recession-signal as we enter Q4 and approach the fiscal cliff, following a mixed pattern of back-revisions that left a 0.2% (was 0.4%) September rise, a 1.1% (was 1.4%) August plunge, and a 0.7% July gain. Is U.S. GDP going to contract by more than expected into year-end as businesses brace for a fiscal fiasco?

Capacity utilization fell to 77.8% from 78.2% (was 78.3) in September, 78.2% (was 78.0%) in August and a cycle-high 79.2% in July, as the index is now trending downward well before reclaiming the 80.6% rate at the end of the last cycle in December of 2007. …

We have lowered our Q4 GDP growth forecast to 1.2% from 1.5%, following a 2.0% advance Q2 clip that we assume will be boosted to 2.8%.

The above chart shows the capacity utilization rate and how it never quite returned to its old highs. Again, we have an output gap and jobs gap, neither of which is closing as we fail to have any catch-up growth.

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Pethokoukis

Tax reform must be pro-family and pro-growth

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111612family

The family — first extended, now nuclear — has been considered the core building block of society throughout human history. But that is changing in high-income nations. More individuals are eschewing both marriage and children. This has been driven, says a new report on the issue by a Joel Kotkin-led research team, by a variety of factors (with much overlap):  a) the rising cost of and declining economic need for children, b) the move away from traditional values, c) the rise in urbanism, and d) the recent extended period of economic weakness and stagnation.

This trend poses challenges:

Societal norms, which once almost mandated family formation, have begun to morph. The new norms are reinforced by cultural influences that tend to be concentrated in the very areas — dense urban centres — with the lowest percentages of married people and children. …

A society that is increasingly single and childless is likely to be more concerned with serving current needs than addressing the future oriented requirements of children. …

The most obvious impact from post-familialism lies with demographic decline. It is already having a profound impact on fiscal stability in, for example, Japan and across southern Europe.  …

A diminished labour force — and consumer base — also suggest slow economic growth and limit opportunities for business expansion. For one thing, younger people tend to drive technological change, and their absence from the workforce will slow innovation. And for many people, the basic motivation for hard work is underpinned by the need to support and nurture a family. Without a family to support, the very basis for the work ethos will have changed, perhaps irrevocably.

Seeking to secure a place for families requires us to move beyond nostalgia for a bygone era and focus on what is possible. Yet, in the end, we do not consider familialism to be doomed. Even in the midst of decreased fertility, we also see surprising, contradictory and hopeful trends. In Europe, Asia and America, most younger people still express the desire to have families, and often with more than one child. Amidst all the social change discussed above, there remains a basic desire for family that needs to be nurtured and supported by the wider society.

Actually, a quote in a David Brooks column today about the report really sums it up, at least at it applies to America, I think:

Toru Suzuki, a researcher at the National Institute of Population and Society Security Research in Japan, gave Kotkin’s team this explanation in its baldest form: “Under the social and economic systems of developed countries, the cost of a child outweighs the child’s usefulness.”

Or as an economist might put it, parents are less able to recapture their economic investment in their children than in the past.  Yet there is evidence Americans still hold deep pro-family, pro-child views: “In a survey conducted by the Pew Foundation, nearly half of adults surveyed identified two as the “ideal” number of children — a number that has been consistent since the early 1970s — while over a quarter preferred three and nearly 10% four. In contrast, barely 3% opted for one, while a similar number chose none.”

The study takes an initial stab at a solution: greater flexibility in the workplace including a more “home-based economic system’ that “provides greater flexibility to all parents, including women nursing infants, and allows families to move to more.”

I would focus on tax policy. As Phil Longman explains in The Empty Cradle – and I paraphrase — by raising and educating their children, parents have already contributed hugely (in the form of human capital) to social insurance systems. The cost of their contribution, in both direct expenses and forgone wages, is often measured in the millions. Requiring parents to also then contribute to payroll taxes is not only unfair, but imprudent for societies that are already consuming more human capital than they produce.

So one option is giving parents a break on payroll taxes. The more kids you have, the less you pay. Another option is a new, larger child credit that can be applied against income taxes and payroll taxes. I would be surprised if some GOP policymakers aren’t already looking at one or both options as they seek to have a more pro-middle class, pro-family economic message. I don’t see how it would conflict with also continuing to reward working hard and taking risks.

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Pethokoukis

5 myths about U.S. defense spending

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Venture capital firm Kleiner Perkins put together a great, chart-filled budget study a couple of years ago looking at America like it was USA Inc. Frankly, it’s an approach Mitt Romney should have copied. Anyway, here is one telling bit of analysis:

Since the Great Depression, USA Inc. has steadily added “business lines” and, with the best of intentions, created various entitlement programs. Some of these serve the nation’s poorest, whose struggles have been made worse by the financial crisis. Apart from Social Security and unemployment insurance, however, funding for these programs has been woefully inadequate – and getting worse.

– Entitlement expenses (adjusted for inflation) rose 70% over the last 15 years, and USA Inc. entitlement spending now equals $16,600 per household per year; annual spending exceeds dedicated funding by more than $1 trillion (and rising). Net debt levels are approaching warning levels, and one-time charges only compound the problem.

– Some consider defense spending a major cause of USA Inc.’s financial dilemma. Re-setting priorities and streamlining could yield savings – $788 billion by 2018, according to one recent study – perhaps without damaging security. But entitlement spending has a bigger impact on USA Inc. financials. Although defense nearly doubled in the last decade, to 5% of GDP, it is still below its 7% share of GDP from 1948 to 2000. It accounted for 20% of the budget in 2010, but 41% of all government spending between 1789 and 1930.

Indeed, there are plenty of myths about U.S. defense spending:

1. Defense spending doubled over the past decade. Can’t we return to previous levels? No. That would mean returning to an era when general readiness was at a nadir and equipment was aging. Excluding funds associated with war fighting in Iraq, Afghanistan, and the global war on terror, the defense budget from 2001 to 2008 increased by just 4 percent annually, adjusted for inflation.

2. But aren’t today’s defense budgets at historic highs? In constant, “real” dollars, yes. But a better way to gauge the “cost” of defense is by measuring it as a percentage of the US economy. In that respect, the economic burden of defense has been cut almost in half, from a 50-year Cold-War average of about 7 percent to 4.1 percent today (3.4 percent without war costs).

3. We spend more on defense than many other nations combined. Isn’t that excessive? Not if you look at what we ask our military to do and the value it generates. Our preeminence yields enormous strategic returns: (1) It protects the security and prosperity of the United States and its allies; (2) It amplifies America’s diplomatic and economic leadership; (3) It prevents the outbreak of great-power wars so common in previous centuries; and (4) It preserves the international order in the face of aggressive, illiberal threats. These benefits are a bargain at 4 cents on the dollar.

4. Sequestration hits defense and domestic programs equally. Fair’s fair, right? Sequestration does virtually nothing to address the source of the federal government’s fiscal problem, which is the unchecked growth in entitlement spending. In 2012, Medicare, Medicaid, and Social Security accounted for more than $1.5 trillion in federal spending, compared to $1.2 trillion for total discretionary spending, about half of which was defense. Think about it this way: defense and discretionary spending and entitlements and debt service are not equal slices of the budget pie; indeed, one of the smaller slices is taking a disproportionately high cut. That is not an equal share. Nor is it right to jeopardize the most fundamental function of government—protecting its people.

5.  Does the size of the military matter, given how much more today’s ships and planes can do? No matter how advanced, today’s ships and planes still cannot be in two places at once, nor can they shrink the size of the skies or oceans. Numbers matter in war, and, for deterrence, in peace. The problem with the US military is not just that it is smaller than it used to be, but that, in a dangerous world, it is smaller than it needs to be.

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Pethokoukis

Charts: Warfare State and Innovation State down, Welfare State up

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111512fiscal

So what exactly is the cause of America’s fiscal problem? 

And it is not just about declining defense budgets. As a recent report from Third Way concluded, ”As the Baby Boomers enter retirement, entitlements will encroach upon an even greater portion of the federal dollars once reserved for building roads, educating kids, and paving the way for technological breakthroughs. Entitlements are a critical part of economic security, but without change, investments will all but dry up, threatening our economy’s ability to grow and create opportunity in the 21st century.”

Image Credit: Third Way

 

 

 

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Pethokoukis

Will Obama make one last run at a broad homeowner bailout or mass refi?

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A bit of buzz in Washington that not only will President Obama replace Ed DeMarco — perhaps with a stick-it-in-your-eye recess appointment — as the regulator of Fannie and Freddie — but also that DeMarco’s departure from the Federal Housing Finance Agency would lead to some sort of broad principal forgiveness program  As the FT reports:

Investors in the US are marking down the prices of securities backed by mortgages written before the financial crisis, anticipating that the re-election of President Barack Obama presages a new effort to help distressed borrowers refinance their loans.

The sell-off is being dubbed “the DeMarco trade” after Edward DeMarco, acting director of the Federal Housing Finance Agency. The Obama administration has quietly told housing industry activists in recent weeks that he will be replaced as head of the agency that supervises government-run mortgage finance agencies Fannie Mae and Freddie Mac.

Mr DeMarco has repeatedly clashed with the administration over its hopes of using Fannie and Freddie to enable more borrowers to write off part of their mortgage debt, a move called “principal forgiveness” that officials believe could stimulate the housing market and the broader US economy.

But Jaret Seiberg, analyst at Guggenheim Securities’ Washington Research Group, is dubious. In a new research note, he argues that just broadly forgiving mortgage principal for underwater borrowers is too expensive since, by law, the FHFA is suppose to limit taxpayer losses. More likely any forgiveness would be limited to  ”borrowers who are seriously underwater and who have not made payments for two years or longer. We do not see this as a large universe of borrowers.”

You might also recall that the back in Obama’s 2012 State of the Union speech, there was this stab at new housing policy:

And that’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust.

Basically, Obama was calling for a way to allow homeowners with non-government backed loans to refinance into FHA loans. It didn’t seem likely then and it seems even less likely now given that the FHA may need a taxpayer bailout. Seiberg: “In short, there is no real path forward to refinance non-agency mortgages into FHA loans. So we see little government help on the horizon for these borrowers.”

Now the president might have somewhat better luck with Congress by just focusing on Fannie and Freddie mortgages. Economists Glenn Hubbard and Chris Mayer have devised a center-right mass refi plan. As Mayer described it in congressional testimony $242 billion split equally between the government and lenders. Hubbard and Mayer calculate the economic impact this way:

The typical borrower would reduce his or her principal and interest payments by about $350 dollars, a total reduction in mortgage payments of nearly $100 billion per year. …

The macroeconomic stimulus effect should also include an additional housing wealth effect. At the low end of our estimates, improved mortgage market operations would reduce house price declines by 10 percent. With an estimated aggregate housing valuation of about $18 trillion, housing wealth would increase about $1.8 trillion relative to what it might fall to without this program.

If we assume a relatively low marginal propensity to consume out of housing wealth of 3.5 percent, U.S. consumption would rise by $63 billion relative to what would otherwise have occurred. … Combining these estimates gives a total macroeconomic stimulus of as $118 billion per year in lower mortgage payments and any new consumer spending due to a housing wealth effect. In addition to the direct macroeconomic stimulus, jump-starting the stalled housing market will increase employment in a variety of industries that depend on housing transactions (mortgage and real estate brokers, home supply companies, moving companies, etc.) as well as increase the efficiency of the labor market by reducing impediments to households moving to take another job.

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Pethokoukis

Get ready for a taxpayer bailout of the Federal Housing Administration

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Image credit: Kevin Shorter (Flickr) (CC BY-SA 2.0)

Image credit: Kevin Shorter (Flickr) (CC BY-SA 2.0)

The Wall Street Journal’s Nick Timiraos:

The Federal Housing Administration is expected to report this week it could exhaust its reserves because of rising mortgage delinquencies, according to people familiar with the agency’s finances, a development that could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history.

This isn’t your granddaddy’s FHA. Back in the 1930s, it insured 20-year term loans combined with a 20% down payment. What’s more, FHA lending was backed by a rigorous property appraisal process. Not surprisingly, defaults resulting in claims were super low. From 1934 through 1954, notes AEI’s Ed Pinto, the FHA insured 2.9 million mortgages. During this period, FHA paid claims on 5,712 properties for a cumulative claims rate of 0.2%.

But these days, Timiraos writes, it’s backing borrowers with downpayments “of as little as 3.5%—loans that most private lenders won’t originate without a government guarantee.” And although it guarantees fewer mortgages than Fannie or Freddie, it has more seriously delinquent loans than either of them. Again, Timiraos:

Overall, the FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from a year ago. That represents about 9.6% of its $1.08 trillion in mortgages guaranteed. …  The FHA never relaxed its underwriting rules during the housing boom, and its market share plunged as private lenders offered loans on much easier terms. But the agency saw business soar as the housing bust deepened, first in 2007, as private lenders retreated, and later in 2008 and 2009, as Fannie and Freddie tightened standards. Most of the agency’s losses now stem from loans made as the housing bust deepened. About 25% of mortgages guaranteed in 2007 and 2008 are seriously delinquent, compared with about 5% in 2010.

Every year the FHA’s annual audit estimates how much money the agency would need to pay off all claims on projected losses versus how much it has in reserves. Last year, that represented 0.12% of its loan guarantees. Federal law requires the agency to stay above a 2% level. But as Pinto and Peter Wallison explain in an paper earlier this year, that ratio actually understates the severity of the problem:

To put this in perspective, as recently as 2006, the FHA’s capital ratio was 7.38 percent. If this were a real capital ratio, a decline of this size would be bad enough, but the “capital” in the FHA’s capital ratio is not even made up entirely of tangible assets. It is primarily expected future insurance losses subtracted from current net assets and expected future insurance premiums over the next thirty years.

In fact, if the FHA were treated like a private insurer, it would already be insolvent with a total capital shortfall of nearly $60 billion. Also note that Congress poured fuel on the fire last year when it raised the FHA’s conforming loan limit to $729,750.

Clearly the FHA desperately needs reform with the overriding principle being that it should return to its traditional mission of being a targeted provider of sustainable mortgage credit to low- and moderate-income Americans and first-time homebuyers. Among Pinto’s suggestions:

1. The FHA needs to return to its traditional market share of 10% versus today’s 30%.

2. The worst performing  25% of its mortgages will likely have a claim rate of at least 15%. FHA should limit the worst credit risk categories to a maximum claim rate of half that.

3. The FHA should focus on homebuyers who truly need help purchasing their first home.The homes it finances should cost less than the median priced home for an area.  And first-time homebuyers should be limited to an income of less than 100% of area median income and repeat home buyers to an income of less than 80% of area median income.

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Pethokoukis

A carbon tax — or just more energy science research?

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On Election Night last week, President Obama made a point of mentioning climate change: “We want our children to live in an America that isn’t burdened by debt, that isn’t weakened up by inequality, that isn’t threatened by the destructive power of a warming planet.”

That, along with superstorm Sandy, was enough — at least for the moment — to put the issue  back on the national radar. And as it so happens, Brookings is out with a plan for a carbon tax. It would start at $20 per ton of carbon dioxide, rising 4% per year in real terms. Over a decade, it would raise on average $150 billion a year while reducing carbon dioxide emissions 14% below 2006 levels by 2020 and 20% below 2006 levels by 2050. Brookings proposes would set aside “at least the first $30 billion of revenue annually for clean energy- and energy efficiency-related RD&D” while allocating the remaining $120 billion a year ”to tax cuts and deficit reduction as well as rebates to affected low-income households.”

AEI’s Ken Green thinks implementing a carbon tax would be a mistake for a variety of reasons:

There would be virtually no environmental benefits to unilateral greenhouse gas emission reductions by developed countries (whose GHG levels are already flat and slowly declining), while developing countries are pouring out virtually every kind of pollutant with joyous abandon.  …  Low carbon taxes won’t have a significant effect, and high carbon taxes won’t retain political support long enough to provide environmental benefits. … Energy taxes also make countries less competitive when it comes to exports, particularly when they’re competing against countries that don’t impose comparable taxes.

But his strongest point, to me, is that the way most carbon tax proponents want to implement  the levy makes for bad economics. How can you accurately price carbon while keeping myriad layers of government intervention from efficiency standards to regional trading systems to subsidies? Indeed, when a group of AEI scholars proposed a carbon tax, they addressed that very issue, substituting a tax on emissions for a) subsidies for ethanol and other alternative fuels, b) business and household energy tax credits, and c) regulations designed to lower greenhouse gas emissions. All those market interventions would be repealed or abolished. If you really want to address climate change in a pro-market fashion, that’s where you begin.

But I think the politics for a carbon tax remain daunting, especially given the Long Recession. Anyway, U.S. carbon emissions are already decreasing, down over 10% since 2007. That’s partly due to the Great Recession, but also the natural gas revolution. Fracking technology may allow natural gas to be a bridge fuel to this:

A technology is in the pipeline that has the potential to eliminate CO2 emissions entirely. Solar power, long believed to be unworkably expensive, has actually been falling in cost at a steady exponential rate of 7 percent per year for the last three decades straight. Because of this “Moore’s Law for solar”, electricity from solar panels now costs less than twice as much as electricity from coal, and only about three times as much as electricity from gas. Furthermore, technologies now in the pipeline seem to ensure that the cost drop will continue.

Within the decade, solar could be cheaper than coal. Within two decades, cheaper than gas. When that happens, assuming we also have electric cars, it is game over for carbon emissions.

So let innovation work its magic, with a bit of a nudge from increased government investment in energy science.

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  7. 55
  8. 56
  9. 57
  10. ...
  11. 97

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