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February 28, 2008

A New Low

(Or: How I learned to stop worrying and love the deficit)

The U.S. dollar fell to a new low against the euro, finally crossing $1.50:€1.00. Gold is at $950/toz and silver is at $19/toz. The dollar stinks, and I believe it will continue to stink for a long time to come: the central bank is overstimulative, and other governments will rationally diversify reserves away from the dollar.

Against this backdrop I've become less worried about the government budget deficit. If I were cynical I might believe that the falling dollar has been a deliberate government policy. But I'm too cynical to believe that they had such planning and foresight. Why am I talking like this has benefited the government?

The U.S. Treasury publishes a quarterly bulletin with interesting data. The most recent one is for Q4 2007. If you look at table OFS-2 (p. 48) you can figure the percentage of the debt held by foreigners. At the end of Sept. 1996, $993.4 billion of U.S. treasury debt was owned by foreigners, out of $3,393.2 billion privately held. (Yes, I'm excluding intragovernmental debt.) At the end of Sept. 2007, the amount had risen to $2,248.9 billion out of $4,269.7 billion. From 29.3% to 52.7%!

Even as the dollar has fallen in value, foreigners have owned an increasing percentage of the total privately-held debt. Interest rates on treasury debt aren't high enough to offset the fall in the value of the dollar — foreigners have been losing a lot of money (well, purchasing power) on this. What an awful trade.

Who benefits from that bad trade? The U.S. government. Deficit spending financed by foreigners as the dollar falls in value is a pretty lucrative deal. Negative real interest rates… what debtor doesn't love that?

February 24, 2008


Let's have a browse through Barack Obama's economic policy plan.

The very first paragraph tells me Obama is in favor of expanding Federal power over the States: "Obama's STOP FRAUD Act provides the first federal definition of mortgage fraud…" and "Obama's bill requires the Government Accountability Office to evaluate and report to Congress on various state lending practices so that state regulations that undermine consumers rights can be identified and hopefully eliminated." (emphasis added). Firstly, it is not clear to me why "mortgage fraud" merits treatment different from any other kind of fraud. And granting arguendo that it does, why should it be handled at the federal level? Neither question is addressed.

About mortgage loan disclosure, it says "As president, Barack Obama will enact laws to ensure that all prospective homebuyers have access to accurate and complete information about their mortgage options." This betrays a fundamental misunderstanding of the President's job. Presidents do not enact laws. Presidents enforce laws. Legislators enact laws. If Obama is serious about this, he should introduce the legislation while he's still a legislator!

Obama wants to create a mortgage tax credit that is, if I'm reading this correctly, 10% of income up to $500. I understand and agree with the argument that the tax-deductibility of mortgage interest favors those with high incomes, but the solution isn't to expand the subsidy so everyone gets a bite. We should instead eliminate the tax deduction for mortgage interest. Of course I don't want peoples' taxes to go up a lot, and I sympathize with the idea of providing a benefit to low-income / non-itemizing people, so let's replace the tax deduction for mortgage interest with the simple elimination of the 10% federal tax bracket (tax at 0% instead of at 10%).

Then Obama wants to create another $500 tax credit, this time allegedly to offset payroll taxes. This is too complicated! How about we simply put the upper end of my 0% tax bracket at $10,000? That would save people about $1,100 compared to today's taxes.

Then there's this:

Currently, the IRS receives Americans' financial information directly from employers and banks. Obama will ensure that the IRS uses this information to give taxpayers the option of a pre-filled tax forms to verify, sign and return to the IRS or online. This will eliminate the need for Americans to hire expensive tax preparers and to gather information that the federal government already has on file.

In theory, this is a good idea. People who take advantage of this would risk paying more tax than necessary, but he said it would be optional, so I could still hire a tax preparer. The real problem here is the implementation. How exactly is the IRS going to deliver pre-filled tax forms to everyone without creating enormous identity theft problems? The potential for disaster here is overwhelming.

Oh, look, another tax credit! "Barack Obama will make college affordable for all Americans by creating a new American Opportunity Tax Credit. This universal and fully refundable credit will ensure that the first $4,000 of a college education is completely free for most Americans…" No. No. A million times no. Higher education is expensive because it is subsidized. This will only make things worse. Besides, I have yet to hear any good argument why education deserves to be subsidized in the first place. (Although I'll admit I'm harder than most to persuade.)

My, my, Obama loves tax credits. We also have this: "Barack Obama will reform the Child and Dependent Care Tax Credit by making it refundable and allowing low-income families to receive up to a 50 percent credit for their child care expenses." Why, pray tell, should children be subsidized?

Would you believe Obama is a tax cutter too?

Barack Obama will eliminate all income taxation of seniors making less than $50,000 per year. This will provide an immediate tax cut averaging $1,400 to 7 million seniors and relieve millions from the burden of filing tax returns. For millions of seniors, this will eliminate the need to hire a tax preparer, resulting in even larger savings.

While I love the idea of eliminating income taxes for people (why limit it to seniors?) making less than $50,000 per year, the consequence stated here simply isn't true. These people would still need to file state tax returns! And wouldn't they have to file federal returns anyway if they want to obtain any of the basketfuls of tax credits Obama wants? Whoever wrote the document ought to have known better than to claim something so transparently wrong.

Changing topics to consumer credit:

Barack Obama will create a credit card rating system, modeled on five-star systems used for other consumer products, to provide consumers an easily identifiable ranking of credit cards. Under the Obama plan, the Federal Trade Commission (FTC) will assess the degree to which credit cards meet consumer-friendly standards.

There is no reason for the government to do this. I am appalled by the thinking that "having X would be nice" is somehow a legitimate motivation for "the government should provide X". Besides disagreeing with this on principle, I think it's a bad idea to pretend there is a single reasonable set of consumer-friendly standards to judge against. And I can already imagine the army of lobbyists that would descend on this thing.

As is well-known, Obama wants universal (read: compulsory) health insurance, about which I could complain almost endlessly. There's only one point I cannot resist making. How does he propose to afford universal health insurance and tax cuts and tax credits? The federal budget is already in deficit and there is nothing in his economic plan that suggests he knows how to pay for the things he wants.

Obama will create a federal Renewable Portfolio Standard (RPS) that will require 25% of American electricity be derived from renewable sources by 2025.

Ah, yes. While we're thinking about it, what other industries should we have the government pick winners and losers in? (P.S., if this turns out like Oregon, hydroelectric power won't count as renewable!)

This measure, which builds off what many states across the nation have enacted, has the potential to create hundreds of thousands of new jobs on its own.

Constructing a replica of the Great Pyramid of Giza in the Arizona desert without automated machinery would also create hundreds of thousands of new jobs. But what about the other things these people would create if they weren't involved in a government boondoggle?

Speaking of this misguided, Obama would "in the case of China in particular [put] an end to an artificially devalued currency that puts U.S. companies at a perpetual disadvantage." The undervaluation of the renmimbi is in fact a subsidy to American consumption. Imagine my surprise that Obama would put the interests of businesses ahead of consumers! (He'd probably change his stance, if he understood.)

On the pandering front:

As a country, we have ensured that every American has access to telephone service and electricity, regardless of economic status, and Obama will do likewise for broadband Internet access.

Bread and circuses! Porn and YouTube!

In a return to economics:

Credit agencies are paid by the issuers of securities, not by the buyers of securities, which creates a potential conflict of interest in favor of issuing strong securities ratings. This problem was illustrated in the subprime market crisis in which credit rating agencies strongly rated subprime mortgage securities even as there were significant indications of large numbers of foreclosures and a weakening housing market. Barack Obama supports an immediate investigation into the ratings agencies and their relationships to securities issuers, similar to the investigation the EU has recently announced.

Yeah, let's be sure to close that barn door now. There is a real problem here in that the credit ratings of these securities were (with benefit of hindsight) much too high. But I for one can't see what good will come of a federal investigation. The actual culprit — the Federal Reserve — is easily fingered. I doubt that the credit rating agencies have a special culpability in this; they were following the same market signals (as distorted by the Fedear Reserve) as everyone else.

I do wish the outrage directed at the lenders / borrowers / homebuilders / rating agencies were focused at the correct target. But it's not going to happen outside economic circles, unless Ron Paul gets his way.

February 10, 2008

A Blow Against Earmarks

If you listened to the recent State of the Union Address, you heard President Bush complain about earmarks … and, importantly, announce that he was going to do something about them. He did.

Executive Order 13457, titled "Protecting American Taxpayers From Government Spending on Wasteful Earmarks", is among the best things Bush has done. It says that:

… executive agencies should not commit, obligate, or expend funds on the basis of earmarks included in any non-statutory source, including requests in reports of committees of the Congress or other congressional documents, or communications from or on behalf of Members of Congress, or any other non-statutory source …

In other words, earmarks must be included in the actual legislation Congress votes on, and may not be added after the vote. And more, it shines light on those who try to influence how money is spent:

An agency shall not consider the views of a House, committee, Member, officer, or staff of the Congress with respect to commitments, obligations, or expenditures to carry out any earmark unless such views are in writing … All written communications from the Congress, or a House, committee, Member, officer, or staff thereof, recommending that funds be committed, obligated, or expended on any earmark shall be made publicly available on the Internet by the receiving agency, not later than 30 days after receipt of such communication …

This executive order probably won't make a big difference on discretionary spending, although I will be curious to compare the quantity of earmarks today with the quantity a year from now. For me, the victory here is procedural. If Congress wants money spent a certain way, let them put it in the legislation and let them be accountable for it.

Tiny Island