59 Responses to Taxes Aren't The Only Problem

  • Donald R. McClarey says:

    Joe, I think tax revenues have increased precisely because tax rates have been cut. I think it is a good thing that a large segment of our society pays no federal income tax as a result of Republican initiated tax bills since 1980. Of course all of us still pay into the government sponsored Ponzi scheme known as social security which I think is a great cheat, especially for the poor. Government debt is a result of feckless spending and not because the government does not drain enough money from the tax payers.

    A good article on tax rates and tax revenues is here:

    http://www.heritage.org/Research/Taxes/BG1086.cfm

  • This is a good post, and you are right to focus on the increasing inequality and median real wage stagation as a key economic factor of the past quarter century or so. I’ve been struck by the similarities to the Gilded Age that ended with the Great Depression, and now our own Gilded Age has ended with the greatest global slowdown since the Great Depression. Pius XI wrote during that time, and his words ring true today as well, as he warns of the “twin rocks of shipwreck” that are socialism and free market capitalism.

    I’ve written about this issue on Vox Nova quite a lot. See here:

    http://vox-nova.com/2007/09/26/why-inequality-matters/

    http://vox-nova.com/2007/12/06/laissez-faire-restored-workers-left-behind/

    Donald makes the argument that “I think tax revenues have increased precisely because tax rates have been cut”. Honestly, I can’t believe people are still making this, as it’s a hoax on the scale of Madoff! What you can possibly argue is that the incentive effects of cutting taxes mean that the drop in revenues from cutting taxes is less than it would otherwise have been, but you are not going to get higher revenues — assuming you keep the tax base constant (if you widen the base by eliminating exemptions and deductions, you will get more revenue, but that’s a different experiment).

  • Donald R. McClarey says:

    Tony the world is not a static pie no matter how much you wish it to be so. Higher tax rates will decrease government revenue by being a drag on economic performance. I will quote on that point that famed right wing Democrat President John F. Kennedy:

    “It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

    – John F. Kennedy, Nov. 20, 1962, president’s news conference

    “Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”

    – John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964

  • Donald: there is not a single reputable economist –right, left, center — who believes that the incentive effects of cutting current US income taxes will lead to an increase in revenue, and it did not happen when rates were cut.

  • Donald R. McClarey says:

    A good article on how raising tax rates doesn’t guarantee more revenue.

    http://scottgrannis.blogspot.com/2009/02/raising-tax-rates-doesnt-guarantee-more.html

    Of course all of this should be pefectly obvious to anyone who understands human nature. Increasing taxes is a disincentive for people to engage in the activity subject to the higher tax. People aren’t that stupid. They will do their best to avoid having to pay the higher tax.

  • First off, I want to be clear that while Joe and I doubtless have a lot of policy differences, I share his preference for smaller enterprises over larger, and preference for as many people as possible being owners or part owners of their own enterprises.

    However, I think it’s important to be clear on the facts of the matter, and in that regard I think there’s a fair amount to clear up in regards to the first third of your post (and MM’s comment above.)

    First off, although top tax rates have been cut significantly over the last 50 years, tax revenues have not gone down. Indeed, total tax revenues have hovered right around 20% of GDP since 1950, and since the GDP has steadily increased since 1950 that clearly means that total tax revenues have increased throughout that period:
    http://online.wsj.com/article/SB121124460502305693.html?mod=opinion_main_commentaries
    http://darwincatholic.blogspot.com/2008/05/steady-state-taxation.html
    The reason why we’ve racked up so much debt is that while the government has collected a steady 20% of GDP in tax revenues, it has not been able to restrict its spending increases to the annual rate of increase in GDP.

    Also, the case for median income stagnation is, I think, rather overstated. When you look at median, by person or by household, inflation adjusted income has increased about 25% over the last 30 years.
    People: http://www.census.gov/hhes/www/income/histinc/p07AR.html
    Households: http://www.census.gov/hhes/www/income/histinc/h06AR.html

    When you look at it by income quintile, you start to see elements of inequality (inflation adjusted is the second table down) in that the bottom 20% only saw a 10% median income increase over the last 30 years while the middle 20% saw a 20% increase and the top 20% saw a 45% increase. Much of that difference has to do with productivity differences between groups of workers. But no matter how you look at it the growth is there.

    http://www.census.gov/hhes/www/income/histinc/h01AR.html

    The last eight years have been fairly flat, but that’s broadly shared. (Recall that except for the brief period of optimism around the real estate bubble the economy has been semi on the rocks since the .com bubble burst in 00/01.) The 95th household income percentile saw flat inflation adjusted earnings from 2001 to 2007 while the 20th percentile saw a 5% drop.

  • Joe Hargrave says:

    I appreciate the extensive empirical data that people have provided in response to my article. Two points in response.

    With respect to this claim:

    “The reason why we’ve racked up so much debt is that while the government has collected a steady 20% of GDP in tax revenues, it has not been able to restrict its spending increases to the annual rate of increase in GDP.”

    I understand the logic, but shouldn’t we therefore conclude that if government must increase spending, it must also increase taxes? The Iraq war added a major burden to the federal budget but it took place against a backdrop of the Bush tax cuts, which even conservatives such as McCain opposed – tax cuts which cost hundreds of billions of dollars.

    To the outside observer it appears as if the government wanted to take on burdens it was unwilling to shift onto the backs of those who could most easily bear them – the wealthiest Americans, and turned to excessive borrowing from East Asia.

    Next:

    “Also, the case for median income stagnation is, I think, rather overstated. When you look at median, by person or by household, inflation adjusted income has increased about 25% over the last 30 years.”

    I didn’t mention “median income”, though, did I? I mentioned real wages, which are wages adjusted for inflation. The rise of median income doesn’t tell us as much because on its own, it leaves out other important factors such as the cost of living, the purchasing power of the dollar, etc. Median income may have increased but it is evident from the levels of household debt that it wasn’t quite enough to keep up with the cost of living.

  • I understand the logic, but shouldn’t we therefore conclude that if government must increase spending, it must also increase taxes?

    In general, I would tend to say: Yes. (At the granular level we should run at a surplus when the economy is growing and at a deficit at times of recession, IMHO.) I wouldn’t say it’s an iron clad principle, but we certainly have way too much debt right now and should be paying it down rather than racking it up.

    I didn’t mention “median income”, though, did I? I mentioned real wages, which are wages adjusted for inflation. The rise of median income doesn’t tell us as much because on its own, it leaves out other important factors such as the cost of living, the purchasing power of the dollar, etc. Median income may have increased but it is evident from the levels of household debt that it wasn’t quite enough to keep up with the cost of living.

    Normally “real wages” simply means wages adjusted for inflation, which all the figures I linked to are. So for instance, the inflation adjusted median household income (more reflective of the experience of “middle America” than the average because it represents what was actually made by the 50th percentile rather than an average which can be moved up when only the rich get richer) was 42k (in 2007 dollars) in 1980 vs. 50k in 2007. Without adjusting for inflation, the change was from 18k to 50k.

    However, people also sometimes talk about “real income” which tries to look at the relative values of benefits and a more detailed breakdown of cost of living than pure inflation. This gets tricky because you’re looking at a highly derived statistic. This article from the Minneapolis Federal Reserve takes a detailed look at several methodologies (including the one you link to) and makes the case that the actual increase in real hourly wages (including cost of living, inflation, and benefits) was roughly 16-20% over the last 30 years.

    http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=1140

  • Mike Petrik says:

    “What you can possibly argue is that the incentive effects of cutting taxes mean that the drop in revenues from cutting taxes is less than it would otherwise have been, but you are not going to get higher revenues — assuming you keep the tax base constant (if you widen the base by eliminating exemptions and deductions, you will get more revenue, but that’s a different experiment).”

    It is exceedingly difficult to know the revenue effect of tax rate deductions at any given moment. The claim that rate reductions can decrease revenues assuming no base adjustments is unquestionably true under some circumstances, but knowing with precision whether those circumstances are satisfied at any given moment is elusive at best. Conservatives seem to think that we can reduce tax rates to virtually zero without revenue loss (which is silly), while liberals seem to think the government would actually maximize revenue at 100% (just as silly). Responsible people understand that the truth is somewhere in the middle but admit we don’t know exactly where, and the optimal rate (for purposes of revenue maximization, which is not necessarily the socially optimal rate) is hard to know.
    Also, the notion that the middle class has not experienced an increase in living standards over the last several decades is belied by common sense and observation. Only an idiot would really believe that to be true.

  • Joe Hargrave says:

    Mike,

    At the risk of continuing to sound like an idiot, I’m going to point out that the level of debt that the average American household has accumulated since the early 80s belies the notion that the actual standard of living has increased.

    What exactly do we mean by “living standards”? The number of Americans living in poverty continues to increase every year, the number of secure, well-paying jobs that are replaced with unstable low-wages jobs also increases every year. In many parts of the country the cost of living has outpaced any growth in wages.

    So, forgive me if I believe that only an idiot would deny that the long-term trends have been against the American worker, as his labor unions have been betrayed him, his government increasingly sided with his bosses, his employer sought to replace him with low-wage workers in other countries. 50 years ago a man could support an entire family on one income and expect a decent pension for retirement. That this has become an exception and not a rule in American life is a pretty sure sign of declining living standards to me.

  • Joe Hargrave says:

    For Darwin Catholic,

    Yes, I am aware that there are always going to be methodological disputes, which is why I sometimes wonder if we can ever really know anything about the economy. For years I followed the reports of the Economic Policy Institute, but I realize some find their work to be biased. But is the answer then to turn to a group like the Heritage Foundation? Who is really impartial, who is really unbiased?

    I think some facts we can agree on is that more Americans than ever before have gone into debt to acquire homes and other necessities, sometimes recklessly, sometimes out of true necessity. I think we can agree that the unionized sector of the economy has shrunk from an all-time high of 35% in the 50′s to all time lows of around – I think – 12% today.

    I think we might be able to agree that a man can’t support a family on one income as easily today as he used to be able to, that outsourcing and downsizing are still very real phenomena, and that the corporate world has sought to transform the entire concept of labor from that of stable, secure employment to more “flexible” employment. Perhaps living standards in some areas have gone up, but now things are more in-flux; there is the potential for great gains but also much greater losses, and so in general the equilibrium of an earlier era has been thrown off.

    My sense is that what we see around us today is the result of a) debt, b) exploitation of the third world, c) “flexible” labor practices, d) massive expansion of the money supply, the loosening of credit, longer periods of low interest rates, deregulation of the financial sector, etc.

    All of these things have served to replace what I tend to think of as normal profitability, that since the late 1970s it became extremely difficult to maintain the old status quo: where debt and credit were an axillary and not the main engine of economic development, and where production took place within the national boundaries by a heavily unionized labor force. Today it is just taken for granted that many businesses don’t even make a profit, they are sustained through debt or subsidies or other artificial means. How can we even call this an economy anymore?

    But it only became difficult from the standpoint of those running the show; had industry been privately owned by the workers instead of an oligarchy of large shareholders, I think whatever adjustments that needed to be made could have been made in a far less painful manner. Instead you had widely divergent interests that have lead to a much worse problem that we see today. Society is too complex to be run by an oligarchy. We need more economic power in the hands of more people.

  • Matt McDonald says:

    Joe,

    50 years ago a man could support an entire family on one income and expect a decent pension for retirement. That this has become an exception and not a rule in American life is a pretty sure sign of declining living standards to me.

    Absolutely, and what have had since then? More welfare handouts, more government intervention in the economy, more affirmative action, raised the minimum wage, etc., etc. And you want MORE of this? Can the poor survive such “help”?

  • Joe Hargrave says:

    What’s the matter with you? Did I ever say that any of those things were the answer?

    Even if I think they shouldn’t be abolished overnight lest millions of people loose what little support they have, it hardly means I think they are a permanent solution.

    I’m a Distributist, Matt. If you don’t know what that is, look it up. If you do, stop insinuating that I support welfare-statism as long-term solution.

  • Matt McDonald says:

    Joe,

    if you’re a distributist then why do you spend your time arguing against lower taxes and reduced government?

    If you don’t know what distributism is I’m not going to explain it but is not involved with oppressive taxation and government.

  • Matt McDonald says:

    by the way, nobody here is arguing for a sudden and complete cessation of social welfare programs. We need a proper reform that will gradually wean those dependent on the programs and move the remaining support to the groups most equipped to aid the poor… not government.

  • Joe Hargrave says:

    Matt,

    I spend my time arguing against one-sided approaches to social and economic problems. So much of the focus here is on government and taxes that I’d like to call attention to other problems that I think are just as, if not more serious – growing social inequality, obscene concentrations of wealth, job loss, etc.

    I am all for lower taxes – on the working and middle class. I don’t subscribe to the theory, however, that cutting taxes on the wealthy causes a “trickle down” effect. I think they should pay more because they can pay more, and I don’t call that “punishing success” either. I call it carrying their fair share.

    How cute, that you might suggest that I don’t know what distributism is :) Why is it always a fight with you? Why does someone having a different point of view seem to annoy you so much? I critique other points of view but I try to do it in a way that establishes that we’re all still Catholic and more or less on the same page. With you its like pulling teeth.

    Its that “proper reform” that is the question – I rarely see ideas on how that is going to work. So I can’t oppose welfare and other programs until I know how the needy are going to be cared for. I think distributism is the best alternative but we aren’t in a position to replace government aid yet.

  • Mike Petrik says:

    Joe,
    First, the poverty standards are largely relative, not absolute — they prove nothing. Two incomes are required today because people demand a higher standard of living. Remember the IV show the Honeymooners? At one time in my lifetime that defined American middle class. One bathroom per household today? Forget it. Bigger TVs, bigger fridges, dishwashers, microwaves — all these are owned even by our poor. Look at a line of kids waiting for college financial aid — they are all talking on their cell phones. Even health care, the item that whose cost has increased the most, cannot be compaired. If you offered Americans circa 1970 health care at inflation ajdusted 1970 prices no one would take it. Everyone is living better — that is a fact. Claims to the contrary are grounded in statistical gamesmanship. Every reputable economist knows this.

  • Donald R. McClarey says:

    Quite right Mike. My family didn’t own a car until 1970 when I was 13, and that first car was 9 years old. We had one room air conditioner and it was hard getting permission from my father to run it because of the added cost to the utility bill. Living in a small, cramped apartment as the Honeymooners did was exactly how my parents were living when I was born. My grandparents on my father’s side never had a car, no indoor toilet until 1967, and my grandmother, God rest her soul, didn’t get a phone until after my grandfather died because he thought they couldn’t afford it. Raising six kids on what a shoemaker could earn during the Great Depression, and what his wife could earn part time cleaning homes, left a legacy of thrift on my family to say the least, but their lifestyle was by no means uncommon in my hometown of Paris, Illinois when I was growing up.

  • Mike Petrik says:

    Correct, Don. Air conditioning is another great example. Growing up on Chicago’s south side we had a couple room air conditioners that were used very infrequently. Also, going out to eat was unheard of. Rather than living standards, a better case can be made that the quality of life has diminished. But that is a more elusive concept and any degradation is probably largely tracable to the decline of the American family. I have been fighting social problems for 25 years, having served on my local United Way board for most of the last 15, and I currently serve on the Salvation Army board. The vast majority of the social problems we face centered in single parent households. Church teaching is spot on correct. Once society started viewing sex, marriage, and children as no longer interdependent the human cost has been enormous. Most of that cost is not strictly financial — in general, children are more than adequately clothed, fed, and housed by any reasonable historic or worldwide measure; but they lack direction, purpose, and love. And that is true poverty.

  • Matt McDonald says:

    I think they should pay more because they can pay more, and I don’t call that “punishing success” either. I call it carrying their fair share.

    That’s the same tired lefty rhetoric. How much is their “fair share”? What portion of taxes should be born by the top 1%? Nobody is suggesting that we should all pay an equal amount of tax, that is ridiculous, but what is their fair share?

    I critique other points of view but I try to do it in a way that establishes that we’re all still Catholic and more or less on the same page. With you its like pulling teeth.

    You sound rather annoyed, did you consider that it’s like pulling teeth because I refuse to give in to your rhetoric when it is meaningless (such as the above statement)?

    Its that “proper reform” that is the question – I rarely see ideas on how that is going to work. So I can’t oppose welfare and other programs until I know how the needy are going to be cared for. I think distributism is the best alternative but we aren’t in a position to replace government aid yet.

    Really? I know one… the Church, we have been caring for the needy since Pentecost. You see, you are saying you can’t oppose welfare as if it’s actually a good thing, rather than a harmful thing to the needy. It is HARMFUL in a way that charity is not, especially given the nature of our current problem. These people need what the government can not provide, as Mike so aptly put it “direction, purpose, and love”.

  • Mike Petrik says:

    Joe, as far as paying more goes, I agree with Matt that this assertion is stubbornly elusive. First, we fail to distinguish wealth from income, two very different concepts. An income tax is not a tax on wealth; it is a tax on those working hard trying to build wealth. Second, high income earners do pay more — a lot more. As a self-employed high income earner, my yearly taxes are more than my annual allowances for food, mortgage, insurance, utilities, car expenses, savings, college tuitions, and charitable contributions combined. When do you think I have paid enough? And if my taxes should be raised, what exactly should give? We don’t take fancy vacations — some years we don’t take any. Our cars are 12 and 20 years old; and my wife has been on my butt to pay for a kitchen renovation for years. I will not stop saving for retirement. Like a lot of conservatives, I’m a believer in delayed gratification and hope to save enough to retire at 60 on a beach somewhere paying back my wife for the years of no-frills vacations and general frugality. Let me tell you what will really happen in the event of a tax increase: it will come straight our my very substantial (six figure) charitable contributions.
    Now, I realize my situation may not be typical, but bear in mind that high income earners who are conservative tend to be big charitable givers (much bigger than liberal high income earners). See A. Brooks, “Who Really Cares.” Increasing taxes on people like me will not be good for people in need.
    And while I’m on my rant I’ll make a couple other points. First, the infatuation some have with taxing corporations is really quite naive. We don’t really even know who bears the economic burden of this tax (currently the world’s second highest) — consumers through higher prices? investors through reduced returns (which are taxed again by the way)? workers through lower wages? Economists admit they do not know, though they agree that all bear a share in various always changing proportions based on market conditions. Essentially it is tax whose burden is distributed randomly, thereby paying no mind to the hallowed principles of vertical and horizontal equity. And speaking of those principles, the notion that even vertical equity demands progressive taxation is dubious (even though I support it). If you really want to learn something in this field, rather than just write about it, there is plenty of excellent literature. Best serious work for beginners is “Public Finance” by the Musgraves, and best work on progressive taxation is seminal article written in the 1950s by Blum and Kalvin, “The Uneasy Case for Progressive Taxation.”
    Rant off.

  • Matt McDonald says:

    Mike leads us to a very interesting point…. why are we taxing income in the first place? It is a terrible system that has lead to concentration of power in the hands of few, it punishes good behavior, and rewards bad. We need to move towards the FAIR tax which taxes not income and productivity but consumption. Don’t punish Mike when he saves for retirement and donates to charity, punish him for buying that new Benz, and 50′ yacht. Don’t punish the rich for keeping their money circulating to help employ many and provide loans for homes, punish them for extravagant consumption.

    This system has the added benefit of taking a lot of power away from the government and will reduce the financial interest in lobbying that results from income based taxes.

  • Mike Petrik says:

    I am not a big fan of the FAIR tax, though do appreciate its merits. I would prefer a graduated consumption tax using our current income tax architecture. Basically, it would work by replacing all tax favored retirement plans with a simple IRA system with not timing or amount restrictions on savings or withdrawals. Amounts saved would be deductible and amounts withdrawn would be taxable. In essence this is a consumption tax; its principle virtue is that it allows for graduated rates. I realize that many Americans favor a single so-called flat rate, but I do not. I would not apply any rate beyond nominal to the poor, and would have no problem applying higher rates to higher consumers. Finally, I would repeal the estate and gift tax, but treat all accumulated IRA savings as deemed withdrawn and taxable at death. This approach was first advocated in the 1970s by Harvard law professor William Andrews, and was advanced more recently by Sen. Sam Nunn. Tax policy wonks favor it, but nobody else apparently. Detractors fall into two schools. Those that view a single rate as a chief objective, and those who are disturbed by the system’s departure from current ability to pay, which is arguably better measured by income rather than consumption. For long complicated reasons I think both detractors are mistaken, but I don’t want to convert this into a tax policy blog any more than I already have.

  • Matt McDonald says:

    Mike,

    the fair tax includes a pre-pay refund that would cover the cost of the tax on all basic necessities, so essentially if you have no disposable income you pay no tax, if you have a little you pay a little.

    I do like your proposal a lot and would support it. I think it’s only superior to fair tax in that it’s more realistic. The congress is unlikely to agree to give up it’s power to manipulate the tax system so easily, which the fair tax would do. Your system would still allow the congress to allow deductions and thus still draw their “bonus” from the lobbiests.

    Keep in mind with the fair tax, if you apply it to a typical spending habit it is graduated from 0 for someone who only consumes the necessities, to essentially 25% for those who make much more than the poverty level and spend all their money on luxuries instead of circulating them in the economy.

    One other benefit of a fair tax is that companies are not benefited by moving offshore, and are not in any way encumbered from expanding their employment here in the US.

  • Mike Petrik says:

    Matt,
    A few observations. I practice a lot in the area of sales and use tax — an area most people naively assume is simple. It is not. There are many exemptions, varying by state and locality, and they change constantly. They are also awkward to audit and police. A national sales tax would not in any way be immune from the same kinds of political pressures that states have experienced. People often make the mistake of comparing a real world tax with a hypothetical tax; the problem is that every hypothetical tax would eventually mutate once introduced to the real world.
    Second, I am not convinced the prebate would work well in practice, but my concerns are too technical to explain here.
    Third, I agree that the FAIR tax would alleviate any corporate tax benefit of moving offshore. Any tax regimen that does not tax corporations at all would do so. It is doubtful, however, that Americans would favor zero taxation of corporations, even though a case can be made for it — especially at the federal level, less so at the state level. It does seem fair for states to extract something for granting corporations the privilege of limited liability under state law.
    Finally, the 23% rate would be on top of state tax rates.
    All that said, I agree that taxed properly consumption is a superior measure of lifetime ability to pay. It also avoids the problem of discriminating against savings, which is what an income tax does. Taxes on consumption actually treat savings and consumption neutrally, but only of one assumes that savings simply represent postponed consumption. And that would be true only of one treats bequests as taxable consumption, something the FAIR tax fails to address. Without such a stipulation income can be earned tax-free indefinately across generations. While some people may be ok with this, it does push the tax further away from the ability to pay principle.

  • Matt McDonald says:

    Mike,
    A few observations. I practice a lot in the area of sales and use tax — an area most people naively assume is simple. It is not. There are many exemptions, varying by state and locality, and they change constantly.

    this is not the case with the proposed fair tax. Exemptions are handled by the pre-paid credit based on cost of basic necessities (per county I believe), there is no item specific exemptions.

    They are also awkward to audit and police.

    Not unlike the income tax, but probably less so.

    A national sales tax would not in any way be immune from the same kinds of political pressures that states have experienced. People often make the mistake of comparing a real world tax with a hypothetical tax; the problem is that every hypothetical tax would eventually mutate once introduced to the real world.

    Of course, but it creates a larger threshold to over come, some exemptions vs. none. The first exemption creates a huge problem because more will follow. Eliminating exemptions on an income tax seems very unreasonable.

    Second, I am not convinced the prebate would work well in practice, but my concerns are too technical to explain here.

    I disagree, so do all of the far more educated proponents of a fair tax than I.

    Third, I agree that the FAIR tax would alleviate any corporate tax benefit of moving offshore. Any tax regimen that does not tax corporations at all would do so.

    True enough.

    It is doubtful, however, that Americans would favor zero taxation of corporations, even though a case can be made for it — especially at the federal level, less so at the state level. It does seem fair for states to extract something for granting corporations the privilege of limited liability under state law.

    I don’t think the Americans objections would be the most difficult to overcome, it’s the self-interested politicians. I don’t think this would address any state level systems, they would be free to tax how they see fit.

    Finally, the 23% rate would be on top of state tax rates.

    Yes. So? Income tax is on top of state sales and income tax too.

    All that said, I agree that taxed properly consumption is a superior measure of lifetime ability to pay. It also avoids the problem of discriminating against savings, which is what an income tax does. Taxes on consumption actually treat savings and consumption neutrally, but only of one assumes that savings simply represent postponed consumption. And that would be true only of one treats bequests as taxable consumption, something the FAIR tax fails to address. Without such a stipulation income can be earned tax-free indefinitely across generations. While some people may be ok with this, it does push the tax further away from the ability to pay principle.

    In theory yes, but the reality is that people do consume, there would be little benefit to an individual to consume nothing and just grow the nest egg generation over generation. To the extent that is done there is a benefit to the economy, there is more money available for lending and growing the economy benefiting more people. Treating bequests as taxable consumption would be the estate tax, as it would be taxed again when used by the beneficiary.

  • Joe Hargrave says:

    I love arguing with three people at once :)

    Mike,

    “First, the poverty standards are largely relative, not absolute — they prove nothing.”

    I’m sorry but I disagree that they “prove nothing” – just because they are relative doesn’t mean we have no way of gauging whether or not a person lives in poverty. That is a convenient side-step. On what grounds do you entirely throw out the methodology of the Census Bureau? Is it all a liberal conspiracy to get us to support more gov’t programs? I don’t ask sarcastically – I want to know.

    “Two incomes are required today because people demand a higher standard of living.”

    Is that so? I think it is more accurate to say that two incomes are required because people want to maintain a standard of living today that they had on one in the 50s. Yes it is relative – yes there is bigger this and that, but what you can’t forget is that in truth all of these things are actually less expensive today than they were then. Today they are produced in greater volume with cheaper materials by lower-paid workers in other countries. If we were to remake the same stuff people had in the 50s in the same way, it would be several times more expensive than it is now.

    That said, however, I am totally against the idea that we need any of this crap in the first place. It may seem like I’m all over the place here but the truth is that I think Americans should downsize themselves and their lives. We should live in a manageable and sustainable poverty – not destitution or squalor, and not uncertainty, which a lot of Americans live with constantly, but simple poverty.

    “Everyone is living better — that is a fact. Claims to the contrary are grounded in statistical gamesmanship. Every reputable economist knows this.”

    I’m not going to accept this “here’s the authority and that’s the end of it” argument. Arguments from authority are flawed if for no other reason that in economics, I can find a dozen economists to say the opposite, even though you may not find them “reputable” (talk about relative standards).

    I don’t think its “a fact” – It is a fact that large areas of this country have been given over to rot and decay, such as the city of Detroit or practically every major manufacturing town in the state of Michigan, not to mention the rest of the Rust Belt. That is only one fact. Others could follow, but I have places to go and people to see today.

    As for the Mike-Matt love affair with the rich, I can’t address it now, but I know where Catholic social teaching and its 120 year tradition stand on that…

  • Matt McDonald says:

    Joe,

    As for the Mike-Matt love affair with the rich, I can’t address it now, but I know where Catholic social teaching and its 120 year tradition stand on that…

    Surely we can have a conversation without attacking each others Catholicism…

  • Joe Hargrave says:

    Matt,

    Surely, one day, you’ll stop trying to be clever and just doing a really laughable job at trying to point out hypocrisy.

    You can be a Catholic and not in-step with the social teaching. It isn’t a mortal sin not to take its suggestions to heart – it would be a grave matter to entirely ignore what it has deemed unethical and unacceptable in economic practice.

    Ok, I’m out. See you all later this evening :) Even you Matt!

  • Being the middle-ground seeking fellow that I am, I’ll start with:

    Society is too complex to be run by an oligarchy. We need more economic power in the hands of more people.

    Agreed! Now, I would imagine we may have a lot of divergent ideas as to how best reduce oligarchy. But rest assured that on this we have a broad base of agreement.

    Yes, I am aware that there are always going to be methodological disputes, which is why I sometimes wonder if we can ever really know anything about the economy.

    This is probably a key thing to understand about interpreting data. Not to say that there is no root truth out there, but often how one normalizes for other factors has a lot to do with one’s interpretive framework. So ideological disputes quickly turn into data disputes.

    In this regard, I’d tend to lean heavily on the most raw data possible. (For instance, simple inflation adjusted per person income, rather than cost of living adjusted income.) This allows you to agree on your base data and then argue about other factors. (Isolate an argument on whether the cost of living has really increased, rather than having an argument about earnings.)

    I think some facts we can agree on is that more Americans than ever before have gone into debt to acquire homes and other necessities, sometimes recklessly, sometimes out of true necessity. I think we can agree that the unionized sector of the economy has shrunk from an all-time high of 35% in the 50’s to all time lows of around – I think – 12% today.

    I think we might be able to agree that a man can’t support a family on one income as easily today as he used to be able to, that outsourcing and downsizing are still very real phenomena, and that the corporate world has sought to transform the entire concept of labor from that of stable, secure employment to more “flexible” employment.

    I think a lot of this may have to do with one’s regional and familial background. For instance: My father was a single income with a stay-at-home wife and three kids. He worked at a community college (where he was forced to unionize when it became a union shop), but far from that making it better for him he never saw a raise of more than 3% a year, received no annual bonus, and worked two part time jobs in order to make ends meet. The public employees union strongly supported the administration, which grew management at the expense of actual teachers and workers and would lay people off whenever the state budget was in a crunch. So on top of working three jobs, he was always worried about laying off. So as someone who works in the “corporate world” (and started both his recent jobs as a contractor who was then hired full time) and makes at 30 50% more than my father ever did, I don’t necessarily see the union model as a golden. (To be fair, on the flip side, the state sponsored pension and health care worked out very well for my father when he came down with cancer in his 50s.)

    I do think that we’re seeing an increasing trend towards inequality, and I think that trend will result in social and political instability before much longer. But I think that a lot of it has to do with what the changes in technology that we’ve had over the last 20 years, which are increasingly allowing small numbers of highly skilled people to have huge effects on the profitability of their companies.

    Which is something I keep meaning to post on one of these days…

  • e. says:

    Joe Hargrave,

    Have you just woke up from a long nap?

    Don’t you actually know that one of the principal causes for our economic crisis today is because of folks taking on more debt than they could afford because they wanted to acquire the kind of lifestyle that only the wealthy is able to have?

    So, yes, I do happen to concur with what Mike Petrik is suggesting pertaining to poverty standards being largely relative since most folks generally consider themselves impoverished if they do not happen to have the same luxuries as the filthy rich do.

    That’s one of the major drivers that led up to our sad state of affairs because people borrowed against their mortgages just to acquire luxuries they couldn’t even afford in the first place!

    “The root cause of today’s crisis lies not in the housing market but in America’s foreign debt. Over the past four years the U.S. private sector has borrowed an astonishing $3 trillion from the rest of the world. The money, directly and indirectly, came from countries such as China, Germany, Japan, and Saudi Arabia, which ran huge trade surpluses with America. Foreign investors trusted their funds to U.S. financial institutions, which used much of the money for mortgage loans.

    But American families took on a lot more debt than they could comfortably afford. Now no one is sure how much of that towering sum the U.S. is going to pay back—and all the uncertainty is roiling the financial markets.

    SINCE MID-2004, AMERICAN HOUSEHOLDS HAVE TAKEN ON A BIT MORE THAN $3 TRILLION IN MORTGAGE DEBT.”

    SOURCE: Chief Economist Michael Mandel

    “Experts say that even when the current credit crunch eases, the nation may finally have maxed out its reliance on borrowed cash. Today’s crisis is a warning sign, they say, that consumers could be facing long-term adjustments in the way they finance their everyday lives.

    ‘I think we’re undergoing a fundamental shift from living on borrowed money to one where living within your means, saving and investing for the future, comes back into vogue,’ said Greg McBride, senior analyst at Bankrate.com. ‘THIS ENTIRE CREDIT CRUNCH IS A WAKEUP CALL TO ANYBODY WHO WAS ATTEMPTING TO BORROW THEIR WAY TO PROSPERITY.’

    AMERICANS ARE MORE RELIANT ON DEBT THEN EVER BEFORE.

    The portion of disposable income that U.S. families devote to debt hit an all-time high in the second half of last year, topping 14 percent, figures from the Federal Reserve show. When other fixed obligations — like car lease payments and homeowner’s insurance — are added in, about one of every five household dollars is now claimed by bills.

    The credit card industry lobbied heavily in 2005 to tighten bankruptcy laws to make it more difficult for consumers to seek court protection and shed responsibility for paying off debt. But in a sign of just how much households have become dependent on borrowing, the average amount of credit card debt discharged in Chapter 7 bankruptcy filings has tripled — to $61,000 per person — from what it was before the law was passed.

    ‘We are going to have to cut back,’ said Dean Baker of the Center for Economic and Policy Research, a Washington, D.C. thinktank. ‘We’ve really been living beyond our means.’”

    SOURCE: http://www.msnbc.msn.com/id/27149408/

  • Joe Hargrave says:

    I’m home a lot sooner than I thought so I want to address some more issues, particularly those raised by Mike. I’m sorry for any previous snarkiness. We all have a tendency to push each others buttons on these issues, myself especially included, so I’m going to do this without being snarky, if I can. We’re all Catholic brothers here!

    Before getting to Mike, though, I want to say I appreciate Darwin’s points, particularly this:

    “I think a lot of this may have to do with one’s regional and familial background.”

    This is undoubtedly true. And it is also true that in many cases unions have betrayed the workers, so the unions as they currently exist aren’t really the answer, though collective bargaining of some kind is clearly necessary, and moreover, entirely just from a Catholic perspective. Hardly any institution has been a more vocal defender of labor unions than the Catholic Church.

    Now to Mike’s points:

    “When do you think I have paid enough? And if my taxes should be raised, what exactly should give?”

    You classify yourself as a “high income earner”. Here I have to be clear that what I – and a lot of people who typically argue for progressive taxation – am talking about is usually the top 1% of income earners, who command a vastly disproportionate share of society’s wealth. These concentrations of wealth cannot be morally justified – according to the clear pronouncements of the social teaching of our Church. The concentration of vast quantities of wealth, in whatever form, in such a small layer is a danger to social stability and an injustice to those who work hard and have barely anything to show for it.

    Unless you are in that top 1%, to scale it down further, the top .01%, I’m not sure that anything I say applies to you and yours. So I don’t know how to answer your question. What I am sure of is that the tax burden should be lighter on those who make less.

    “Now, I realize my situation may not be typical, but bear in mind that high income earners who are conservative tend to be big charitable givers”

    And that’s good! But it isn’t a solution, anymore than welfare is. The Church does not wish to see the poor remain as “objects of assistance” from either public or private sources, but to see everyone have a chance at securing a dignified social existence. I think both private and public charity can be put to better use than it often is.

    Even so, let me say I agree with you in general – going back to Aristotle, one of his arguments for private property is that it allows us to be generous, it allows “liberality” in the giving of things. But we also can’t forget what Christ said about the old widow who offered her two sheckles as the rich men were offering far finer gifts at the Temple.

    “First, the infatuation some have with taxing corporations is really quite naive. We don’t really even know who bears the economic burden of this tax (currently the world’s second highest) — consumers through higher prices?”

    I don’t see why it is naive if we are fully conscious of the fact. Maybe I’m willing to pay this “tax” through consumption if it would go to fund programs I believe in. On that score I sympathize with the whole fair tax idea, on luxury taxes, and other ways of shifting the burden to excessive consumers.

    Furthermore I think that we urgently need fair trade policies, and that we have to either be willing to pay higher prices for ethically-produced goods or stop consuming so much. Do you realize how many women in third world countries are forced into getting abortions by their bosses or families so they can keep producing cheap crap for us to consume? It is absolutely appalling, and that is only ONE example of the human rights and worker’s rights abuses that take place to support our lifestyles.

    All of this being said, let me stress, once again that I think we agree in principle about taxation. I support distributism, which I think takes the form of workers cooperatives in today’s economy. Do you think I’d want to see them burdened by excessive taxation? These companies as much as any other must operate in the market and be subject to the same effects of taxation as any other firm.

    But I do think we have a right to target highly concentrated wealth and to seek a measure of economic levelling – not a perfect equality, which would be impossible, and immoral even if it were possible – but a range beneath no one ought to be allowed to sink or rise above, for the sake of social stability and social justice. And in truth I think this range would be easily maintained if we simply insisted on 100% ethical production, 100% respect for human rights of all workers everywhere in the world, absolutely zero tolerance for any firm that violates those rights, etc.

    If we were able to uphold these rights (and they ARE clearly outlined by the Church in several documents, there is nothing “relative” about rights), then whatever a man could make would be truly and rightfully his. If the limits on wealth are set by a strict adherence to social and economic ethics, then no one has any grounds to complain.

  • Joe Hargrave says:

    E,

    First of all, in response to your last post, of COURSE I know that Americans are in more debt; but there is a reason that they are going into debt! It isn’t an arbitrary decision. It is because real wages are not keeping pace with the cost of living.

    Now I realize that it is possible to live without many of the gadgets that our society has to offer, but it is difficult. It should be possible for all of us to live a simpler lifestyle where we only go into debt for the things we need. This is a personal goal of mine – to be debt free and to buy only that which I can pay for, with the exception of medical emergencies.

    But even that wouldn’t solve the problem, for there are many businesses now that don’t even make profits; they just keep borrowing to keep going, just like our federal government. The great panic last fall was that if the banks stop lending, businesses won’t be able to pay their workers. The whole thing is propped up by a seemingly endless chain of borrowing, and I think one of the latest South Park episodes got it right as Stan tries to return his dad’s Margarita machine and ends up at the Federal Reserve.

    Our economy is a joke. It isn’t just “gubmint’s” fault either. There were regulations in place that prevented banks and other major lenders from getting too heavily involved in risky markets such as sub-prime, but those were thrown out the window in the late 90s. The savage and relentless pursuit of self-interest is what ultimately brought the economy to its knees, the mentality of having it all right now. Instead of lifting all boats the rising tide capsized them and swept them against the rocks.

    “Debt” is a problem at all levels of society. It has been a problem since industrial profit rates began to stagnate and decline in the late 70s. Since then every artificial method and every pressure on the wages of workers has been employed to maintain profitability. What good does it do to have an abundance of cheap consumer goods if your kids get an education on par with that of a third world country, when a serious illness means you have to file for bankruptcy, when you have to go into debt for 30 years just to finish college or buy a home? Not to mention that all this junk is made available to us through the abuse of workers rights.

    As for “charity”, in the simplest sense it is love of God and our fellow man. I’m going to reiterate what I think is the real solution here – a total commitment to ensuring that the rights of workers as articulated by the Church’s social documents are respect in all parts of the world. It might mean we have to consume less as prices go up for manufactured goods – I think that will be a GOOD thing. It might mean “economic growth” slows down – I think that would be a GOOD thing. Society isn’t going to collapse if we have a slow year because we decided to consume less, save more, and respect everyone’s human rights. It will make the world a better place, not a worse one.

  • e. says:

    Joe,

    They weren’t borrowing against their homes in order to afford the basic necessities of life.

    For heaven’s sake, they were doing so in order to live out the lifestyle of the rich & famous, buying luxury items and even high-end cars, spending money obtained from these on significantly expensive vacations, purchasing a yacht, etc.

    Didn’t you pore into all the articles and Special Reports that were being featured both in the paper (even in the Journal) as well as on television News?

    Now, I agree with you to this extent — that all have a right to the basic necessities of life, but I hardly think that this is actually what most folks are seeking, as can be adduced from all the material sources stemming from previously cited materials.

    However, I remain skeptical as concerning the agenda of the Democratic Party which is fiercely geared towards the creation of the Modern Welfare State (as even evinced in the last porkulus package which read like some sort of Democrat Christmas wishlist), since the ones who typically suffer from the brunt of all this activity (as had been the case in times past)happen to be middle class folk.

    Increasing the monstrosity of Leviathan won’t do anything to heal society’s woes.

    There is a spiritual dimension that current society lacks so heavily (and primarily) especially in our modern times.

    Attending to the monetary needs of such folks will only have them attend to an even greater want for material goods.

    Charity would have us help the poor — not to enrich those who merely seek the unnecessary.

  • Joe Hargrave says:

    E,

    “They weren’t borrowing against their homes in order to afford the basic necessities of life.”

    I don’t think you can make this generalization. Many people did this yes, but many others have gone into debt, or even gone totally bankrupt due to medical bills, student loans, and even affordable homes – once they get laid off, lose their pensions, etc.

    It would be impossible to untangle all the justifiable debt from the unjustifiable debt. I have little sympathy for those who went deeply into debt to buy things they did not need but its simply wrong to assume that EVERYONE did this.

  • But even that wouldn’t solve the problem, for there are many businesses now that don’t even make profits; they just keep borrowing to keep going, just like our federal government. The great panic last fall was that if the banks stop lending, businesses won’t be able to pay their workers.

    While not wanting to seem like the economic fact police, this could use a little bit of clarification.

    It remains impossible to run a business without making a profit for very long. There was that brief period of extreme optimism during the .com bubble when people thought they could rack up huge losses based on the expectation that they were building a huge market which would be profitable later, but there are very few survivors from those days, and they’re pretty much all profitable now. (Amazon.com is the prime example there, having lost large amounts of money for some time while expanding but now being quite decently profitable.) Public and private companies have different ways of trying to keep going without turning a profit for a while, but without expectation of profits, those sources tend to dry up pretty quickly.

    However, a lot of companies carry debt even while running at a profit, just as a family with a highly variable income might carry credit card debt during part of the year while paying it off during other parts of the year when their earnings are higher.

    Issuing commercial paper requires a very high credit rating, so it’s generally only very solid (and profitable) companies that do it. And the majority of companies simply use it to bridge cash flow during the slow times of the year which they know they’ll make up during their boom times. Since these are very solid companies, if they aren’t ready to pay off the debt when it expires, they simply issue new debt for the same amount, like letting your credit card roll over at the end of the month.

    However, during the commercial paper crisis last fall, there was concern that (due to fears surrounding all the short term debt issued by investment banks now in danger of going bankrupt) the market for commercial paper would dry up, and thus companies would be faced with making good on all the bonds when they hadn’t planned so — kind of like if a credit card company could announce one month that they weren’t going to let you roll over and you had to pay off immediately.

    Now, it’s certainly the case that a lot of businesses (mainly financial companies) were relying way too much on money market paper. But it’s not that they weren’t profitable on a quarterly or yearly basis, just that they were using money market funds as extra leverage at low interest rates.

  • Matt McDonald says:

    A little off track… but came across this dire warning:

    Carl Marx 1867
    “Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism. (Das Kapital, 1867)

  • Joe Hargrave says:

    Darwin,

    You are impressively knowledgeable my friend. My kudos.

    Everything you point out is undoubtedly true, but my point is that this is not a sound basis for a human economy. It is a game of musical chairs, and the music eventually has to stop. It very nearly stopped last fall.

    Something that has also been pointed out in many of the social encyclicals, particularly since the 1960s, is the rise of the service and finance sectors of the economy and the proliferation of goods and services of “questionable value” to man and society.

    Again I must refer to the wisdom of John Paul II:

    “Ownership of the means of production, whether in industry or agriculture, is just and legitimate if it serves useful work. It becomes illegitimate, however, when it is not utilized or when it serves to impede the work of others, in an effort to gain a profit which is not the result of the overall expansion of work and the wealth of society, but rather is the result of curbing them or of illicit exploitation, speculation or the breaking of solidarity among working people. Ownership of this kind has no justification, and represents an abuse in the sight of God and man.”

    Does this cover the whole financial sector, the whole American economy? Not quite. But significant parts of it? I believe so. I believe there is a whole layer of the economy that operates independently of, and often to the harm of, what any Catholic would understand as the common good.

  • Joe Hargrave says:

    Matt,

    I hate to break it to you, but Marx didn’t say that.

    http://liberation.typepad.com/liberation/2009/01/did-marx-predict-the-current-economic-crisis.html

    I wouldn’t have needed the link, anyway, because I’ve read volumes 1, 3 and 4 of Capital (I skipped the second because its boring as hell). As I recently explained to some other Catholic friends of mine, Marx and Engels did not believe that socialism could occur gradually, that it could only occur through a violent working class revolution.

    This, I think, is as close as they come to making any sort of gradualist argument, but its not exactly a ringing endorsement:

    “For only when the means of production and distribution have actually outgrown the form of management by joint-stock companies, and when, therefore, the taking them over by the State has become economically inevitable, only then — even if it is the State of today that effects this — is there an economic advance, the attainment of another step preliminary to the taking over of all productive forces by society itself. But of late, since Bismarck went in for State-ownership of industrial establishments, a kind of spurious Socialism has arisen, degenerating, now and again, into something of flunkyism, that without more ado declares all State-ownership, even of the Bismarkian sort, to be socialistic. Certainly, if the taking over by the State of the tobacco industry is socialistic, then Napoleon and Metternich must be numbered among the founders of Socialism.”

    From “Socialism: Utopian and Scientific” Ch. 3

    A good introduction all around to Marxism, if you’re interested.

  • Joe Hargrave says:

    More to chew on, from the same chapter:

    “The modern state, no matter what its form, is essentially a capitalist machine — the state of the capitalists, the ideal personification of the total national capital. The more it proceeds to the taking over of productive forces, the more does it actually become the national capitalist, the more citizens does it exploit. The workers remain wage-workers — proletarians. The capitalist relation is not done away with. It is, rather, brought to a head. But, brought to a head, it topples over. State-ownership of the productive forces is not the solution of the conflict, but concealed within it are the technical conditions that form the elements of that solution. “

  • You are impressively knowledgeable my friend. My kudos.

    Yes, well… I hope I’m not coming off as a smart ass (or indeed more ass than smart.) Given that I’m a classics major who makes his living in pricing analytics, I’d spent a fair amount of time reading up on economics over the last few years (initially as catch-up) and found it to be fascinating stuff.

    Everything you point out is undoubtedly true, but my point is that this is not a sound basis for a human economy. It is a game of musical chairs, and the music eventually has to stop. It very nearly stopped last fall.

    I’m not at all sure that I agree on this, however. Certainly, in rapidly growing economic situations irrational exuberance often kicks in at a certain point, bubbles form, and pop. But while I think that consumers should be more wary of debt overall than they are (and that our government needs to get its spending under control pronto and reduce the national debt) debt is certainly not a universally bad thing. Within reasonable limits it allows people to improve their lifestyles in responsible ways and it allows companies to grow faster and thus provide more jobs to more people more quickly.

    As in all things, moderation is key. And there are elements of the modern financial sector that I’m a bit skeptical about. But overall, while many parts of it are hard to understand, I think a great deal of it is probably of benefit to the common good.

  • Matt says:

    I wonder, when these financial institutions were funding anybody with a pulse for a mortgage so that all could enjoy the american dream did the left take such a dim view of their working for the common good? Now that the folly of such government mandated la it in lending has been made clear they are once again ‘evil rich bankers’ hoarding the nations wealth…

  • Matt says:

    Joe,

    Mea culpa on posting the unverified and obviously erroneous quote from Marx. No doubt if he could observe todays situation he might have wished he had been so astute. Time will tell if we can hold off leviathon.

  • Joe Hargrave says:

    “Yes, well… I hope I’m not coming off as a smart ass (or indeed more ass than smart.)”

    No, not at all. You relay relevant information in a respectable manner. It is all I could ever ask of a person.

    It’s those “reasonable limits” I am concerned with. I see the growing role of credit and debt as an outward sign of a deeper problem. Looking at things from a historical perspective is it not important to ask, “why so much debt now, as opposed to before”?

    I’m not a Marxist, but I do think Marx was right about the tendency of the rate of profit to decline over a long historical period. I think what we have been seeing for the last few decades, between globalization, cutting social spending, and the rapid and massive accumulation of debt, have been broad attempts to recover a falling profit rate. What causes the rate of profit to fall? According to Marx increasing labor productivity through science and technology reduces the value of commodities over time, making them less profitable. The mass of profit may reach great levels but the rate continues to decline.

    Regardless of whatever else he was right or wrong about, I think this is a discernible historical tendency with its ups and downs, but ultimately headed in one direction. But unlike Marx I believe that if production and exchange were conducted along completely ethical lines – such as those called for by the Church – there would never be a need for “class warfare”.

    I certainly don’t accept that the solution is a centralized economy, but I do think we have to have a system that spreads both the gains and the losses more evenly over time and space. I think more cooperatively owned businesses competing in a free market is the best way to navigate between excessive individualism and collectivism. And, after all, if more workers are also owners, then the strife between workers and owners disappears. This is among the many reasons why all of the Popes have asked Catholics, and all people really, to consider ways to spread ownership of the means of production to more people.

  • Joe Hargrave says:

    And Matt…

    I think there is a lot of misconceptions about government’s role in lending.

    I know a lot of conservatives, for instance, were blaming the Community Reinvestment Act. But that was passed in, I think, 1977 and the empirical data I have seen (I’m too lazy to find it now but I can if you like) shows that federally-regulated lenders were absolutely required to practice safe and sound lending practices.

    In other words, a bank operating under the CRA guidelines – which gave preference to low-income and minority individuals, families and businesses – still had to practice sound lending practices. For decades there wasn’t a problem because even low-income workers and minorities have jobs and pay back the loans they take out.

    The problems began when regulatory standards were loosed, when a horde of unregulated lenders flooded the market and began promising the sky and the moon to everyone and their mother. The government never forced a bank or a lender to make a bad loan – there was a monetary incentive for independent, unregulated lenders to make them and then sell them off to another lender, who might sell it again, each time the seller pocketing a fee and going on his merry way. Once a bad loan is sold off, it isn’t that person’s problem anymore.

    So, I take exception with those who blame government policies that sought to open up more credit to disadvantaged folks – as if they are inherently untrustworthy. The data shows that in areas where there are a high concentration of CRA-regulated banks, there are fewer, not more foreclosures.

    Not being a big fan of constant government intervention doesn’t mean that government ALWAYS screws up, that its plans ALWAYS fail. As always we need a balanced perspective. And in this case banks regulated by these CRA standards were still allowed to and expected to make a profit. No one was encouraging handouts or giveaways. They were loans, not grants, and everything I’ve seen indicates it was done responsibly. It was a private-public collaboration and it did more or less what it was supposed to do.

  • Joe Hargrave says:

    For everyone: this is the Compendium on the financial sector:

    “b. The international financial system

    368. Financial markets are certainly not an innovation of our day: for a long time now, in different forms, they have been seeking to meet the financial needs of the productivity sector. The experience of history teaches that without adequate financial systems, economic growth would not have taken place. Large-scale investments typical of modern market economies would have been impossible without the fundamental role of mediation played by financial markets, which among other things brought about an appreciation of the positive functions of savings in the overall development of the economic and social system. If the creation of what is called the “global capital market” has brought benefits, thanks to the fact that the greater mobility of capital allows the productivity sector easier access to resources, on the other hand it has also increased the risk of financial crises. The financial sector, which has seen the volume of financial transactions far surpass that of real transactions, runs the risk of developing according to a mentality that has only itself as a point of reference, without being connected to the real foundations of the economy.

    369. A financial economy that is an end unto itself is destined to contradict its goals, since it is no longer in touch with its roots and has lost sight of its constitutive purpose. In other words, it has abandoned its original and essential role of serving the real economy and, ultimately, of contributing to the development of people and the human community. In light of the extreme imbalance that characterizes the international financial system, the overall picture appears more disconcerting still: the processes of deregulation of financial markets and innovation tend to be consolidated only in certain parts of the world. This is a source of serious ethical concern, since the countries excluded from these processes do not enjoy the benefits brought about but are still exposed to the eventual negative consequences that financial instability can cause for their real economic systems, above all if they are weak or suffering from delayed development.[760 ]

    The sudden acceleration of these processes, such as the enormous increase in the value of the administrative portfolios of financial institutions and the rapid proliferation of new and sophisticated financial instruments, makes it more urgent than ever to find institutional solutions capable of effectively fostering the stability of the system without reducing its potential and efficiency. It is therefore indispensable to introduce a normative and regulatory framework that will protect the stability of the system in all its intricate expressions, foster competition among intermediaries and ensure the greatest transparency to the benefit of investors.”

  • Matt McDonald says:

    Joe,

    I think there is a lot of misconceptions about government’s role in lending.

    I know a lot of conservatives, for instance, were blaming the Community Reinvestment Act. But that was passed in, I think, 1977 and the empirical data I have seen (I’m too lazy to find it now but I can if you like) shows that federally-regulated lenders were absolutely required to practice safe and sound lending practices.

    Sorry, this is not correct. The congress expanded the CRA under Clinton, and subsequently authorized many of the mortgage instruments that have been at the root of the problem (no documentation of income, lower down payments, and interest only loans).

    In other words, a bank operating under the CRA guidelines – which gave preference to low-income and minority individuals, families and businesses – still had to practice sound lending practices. For decades there wasn’t a problem because even low-income workers and minorities have jobs and pay back the loans they take out.

    Because only those low-income workers/minorities who demonstrated an ability to repay the loan were approved… at least until the congress started lifting those limitations.

    The problems began when regulatory standards were loosed, when a horde of unregulated lenders flooded the market and began promising the sky and the moon to everyone and their mother. The government never forced a bank or a lender to make a bad loan – there was a monetary incentive for independent, unregulated lenders to make them and then sell them off to another lender, who might sell it again, each time the seller pocketing a fee and going on his merry way. Once a bad loan is sold off, it isn’t that person’s problem anymore.

    IF that was true, the regulated lenders would not be being bailed out by the Federal government, would they? What about the need to take over Fannie Mae and Freddie Mac (already quasi-government agencies)?

    So, I take exception with those who blame government policies that sought to open up more credit to disadvantaged folks – as if they are inherently untrustworthy. The data shows that in areas where there are a high concentration of CRA-regulated banks, there are fewer, not more foreclosures…Not being a big fan of constant government intervention doesn’t mean that government ALWAYS screws up, that its plans ALWAYS fail. As always we need a balanced perspective. And in this case banks regulated by these CRA standards were still allowed to and expected to make a profit. No one was encouraging handouts or giveaways. They were loans, not grants, and everything I’ve seen indicates it was done responsibly. It was a private-public collaboration and it did more or less what it was supposed to do.

    Wow, you have a lot of research to do. The sub-prime crisis was precisely allowed because of lower lending standards mandated by the CRA and other congressional action. Don’t forget also that the grass-roots lobbying arm of the Democratic Party/Communist Party known as ACORN was demonstrating at the homes of bankers who refused to lower their lending standards.

    I will say that not ALL of the foreclosures involve low-income or minority debtors, the point is that the congress lowered standards to accommodate them, many people at all levels took advantage of these standards to get loans they might not otherwise have qualified for. The bitter pill that must be swallowed is a return to proper standards in lending…. documentation of income, debt-to-income ratios, credit and income history, 20% down payment, etc.

  • Matt,

    While it’s correct that congress was cheerleading for loose lending (not just via CRA, but in general) and approved many of the types of loans and securities which turned south over the last year, I think the CRA was arguably not the main or even a main problem.

    Big problems did include:
    - Real estate values had gone up consistently for so long with no housing bubble so widespread as to bring down prices nationally that the data modelling of the lenders did not include any historical examples of a broad price decline. Some even argued that there couldn’t be a broad price decline. (As an analyst, this is the one I understand best, so I tend to give it the most credit, but that doesn’t necessarily mean it’s the main one.)
    - Government created incentive to list securities as AAA rated (many institutions are legally only allowed to hold AAA rated commoditized debt) created an incentive for ratings agencies to be overly lenient on rating securitized debt, thus making the securities seem safer and more profitable than they actually were.
    - Foreign money flooded in and started financing US mortgages and financial institutions indescriminately without doing much research — because these markets had been so profitable for so long — thus creating a market for junk.
    - The Fed kept interest rates so long for so long (in order to try to grow past the slowdown of 2000-2002) that paying off your mortgage didn’t seem like a good deal, and it was overly easy for home prices to rise.
    - Default swaps meant to insure against a single company defaulting on its debt started to be bought as sold as if they could be used to protect against broad market decline.
    - Fannie and Freddie started buying up securitized debt for mortgages too risky for them to actually hold as loans, because their executives wanted their profits to “keep up” with free wheeling private companies such as CountryWide.

    I’m not sure, however, that we need to go back to the days of 20% downpayments. Lenders do, however, need to be more careful. As in all things, it’s a balance.

  • Joe,

    I hope I don’t paint myself out of the good Catholic club by saying this, but there are parts of the Compendium of Social Teaching where I with the authors had stuck closer to speaking to questions of principle rather than discussing finding of fact — not because I don’t think Catholic teaching has very practical applications but because I think that in some cases the authors are making assumptions about the nature of things in the economy or in society which may or may not be true.

    That said, I do agree that at times financial instruments simply become ends unto themselves and people are effectively trading Amway in a clearing in the forest without anyone actually doing anything. But I have the feeling that the stuff I would label as pointless or parasitic financial activity would be much narrower than what you would — and I’d have a fair amount of confidence that because it doesn’t achieve much it will burn itself out and go away pretty quickly. (Though invariably such things always spring up again in other forms so long as people are always looking for new ways to make a quick buck.)

    Not that I’d hold we should have no regulation. But I have a fair degree of confidence that the market will sort out things which don’t work.

  • Matt McDonald says:

    DarwinCatholic,

    While it’s correct that congress was cheerleading for loose lending (not just via CRA, but in general) and approved many of the types of loans and securities which turned south over the last year, I think the CRA was arguably not the main or even a main problem.

    I agree, but most of the other problems are related to congress’ desire to allow everyone, qualified or not, to be house owners.

    Big problems did include:
    - Real estate values had gone up consistently for so long with no housing bubble so widespread as to bring down prices nationally that the data modelling of the lenders did not include any historical examples of a broad price decline. Some even argued that there couldn’t be a broad price decline. (As an analyst, this is the one I understand best, so I tend to give it the most credit, but that doesn’t necessarily mean it’s the main one.)

    This alone does not cause foreclosures… if you can pay your mortgage it doesn’t matter what the market sets it’s value at. This would be further mitigated by 20% downpayments which would rarely have a mortgage going under-water.

    - Government created incentive to list securities as AAA rated (many institutions are legally only allowed to hold AAA rated commoditized debt) created an incentive for ratings agencies to be overly lenient on rating securitized debt, thus making the securities seem safer and more profitable than they actually were.

    why did they do this?

    - Fannie and Freddie started buying up securitized debt for mortgages too risky for them to actually hold as loans, because their executives wanted their profits to “keep up” with free wheeling private companies such as CountryWide.

    Fannie and Freddie where substantially controlled by congress and were also motivated by pressure to allow risky loans in order to expand home ownership. Interesting side-note Rahm Emanual was on the board of Fannie Mae.

    I’m not sure, however, that we need to go back to the days of 20% downpayments. Lenders do, however, need to be more careful. As in all things, it’s a balance.

    If being “careful” tends to deny “low-income and minorities” it will not be permitted by the federal government, that is a serious problem. Affirmative action DOES NOT WORK.

    I do think a 20% down payment threshold is a good thing as it forces people to work hard and save so that when they do buy a house they will not lose it… It is far better to stay in rented housing than to buy a house and lose it. Doesn’t Habitat for Humanity require a down payment in “sweat equity”? The desire and ability of the federal government to bypass this logic is exactly how government usually screws things up.

    I think your point about the market sorting things out is absolutely dead on, the thing that happens when government meddles in the marketplace is it loses it’s ability to sort itself out. This is my point from prior discussions that we really don’t have a free market economy because there is so much government interference above and beyond legitimate regulation to enforce ethical behavior.

  • This alone does not cause foreclosures… if you can pay your mortgage it doesn’t matter what the market sets it’s value at. This would be further mitigated by 20% downpayments which would rarely have a mortgage going under-water.

    Well, it does and it doesn’t. If someone is more on the marginal side of being able to afford their payments, and then a personal catastrophe hits so they really can’t, in a growing market they can sell the house and walk away with money, covering the mortgage and avoiding foreclosure. In a down market (and keep in mind the vast majority of foreclosures have been in markets like California, Michigan, New York, Florida, etc. where the market has fallen 20-50%) people can’t sell to avoid foreclosure because they owe more than they can sell for.

    So when both regulators and lenders looked at the last 15 years, they were seeing a very low overall foreclosure rate (even for very marginal buyers) because if people ran into trouble they could always sell. This made it look like it was safer to lend than it was.

    I do think a 20% down payment threshold is a good thing as it forces people to work hard and save so that when they do buy a house they will not lose it… It is far better to stay in rented housing than to buy a house and lose it.

    I should probably disclose here that I bought our house in Texas five years ago with only 5% down, and not having told the lending company (they didn’t ask) that I was about to leave the job I had at the time.

    I had savings, but I wanted to hold onto them as we moved from CA to TX so I could make payments if it took me a couple months to find work. And I was pretty confident that I’d get a good job in time to cover it. (Ironically, land lords were much more inquisitive in regards to where I was going to make money in Texas than lenders were.)

    So I’m partly working from the knowledge of a situation in which a “sub prime” mortgage worked out just fine. Being a semi-libertarian sort, I’d tend to lean towards less rules and letting lenders and borrowers take risks knowingly, but the key word is “knowingly”.

    why did they do this?

    In a well intentioned regulatory attempt to require that banks hold “safer” investments.

    Fannie and Freddie where substantially controlled by congress and were also motivated by pressure to allow risky loans in order to expand home ownership. Interesting side-note Rahm Emanual was on the board of Fannie Mae.

    Their leadership was appointed by congress, but they were given a very long leash when times were good. (And no accountability when they went bad.) The old privatized profits, socialized losses game.

  • Matt McDonald says:

    Author: DarwinCatholic
    Comment:
    Matt –
    This alone does not cause foreclosures… if you can pay your mortgage it doesn’t matter what the market sets it’s value at. This would be further mitigated by 20% downpayments which would rarely have a mortgage going under-water.

    DC–
    Well, it does and it doesn’t. If someone is more on the marginal side of being able to afford their payments, and then a personal catastrophe hits so they really can’t, in a growing market they can sell the house and walk away with money, covering the mortgage and avoiding foreclosure. In a down market (and keep in mind the vast majority of foreclosures have been in markets like California, Michigan, New York, Florida, etc. where the market has fallen 20-50%) people can’t sell to avoid foreclosure because they owe more than they can sell for.

    So when both regulators and lenders looked at the last 15 years, they were seeing a very low overall foreclosure rate (even for very marginal buyers) because if people ran into trouble they could always sell. This made it look like it was safer to lend than it was.

    That’s absolutely correct, if lending standards had been maintained, there would still be some scenarios were nobody made any mistakes, but they ended up losing their house…. it would be a much smaller percentage. Keep in mind also, what caused the bubble in part was the reduction in lending standards, when the foreclosures caught up, the collapse began.

    Matt –
    I do think a 20% down payment threshold is a good thing as it forces people to work hard and save so that when they do buy a house they will not lose it… It is far better to stay in rented housing than to buy a house and lose it.

    DC –
    I should probably disclose here that I bought our house in Texas five years ago with only 5% down, and not having told the lending company (they didn’t ask) that I was about to leave the job I had at the time.

    I had savings, but I wanted to hold onto them as we moved from CA to TX so I could make payments if it took me a couple months to find work. And I was pretty confident that I’d get a good job in time to cover it. (Ironically, land lords were much more inquisitive in regards to where I was going to make money in Texas than lenders were.)

    So I’m partly working from the knowledge of a situation in which a “sub prime” mortgage worked out just fine. Being a semi-libertarian sort, I’d tend to lean towards less rules and letting lenders and borrowers take risks knowingly, but the key word is “knowingly”.

    Glad things worked out for you.

    The 20% threshold would, in my mind be a requirement for Freddie Mac, so assuming you’re going for government aid in the first place, that there are limitations set is reasonable. I would also not suggest it’s againts the law for a bank to expose themselves to a 5% loan, but there would be commensurate reserve requirements to protect the people who would pay if the bank were to fail. If we could have system were the lenders and borrows are not able to so easily lay off the risks it would be a good free market. One proposal I heard was to not allow banks to sell off the mortgages, but allow them to sell bonds as a means to fund them. If the mortgages fail, the bank loses money, they are punished for their failure. This would force banks to be more realistic while still providing funding. I’m all in favor of any private enterprise havign the right to risking everything, but not at taxpayer expense.

    why did they do this?

    In a well intentioned regulatory attempt to require that banks hold “safer” investments.

    So in response the investments where just declared “safer”? THat’s a riot.

    Fannie and Freddie where substantially controlled by congress and were also motivated by pressure to allow risky loans in order to expand home ownership. Interesting side-note Rahm Emanual was on the board of Fannie Mae.

    Their leadership was appointed by congress, but they were given a very long leash when times were good. (And no accountability when they went bad.) The old privatized profits, socialized losses game.

    Precisely.

  • Joe Hargrave says:

    Matt,

    “Wow, you have a lot of research to do. The sub-prime crisis was precisely allowed because of lower lending standards mandated by the CRA and other congressional action.”

    There is no evidence that CRA ever mandated lower lending standards. Absolutely none. All it ever did was mandate that certain banks give priority to low-income and minority borrowers who had historically been red-lined out of lending.

    From this fact people automatically assume that brown people can’t pay the bills. I’m not saying YOU did this, but I can’t ignore the plain truth – to some people, any attempt to serve the needs of minorities = a guarantee that there will be a lot of bad loans made.

    “IF that was true, the regulated lenders would not be being bailed out by the Federal government, would they?”

    All the regulations went out the window when the Glass-Stegall Act was thrown out and the Gramm-Leach-Bliley bill introduced. Thank you Bill Clinton for that one!

    There were still plenty of banks that decided not to jump off the cliffs – especially local community banks and credit unions that – gasp! – continued to serve the needs of minorities and low-income customers by CRA standards in their areas, and didn’t have the means or, I imagine, the desire, to get in on the securities madness. As I said, where there were high concentrations of these banks, there were fewer foreclosures.

    Fannie and Freddie, by contrast, were in competition with the big boys, the major lenders who, thanks to deregulation, COULD get involved in sub-prime and mortgage backed securities and begin taking dangerous risks with other people’s money. It doesn’t matter if you have government support if you still compete in the open market.

    “many people at all levels took advantage of these standards to get loans they might not otherwise have qualified for”

    This is true, but its important to remember where most of those loans came from. Not from regulated banks following CRA guidelines, but unscrupulous lenders (anyone can become a lender and many people did) who sought only to collect fees from selling their loans to another institution, where they would be repackaged as securities, then sold again, etc. It started at the ground level with people suckering people into bad loans, and then deregulated banks getting involved in selling them over and over again, not caring if they were bad or good, as long as someone bought them and they made a profit. Whoever was holding the hot potato when the game stopped would be the loser.

  • Matt McDonald says:

    Joe Hargrave,

    “Wow, you have a lot of research to do. The sub-prime crisis was precisely allowed because of lower lending standards mandated by the CRA and other congressional action.”

    There is no evidence that CRA ever mandated lower lending standards. Absolutely none. All it ever did was mandate that certain banks give priority to low-income and minority borrowers who had historically been red-lined out of lending.

    From this fact people automatically assume that brown people can’t pay the bills. I’m not saying YOU did this, but I can’t ignore the plain truth – to some people, any attempt to serve the needs of minorities = a guarantee that there will be a lot of bad loans made.

    Joe, that’s just not true, there is no reason to pull the race card. People who can’t pay their bills can’t pay their bills, people who can’t get into college can’t get into college. Making laws forcing entities to loan money to people or let them into college despite their lack of qualification, necessarily lowers the standards. What the heck do you think “give priority” means??? If banks failed to maintain the required quotas they suffered serious consequences, this forces them to lower standards.

    I have no objection to making sure race is not a negative discriminating factor in loans, but quotas is not the way to do so, it has serious negative results.

    “IF that was true, the regulated lenders would not be being bailed out by the Federal government, would they?”

    All the regulations went out the window when the Glass-Stegall Act was thrown out and the Gramm-Leach-Bliley bill introduced. Thank you Bill Clinton for that one!

    hardly.

    It doesn’t matter if you have government support if you still compete in the open market.

    If you have government support you are not competing in the open market. Period.

    It started at the ground level with people suckering people into bad loans

    So it’s always the lender who is “suckering” people? It’s never to do with greed on the part of the person securing a mortgage? A person who fills out and sign a fraudulent loan application? Are you saying that people didn’t understand the meaning of “INTEREST ONLY”? You can’t exonerate the people who took out the loans knowing they were not being honest and could not pay them, both parties are to blame.

    Those bad loans were only possible because of federally authorized lower lending standards – NO DOCUMENTATION, LOW DOWNPAYMENT, INTEREST ONLY.

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