Congress and the President have no understanding of Economics…
Posted by Mike Sylvester - 11/8/09 @ 6:19 pm - Filed Under Featured, National Politics
The idiots in Washington DC passed another stupid piece of legislation last week. This piece of idiocy was HR3548; the worker, home ownership, & business act of 2009.
This bill passed 98 - 0 in the senate. This bill passed 403 -12 in the House. Both major political parties are overwhelmingly in favor of this idiocy.
This bill does three major things.
The first thing this law does is extends unemployment benefits again. The law extends unemployment benefits to in some cases 99 weeks (A record high amount of time in the US). I oppose this change; however, there are many economists and think tanks who feel that increasing unemployment benefits helps the economy because it puts money in the hands of people who will immediately spend it. This is done at a cost of a couple of billion dollars. So while I disagree with this; there are a significant number of reputable economists and think tanks who feel this is helpful so lets ignore this small portion of the bill.
The second and third things this law does are the problem. The two items below bring the cost of this bill to over 24 billion dollars.
The second thing this bill does; and the one that honks me off the most, is it extends to 1st time home buyers credit through June 30th of 2010 as long as you have a contract signed by April 30th, 2010. Further it extends the credit to people who have owned a home for five of the last eight years. Further it raises the income limits on the people who qualify for the credit. This credit is ABSURD and shows the Congress and the President have no understanding of basic economics. This provision was opposed by large majorities of both liberal economists and conservative economists. As far as I can tell the only groups in favor of this give-away are the mortgage industry and the real estate industry and the residential construction industry. There are several things going against this bill:
- The IRS has already opened over 107,000 civil investigations into the 1st time home buyers credit. They have done this because the credit is rife with fraud.
- The IRS has reported that at least 582 children claimed the credit; several of them were as young as four years old… Imagine a four year old buying a house.
- The IRS has opened 167 criminal investigations due to suspected fraud.
- The IRS is starting to investigate fraudulent claims to such a large extent that it is taking 12-16 weeks for taxpayers to get the tax credit sent to them at this point.
- According the the National Association of Realtors the tax credit will cause 350,000 homes to be purchased by November 30th, 2009 that otherwise would not have been purchased. Goldman Sachs thinks this number is high and feels that the credit only cause 200,000 homes to be purchased by November 30th, 2009 that otherwise would not have been purchased. In other words the original tax credit that is about to expire cost you and I (and our kids) between $43,000 and $80,000 per additional house that was sold. This has to be paid back with interest.
There is no possible justification for the extension of this tax credit. Even the New York Times opposes it along with numerous liberal and conservative think tanks. Between 80% and 90% of the people who get the tax credit would have purchased a home ANYWAY.
The third part of this bill is a provision that allows businesses in some cases to take losses they have in 2008 and 2009 and roll them back for a period of up to five years. This will mean the IRS will have to refund taxes these companies previously had already paid in. This makes our current tax code even more complicated.
Good Grief…
Mike Sylvester
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From the National Association of Realtors website:
Latest Existing-Home Sales Information
Big Rebound in Existing-Home Sales Shows First-Time Buyer Momentum
October 23, 2009 - Existing-home sales bounced back strongly in September with first-time buyers driving much of the activity, marking five gains in the past six months.
From Lawrence Yun, NAR chief economist, “Much of the momentum is from people responding to the first-time buyer tax credit, which is freeing many sellers to make a trade and buy another home,” he said. “We are hopeful the tax credit will be extended and possibly expanded to more buyers, at least through the middle of next year, because the rising sales momentum needs to continue for a few additional quarters until we reach a point of a self-sustaining recovery.”
That doesn’t really seem to support #5.
I know 2 people that have purchased a home this year, and both only got into the market to buy a home because of the tax credit. It is just my opinion, but I would guess that for people purchasing homes priced between $50k and $150k (most first time homebuyers) the tax credit might be the single largest determining factor in purchasing a home. People in that price range probably earn an amount where $8000 dollars is a significant enough percentage of that income to influence their decision. I am sure that this tax credit has almost zero impact in areas where prices are so high that $8k is an insignificant amount of money, but it still seems like you need first time home buyers taking the less expensive homes so that the sellers can upgrade.
Justin,
The facts of actual home sales support #5. You are listening to spin from the National Realtors Association. Of course the National Realtors Association supports the credit; it benefits them… Why do they care that the Federal Government is spending between $43,000 and $80,000 per HOUSE in order to boost home sales?
Mike
Mike, but they are not spending 43 to 80k per house. They are spending 8k or less per house. All of the money being spent is being directly injected into the economy. You can say that it is costing too much to boost home sales, but that is not the only goal of the tax credit. This is finally a stimulus that goes directly to people who are going to turn around and spend the money. The only problem I have with the bill is that it now allows the tax credit to be used toward down payments and closing costs.
Justin, if you like giving some of your money to others to buy a home, how about you give me some? Oh, by the way I am still driving a 95 Ford and my home could use knew windows (energy tax credit) and my furnace is 27 years old (another energy tax credit).
The problem is the government creates no jobs. All it is doing is borrowing money and giving the debt to future generations. This causes the dollar to fall, reducing buying power which if we did not have to import so much, would really not make much difference except when you traveled abroad.
Did we actually have a positive GDP growth this past year? My guess is the $1.9 trillion deficit caused the GDP number to increase, but it will cause future GDP numbers to be lower. In simple terms the $1.9 Trillion deficit artificially stimulated the economy. When the stimulus is gone, the piper still needs to be paid.
Realtors love the $8,000 tax credit. They get 6% for selling a home. That means $480 of that $8,000 goes into realtors pockets and your children will forever pay interest on the $8,000.
How is the money not creating jobs? If people use the credits to buy furniture and appliances, then won’t furniture and appliance manufacturers hire more employees? In turn, those new employees will have money to spend. I guess I am just in the minority on this blog who thinks that right now it is the government’s responsibility to try and inject more money into the economy to help turn things around. Unemployment is not going to go down on its own because wages will never drop enough for that to happen. Once unemployment goes down, tax revenue should go up, that will be the time to pay down the deficir.
Justin,
First off the entire point of the tax credit is to boost home sales. They are not doing it to stimulate the economy; per their own language this tax credit is designed to boost home sales.
The problem with the tax credit is the VAST MAJORITY of the people receiving the tax credit were already going to buy a house…
I tend to agree with you that most of the people getting the tax credit are spending the tax credit which in turn stimulates the economy…
I disagree with the tax credit because it is unfair. If you want money injected in the economy then why not just have the Government mail everyone checks? That way EVERYONE gets some money not just those people who happen to be in the market to purchase a new home and meet their criteria…
Let me give you an example. I have a very good friend who just bought a new home. He lived in his prior home for almost a decade. By the new expanded tax credit he would have qualified for the expanded “step up” home buyers credit; however, he bought his house a few weeks to early. He had no idea they were going to expand the silly credit.
How is that fair Justin?
Mike
Justin, just follow the money. Where does congress get the money to provide tax credits to things like cash for junkers, First time home buyers and more? Did they first collect this money from the taxpayer, no? They borrowed it. If you borrow money, you agree to pay it back.
Using your line of thought, we could all stimulate the economy without the government simply by borrowing money and buying things on credit. Oh, we did that and ran up against the ability to borrow and pay it back which led to defaults, layoffs and down turn in spending.
All you are doing is replacing yourself as the borrower with the government. When do you forsee having to pay more in taxes to pay back the borrowed money? When you begin to pay back the money, does this decrease spending in the future? If it does, does this lead to layoffs? If so do people begin to get worried about their futures and spend less?
Do you get the picture? Every time the government stimulates the economy, they take future sales and bring them forward, thus slowing future growth. How many times can you do this before default? Look at California.
We are just going to have to agree to disagree, burying our collective heads in the sand and hoping that the economy will just fix itself is just silly. I think we tried that once around 1930….
I understand the desire to be fiscally conservative but right now that is just a self-defeating behavior. If everyone stops spending money how will the economy turn around? I know that irresponsible use of credit put us in this situation, but that doesn’t make credit a bad thing. We just have to hope that when the economy turns around we are responsible enough to pay the debt back.
Justin,
As bad as this will sound, I think it is the only way to drag ourselves out of this. Debt got us into this mess and loss or wealth, assets, money will get us out. With this I mean that all the money that was borrowed will have to be lost to some degree. Someone has to pay the piper.
Government bailouts allow failed companies to stay in business sucking more out of the economy. No one knows who will be next. A bankruptcy clears the books. People take losses. They loose their stock and ownership. Everyone connected with the bankruptcy generally looses. In a few months it is over and you move forward.
The government is propping up businesses that should fail. This propping up makes other legitimate companies have to compete against them reducing all to the lowest common denominator instead of the few who should go out of business.
Hoping solves nothing. Action is what is needed.
As for being responsible enough to pay the debt back, keep in mind that this country, the tax payers have never paid a single penny back that has been borrowed since 1958!!. Every single deficit in every year since then was borrowed, adding to the national debt. When it came time to pay the interest, they borrowed money to pay the interest increasing the national debt. 51 years of constant yearly deficits. I have no faith at all that this debt will be paid back.
Finally, not everyone will stop spending without a government handout. However, when the net wealth of a country falls to a level where there is little wealth (assets minus debt), then you have a real problem. The US is very close to this point now. You need capital to move forward. Someone must make the first investment and it should not be one government entity, but millions of people making separate choices.
Things to watch:
Value of the dollar in relationship to other currencies.
The price of oil
The price of gold
Internal inflation versus external inflation.
Justin,
I think you’ve fallen victim to the administration’s ruse. This was not stimulus for the people; it was for the banks - just like 90+% of everything this administration has done.
Just look at your last sentence. Why do you think they are allowing people to use it towards down payments? Clearly it’s to extend credit to people that otherwise couldn’t (and shouldn’t) be buying homes right? And why would they be doing that? It’s not like extending credit to people that can’t afford it otherwise is in anyway beneficial to them.
This entire program is a way to get people buying homes and attempting to prop up prices so that banks don’t have to take large markdowns on their real estate portfolios which would inevitably expose how undercapitalized they still are. Just follow the money.
We need housing prices to fall. We need people to save more and deleverage existing debt. This program, like all government housing programs, is a disaster. It is driving rental vacancies through the roof which is putting pressure on the commercial real estate market at just the wrong time.
There is simply no reason for the government to push homeownership as it only distorts the market. And paying $40k-$80k per additional home sold is so asinine as stimulus it’s not even debated among professional economists. In fact, I don’t think I’ve seen a single one that supports it.
Once can make an argument for stimulus but attempting to prop up an overvalued housing market by extending credit to people that either don’t really need it or can’t afford it is not going to help the economy in the long run…
Ding, Ding, Ding! We have a winner. Savings and production is how you grow an economy yet what we’ve done is simply borrow and import. Capital investment comes from savings. It’s true that it can also come from external investment but don’t we at least want the majority of our assets owned by Americans?
I’m amazed that the Clinton retreads that started this mess via “free trade” and unregulated finance markets are still taken serious enough to get a job at a university let alone be running the show in the Obama administration.
Despite his financial and trade fallacies at least Clinton understood that debt control was important. Unfortunately the Bush administration continued the kamikaze fiscal policies of the Clinton administration but also threw debt concerns out the window as well.
Now we’ve got the Clinton team trying to clean up the whole mess (that they started) by continuing Bush administration policies. It’s almost comical if you really step back and look at it…
Bill,
I’m sure you were referring to gross debt but public debt did decrease during the Clinton years. In fact public debt has historically had its largest increases under Republican administrations.
Jeff,
I was referring to the national debt. Clinton never had one single year of surpluses. Go to the US Treasury Web site and check for yourself. I did not find one single year after 1957 where the national debt decreased.
http://www.treasurydirect.gov/NP/BPDLogin?application=np
The fiscal year ends September 30 of each year. Year are the year end debt levels for each year
1990 $3,233,313,451,777
1991 $3,665,303,351,697
1992 $4,064,620,655,522
1993 $4,411,488,883,139
1994 $4,692,749,910,013
1995 $4,973,982,900,709
1996 $5,224,810,939,136
1997 $5,413,146,011,397
1998 $5,526,193,008,898
1999 $5,656,270,901,615
2000 $5,674,178,209,887
2001 $5,807,463,412,200
2002 $6,228,235,965,597
2003 $6,783,231,062,744
2004 $7,379,052,696,330
2005 $7,932,709,661,724
2006 $8,506,973,899,215
2007 $9,007,653,372,262
2008 $10,024,724,896,912
2009 $11,909,829,003,512
It is also a bit more complicated as to who is responsible. In my opinion both democrats and republicans are responsible. One of the things tha makes it more difficult to determine is under Kennedy, much of the problems we have were passed. We stopped paying down the debt and increased government programs dramatically. Then based on the deficits that were run under Johnson and Kennedy, the interest that was borrowed since then adds up to a lot. I have looked at it by adjusting the dollars in each of the deficit years based on the US Average Wage. Simply looking at the dollars from 1958 and comparing them to 2009 are off by 1144%.
It would be interesting to go back and analyze into two buckets which, sum to the total debt, each years prorated interest to respective parties. I am not sure I would do it justice now. If I feel up to it and can remember, I will attempt it.
Thanks for putting the time into your blog.
Best regards, Bill
Bill,
Those are gross debt numbers which combine the public debt and the intragovernmental debt. Clinton did reduce the public debt at one point but the gross debt was still higher.
Bill,
I took the OMB data (pdf - p. 128) and created this chart showing the year over year percentage change in gross and public debt. When the line dips below zero that’s a reduction in the debt. As you see, it doesn’t happen often.
Jeff wrote “Those are gross debt numbers which combine the public debt and the intragovernmental debt. Clinton did reduce the public debt at one point but the gross debt was still higher.”
Is there really a difference? Intragovernmental debt is that debt which was loaned to the US Treasury, thereby increasing the National Debt. This would include Social Security Surpluses that were allocated to SS-DI and SS-OASI to pay future benefits. It would also include interest paid to Medicares Trust Fund, the DOT trust fund and other government agencies that have dedicated tax revenue.
The fact remains the national debt went up in all years. To say that there was a surplus because Social Security, Medicare, DOT and other government agencies accrual costs to a slight degree and did not need it in the current year is wrong.
The General Budget Deficit remains. The National debt is not reduced simply because SS had a surplus and it was credited with $125 billion in interest.
From 1970 to 1983 SS spent more every year than it collected in Payroll taxes, thus reducing the trust fund it had built up in previous years. These reductions did not increase the national debt, it was simply sold to others.
When SS begins to redeem their on-demand-U.S. Treasuries, the debt will not increase nor with the deficit increase. All that will happen is that some other entity will own that debt.