Comments on naked capitalism: Thomas Palley Questions Housing Subsidies

Anon of 4:08 AM,Can you provide some supporting ev...

2008-05-09T02:14:00.000-04:00

Anon of 4:08 AM,

Can you provide some supporting evidence? I happened to be plugged into the Canadian sports mafia, and US pro sports teams hire certain Canadian doctors as consultants (an interesting loophole, that). They wouldn't do that if they didn't think they were top notch. For instance, the best foot doctor in North America (according to my US sports sources, who have a vested interest in knowing who is really tops) is outside Montreal.

Similarly, I've never run across anyone from Canada coming to the US for care, Indeed, I am told by people in the health business that it isn't safe to go to a New York city hospital without your own private duty nurse. Suburban hospitals are apparently better run, but if you have an emergency, you don't exactly have the luxury of choice.

Finally, this article ran today in the Canada's National Post lamenting that Canadian expats game the system, and fly in from abroad to use Canadian care. If it wasn't reasonably good, cost alone wouldn't justify going to the trouble of getting on a plane.

Going back to the Ozzie & Harriet references of th...

2008-05-08T14:38:00.000-04:00

Going back to the Ozzie & Harriet references of the idealized 1950's nuclear family, recall that this was the definition of middle-class. Now compare that to today's TV household. If not the spoiled rich brats from "The O.C.", it's "Pimp My House" or some such other over-the-top celebration of shallow excess.

In Ozzie & Harriet's day, keeping up with the Jones meant getting a larger lawn mower. Nowadays it means trading the lease in on the X5 in for a new lease on a Range Rover. To, of course, be parked in the 3-car garage attached to the 3000 sq. ft. home. Thus requiring dual incomes to support.

Contrary to the Robin Hood economic polices of the anointed chattering classes, the middle class isn't shrinking. Nor is it under attack. It simply has allowed its narcissistic obsessions with instant gratification to overwhelm its financial resources. Instead of looking inward for a solution, "Honey, maybe it's time to downsize our lifestyle?" they blame storm government, business, and even capitalism itself.

I don't give the boomers any pass on this however, as it was them who were raised by Ozzie & Harriet -- only to become Ozzy & Sharon to their own children.

to anon of May 7, 2008 12:26 PM:the only way to bu...

2008-05-08T04:18:00.000-04:00

to anon of May 7, 2008 12:26 PM:

the only way to buy a pot to piss in, is if you save enough to buy it. It has nothing to do with the lottery of demographics excuse that my generation (30-40 year olds) unfortunately uses to justify living beyond our means. Our parents generation created wealth the only way it gets generated: saving and re-investment. My generation for some reason has forgotten this. Until we re-discover this and stop trying to prop up housing with tax payer money, not only will this country spend the next 10 years as Japan has, people like me who save will have to wait that much longer before housing hits bottom. Ridiculous.

Anon of 9:28,I agree that the will to act is appal...

2008-05-08T04:12:00.000-04:00

Anon of 9:28,

I agree that the will to act is appallingly absent. Everyone is unhappy with health insurance (one of many possible examples of festering problems), yet no one is willing to take the industry out and shoot it (and I don't necessarily mean a single payer system, it seems anything that might cut their profits is verboten. Hell, that's precisely what needs to happen here. We'll throw factory workers on the dust heap, but not companies that are standing in the way of a badly needed restructuring).

I am really perplexed at what has happened to this country. Is everyone anaesthetized by TV, on Prozac, or so burned out by the daily grind as to have no energy left for outrage? When I was a kid (and the very fact of TV was still exciting and fresh), CBS ran a documentary, "Poverty in America" which showed vividly how bad things were in certain parts of America. I am convinced that it helped galvanize the Great Society programs, the same way the lurid footage from Vietnam fueled the war protests. But now that movies and TV programming have far more gory images than the news, maybe the media have lost their impact.

Yves said:"Our medical system costs substantially ...

2008-05-08T04:08:00.000-04:00

Yves said:

"Our medical system costs substantially more as a % of GDP as that of other advanced countries, and delivers no better health outcomes."

I agree with the former part of your statement, and that something has to be done, but if we deliver no better health outcome, then why do Canadians come over the border to pay for services in the U.S. all the time? Because we have better services.

Assuming efficient markets, the mortgage interest ...

2008-05-08T03:56:00.000-04:00

Assuming efficient markets, the mortgage interest deduction is predominantly a subsidy to the home building and mortgage lending industries.

Yves, This is anon 9:28.You are correct that the ...

2008-05-08T03:48:00.000-04:00

Yves,

This is anon 9:28.

You are correct that the Social Security problem is not unmanageable.......until it is unmanageable. Do you see any politicians calling for raising the age to collect payments based on life expectancy? Because that is how it was originally written. The lawmakers back then were ruthless with the rules. Life expectancy was 62.....the age which you collect payments.

We are spending twice as much per GDP as any other country on health care yet were are not getting extra benefits as you noted. It is indeed a health care problem.

Trouble is, Washington simply can't solve any of these problems. They have created a monster with entitlements, and they know it. The half measures and compromises that democracies come up with to solve problems will not work. The special interests (AARP, Big Pharma, trial lawyers, doctors) are two entrenched and too powerful. Our out-of-control legal system is a study in interest group politics.

At the end of the day serious cuts are going to have to be made yet nobody talks about this. And you can't raise taxes much more without capital flight, emigration and eventual currency controls

I suspect the USA will do what all bad governments do when they run into problems like this: print money, monetize the debt and blame others.........a de facto default. And hope the overseas bond holders don't notice they are being robbed.

The Ozzy and Harriet era worked for a lot of peopl...

2008-05-07T22:13:00.000-04:00

The Ozzy and Harriet era worked for a lot of people, but it didn't work so well if you were black, nonunion, or a soldier. Society was relatively stable, but the sharing of benefits was unsustainable, and indeed, was not sustained.

This brings us to the tax system. Business profit and productivity is not an end in and of itself. Wealth is the reward that society confers on those who do socially rewarding things. We measure social reward partly by profit--taking that which is cheap and turning into that which is expensive. So capitalism isn't an end. Rather, it's the means by which society allocates its productive resources most efficiently.

I love capitalism. It's given me, the child of immigrants, a very good life. But I also don't mind paying my way. There are public goods that people value, such as infrastructure and social security. There are private goods, such as medical care, that are subject to serious agency problems and therefore must be socialized in order to provide the service at a reasonable cost. Bottom line, society needs taxes.

Taxes, in order to be equitable and efficient, must collect the required revenue with as little drag as possible on the economy, and as broadly as possible. So, if one were to design such a system from scratch, it would probably include consumption taxes, steeply progressive income taxes (marginal utility of money declines as wealth increases), a social security system that offers a minimum income that gets clawed back at some prescribed rate, to motivate work. And probably very low or nonexistent corporate taxes.

Housing interest deductions would have no place in this world, but I guess that flying pigs would.

Anon of 9:28,Dean Baker, and to a lesser degree Pa...

2008-05-07T21:54:00.000-04:00

Anon of 9:28,

Dean Baker, and to a lesser degree Paul Krugman have pointed out that the Social Security payment increases aren't terribly alarming or unmanageable. The problem is Medicare, and that in turn is NOT a demographic problem, but a health care cost problem. The scary growth is due to assumptions on health cost care increases.

Our medical system costs substantially more as a % of GDP as that of other advanced countries, and delivers no better health outcomes. Treating the Medicare problem as an entitlement problem is a mis-diagnosis. We need to do something about health care, pronto.

The Naked Capitalist doesn't think our entitlement...

2008-05-07T21:28:00.000-04:00

The Naked Capitalist doesn't think our entitlement problems are as bad off financially we think they are? Please explain.

Nobody disputes the eye-popping numbers. So what is his solution?

Republicans want tax cuts and don't seem to care about anything else.

The Democrats refuse to even acknowledge the problem. I think that they assume that all we will have to do is "tax the rich". Trouble is, those deficit projections are based on optimistic economic growth. Higher and higher taxes will inhibit that growth and make the problem worse.

I have heard commercial real estate people complai...

2008-05-07T18:29:00.000-04:00

I have heard commercial real estate people complain that some 1980's amendments to the tax code (the so-called passive activity loss rules) made the 1980's real estate contraction much worse by drasticly restricting the ability of individuals to offset depreciation deductions against their ordinary income (from working, operating a business, etc). Some econometrics professor has probably done a study on how badly instituting these rules hurt the commercial real estate market in the 1980's, and from that, one might be able to draw conclusions on how badly drasticly restricting tax benefits for residential housing would hurt the residential real estate market currently.

Palley seems to argue that a housing subsidy leads...

2008-05-07T16:29:00.000-04:00

Palley seems to argue that a housing subsidy leads to a net higher cost of housing, thus leading to two-earner families, etc. This is absurd on the face of it.

Some kind of subsidy for home ownership is arguable due to the alleged spillover effects of ownership--neighborhood stability, etc.

Palley doesn't mention that a large percentage of the current interest subsidy has gone to second homes (vacation homes) for upper income families.

So I guess I would agree with his main point, that some reconfiguration is due.

The system has accommodated to existing law. What...

2008-05-07T15:12:00.000-04:00

The system has accommodated to existing law. What would be unfair is to change it. Perturbing taxation is merely a means of temporarily increasing revenues until the system adjusts to compensate. Playing the tax game is so pointless for a society and leads to nothing productive. Just say no to such lame ideas.

Thanks for posting Palley's wonderful piece, Yves....

2008-05-07T12:26:00.000-04:00

Thanks for posting Palley's wonderful piece, Yves. I don't know that I agree with all its' conclusions, but I certainly agree with him that the current tax subsidy system has produced or contributed to a deep inter-generational inequity and unfairness. One of the most annoying aspects of the current housing debacle is listening to the self-satisfied lecturing from older boomers like "R" above, who shake their fingers and drone on about how the people who are now in foreclosure situations "lived beyond their means" and were "too hedonistic". People like R never want to admit the obvious: by pure dumb luck, they won the demographic/historical lottery. The conditions which produced cheap-relative-to-cost-of-living housing were unique and not reproducible now. Aging boomers like R aren't any morally better than Joe Twentysomething, who just lost his 500K house, they're just much luckier. If I have to listen to any more "moral hazard" drivel I'm going to toss my Wheaties. The actual economic and social data--not Boomers' pleasantly self=satisfied fantasies of moral superiority--show clearly that by any objective standards, most people now are working much harder, feel endless anxiety about their future, and are enjoying fewer real benefits.

The Federal Gov't will be looking to increase reve...

2008-05-07T12:18:00.000-04:00

The Federal Gov't will be looking to increase revenue in the future so I expect housing to lose some if not all its tax saving incentives. With high energy cost builders will not be inclined to turn raw Ag land into subdivisions and with that long term decline their political power and popularity with Congress will decline.

All tax systems create distortions. Perhaps it's t...

2008-05-07T11:08:00.000-04:00

All tax systems create distortions. Perhaps it's time to consider an alternative to our current mess. The automated payments transaction tax proposed by a University of Wisconsin economics professor a number of years ago is worth considering.

http://www.apttax.com/

I like the idea of reducing the subsidy over ten y...

2008-05-07T10:45:00.000-04:00

I like the idea of reducing the subsidy over ten years. A sudden change would ruin the markets, but a slow and gradual change, especially be simply dropping the cap in the deduction, makes sense and would allow people to plan in advance. It will also result in a reduction in home prices, but given that home prices are already dropping (and are likely to overshoot), now would be the time to do it.

The elimination of the capital gains tax would also dramatically reduce speculation in residential real estate, but given that speculation in real estate is currently a smoldering ruin, now would also be the time to do it.

☺☺R said... "My Ozzie and Harriet era friends and ...

2008-05-07T10:28:00.000-04:00

☺☺R said...
"My Ozzie and Harriet era friends and I often reflect about how our parents provided us such a wonderful childhood – on one income. It's simple – they bought only what they could afford; one mortgage; and maybe, maybe one credit card. We've become hedonists."

"How advertising turned into a force acting on the public mind so successfully that it now serves to propel every kind of purpose, dogma, political and private ambition, health measures, and private or public institutions is a long chapter of cultural history that has yet to be writen...

"In short, those were the years when Comfort was replaced by Convenience...

"The modern situation has been described in detail by a Swedish scholar who explains 'the decline of service in a service economy' and gives the mathematical model for the relation between increased mechanization and loss of free time. (His book, brief and non-technical until the last chapter is: 'The Harried Leisure Class' by Steffan Linder.)

"Long ago, John Stuart Mill pointed out that mechanizing man's work had changed but not lightened his toil. But it has not been noticed that mechanizing the home has laid another load on the laborer's back: it has made simple poverty impossible. No household today can remain without the conveniences, beginning with the telephone and other utilities (as they are called), and going on to the car, radio, and television. Needed for holding one's job or socially imposed by the neighbors and one's children, they are part of an oppressive 'standard of living.' For some families this means moonlighting or perpetual debt, for others, who refuse the struggle, it is abject poverty instead of the tolerable life that an earlier age might have afforded."

Both England and Sweden abolished the mortgage de...

2008-05-07T10:05:00.000-04:00

Both England and Sweden abolished the mortgage deduction in the 80s and 90s abruptly. Housing prices tumbled, but both markets recovered in 5-10 years.

The Netherlands still has a similar mortgage deduction system, and is looking to abolish it gradually. Actually doing it is nearly impossible though, since it would put the last buyers (= the younger generations) deeply underwater on their mortgages

The reasoning by Palley that the mortgage deduction makes houses unaffordable for young people is a fallacy. The TCO of owning a house is going to be largely unchanged, mortgage deduction or not. Higher price with deduction or lower price without deduction leads to same TCO.

The tax deduction for capital gains on this asset class in the US leads to a far bigger distortion in asset allocation.

R said... My Ozzie and Harriet era friends and I o...

2008-05-07T10:01:00.000-04:00

R said...
My Ozzie and Harriet era friends and I often reflect about how our parents provided us such a wonderful childhood – on one income. It's simple – they bought only what they could afford; one mortgage; and maybe, maybe one credit card.

hate to be so blunt, but this is a wrong conclusion. the primary reason that dual incomes are needed today is because of the debasement of our currency by the fed and the increased tax burden (federal, state, exise, etc.) a stable dollar and low taxes would allow households to have a decent living on one income.

The absurdity of it is mindboggling.Policy makers...

2008-05-07T09:58:00.000-04:00

The absurdity of it is mindboggling.

Policy makers have lent the full force of the government to insure unaffordable housing for all.

Just think about it. Housing prices go down 10% and the sophists scream "CRISIS!"

But can you imagine them howling "CRISIS" if the price of gasoline, which is much less of a neccessity than a roof over your head, were to go down 10%?

It's insane.

My Ozzie and Harriet era friends and I often refle...

2008-05-07T09:34:00.000-04:00

My Ozzie and Harriet era friends and I often reflect about how our parents provided us such a wonderful childhood – on one income. It's simple – they bought only what they could afford; one mortgage; and maybe, maybe one credit card. We've become hedonists. Having recently returned from many years in southern Europe, I'm constantly amazed at the frenetic pace of Americans, now conditioned to go 24/7 as they seek to pay down the levels of debt required to “have it all”. Isn't the the dramatic rise of the divorce rate since 1965 indicative that our living/working values are all out of whack?

RE COMMENT BY "MARTIN"..the wealthy are already pa...

2008-05-07T09:16:00.000-04:00

RE COMMENT BY "MARTIN"..
the wealthy are already paying more out of pocket via the higher marginal rate. using your museum example, lets say the admit fee = the US marginal tax rates. the wealthy pay 36 eur to get in and others pay 28 eur. the museum offers a 36% discount to wealthy, who pay a net 23.04, and a 28% discount to the others who pay a net 20.16..
its amazing how the over-educated libs always forget this simple math.

Once one is prepared to see mortgage interest dedu...

2008-05-07T08:30:00.000-04:00

Once one is prepared to see mortgage interest deductibility as a form of subsidy, it does strike one as odd that it gives a higher subsidy to people in higher tax brackets. (Over here -the Netherlands- it's on the same principle, if I understand correctly.) If you deduct the same amount at 32% marginal income tax rate, it leaves you with paying 68% yourself, but at a 52% marginal tax rate, you pay 48% percent yourself. It's a bit like having three prices for admission to a museum: the wealthy guy pays EUR 4.80 and the other guy pays EUR 6.80... But there are far too many vested interests to expect this system to change.

there was an article in the economist a while ago ...

2008-05-07T08:00:00.000-04:00

there was an article in the economist a while ago about the ineffectiveness of the mortgage deduction. the example they cited was of england, whose property market actually did quite well without it. (i'm not sure if they had it and then eliminated it, or never had it at all). anyway, eliminating it just might not cause a collapse like most believe.