Home Ownership Dips to Nearly the Level in 1960

The U.S. home ownership rate, as recently reported by the Census Bureau, dropped to 62.9% in the second quarter of 2016, a rate about equal to the rate of 61.9% reported over a half century ago for 1960. This stagnation compares unfavorably to 1900 to 1960 when the non-farm homeownership rate increased from 36.5% to 61%.-a period encompassing rampant urbanization, immigration, and population growth. For example, the non-farm population quadrupled from about 42 million to 166 million, yet the non-farm home ownership rate increased by 67%. Except for the interruption caused by the Great Depression, the rate of increase was moderate to strong throughout the period.

How can this be? Isn’t there an alphabet soup of federal agencies-FHA, HUD, FNMA, FHLMC, GNMA, RHS, FHLBs-all with the goal of increasing homeownership by making it more “affordable”? Don’t these agencies fund or insure countless trillions of dollars in home loan lending–most with very liberal loan terms? Could it be the federal government massive liberalization of mortgage terms creates demand pressure leading to higher prices? Could it be federal, state, and local governments’ implement land use policies that constrain supply and drive prices up even further? Could it be government housing policies have made homeownership less, not more affordable or accessible?

The answer is an unequivocal yes. Since the mid-1950, liberalized federal lending policies have fueled a massive and dangerous increase in leverage-one that continues to this day. For example, in 1954 FHA loans had an average loan term of 22 years vs. 29.5 years today, an average loan-to-value of 80% vs. 97.5%, average housing debt-to-income ratio of 15% vs. 28%. Only the average borrowing cost in 1954 of 4.5% is the same as it is today. The result is today’s FHA borrower can purchase a home selling for twice as much as one with the underwriting standards in place in 1954-but without a dollar’s increase in income!

The result is that federal policies and a phalanx federal agencies have made the dream of home ownership, particularly for low-income and minority renters: less accessible, less affordable, less of a means to reliable wealth building, and more dangerous.

Home prices have risen substantially faster than incomes. Nationally, the median home price is 3.3 times median income, up from 2.9 times in 1979 and 2.0 (FHA only) in 1954. Today Los Angeles has a median home price 8.8 times median income, up from 4.2 times in 1979. Observers, including the FHA commissioner in 1963, noted: “Under conditions of limited supply, price changes tend to exceed [construction] cost changes.”

The size of new homes has nearly tripled–from 988 square feet in 1950 to 2687 square feet in 2015
. This wouldn’t be a problem if the demand for larger homes came from growing real incomes not growing leverage. This problem was recognized in President Clinton’s 1995 National Homeownership Strategy (NHS), which noted: “The new entry-level or starter home is fast becoming a thing of the past. … During the [1972-1992] period, the median new home size grew from 1,385 square feet to 1,920 square feet, and prices increased accordingly.” NHS’s goal was “to promote expanded production of starter homes … for all families who want and can afford to buy.” Unfortunately, the demand-side features of the NHS promoting higher leverage worked at cross-purposes and ended up financing even larger homes, so that by 2007 and 2015 respectively the average size had increased 31% and 40% since 1992.

The now standard 30-year loan condemns FHA’s and other low-income buyers to a life of debtorship. The 20-year loan term it replaced built wealth rapidly and reliably.

Finally, it has made foreclosures commonplace again. From 1934 to 1957, FHA had an estimated 13,500 insurance claims on defaulted loans (note: in 1957 the US homeownership rate was 60%). From 1958 to 2014 FHA had an estimated 3.5 million insurance claims. This is the direct result of liberalized credit standards. Government policies have become what they were intended to cure. The FHA itself described the problem it faced in 1936-“To many people, “Mortgage” became just another word for trouble-an epitaph on the tombstone of their aspirations for home ownership.”

The answer? Market-rate, economical housing, along with incentives to reduce leverage so as to reliably build wealth. This starts with bending the local and state government regulatory cost curve so as to increase the supply of market rate, economical housing. This is housing that largely serves service, light manufacturing and entry-level workers. Such housing is economical by design, making it naturally affordable, not expensive housing made affordable by government subsidy. Unleashing private enterprise will expand supply, thereby allowing supply and demand to reach equilibrium at lower and more sustainable price points. Undoubtedly the greatest beneficiaries will be low- and moderate-income and minority households.

EDITORS NOTE: This column originally appeared on RealClearMarkets.com.

Infrastructure Unites Voters in Divisive Election Year — Advantage Trump

MILWAUKEE, Wis. /PRNewswire-USNewswire/ — With 90 days left before Election Day, a national poll released Tuesday by the Association of Equipment Manufacturers (AEM) found that half of registered voters say the nation’s infrastructure has gotten worse over the last five years, and a majority of voters said roads and bridges are in “extreme” need of repair.

Donald Trump at the Detroit Economic Club stated:

We will build the next generation of roads, bridges, railways, tunnels, sea ports and airports that our country deserves. American cars will travel the roads, American planes will connect our cities, and American ships will patrol the seas.

AEM notes that the findings were part of a new national poll to gauge voter perceptions and attitudes about the current and future state of U.S. infrastructure amid a high-profile election. The poll found that registered voters, regardless of political affiliation, recognize the declining state of the nation’s infrastructure as an issue that should be addressed and believe that the federal government should do more to improve infrastructure across the board.

“Americans across the political spectrum understand the dire state of U.S. infrastructure and believe that the federal government should do more to improve our infrastructure,” said Dennis Slater, president of AEM. “Voters recognized that increased federal funding for assets such as roads, bridges, and inland waterways will have a positive impact on the economy, and they are looking to the federal government to repair and modernize.”

The national poll identified a number of key findings, including:

  • Nearly half (46 percent) of registered voters believe that the state of the nation’s infrastructure has gotten worse in the last five years.
  • A significant majority (80 – 90 percent) of registered voters say that roads, bridges and energy grids are in some or extreme need of repairs.
  • Half (49 percent) of the surveyed population feel that the federal government is primarily responsible for funding repairs to the nation’s infrastructure.
  • Seven out of every 10 registered voters say increasing federal funding for infrastructure will have a positive impact on the economy.
  • More than eight out of every ten Americans consider water infrastructure (86 percent), solar powered homes (83 percent) and smart infrastructure (82 percent) as the top three important innovations for the future of infrastructure.
  • Voters across the political spectrum think that the federal government should do more to improve the nation’s overall infrastructure, with 68 percent of Republicans, 70 percent of Independents and 76 percent of Democrats sharing this sentiment.

Registered voters also feel that government across the board should be doing more to improve the nation’s overall infrastructure, with 76 percent of individuals surveyed wanting more from state governments, 72 percent looking to the federal government to do more and 70 percent expecting more from local governments.

“Both presidential nominees have voiced their strong support for infrastructure investment,” said Ron De Feo, CEO of Kennametal and chairman of AEM’s Infrastructure Vision 2050 initiative. “The specific ideas and proposals they offer over the next 90 days will be critically important, and voters should consider them carefully on Election Day.”

The national poll was conducted as part of AEM’s ongoing efforts to develop a long-term national vision for U.S. infrastructure. An analysis of the national poll results is available here.

aem logoAbout the Association of Equipment Manufacturers (AEM) – www.aem.org

AEM is the North American-based international trade group providing innovative business development resources to advance the off-road equipment manufacturing industry in the global marketplace. AEM membership comprises more than 850 companies and more than 200 product lines in the agriculture, construction, forestry, mining and utility sectors worldwide. AEM is headquartered in Milwaukee, Wisconsin, with offices in the world capitals of Washington, D.C.; Ottawa, Canada; and Beijing, China.

Hawaii: Obama’s favorite Democrat run state ranks 50th in Cost of Doing Business

CNBC: America’s Top States for Business 2016

49. Hawaii

Quality of life in the Aloha State can’t be beat. But neither can costs, which are the highest in the nation.

Category
Score
2016 Rank
2015 Rank
Workforce 165 48 46
Cost of Doing Business 45 50 50
Infrastructure 116 46 49
Economy 181 25 42 (Tie)
Quality of Life 295 1 1
Technology & Innovation 90 38 36 (Tie)
Education 74 43 45
Business Friendliness 27 46 44
Cost of Living 2 50 50
Access to Capital 14 37 37
Overall 1009 49 50

Economic Profile

  • Governor: David Ige, Democrat
  • Population: 1,431,603
  • GDP growth: 1.7 percent
  • Unemployment rate (May 2016): 3.2 percent
  • Top corporate tax rate: 6.4 percent
  • Top individual income tax rate: 8.25 percent
  • Gasoline tax: 60.39 cents/gallon
  • Bond rating/outlook: Aa2, positive
  • Major private employers: Bank of Hawaii, Corp., Hawaiian Electric Industries Inc.

Economic profile sources: U.S. Census Bureau, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, Federation of Tax Administrators, American Petroleum Institute, Moody’s Investor Service, S&P

Venezuela Has Made It Impossible to Run a Business by Rachel Cunliffe

Businesses in Venezuela have a problem.

Actually, almost everyone in Venezuela has a great many problems. Starvation, for example. Shortages of basic goods. Dysfunctional and understaffed hospitals, which lack medications. A corrupt and increasingly militarised government determined to protect the incumbent president, Nicolás Maduro, at all costs.

Shortages, inflation, and protectionism cripple the economy.But businesses, especially factories, face another, more specific problem. As Venezuela’s economy has ground to a halt and its currency has depreciated by nearly two thirds in the past year, the raw materials needed for manufacturing have become prohibitively expensive, or simply impossible to come by. This is not helped by the government’s steep import tariffs and currency restrictions, nor by the rock-bottom price controls, which make operating a business an utterly unprofitable enterprise.

This disaster is entirely of President Maduro’s own making. But rather than acknowledge that 17 years of Chavismo socialism have been a terrible mistake that have wrecked Venezuela, Maduro is tightening the iron fist of state control.

The BBC reports that the Venezuelan government has seized a factory that makes hygiene products like toilet paper, owned by the US company Kimberly-Clark. Kimberly-Clark’s crime? Closing the factory, due to an inability to obtain raw materials.

The Venezuelan Labour Minister, Oswaldo Vera, has called the closing of the factory “illegal,” and promised that the factory will continue to operate “in the hands of the workers.” To which the obvious question must be: with what materials? How does the government think the factory can re-open without the raw materials it needs?

The president there is then the issue of the chilling authoritarianism of declaring that a privately-owned company broke the law by ceasing business. In May, President Maduro threatened to arrest and jail the owners of factories that stop producing, saying Venezeula’s productive capacity was “being paralysed by the bourgeoisie.”

Who would open a business where it’s illegal succeed and illegal to fail?In actual fact, it is being paralysed by the government’s radically anti-business policies, which include such threats. What company, whether domestic or international, will want to set up a factory in Venezuela under such tyrannical conditions, knowing it is impossible to make a profit and that owners risk arrest by trying?

Maduro has blamed the latest crisis, as he has all previous crises, on an economic war being waged against his regime by the opposition, in collusion with US forces. The simple fact is he has left business owners no options, creating a climate in which it is impossible to operate. The daily protests against food shortages across the country show that Venezuelans are getting desperate. Nicolás Maduro’s socialist regime is running out of time.

This article first appeared at CapX.

Rachel Cunliffe

Rachel Cunliffe

Rachel Cunliffe is the Deputy Editor of CapX.

The Concorde Coalition says it’s the Budget Stupid!

WASHINGTON, D.C. /PRNewswire-USNewswire/ — Sobering 30-year projections that the Congressional Budget Office (CBO) released today underscore the need for the 2016 presidential and congressional candidates to provide voters with credible plans to put the federal budget on a more responsible course, according to The Concord Coalition.

cbo long term spending revenues

“If current laws remained generally unchanged, the United States would face steadily increasing federal budget deficits and debt over the next 30 years—reaching the highest level of debt relative to GDP ever experienced in this country” – Congressional Budget Office.

“Americans like to think we put a high priority on strengthening the country and looking out for the next generation, but the CBO’s latest long-term projections show once again that we are falling far short on both counts,” said Robert L. Bixby, Concord’s executive director. “Those who aspire to national leadership should take a good look at these projections and explain to the public how they intend to avoid the intense budget pressures and grave economic consequences toward which current policies are leading us.”

Bixby added:

“If candidates for federal office over the next few months ignore the CBO’s warnings of severe trouble ahead, whoever wins in November will not have a clear mandate for the reform measures needed to rein in the federal debt, strengthen the economy and protect our children’s future.”

The federal deficit has been dropping in recent years, creating a sense of complacency in Washington about the need for such reforms. Yet under current law the deficit is rising again this year and the debt will continually grow more quickly than the economy — a trend that is ultimately unsustainable.

Today’s CBO report looks out over the next three decades and projects even greater government debt and fiscal pressures after 2026.

The federal debt held by the public, which was only 39 percent of GDP at the end of Fiscal 2008, has climbed to 75 percent. That is already high by historical standards. The budget office projects that under current law, that debt would rise to 86 percent of GDP in 2026 and to 141 percent in 2046 — far exceeding the historical peak of 106 percent shortly after World War II.

As the CBO points out, such high levels of public debt would reduce national savings and income, increase interest costs that would put more pressure on the rest of the budget, limit the nation’s ability to respond to unforeseen problems and increase the likelihood of a fiscal crisis in which investors would demand extremely high interest rates on further loans to the government.

“The changes needed to bring about a sustainable fiscal policy are substantial and the costs of delay are profound, yet so far the 2016 presidential candidates have said nothing that comes close to addressing the challenges identified in CBO’s report,” Bixby said.

According to CBO, simply keeping the debt-to-GDP ratio from rising above its current level, would require spending cuts and/or tax increases totaling 1.7 percent of GDP in every year through 2046. That would amount to $330 billion in 2017.

Waiting until 2022 would require annual changes totaling 2.1 percent of GDP, and procrastinating until 2027 would require annual changes totaling 2.7 percent of GDP.

The choice about when to make policy decisions also has different generational impacts. As CBO says: “Reducing deficits sooner would probably require today’s older workers and retirees to sacrifice more and would benefit today’s younger workers and future generations. By contrast, reducing deficits later would require smaller sacrifices by older people and greater sacrifices by younger workers and future generations.”

An aging population and rising health care costs are key factors in the government’s growing financial problems. As more people retire, the government must spend more just to maintain current levels of service. Health care costs rise as more treatments become available and demand for them increases.

CBO says federal spending on Social Security, the government’s major health problems and other “mandatory” programs would rise from 13.2 percent of GDP today to nearly 16.9 percent in the decade starting in 2037.

The budget office also warns that interest payments on the federal debt are expected to rise rapidly as government borrowing continues and low interest rates return to normal levels. Net interest costs now amount to only 1.4 percent of GDP but that figure is expected to rise to 5.1 percent after 2037.

The CBO report shows other areas in the federal budget — even those that may prove critical to the nation’s future — being squeezed harder and harder in the coming years. CBO projects that over the next 30 years spending on national defense, infrastructure, research and development,  and everything else other than health care, Social Security and interest payments would drop to 5.2 percent of GDP, down from 6.5 percent today.

In addition to more thoughtful spending decisions in Washington, reasonable reforms in the federal tax system could help boost the economy and reduce federal borrowing.

“As in past years, CBO’s long-term projections are a valuable reminder that the federal budget is not on a sustainable course,” Bixby said. “Interest payments and a few spending programs, no matter how important, cannot be allowed to squeeze other national priorities out of existence. Voters this year would do well to look for candidates who understand this and are prepared to do something about it.”

ABOUT THE CONCORD COALITION

The Concord Coalition is a nationwide, non-partisan, grassroots organization advocating generationally responsible fiscal policy. The Concord Coalition was founded in 1992 by the late former Senator Paul Tsongas (D-Mass.), late former Senator Warren Rudman (R-N.H.), and former U.S. Secretary of Commerce Peter Peterson. Former Senator Sam Nunn (D-GA) serves as co-chair of the Concord Coalition.

RELATED ARTICLE: The 15th Obamacare Co-Op Has Collapsed. Here’s How Much Each Failed Co-Op Got in Taxpayer-Funded Loans.

Corruption: Millions in business loans to Muslim refugees not tracked by Obama administration

I’m dashing out the door and cannot do this incredible work by Judicial Watch justice, but wanted to get it up now hot off the presses!

For years I’ve wondered how you get at this information on special loans for special peopleand now I know—someone does a Freedom of Information Act request (a specialty of JW as Hillary knows so well!).

Here is how the story begins:

The U.S. government gives refugees on public assistance special “loans” of up to $15,000 to start a business but fails to keep track of defaults that could translate into huge losses for American taxpayers, records obtained by Judicial Watch reveal. The cash is distributed through a program called Microenterprise Development run by the Department of Health and Human Services (HHS) Office of Refugee Resettlement.

Since 2010 the program has granted thousands of loans to refugees that lack the financial resources, credit history or personal assets to qualify for business loans from commercial banks. Most if not all the recipients already get assistance or subsidies from the government, according to the qualification guidelines set by the Microenterprise Development Program. It’s a risky operation that blindly gives public funds to poor foreign nationals with no roots in the U.S. and there’s no follow up to assure the cash is paid back. The idea behind it is to “equip refugees with the skills they need to become successful entrepreneurs” by helping them expand or maintain their own business and become financially independent.

You gotta read this, continue here.

If you are looking for an organization to donate to—Judicial Watch is it!

Afterthought:  Repeatedly you see news stories that refugees are opening new businesses at record rates and thus boosting the local economy.  (Opening businesses with your financial help.)  This information makes me wonder how many of those new businesses survive for even a year or two?

The Most Schooled Generation in History Is Miserable by Zachary Slayback

It’s said that sadness isn’t the opposite of happiness — boredom is.

A fully schooled generation has created a generation of bored adult children.With this in mind, is it any surprise that children, adolescents, and young adults today are so unhappy? Is it any surprise that so many turn to extending their schooled lives into structured activities as long as possible? Is it any surprise that when people don’t know what to do, they simply go to graduate school?

To understand this mass unhappiness and boredom with life — and the sudden uptick in quarter-life crises — look at where these young people have spent most of their lives.

What we see today in Millennials and younger is something henceforth unseen in the United States: a fully-schooled generation. Every young person, save the occasional homeschooler, today has been through schools. This means rich and poor, established and unestablished, and developed and undeveloped young adults have all been put through roughly the same exact system with the same general experiences for the last two decades of their lives.

School teaches them that life is broken into discernible chunks and that learning and personal development are to be seen as drudgery. Rather than teaching them how to foster a love of learning, a constantly-centralizing school regime in the US today teaches them to look for standards to be measured against.

Rather than helping give them the cognitive and philosophical tools necessary to lead fulfilled lives in the context of the world in which they live, schools remove them from this world and force them to develop these skills only after 18–25 years of being alive. Rather than allowing them to integrate themselves into the broader scheme of life and learn what they get fulfillment from achieving and what they don’t, school leaves fulfillment to five letter grades and a few minutes of recess.

“We destroy the love of learning in children, which is so strong when they are small, by encouraging and compelling them to work for petty and contemptible rewards, gold stars, or papers marked 100 and tacked to the wall, or A’s on report cards, or honor rolls, or dean’s lists, or Phi Beta Kappa keys, in short, for the ignoble satisfaction of feeling that they are better than someone else.” ~ John Holt

In short, school teaches apathy towards education and detachment from the world. School removes people from being forced to learn how to get fulfillment from a variety of activities and subjects and instead foists a handful of clunky subjects onto them hoping they meet state standards for “reading,”“mathematics,” “writing,” and “science.”

Extended Childhood

Not only this, but they’ve had childhood extended further into adulthood than any other generation before them. A young person today is considered a “child” much longer than a young person was 20 or 40 years ago. To treat a 16 year-old as a child in the 1960s would have been insulting. Today, it is commonplace.

Adult children wander the hallways of universities and workplaces today, less-equipped to find purpose and meaning than their predecessors. They can’t be entirely blamed for their anxiety and depression — their parents, teachers, and leaders put them through an institution and created a cultural norm that created the world they live in today.

“Once you understand the logic behind modern schooling, its tricks and traps are fairly easy to avoid. School trains children to be employees and consumers; teach your own to be leaders and adventurers. School trains children to obey reflexively; teach your own to think critically and independently. Well-schooled kids have a low threshold for boredom; help your own to develop an inner life so that they’ll never be bored.” ~ John Taylor Gatto

This is the perfect formula for creating a group of constantly bored people. They’ve been deprived of a chance to find meaning for themselves in subjects by engaging with them on a deep level and internalizing the responsibility necessary to live in the world. They’ve been cut off from opportunities to make real connections with people based on more than a lottery of ZIP codes for a decade. They’ve been taught that achievement is getting to the next level set by people outside of themselves.

Sadness isn’t the opposite of happiness — boredom is. A fully schooled generation has created a generation of bored adult children. It’s no wonder young people today seem so unhappy.

Originally appeared at zakslayback.com.

Zachary Slayback

Zachary Slayback

Zachary Slayback is the Business Development Director for Praxis, a one year program that trains future entrepreneurs. He writes regularly at ZakSlayback.com and can be contacted at zak@slayback.xyz.

Democratic Socialism Debunked: The rhetoric and the reality never changes [+Videos]

Socialist rhetoric changes very little over time. It turns out to be rather easy to juxtapose refutations from decades ago against the blather you hear on the news today.

As with economics generally, the fallacies of collectivist statism must be refuted in every generation. So here we have video of Milton Friedman dealing with the fallacies of Bernie Sanders.

For your convenience for sharing, here are other versions of the video.

Short versions:

RELATED ARTICLE: Socialist Self-Deception: Einstein and the USSR to Bernie Sanders and Venezuela

EDITORS NOTE: The below graphic summarizes socialism by one of its primary proponents.

HitlerSocialist-1024x535

 

When Employers Compete, Workers Win — When They Can’t, Workers Lose by Donald J. Boudreaux

David Henderson does a very nice job summarizing why stripping workers of the right to offer X as part of an employment contract makes most workers worse off, even if the intention of the government officials who do the stripping is to help workers — and, indeed, even if a Nobel laureate economist misses this reality.

Here’s another part of the picture.

Workers’ bargaining power ultimately is tied positively to workers’ alternatives: the greater the number, and the better the quality, of a worker’s employment options, the stronger is that worker’s bargaining power. If many different employers are competing for your services — each by offering you good pay, good benefits, and good work conditions — you as a worker have splendid bargaining power.*

It follows that government interventions that reduce the creation of good jobs— that is, interventions that reduce firms’ incentives to create better opportunities for employing human labor — reduce workers’ bargaining power. In turn, it follows that if overtime-pay arrangements of the sort that emerge in the absence of government restrictions on employment contracts are for many firms and workers the most efficient sorts of labor contracts available — as they are likely to be in a competitive economy — then government prohibitions that make those contract terms illegal will reduce firms’ efficiencies and, hence, dampen their willingness to create new jobs that pay as much as jobs would pay in the absence of those prohibitions.

Put differently, government restrictions that shrink the ways that employers can squeeze more efficiency into their operations shrink the number of jobs that are created, or reduce the maximum pay that employers can offer to employers who perform newly created jobs.

Over time, therefore, regulations such as the newly imposed overtime-pay diktats dampen workers’ bargaining power by reducing the number of high-as-possible-quality jobs created by employers. With fewer such jobs, there’s less competition for workers.  And with less competition for workers, workers’ bargaining power shrinks.

Note that empirically documenting this reduced competition for workers, as well as documenting its effects on workers’ pay (lower than otherwise), fringes (lower than otherwise), and work conditions (worse than otherwise) would be practically impossible. Because the consequences of these diktats play out fully only over a long span of time, it is simply too difficult for an empirical investigator to uncover, amidst all the countless other changes that occur in the economy, the details of what pay, fringes, and work conditions would beotherwise — that is, had such diktats not been imposed.

Yet unless you think you can say nothing absent empirical evidence about the effects on workers’ well-being of a reduction in the intensity and quality of competition for labor, then you should worry that these new overtime-pay diktats will, over time, make many workers worse off than they would otherwise be.

* Note that if, in this situation, you as the worker (whose services employers are competing for) agree to reduce the value that you will receive on one margin (say, pay) in order to increase the value you will receive on another margin (say, working conditions), it would be wholly mistaken for an outside observer to notice your agreement to work for lower pay and conclude from that observation that youremployer has undue bargaining power over you. And it would harm you if this outside observer, arrogant in his or her ignorance of the details of your and your employer’s affairs, orders your employer to increase your pay to some level higher than you agreed to accept.

Cross-posted from the indispensable Cafe Hayek.

Donald J. Boudreaux

Donald J. Boudreaux

Donald Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, a professor of economics and former economics-department chair at George Mason University, and a former FEE president.

It’s Time to Put the Market Back in Housing Finance

Today’s government-centric housing finance system is an “economics free zone” indifferent to supply and demand. Composed of an alphabet soup of agencies, this system has fostered a massive liberalization of mortgage terms and provided countless trillions of dollars in lending in up and down markets. At the same time, other government polices constrain supply. As a result, housing has become less, not more affordable or accessible. Here’s why.

“[In a seller’s market] it is more likely that the liberalization of mortgage terms will increase both price and the amount of the debt, with debt service remaining approximately unchanged. … Thus, the liberalization of terms easily becomes capitalized in higher prices.” (Fisher 1951).

Because of a reliance on excessive leverage, US homeownership policy has failed to broaden homeownership access, failed to achieve wealth accumulation for low- and middle-income homeowners, and led to 11 to 12 million foreclosures since 1973.

US multifamily policy failed to promote plentiful rental housing opportunities at rents accessible to low- and moderate-income tenants (Fisher 1975; Jakabovics et al. 2014). With the supply of unsubsidized, economical, workforce housing stagnating, there are calls for large expansions in subsidies.1 Building hundreds of thousands of high-cost apartment units—with inflated costs because of federal, state, and local regulations as well as layers of subsidies to lease to extremely low and very low income households—is not viable (Fisher 1975).

The Case against Current US Homeownership Policy

For 60 years, policymakers have loosened mortgage lending standards ostensibly to promote broader homeownership and wealth accumulation, particularly for low- and moderate-income households.

  • In 1954, Federal Housing Administration (FHA) borrowers had an average loan-to-value of 79.9 percent, an average loan term of 21.4 years, and an average housing debt-to-income ratio of 15 percent.
  • By 1964, these metrics had risen to 92.8 percent, 29.9 years, and 16.5 percent, respectively.
  • Today, the average figures are 96 percent, 29.5 years, and 28 percent, respectively.

Today’s FHA borrowers spend nearly twice as much of their income—2.15 times the debt, for a home at 1.79 times the price, with 6 times the default risk under stress—compared with typical 1954 FHA borrowers with the same nominal income.

It not surprising that the FHA has experienced 3.4 million foreclosures from 1973 to 2014 (one in eight purchase borrowers) compared with a near-zero rate in its first 25 years.2 For the 25 percent of FHA borrowers living in the highest default rate zip codes, an estimated one in five lost their homes, with untold neighborhood devastation (Pinto 2012).

Fact 1: The US homeownership rate is no higher today than in the early 1960s and is only marginally higher than in 1956, before FHA loans with low down payments or 30-year terms became broadly available.3

Fact 2:  Homes are less affordable today, standing at a multiple of 3.32 times median home price and median income compared with 2.95 times in 1979 or 2.86 times in 1992.  A new round of increasing loan leverage began after 1992, the year Congress imposed government-sponsored enterprise (GSE) affordable housing mandates. This helped drive home prices to unsustainable levels (4.05 times in 2006). After hitting a trough of 3.03 times in 2012, the ratio now stands at 3.32 times.4

Fact 3: Low- and middle-income households have lost wealth since 1989.

Fact 4: Liberalizing credit terms during a seller’s market inflates home prices and sets up future price volatility and higher default rates under stress.5 Extended periods of increasing leverage fuel a price boom that makes homes unaffordable, promotes price volatility, and leads to unforgiving mean reversion.6

Figure 2 confirms FHA’s first chief economist Ernest M. Fisher’s 1951 prediction that in a seller’s market, liberalized credit terms easily translate into higher prices. During the current up cycle, real home prices are up 16 percent.

In January 2015, the FHA announced a mortgage insurance premium cut during a seller’s market. It had the effect predicted by Fisher: nearly three-quarters of the additional buying power was absorbed by price (18 percent) and quality/quantity (55 percent) effects.7 Because the price effect increased the cost for all FHA buyers, the marginal cost of attracting each new first-time buyer was high ($82,000).8

Fact 5: Averages are misleading, and home prices are volatile.

National averages are misleading because they mask price volatility (figure 3) and price dispersion at the metro, zip code, and neighborhood levels (figures 4 and 5).

Lower-priced homes, generally owned by low-income and minority households, experience higher price volatility and lower nominal gains. In figure 5, the bottom price tier of all 28 cities had a lower nominal price increase per year than the top tier (computed over 18 years). These borrowers also experience higher default rates because of the higher leverage.9

Fact 6: Post crisis credit is not tight;10 underwriting and regulatory changes promote rather than constrain a boom.11 Whether leverage is exotic is less relevant than the relative change in buying power generated by increasing leverage, which drives deviation from the price mean.

Fact 7: Federal, state, and local policies increase home-building costs (Jakabovics et al. 2014).  The 10 metros with the lowest multiples of 2013 median home price and 2013 median household income had less restrictive land-use regulations.  The 15 metros with the highest multiples had more restrictive land-use regulations.12 Even California has recognized that public policies are largely responsible for it being the most expensive housing market in the country (Taylor 2015). Burgeoning impact fees have a disproportionate impact by constraining the construction of entry-level homes. 13

The Case against Current US Multifamily Policy

Fact 1: Rents are increasingly less affordable. In 1979 (earliest Zillow data available), median rents nationally stood at 24 percent of median incomes (Los Angeles rents stood at 30 percent of median incomes).  Today, the national rate stands at 30percent with Los Angeles at 49 percent.

Fact 2: Federal, state, and local policies increase apartment construction costs.  Eight of the 10 metros with the lowest multiples of 2015 median rent and median household income had less restrictive land-use regulations.  Thirteen of the 15 metros with the highest multiples of 2015 median rent and median household income had more restrictive land-use regulations.14

Fact 3: Multifamily debt (in 2010 dollars) is rising much faster than the number of total units because of liberal financing from Fannie Mae, Freddie Mac, FHA, and Ginnie Mae, as well as highly accommodative monetary policy.15

Fact 4: While the Low-Income Housing Tax Credit (LIHTC) is the primary means of promoting the construction of “affordable” apartments, it’s expensive and opaque.

New LIHTC credits total $10 billion annually, funding about 100,000 LIHTC units.

  • These units have high construction costs (estimated $175,000 to $200,000 per unit).
  • These units serve few low-income tenants; 80 percent are either extremely low income (area median income less than or equal to 30 percent) or very low income (area median income from 31 to 50 percent); only 7 percent have an area median income greater than 60 percent but less than or equal to 80 percent (Furman Center 2012).
  • These units benefit from layers of subsidies, driving subsidy costs to $12,000 per unit, raising questions about unfair distribution of scarce resources. These subsidies include government-aided financing, state and local subsidies, and rental assistance (e.g., Section 8 and Housing Choice Vouchers) targeted to very low and extremely low income households.
  • This tax credit risks repeating same errors as previous housing subsidy programs.
    • Tenants are overwhelmingly minority households (61 percent), and nonelderly units are concentrated in metropolitan statistical area census tracts with high minority concentrations (Office of Policy Development and Research 2016).
    • Many developments face fiscal challenges to avoid blight that sets in after 16 to 20 years.

Market-Based Solutions to Bring Home Prices Back in Line with Median Incomes and Improve Accessibility

Objective: A more stable housing finance market that provides a reliable path to wealth building and broader low- and middle-income access to homeownership.

  • Repeal Title XIV (qualified mortgage) and section 941 (qualified residential mortgage) provisions of Dodd-Frank (Pinto 2016) (legislative action needed)
  • Require the FHA and GSEs to adopt sound underwriting, pricing, and capital standards (legislative and administrative action needed)
  • Repeal the GSE affordable housing goals (see replacement Low-Income First-Time Buyer tax credit below) to end destabilizing competition between the FHA and the GSEs (legislative action needed)
  • Adopt policies to support market stability by ensuring a high preponderance of good-quality mortgages (administrative action needed)
  • Help low- and middle-income families with wealth-building strategies
    • The American Enterprise Institute’s Wealth Building Home Loan offers such a path, but the 30-year mortgage does not.16(administrative action needed)
  • Enact the Low-income First Time Homebuyer (LIFT Home) tax credit (legislative action needed)
    • This credit would allow low-income,17 first-time buyers to forgo the interest deduction and receive a one-time refundable tax credit.
    • This credit is equal to 4 percent of the mortgage loan ($10,000 maximum) and can be used to buy down the loan’s interest rate for at least seven years on loans with terms of 20 years or less.
    • The legislation would funnel $4.5 billion per year to fund 500,000 LIFT Home buyers, 250,000 of whom would be incremental low-income, first-time buyers. This assumes that 150,000 live in apartments (freed-up units would be a bonus).
    • Funding LIFT Home would require the following:
      • Reductions in the US Department of Housing and Urban Development’s budget
      • Repurposing other budgeted amounts that support affordable housing to push tax dollars directly to homebuyers instead of having the money siphoned off by bureaucracies and advocacy groups
      • Restructuring home mortgage interest deductions to promote wealth, not debt accumulation
        • For future homebuyers, this restructuring would
          • limit interest deductions to purchase loans and exclude second mortgages and cash-out refinances (also for existing homeowners) and
          • cap mortgage interest deductions to amounts payable on a loan with a 20-year amortization term.
      • For existing home loan borrowers, the restructuring would
        • grandfather current interest deductions, ameliorating impact of change on current home prices; and
        • direct any interest savings (from refinancing an existing loan at a lower rate) toward shortening the loan term.

Over 10 years, these solutions would reduce capital needs by 60 percent and allow weaning off the federal government’s overwhelming loan guarantee role. Outstanding debt would be reduced by approximately 20 percent, and risk-absorbing capital per loan would be reduced by 50 percent.

  • With less interest rate risk and lower capital requirements, these loans would be safer and easier for depository institutions to hold in portfolio.  Today, these institutions hold about 50 percent of total single-family mortgage debt.

Market-Based Rental Housing Solutions to Bring Rents Back in Line with Median Incomes and Improve Accessibility: the “Blight Preventer” Loan

Objectives: Shift from the current debt- and government-centric finance system to a rental housing market where supply is permitted and encouraged to meet demand; establish life cycle underwriting18and the “Blight Preventer” Loan as best practices in financing subsidized multifamily housing.

  • Repeal GSE affordable housing policies and the Community Reinvestment Act
  • Increase supply of unsubsidized economical workforce and entry-level apartments
  • Use lifecycle underwriting and 15- and 20-year self-amortizing first mortgage—the “Blight Preventer” Loan (White and Wilkins 2016):
    • Excessively long loan terms used to finance affordable multifamily properties leave many properties unable to fulfill affordability commitments without additional public subsidies and leaves those properties poorly maintained, leading to blight and urban decay.
    • Most affordable multifamily housing is located in lower-income neighborhoods, leaving public funders to accept blight or throw good money at bad investments.

Bending the Cost Curve to Increase the Supply of Unsubsidized Economical Workforce and Entry-Level Houses and Apartments

  • Local and state governments should
    • authorize expedited permitting and “just-in-time” building inspections;
    • identify building code interpretations to reduce cost impact;
    • review and amend density and parking requirements, height maximums, size minimums, and other provisions that increase barriers and raise costs;
    • expand permitted uses in a zoning district that are not subject to special review and approval by local government;
    • review and amend building codes that dictate costs and amenities that put economical workforce developments at a disadvantage;
    • reduce regulatory complexity and include staff flexibility in applying and interpreting burdensome requirements (direct staff to be as flexible as possible);
    • adjust impact and permitting fees to reflect any reduced impact of such housing;
    • establish a “good enough to be economical” standard; and
    • reduce the expenses calculated as a percentage of costs.
  • Designers and  builders should implement innovative and economical techniques for
    • design and construction,
    • sustainability,
    • utilizing existing infrastructure,
    • repurposing existing structures, and
    • management.

Notes

  1. “Cantwell Launches National Campaign to Increase Federal Resources for Affordable Housing,” press release, March 24, 2016, https://www.cantwell.senate.gov/news/press-releases/cantwell-launches-national-campaign-to-increase-federal-resources-for-affordable-housing; Peter Dreier, “How to House the Working Poor,” How Housing Matters, last updated April 7, 2016, http://howhousingmatters.org/articles/house-working-poor/.
  2. FHA Actuarial Studies and author. See Pinto (2012).
  3. Edward J. Pinto, “Housing finance fact or fiction? FHA pioneered the 30-year fixed rate mortgage during the Great Depression?” AEIdeas (blog), June 24, 2015,http://www.aei.org/publication/housing-finance-fact-or-fiction-fha-pioneered-the-30-year-fixed-rate-mortgage-during-the-great-depression/.
  4. Zillow and author.
  5. Liberalization of credit terms takes many forms, including smaller down payments, higher debt-to-income ratios, longer loan terms, lower interest rates, quantitative easing, and reduced mortgage insurance premium.
  6. Mean reversion is a theory suggesting prices and returns eventually move back toward the mean.
  7. The 0.50 percent decrease in premium increased buying power by 6 percent. This could be “spent” in three ways: price effect (seller raises price), quality/quantity effect (buyer purchases larger or better-quality home), or expanded access (attracts new buyers).
  8. Forthcoming research to be published by Stephen Oliner, Edward Pinto, and Tobias Peter.
  9. Default risk increased in zip codes where median family income and median home prices are low. See Pinto (2012).
  10. First-time buyer credit metrics are follows: 69 percent of buyers have a combined loan-to-value ratio less than or equal to 95 percent, 97 percent have a 30-year loan, 29 percent have a debt-to-income ratio less than 43 percent, and 22 percent have a FICO score below 660. See “Mortgage Risk Index Release of March 2016 Data,” American Enterprise Institute’s International Center on Housing Risk, last updated April 26, 2016.  As an up real estate cycle ages, credit maximums usually become minimums, thus leading to calls for even more liberal credit terms, including less traditional ones. See Fisher (1951).
  11. For example, income leverage (measured by borrower debt-to-income ratio) is largely unconstrained by Dodd-Frank’s qualified mortgage regulation. Its 43 percent limit is swallowed by agency exemptions (Fannie, Freddie, FHA, the US Department of Veterans Affairs, and the Rural Housing Service guarantee some 85 percent of all primary home purchase loans). An effective income leverage limitation operates to “take the punch bowl away” before a leverage-fueled price boom goes too far.
  12. Demographia.com and author. “Regulations Add a Whopping $84,671 to New Home Prices,”NAHBNow (blog), May 9, 2016, http://nahbnow.com/2016/05/regulations-add-a-whopping-84671-to-new-home-prices/.
  13. Nick Timiraos, “How City Hall Exacerbates the Entry-Level Housing Squeeze,” The Wall Street Journal, May 5, 2016, http://blogs.wsj.com/economics/2016/05/05/how-city-hall-exacerbates-the-entry-level-housing-squeeze/.
  14. Demographia.com and author.
  15. Paul Bubny, “CRE Debt Increase Hits 8-Year High,” Law.com, March 15, 2016,http://www.law.com/sites/paulbubny/2016/03/15/cre-debt-increase-hits-8-year-high/?slreturn=20160419120431.
  16. Edward Pinto and Stephen Oliner, “WBHL,” American Enterprise Institute’s International Center on Housing Risk, accessed May 19, 2016, http://www.housingrisk.org/category/wealth-building-home-loan/.
  17. Incomes below 80 percent of the area median income.
  18. Lifecycle underwriting considers a property’s ability to cover its long-term capital needs (e.g., replacing worn-out roofs, air conditioners, and appliances) over the property’s life cycle. See Brennan and colleagues (2013).

References

Brennan, Maya, Amy Deora, Ethan Handelman, Anker Heegaard, Albert Lee, Jeffrey Lubell, and Charlie Wilkins. 2013. “Lifecycle Underwriting: Potential Policy and Practical Implications. Working paper. Washington, DC: Center for Housing Policy.http://media.wix.com/ugd/19cfbe_891b4788e2e64d0cb71a75940a101f2f.pdf.

Fisher, Ernest M. 1951. “Financing Home Ownership.” In Urban Real Estate Markets: Characteristics and Financing, edited by Ernest M. Fisher, 61–90. Cambridge, MA: National Bureau of Economic Research. http://www.nber.org/chapters/c3180.pdf.

———. 1975. Housing Markets and Congressional Goals. Westport, CT: Praeger Publishers Inc.

Furman Center for Real Estate and Urban Policy. 2012. “What Can We Learn about the Low-Income Housing Tax Credit Program by Looking at the Tenants?” New York: New York University.http://furmancenter.org/files/publications/LIHTC_Final_Policy_Brief_v2.pdf.

Jakabovics, Andrew, Lynn M. Ross, Molly Simpson, and Michael Spotts. 2014. Bending the Cost Curve: Solutions to Expand the Supply of Affordable Rentals. Washington, DC: Urban Land Institute.http://uli.org/wp-content/uploads/ULI-Documents/BendingCostCurve-Solutions_2014_web.pdf.

Office of Policy Development and Research. 2016. Data on Tenants in LIHTC Units as of December 31, 2013. Washington, DC: US Department of Housing and Urban Development.https://www.huduser.gov/portal/sites/default/files/pdf/LIHTC-Tenants-2013.pdf.

Pinto, Edward J. 2012. How the FHA Hurts Working-Class Families and Communities. Washington, DC: American Enterprise Institute. http://www.nightmareatfha.com/how-the-fha-hurts-working-class-families-and-communities/.

———. 2016. “Repealing Dodd-Frank’s Qualified Mortgage and Qualified Residential Mortgage.” InThe Case Against Dodd-Frank: How the “Consumer Protection” Law Endangers Americans, edited by Norbert J. Michel, 31–38. Washington, DC: The Heritage Foundation. http://thf-reports.s3.amazonaws.com/2016/The%20Case%20Against%20Dodd-Frank.pdf.

Taylor, Mac. 2015. California’s High Housing Costs: Causes and Consequences. Sacramento, CA: Legislative Analyst’s Office. http://www.lao.ca.gov/reports/2015/finance/housing-costs/housing-costs.pdf.

White, Tom, and Charlie Wilkins. 2016. “‘Blight Preventer’ Loan: Property Lifecycle Underwriting and 15–20 Year Self-Amortizing First Mortgage Debt as a Best Practice for Financing Subsidized Multifamily Housing.” Washington, DC: American Enterprise Institute.http://www.housingrisk.org/wp-content/uploads/2016/05/White-Wilkins-MF-debt-paper-final.pdf.

EDITORS NOTE: This column originally appeared on the Urban.org website.

BELOW ZERO: What does ‘negative interest rates’ mean and will the policy work?

A friend of mine sent me a video concerning negative interest rates and the positive and negative impacts they may have on the economy. There are six foreign banks that have adopted negative interest rates. European countries offering negative interest rates include Denmark, Sweden, Switzerland, Hungary and the European Central Bank (ECB). Japanese banks also offer negative interest rates. Taken together these countries and the ECB represent 1/4 of global economic output.

Question: Are zero interest rates good or bad? 

CLICK HERE FOR A INTERACTIVE GLOBAL MONETARY POLICY TRACKER

Here are two videos that answer the above question:

What does ‘negative interest rates’ mean and will the policy work?

Video on negative interest rates from Bloomberg:

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Below Zero: The World Experiments with Negative Interest Rates

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How Sweden’s negative interest rates experiment has turned economics on its head

Paul Krugman, Now Mistaking Less for More by David R. Henderson

This is from Paul Krugman, “Obama’s War on Inequality,” New York Times, May 20.

The other story was about a policy change achieved through executive action: The Obama administration issued new guidelines on overtime pay, which will benefit an estimated 12.5 million workers.

What both stories tell us is that the Obama administration has done much more than most people realize to fight extreme economic inequality. That fight will continue if Hillary Clinton wins the election; it will go into sharp reverse if Mr. Trump wins.

Step back for a minute and ask, what can policy do to limit inequality? The answer is, it can operate on two fronts. It can engage in redistribution, taxing high incomes and aiding families with lower incomes.

It can also engage in what is sometimes called “predistribution,”strengthening the bargaining power of lower-paid workers and limiting the opportunities for a handful of people to make giant sums. In practice, governments that succeed in limiting inequality generally do both. (Emphasis added.)

It is clear from the context that Krugman is claiming that the new Obama regulation on overtime pay is an example of “strengthening the bargaining power of lower-paid workers.”

He’s wrong. It does just the opposite.

Probably the best way to help him see the point — if, as I doubt, he wants to see the point — is to consider his situation with his employer, the City University of New York. Krugman is a salaried rather than an hourly worker, so he doesn’t have to punch a clock, and no one is keeping track of his hours.

He can work on his lunch break if he wants, he can work on an airplane, he can work any time and anywhere.

I don’t know the specifics of his deal with his employer, but I am virtually certain of the above claims.

Imagine that you are making between $40K and $45K — much less than Krugman’s $225K. You are salaried. You don’t want or need as much flexibility as Paul Krugman has, but you do want some flex. You want to be able to have an occasional long lunch hour some days and a short lunch hour other days. But this won’t always works out to 40 hours a week. Some weeks you will work 38 hours, some 42 hours, some 45 hours, some 34 hours. You ask your employer for that flexibility, and your employer answers, “Fine, as long as the work gets done. And, in return, there might be times — not often, but sometimes — when you need to come in on a Saturday morning.”

You think about that. You respond, “OK, as long as I can take a few hours off in a day, when there’s a lull, but I guarantee that the work will get done.” Your employer and you agree.

Is there anything in this story that sounds implausible?

What just happened?

You exercised your bargaining power.

Now someone who doesn’t know you from Adam comes along and says,

Your agreement with your employer means that some weeks you will work 45 hours. In the weeks that you earn 45 hours, the employer must pay you for 47.5 hours. (Overtime rules require that the employee be paid time and a half for any hours over 40 in a week.)

You may think that those cancel out so that your average is 40 hours a week. Tough. We don’t think the same way. Your deal is illegal. The employer must pay you overtime any week that you work more than 40 hours, no matter what happens in the other weeks.

Now the employer has to rethink his earlier agreement. Paying overtime wasn’t part of the plan. He can adjust by lowering your base pay so that some weeks you earn less than before and some weeks (the weeks with overtime) you earn more than before. And he must keep track of all these hours, whereas he didn’t before. He reluctantly goes along and cuts your base pay.

The arrangement has been altered. You might not like that. You have rent to pay in the 4-bedroom house you share with 3 other single people and you like the certainty of that weekly income. But now the employer, in response to that regulation, has removed that certainty.

Your bargaining power is now less. QED.

Cross-posted from Econlog.

David R. HendersonDavid R. Henderson

David Henderson is a research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, California. He is editor of The Concise Encyclopedia of Economics (Liberty Fund) and blogs at econlib.org.

Corporations Should Flee America: High Tax Rates Help Politicians, Not the Country by Doug Bandow

Every day in Congress, it seems, a member who created a problem demands more power and money to “solve” the resulting crisis. So it is with “tax inversions,” by which companies change their tax domicile — their country of residence, for tax purposes — to escape Washington’s clutches. Doing so deprives Uncle Sam of money to waste, which naturally drives politicians into a frenzy.

Left-wing activists tend to favor corporate taxation. They imagine a society divided between businesses and people. However, firms are owned by people, employ people, sell to people, and contract with people. Taxing companies means taxing people.

Politicians like to target business in order to disguise the incidence of taxes. At least shareholders know they are paying government twice. Employees and consumers, in particular, usually don’t know that they are earning less and paying more, respectively, because of government. In effect, everyone is taxed twice, first at the corporate level and then at the personal level.

America’s current corporate income tax rate is roughly 40 percent — it varies a bit by state and locality — and is second highest in the world. Only the United Arab Emirates is higher. Just six economic laggards — Argentina, Chad, Iraq, Malta, Sudan, and Zambia — match the federal government’s 35 percent rate. In fact, America is one of only three states in the Organisation for Economic Co-operation and Development (OECD) not to reduce rates over the last 15 years.

The US tax code includes loopholes to lower the effective burden for many companies, but trading complexity for lower effective levies is dubious policy. Virtually every other nation on earth has a lower rate. According to tax firm KPMG, the global average is 23.87 percent. Asia’s is 22.59 percent. Europe averages 20.12 percent. The tax rate for OECD countries, America’s most obvious competitors, is 24.86 percent. Several states in Europe come in at 10 to 15 points lower. The rate in Czech Republic and Hungary is 19 percent, in Switzerland 17.92 percent, in Taiwan and Singapore 17 percent, and in Ireland 12.5 percent.

The United States makes the situation worse by taxing a company’s global earnings. Most countries claim only money earned within their boundaries. Although Americans can take a credit for foreign taxes paid, most firms owe extra. Only five other OECD countries also tax worldwide income.

It should surprise no one, then, that companies seek to escape Washington’s grasp. As Judge Learned Hand, no radical libertarian, pointed out in 1934: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury.” Hand criticized the idea of “a patriotic duty to increase one’s taxes.”

Companies “avoid” taxes simply by conforming to the law as written by Congress and regulations as drafted by the IRS. A recent tool of choice has been inversions, whereby a merger moves a firm’s tax domicile overseas. Doing so actually makes it more cost-effective for companies to invest in the United States. About 50 major firms have “inverted,” more than half of those since 2008. Another 20 may be considering the idea. Among the recent controversial deals have been Liberty Global–Virgin Media, Burger King–Tim Hortons, Pfizer–Allergan, CF Industries–OCI, and Johnson Controls–Tyco Industries (British, Canadian, Irish, Dutch, and Irish partners, respectively).

High tax rates help politicians, not the country. An old-fashioned highwayman grabbed your money and went on his way. Uncle Sam seizes your cash and then uses it to boss you around in the name of helping you and everyone else. Moreover, higher corporate rates directly reduce business investment and indirectly cut consumer spending, thereby slowing job creation and economic growth.

High rates also put American enterprises at a competitive disadvantage. They can try to make do while bearing a greater burden — some simply keep their money abroad. The share of profits attributed to low-tax jurisdictions has more than doubled over the last three decades, and an estimated $2.1 billion in US multinational profits have not been repatriated. Some of that cash may be held overseas for business reasons, but avoiding high US tax rates is a powerful incentive.

Even the White House has acknowledged the problem:

Our system has one of the highest statutory tax rates among developed countries to generate about the same amount of corporate tax revenue as our developed country partners as a share of our economy; this, in turn, hurts our competitiveness in the world economy.

But, so far, the administration has done nothing to redress the situation.

The best response would be to lower corporate tax rates and adopt a “territorial” tax system, hitting only domestic earnings. Although this change would make the United States more competitive, the problem is not just tax rates. Throughout the latter half of the 20th century, America was the freest OECD nation. However, the US rating has fallen over the last decade and has dropped in every category; it is weakest on size of government, business regulation, and rule of law/property rights. The latest Economic Freedom of the World index ranks America at only 16.

Instead, most politicians decry “economic treason” and “desertion” and want to punish American firms. It’s not the first time Uncle Sam has sought to bar the door to tax escapees. The Treasury Department has been tweaking rules since the 1990s without much success.

The Obama administration has made the issue a priority. President Barack Obama said of corporate inversion, “I don’t care if it’s legal; it’s wrong.” He called it an “unpatriotic tax loophole.”

Treasury Secretary Jack Lew denounced the lack of “economic patriotism.” His department issued rules each of the last two years in a largely unsuccessful attempt to prevent inversions, but, complained Lew, “Our actions can only slow the pace of these transactions. Only legislation can decisively stop them.” Nevertheless, he reportedly has another 150 pages worth of regulatory changes in the works. Some observers believe the administration is drawing out the process to create uncertainty in order to discourage more inversions.

These tactics create a substantial danger of unintended consequences. Inversions usually reflect a mix of motivations, of which taxes are only one. Penalizing inversions may discourage economically motivated changes. European firms worried that the 2014 regulations would cover them because of their corporate structure, even if it was not a product of an inversion. Nestle’s senior vice president of taxes, Alex Spitzer, warned that new restrictions could result in “unintended consequences, creating disincentives for inbound investment.”

Nevertheless, corporate critics are revving up their campaign. Billionaire GOP presidential candidate Donald Trump called Pfizer’s departure “disgusting.” Senate Minority Leader Harry Reid contended that Pfizer “is gaming the system and will avoid paying its fair share of US tax dollars.” Senator Bernie Sanders denounced the “corporate deserters.”

Hillary Clinton attacked the Pfizer–Allergan deal, complaining that it and other inversions will “erode our tax base” and “leave US taxpayers holding the bag.” She proposed taking “specific steps to prevent these kinds of transactions,” such as imposing an “exit tax” on firms that leave and impeding the transfer of multinational profits to US subsidiaries.

Other ideas include continuing to impose US taxes if management control remains in America; if a certain percentage of assets, employees, or sales stay here; if the new company doesn’t do substantial business in its new location; or if its foreign ownership is less than half the shares (the current rule is 20 percent) in the combined operation. Some critics have suggested taxing money earned and kept overseas, imposing higher capital gains tax rates on sale of shares in inverted companies, limiting federal contracts for “inverted” firms, organizing consumer boycotts, and criticizing low-tax nations for, as the New York Times puts it, “their beggar-thy-neighbor tax policies.”

Some politicians propose industry-specific penalties. For instance, to favor domestically produced pharmaceuticals in FDA approvals and federal purchasing, which would hurt patients. Senator Sherrod Brown (D-Ohio) urged a boycott of Burger King. Last year, New Jersey’s legislature voted to punish inversions, which would encourage companies to shift to other states.

Washington has taken much the same approach to individuals who renounce their citizenship to avoid excessive regulations and taxes, attempting to penalize them on their way out. Nor is the US government alone in wanting to squeeze more cash out of the productive. Big-spending European states are engaged in a constant war with their lower-tax neighbors. It doesn’t matter how much governments collect from taxpayers; it never is enough.

It is the height of chutzpah for politicians to act as if providing them with money is evidence of patriotism. 

Despite Washington’s sustained campaign to squeeze more money out of hapless taxpayers, firms have good reasons for resisting the taxman. First, the more cash they have, the better able they are to invest in both capital and labor. That means more and higher-paying jobs. Second, the more money they keep, the fewer resources politicians have to waste on pernicious purposes. That means greater liberty.

Indeed, it is the height of chutzpah for politicians to act as if providing them with money is evidence of patriotism. The real outrage is what goes on every day in Washington: essentially looting and pillaging. Politicians are greedy, stirring up envy in other people for their own advantage. In such circumstances, cutting Washington’s take is a moral imperative.

America long was known globally as a land of opportunity. Now, its government is driving the creative and productive abroad. Policymakers should acknowledge their responsibility and reform the punitive policies that are changing America for the worse.

Doug BandowDoug Bandow

Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.

Dear Presidential Candidates: The National Debt is your Running Mate

WASHINGTON, D.C. /PRNewswire-USNewswire/ — With voters going to the polls in several key primary and caucus states on March 15, The Concord Coalition reminded all candidates today that regardless of party affiliation or ideology the rising national debt will affect the feasibility of their policy proposals.

“The debt is your running mate,” said Concord Co-Chairs Bob Kerrey (D-NE) and Jack Danforth (R-MO) former U.S. senators, and John Tanner (D-TN) and Mike Castle (R-DE), former U.S. House of Representatives members.

Their full statement.

Our nation’s budget policies simply don’t add up. And judging by what the leading 2016 presidential candidates are promising on the campaign trail, this sobering fact has not sunk in.

Republicans are proposing major tax cuts and higher defense spending. Their proposed spending cuts are nowhere near as large or specific. Democrats are proposing an array of expanded domestic programs that even if paid for with higher taxes would leave large and growing deficits.

This may seem like good campaign rhetoric, but it calls for a hard reality check. Whoever is elected president in 2016 will face a deep fiscal hole.

Failure by the new president and the next Congress to take quick and effective action on this fundamental problem could hurt the economy, lower American living standards, strangle investments on national priorities like infrastructure and medical research, leave critical entitlement programs on unsustainable paths, and put our position of global leadership at risk.

Even more shameful, we would be passing on the unfair burden of an enormous government debt to our children, grandchildren and future generations.

Projections by the Congressional Budget Office (CBO), based on current law, demonstrate that the government is in an increasingly difficult position:

  • The budget deficit is projected to begin rising this year reaching $1 trillion (4.4 percent of GDP) by 2022 at the end of the next president’s first term.
  • Debt held by the public is projected to grow from 76 percent of GDP this year to 86 percent over the coming decade, far above the 39 percent average for the past half-century.
  • According to CBO, “Beyond the coming decade, the fiscal outlook is significantly more worrisome,” with debt rising further to 155 percent of GDP by 2046.

Population aging and rising health care costs mean that spending growth on the major entitlement programs is outpacing revenue growth, squeezing out other programs and adding to the debt. Under current law:

  • The CBO projects that most of the spending growth over the next 10 years will be driven by major health care programs (32 percent of the increase), Social Security (28 percent of the increase), and interest on the debt (23 percent of the increase).
  • Mandatory spending — which grows on autopilot and includes the major entitlement programs — along with interest on the debt will consume 99 percent of all revenues by 2026.
  • The projected rise in interest payments on the debt, from $255 billion in 2016 to $830 billion in 2026, is attributable to growing government borrowing and interest rates gradually increasing to more typical levels.
  • Social Security and Medicare continue to pay out more than they take in from their designated revenues, putting a growing strain on general revenues. The programs’ trustees warn that, “Social Security as a whole as well as Medicare cannot sustain projected long-run program costs under currently scheduled financing.”

Owing in large part to tight caps agreed to in the Budget Control Act of 2011, discretionary spending — which includes defense, education, transportation, justice, environment and certain veterans’ benefits – will actuallydecline from 6.5 percent of GDP in 2016 to 5.2 percent in 2026. By that year, discretionary spending and the deficit will both amount to roughly $1.4 trillion.

That means that cutting “waste, fraud and abuse,” as so many candidates advocate, is not the answer; Congress would have to eliminate all discretionary spending to balance the budget that year (assuming there were no entitlement cuts or tax increases).

The next President and Congress will not have the luxury of putting off the hard choices. Voters must ask some tough questions about the totality of the candidates’ fiscal plans and whether they add up. Candidates must do more than rail against the debt; they must give voters credible plans to rein it in and put the country’s finances on a sustainable path.

So our message to the candidates is this: The debt is your running mate. It will be there when this year’s winning candidate takes the Oath of Office. Your campaign promises need to reflect that reality. So far, they don’t.

ABOUT THE CONCORD COALITION

The Concord Coalition is a nonpartisan, grassroots organization dedicated to fiscal responsibility. Since 1992, Concord has worked to educate the public about the causes and consequences of the federal deficit and debt, and to develop realistic solutions for sustainable budgets. For more fiscal news and analysis, visit concordcoalition.org and follow us on Twitter: @ConcordC

The Economic Policy of the Nazis by Ludwig von Mises

The doctrines of Nazism swept the developed world long before the Nazis took power.

[Excerpt from Omnipotent Government: The Rise of Total State and Total War (1944), chapter 7]

Hitler and his clique conquered Germany by brutal violence, by murder and crime. But the doctrines of Nazism had got hold of the German mind long before then. Persuasion, not violence, had converted the immense majority of the nation to the tenets of militant nationalism.

If Hitler had not succeeded in winning the race for dictatorship, somebody else would have won it. There were plenty of candidates whom he had to eclipse: Kapp, General Ludendorff, Captain Ehrhardt, Major Papst, Forstrat Escherich, Strasser, and many more. Hitler had no inhibitions and thus he defeated his better instructed or more scrupulous competitors.

Nazism conquered Germany because it never encountered any adequate intellectual resistance. It would have conquered the whole world if, after the fall of France, Great Britain and the United States had not begun to fight it seriously.

The contemporary criticism of the Nazi program failed to serve the purpose. People were busy dealing with the mere accessories of the Nazi doctrine. They never entered into a full discussion of the essence of National Socialist teachings. The reason is obvious. The fundamental tenets of the Nazi ideology do not differ from the generally accepted social and economic ideologies. The difference concerns only the application of these ideologies to the special problems of Germany.

These are the dogmas of present-day “unorthodox” orthodoxy:

  1. Capitalism is an unfair system of exploitation. It injures the immense majority for the benefit of a small minority. Private ownership of the means of production hinders the full utilization of natural resources and of technical improvements. Profits and interest are tributes which the masses are forced to pay to a class of idle parasites. Capitalism is the cause of poverty and must result in war.
  2. It is therefore the foremost duty of popular government to substitute government control of business for the management of capitalists and entrepreneurs.
  3. Price ceilings and minimum wage rates, whether directly enforced by the administration or indirectly by giving a free hand to trade-unions, are an adequate means for improving the lot of the consumers and permanently raising the standard of living of all wage earners. They are steps on the way toward entirely emancipating the masses (by the final establishment of socialism) from the yoke of capital. (We may note incidentally that Marx in his later years violently opposed these propositions. Present-day Marxism, however, endorses them fully.)
  4. Easy money policy, i.e., credit expansion, is a useful method of lightening the burdens imposed by capital upon the masses and making a country more prosperous. It has nothing to do with the periodical recurrence of economic depression. Economic crises are an evil inherent in unhampered capitalism.
  5. All those who deny the foregoing statements and assert that capitalism best serves the masses and that the only effective method of permanently improving the economic conditions of all strata of society is progressive accumulation of new capital are ill-intentioned and narrow-minded apologists of the selfish class interests of the exploiters. A return to laissez faire, free trade, the gold standard, and economic freedom is out of the question. Mankind will fortunately never go back to the ideas and policies of the nineteenth century and the Victorian age. (Let us note incidentally that both both Marxism and trade-unionism have the fairest claim to the epithets “nineteenth-century” and “Victorian.”)
  6. The advantage derived from foreign trade lies exclusively in exporting. Imports are bad and should be prevented as much as possible. The happiest situation in which a nation can find itself is where it need not depend on any imports from abroad. (The “progressives,” it is true, are not enthusiastic about this dogma and sometimes even reject it as a nationalist error; however, their political acts are thoroughly dictated by it.)

With regard to these dogmas there is no difference between present-day British liberals and the British labor party on the one hand and the Nazis on the other. It does not matter that the British call these principles an outgrowth of liberalism and economic democracy while the Germans, on better grounds, call them antiliberal and antidemocratic. It is not much more important that in Germany nobody is free to utter dissenting views, while in Great Britain a dissenter is only laughed at as a fool and slighted.

We do not need to deal here with the refutation of the fallacies in these six dogmas. This is the task of treatises expounding the basic problems of economic theory. It is a task that has already been fulfilled. We need only emphasize that whoever lacks the courage or the insight to attack these premises is not in a position to find fault with the conclusions drawn from them by the Nazis.

The Nazis also desire government control of business. They also seek autarky for their own nation. The distinctive mark of their policies is that they refuse to acquiesce in the disadvantages which the acceptance of the same system by other nations would impose upon them. They are not prepared to be forever “imprisoned,” as they say, within a comparatively overpopulated area in which the productivity of labor is lower than in other countries.

Both the German and foreign adversaries of Nazism were defeated in the intellectual battle against it because they were enmeshed in the same intransigent and intolerant dogmatism. The British Left and the American progressives want all-round control of business for their own countries. They admire the Soviet methods of economic management.

In rejecting German totalitarianism they contradict themselves. The German intellectuals saw in Great Britain’s abandonment of free trade and of the gold standard a proof of the superiority of German doctrines and methods. Now they see that the Anglo-Saxons imitate their own system of economic management in nearly every respect. They hear eminent citizens of these countries declare that their nations will cling to these policies in the postwar period. Why should not the Nazis be convinced, in the face of all this, that they were the pioneers of a new and better economic and social order?

The chiefs of the Nazi party and their Storm Troopers are sadistic gangsters. But the German intellectuals and German labor tolerated their rule because they agreed with the basic social, economic, and political doctrines of Nazism. Whoever wanted to fight Nazism as such, before the outbreak of the present war and in order to avoid it (and not merely to oust the scum which happens to hold office in present-day Germany), would have had to change the minds of the German people. This was beyond the power of the supporters of etatism.

It is useless to search the Nazi doctrines for contradictions and inconsistencies. They are indeed self-contradictory and inconsistent; but their basic faults are those common to all brands of present-day etatism.

One of the most common objections raised against the Nazis concerned the alleged inconsistency of their population policy. It is contradictory, people used to say, to complain, on the one hand, of the comparative overpopulation of Germany and ask for more Lebensraum and to try, on the other hand, to increase the birth rate. Yet there was in the eyes of the Nazis no inconsistency in these attitudes. The only remedy for the evil of overpopulation that they knew was provided by the fact that the Germans were numerous enough to wage a war for more space, while the small nations laboring under the same evil of comparative overpopulation were too weak to save themselves. The more soldiers Germany could levy, the easier it would be to free the nation from the curse of overpopulation. The underlying doctrine was faulty; but one who did not attack the whole doctrine could not convincingly find fault with the endeavors to rear as much cannon fodder as possible.

One reason why the objections raised to the despotism of the Nazis and the atrocities they committed had so little effect is that many of the critics themselves were inclined to excuse the Soviet methods. Hence the German nationalists could claim that their adversaries—both German and foreign—were being unfair to the Nazis in denouncing them for practices which they judged more mildly in the Russians. And they called it cant and hypocrisy when the Anglo-Saxons attacked their racial doctrines. Do the British and the Americans themselves, they retorted, observe the principle of equality of all races?

The foreign critics condemn the Nazi system as capitalist. In this age of fanatical anticapitalism and enthusiastic support of socialism no reproach seems to discredit a government more thoroughly in the eyes of fashionable opinion than the qualification pro-capitalistic. But this is one charge against the Nazis that is unfounded. We have seen in a previous chapter that the Zwangswirtschaft is a socialist system of all-round government control of business.

It is true that there are still profits in Germany. Some enterprises even make much higher profits than in the last years of the Weimar regime. But the significance of this fact is quite different from what the critics believe. There is strict control of private spending.

No German capitalist or entrepreneur (shop manager) or any one else is free to spend money on his consumption than the government considers adequate to his rank and position in the service of the nation. The surplus must be deposited with the banks or invested in domestic bonds or in the stock of German corporations wholly controlled by the government.

Hoarding of money or banknotes is strictly forbidden and punished as high treason. Even before the war there were no imports of luxury goods from abroad, and their domestic production has long since been discontinued. Nobody is free to buy more food and clothing than the allotted ration. Rents are frozen; furniture and all other goods are unattainable.

Travel abroad is permitted only on government errands. Until a short time ago a limited amount of foreign exchange was allotted to tourists who wanted to spend a holiday in Switzerland or Italy. The Nazi government was anxious not to arouse the anger of its then Italian friends by preventing its citizens from visiting Italy.

The case with Switzerland was different. The Swiss Government, yielding to the demands of one of the most important branches of its economic system, insisted that a part of the payment for German exports to Switzerland should be balanced by the outlays of German tourists. As the total amount of German exports to Switzerland and of Swiss exports to Germany was fixed by a bilateral exchange agreement, it was of no concern to Germany how the Swiss distributed the surplus. The sum allotted to German tourists traveling in Switzerland was deducted from that destined for the repayment of German debts to Swiss banks. Thus the stockholders of the Swiss banks paid the expenses incurred by German tourists.

German corporations are not free to distribute their profits to the shareholders. The amount of the dividends is strictly limited according to a highly complicated legal technique. It has been asserted that this does not constitute a serious check, as the corporations are free to water the stock. This is an error. They are free to increase their nominal stock only out of profits made and declared and taxed as such in previous years but not distributed to the shareholders.

As all private consumption is strictly limited and controlled by the government, and as all unconsumed income must be invested, which means virtually lent to the government, high profits are nothing but a subtle method of taxation.

The consumer has to pay high prices and business is nominally profitable. But the greater the profits are, the more the government funds are swelled. The government gets the money either as taxes or as loans. And everybody must be aware that these loans will one day be repudiated.

For many years German business has not been in a position to replace its equipment. At the end of the war the assets of corporations and private firms will consist mainly of worn-out machinery and various doubtful claims against the government. Warring Germany lives on its capital stock, i.e., on the capital nominally and seemingly owned by its capitalists.

The Nazis interpret the attitudes of other nations with regard to the problem of raw materials as an acknowledgment of the fairness of their own claims. The League of Nations has established that the present state of affairs is unsatisfactory and hurts the interests of those nations calling themselves have-nots.

The fourth point of the Atlantic Declaration of August 14, 1941, in which the chiefs of the governments of the United Kingdom and of the United States made known “certain common principles in the national policies of their respective countries on which they base their hope for a better future of the world,” reads as follows: “They will endeavor, with due respect for their existing obligations, to further the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity.”

The Roman Catholic Church is, in a world war, above the fighting parties. There are Catholics in both camps. The Pope is in a position to view the conflict with impartiality. It was, therefore, in the eyes of the Nazis very significant when the Pope discovered the root causes of the war in “that cold and calculating egoism which tends to hoard the economic resources and materials destined for the use of all to such an extent that the nations less favored by nature are not permitted access to them,” and further declared that he saw “admitted the necessity of a participation of all in the natural riches of the earth even on the part of those nations which in the fulfillment of this principle belong to the category of givers and not to that of receivers.”

Well, say the Nazis, everybody admits that our grievances are reasonable. And, they add, in this world which seeks autarky of totalitarian nations, the only way to redress them is to redistribute territorial sovereignty. It was often contended that the dangers of autarky which the Nazis feared were still far away, that Germany could still expand its export trade, and that its per capita income continued to increase. Such objections did not impress the Germans. They wanted to realize economic equality, i.e., a productivity of German labor as high as that of any other nation.

The wage earners of the Anglo-Saxon countries too, they objected, enjoy today a much higher standard of living than in the past. Nevertheless, the “progressives” do not consider this fact a justification of capitalism, but approve of labor’s claims for higher wages and the abolition of the wages system. It is unfair, said the Nazis, to object to the German claims when nobody objects to those of Anglo-Saxon labor.

The weakest argument brought forward against the Nazi doctrine was the pacifist slogan: War does not settle anything. For it cannot be denied that the present state of territorial sovereignty and political organization is the outcome of wars fought in the past. The sword freed France from the rule of the English kings and made it an independent nation, converted America and Australia into white men’s countries, and secured the autonomy of the American republics. Bloody battles made France and Belgium predominantly Catholic and Northern Germany and the Netherlands predominantly Protestant. Civil wars safeguarded the unity of the United States and of Switzerland.

Two efficacious and irrefutable objections could well have been raised against the plans of German aggression. One is that the Germans themselves had contributed as much as they could to the state of affairs that they considered so deplorable. The other is that war is incompatible with the international division of labor. But “progressives” and nationalists were not in a position to challenge Nazism on these grounds. They were not themselves concerned with the maintenance of the international division of labor; they advocated government control of business which must necessarily lead toward protectionism and finally toward autarky.

The fallacious doctrines of Nazism cannot withstand the criticism of sound economics, today disparaged as orthodox. But whoever clings to the dogmas of popular neo-Mercantilism and advocates government control of business is impotent to refute them. Fabian and Keynesian “unorthodoxy” resulted in a confused acceptance of the tenets of Nazism. Its application in practical policies frustrated all endeavors to form a common front of all nations menaced by the aspirations of Nazism.

Ludwig von MisesLudwig von Mises

Ludwig von Mises (1881-1973) taught in Vienna and New York and served as a close adviser to the Foundation for Economic Education. He is considered the leading theorist of the Austrian School of the 20th century.