Sunday, October 30, 2011

How my taxes are raised matters

I need to pay higher taxes.  To get to fiscal balance, I need to pay higher taxes.  To fund the things I support, such as national health insurance, more Section 8 housing, and a robust military, I need to pay higher taxes.  But I am not paying them alone--to pay more without others paying more is a gesture, and would not solve anything.

The federal government can get at me one of two ways: it can scale back or eliminate my deductions, or it can raise my rates.  If my mortgage interest deduction goes away, for example, my federal tax liability would increase by around 10 percent; alternatively, the federal government could just charge me a ten percent surtax on income.

If my income is taxed, the impact on my desire to work is ambiguous.  On the one hand, because the cost of leisure would fall, I would have an incentive to work less.  On the other hand, if I want to restore my previous after tax standard of living, I would have an incentive to work more.

If you take away my mortgage interest deduction, however, the impact is not ambiguous--I will have an incentive to work more.  Leisure is no less expensive (there is no substitution effect), but my desire to restore my previous income remains as before.  

Monday, October 24, 2011

The new HARP might help...

From this morning's New York Times:

The Federal Housing Finance Agency, which oversees mortgage finance giants Fannie Mae and Freddie Mac, said it was easing the terms of the two-year-old Home Affordable Refinance Program, which helps borrowers who have been making mortgage payments on time but have not been able to refinance as home values have dropped...

...To encourage banks to participate in the program, FHFA is revamping it to protect lenders from having to buy back HARP loans if underwriting problems are later found. Banks will only have to verify that borrowers have made at least six of their last mortgage payments and the new rules eliminate the need for appraisals in most cases.FHFA said government-controlled Fannie Mae and Freddie Mac will waive certain fees for borrowers that refinance into loans with a shorter term, such as 15 years, aiming to spur homeowners to pay down the amount they owe at a faster rate.
The elimination of the requirement for an appraisal will make a big difference.  So will the waiver of fees for those who shorten terms.  Lower interest rates and shorter terms will help borrowers get right-side up faster.

Saturday, October 22, 2011

Type I error, Type II error, and voting

No matter how our registration laws are set up, we will make errors: either people who are eligible to vote will be prevented from doing so, or people who are not eligible to vote will be allowed to do so.  Type I error falsely rejects a null hypothesis, while Type II error falsely fails to reject a null hypothesis.

If the null is that people who should be eligible to vote should be allowed to vote, then the new voter registration laws  being propagated around the country will produce more Type I error.  Two points here--I suspect that the new laws will create a lot more Type I error than precent Type II error.  Also, to me, Type I error is more serious than Type II error--preventing eligible voters from voting is a more egregious error than  allowing ineligible voters to vote.

Thursday, October 20, 2011

Another impediment to short sales?

This morning, I participated in a conference in Lakewood on housing sponsored by Rep. Linda Sanchez.   A HUD representative made me aware of an issue I hadn't known about before: how mortgage insurance is giving lenders an incentive to foreclose, rather than agree to short sales.

Apparently, a number of lenders bought mortgage insurance on particular mortgages from private mortgage insurance companies.  To clarify, the lenders did not require borrowers to purchase the mortgage insurance, but rather bought mortgage insurance (and paid the cost) on their own.

Under the terms of the policies, the lenders get a pay-off from the PMI companies is they foreclose on a property, but not if they modify a loan or allow for a short sale.  Consequently, lenders are better off foreclosing than modifying, even if the foreclosure produces lower proceeds than a modification.

This is yet another perverse incentive that is contrary to the policy aim of stabilizing the housing market.  I have no idea how widespread this is, but if it is common, it is yet another problem.  

Monday, October 17, 2011

Plane and train envy

One of the privileges of my job is I get to travel a lot.  In the past year, I have been to Hong Kong, Seoul and Singapore.  All three cities have great airports, and nice, clean, comfortable, fast rail transportation from their central cities to their airports.

By comparison, many airport terminals in the US--including two of our biggest international airports, LAX and JFK--are embarrassing, and transportation options to them are limited.  Perhaps such things don't matter much to economic performance--it is easy to overstate the wonders of nice infrastructure when the cost is being hidden via subsidies.  Nevertheless, there is something about the ability of Asian cities to do infrastructure well that makes me envious.   

Sunday, October 16, 2011

Lucid is the eye of the beholder

Ed Glaeser celebrates Tom Sargent in a recent Bloomberg column (h/t my father).  The following statement really struck me:
Two of his lucid monographs, “Macroeconomic Theory” and “Dynamic Economic Theory,” have long been mainstays of macroeconomic education
I am guessing pretty much anyone who went to grad school in econ in the late 1980s was subjected to "Macroeconomic Theory."  It has indeed become a useful reference to me, but lucid is about the last word I would use to describe it.  Lucid writers (within the realm of their academic work) include Paul Krugman, Milton Friedman and....Ed Glaeser.  Michael Intriligator manages to make dynamic optimization intuitive.  I just don't see how Sargent gets in the same category.

Friday, October 14, 2011

For free trade to fulfill its promise, the national government must redistribute income

As a card-carrying economist, I like trade--overall, it potentially enriches countries that engage in it.  The problem is the meaning of enrichment.

Trade theory says that trade enlarges the pie that people share.  But among the most important contributions to trade theory is the Samuelson-Stolper Theorem, which says that relatively scarce factors of production see their returns fall when trade is introduced.  In the context of an economy like the US, this means that low skilled workers see their wages fall in the presence of trade.  The trajectory of wages in the US over the past 20 years or so is consistent with the predictions of Samuelson and Stolper.

NAFTA was sold to the US public as something that would make everyone better off.  And in principle, it could have done so, had some of the gains to those who benefited from NAFTA been redistributed to those who lost as a result of it.  Instead we got the NAFTA but not redistribution.  This likely explains the widening disparity of incomes.

Saturday, October 08, 2011

Urban Population Share and Carbon Footprints

I am teaching Ed Glaeser's Triumph of the City to my undergrads right now; he has a chapter called "Is there anything greener than blacktop."  Just for fun, I plotted urban land share by state (source Demographia) against CO2 emissions per capita by state.  Here is what you get:

The regression line is log-linear.  An R2 of .28 on a bivariate relationship is not awful.  One should never make claims based on such things, but they are kind of fun to look at.

A couple of thoughts on the passing of Steve Jobs

(1) I wish we could have a tax code that could somehow discriminate between the truly productive rich and the, well, rich.  While I agree with Elizabeth Warren that no one gets rich by himself, there are rare people who really do know how to spend their own money better than the government.  The social returns to Steve Jobs must be remarkable.

(2) When politicians (and others) pay fealty to a market economic, their implicit assumption is that markets are competitive and exhibit, among other things, industrial (if not firm specific) constant returns to scale.  But successful enterprises like Apple often exhibit increasing returns to scale, at least for awhile, and certainly do not produce commodities sold into a competitive market.  Apple's innovation gives ii market pricing power, which is why it is so successful.  Without that pricing power, there might never be an Apple.  Yet the fact that success often requires market power implies that policies based on an assumption of a competitive equilibrium might be misplaced, perhaps disastrously so.

Thursday, October 06, 2011

My testimony to Senate Finance Committtee on Housing and Tax Reform

I testified today.  Here is how the written testimony opens:

Chairman Baucus and Ranking Member Hatch, I want to thank you for the opportunity today to present my views on the issue of housing and tax reform.  My name is Richard Green, and I am a professor in the School of Policy, Planning and Development and the Marshall School of Business at the University of Southern California.  I have published extensively on the issue of the Mortgage Interest Deduction, and in particular published a paper co-authored with Dennis Capozza and Patric H. Hendershott on housing and fundamental tax reform for the Brookings Institution[1].

My general philosophy is that the tax code should be as broad-based and efficient as possible, while maintaining vertical and horizontal equity to the best extent possible.  I find many of the ideas proposed by Robert Hall and Alvin Rabushka to be quite appealing, and to me, in an ideal world, we would have something quite similar to the tax code they propose, albeit with an earned income tax credit added.  That said, we are manifestly not in an ideal world, and issues of transition matter.  As I wrote in 1996, a rapid change in tax policy could have a traumatic impact on the economy, so it is important that congress phase in any major changes to tax policy involving housing.

That said, I have long thought that the Mortgage Interest Deduction is a residual of the 1913 tax code, accomplishes little that its supporters claim for it, pushes capital away from plant and equipment toward housing, and benefits high income (although perhaps not very high income) households more than the remainder of the country.

I will divide my remarks into 8 parts; (1) I will argue that the Mortgage Interest Deduction is a residual of the 1913 tax code, and was not created to encourage homeownership; (2) that those on the margin of homeowning get little-to-no benefit from the Mortgage Interest Deduction, and that the policy therefore does little to encourage homeownership; (3) that the Mortgage Interest Deduction does encourage those who would be homeowners anyway to purchase larger houses than they otherwise would; (4) that even in the absence of the Mortgage Interest Deduction, owner-occupants receive a large tax benefit; (5) that phasing out the Mortgage Interest Deduction would encourage households to pay down their mortgages more quickly, and would therefore encourage households to rely less on leverage; (6) household deleveraging would lead to greater market stability, but would also mean that the revenues generated by the elimination of the deduction would be smaller than static estimates suggest; (7) at a time when the housing market remains quite weak, it is important that the Mortgage Interest Deduction be phased out carefully; (8) that if we do wish to encourage homeownership via tax policy, a targeted, refundable credit would be more effective than the current Mortgage Interest Deduction.

[1] Dennis Capozza, Richard Green and Patric Hendershott (1996), Taxes, Mortgage Borrowing and Residential Land Prices in H. Aaron and W. Gale, ed. The Economic Effects of Fundamental tax Reform, Washington, DC Brookings Institution Press: 171-210