By Simon Grey, on May 26th, 2011
I hope this isn’t the case, but if it is, it probably suggests a far more radical regulatory approach than the Independent Commission on Banking has considered. It might even point in the direction of ‘narrow’ or ‘limited purpose’ banking, which would involve imposing strict structural divisions in the finance industry, and require banks to hold dramatically higher levels of liquid reserves. Bank of England governor Mervyn King has nodded in this direction.
Of course, I’d much prefer the free market option, but the trouble with the Independent Commission on Banking’s proposals is – arguably – that they do neither one thing nor the other. They don’t eliminate moral hazard and risk subsidies or restore real market discipline to the financial sector. But they don’t offer a particularly strong regulatory response either. As such, the banking sector is liable to cause more problems in future.
Regulation is the natural and proper response to subsidies. If the government is going to subsidize something, it is only natural that the government also regulates it in order to ensure that the new incentives don’t lead to financial (or behavioral) malarkey. In fact, the general purpose of incentives is not to upend the market, but rather to tweak it slightly. Of course, not all consequences can be appreciated in advance, which is generally why regulation is an inevitable response to subsidies.
As such, there are two proper responses to subsidies: either abolish them, or regulate the recipients. The banking commission appears to have taken the worst approach, which combines the free-market approach to regulation coupled with an interventionist approach to subsidies. One need not be a genius to see that this plan is doomed. If the banking commission desires to be successful, it needs to have a consistent philosophical approach: either free markets or proper intervention. It does not need some half-way measure combining the two. Compromise is counterproductive and damaging in the long-run, and so the commission simply needs to get off the fence.
By Christopher Briem, on May 16th, 2011
One of those news items I should have noted already. PBT points out that one of the city of Pittsburgh’s property tax abatement is drawing to a close. The article is talking about the LERTA program which is a state statute that allows municipalities to exempt taxes on commercial real estate in a designated district from taxes on a depreciating scale and in particular the district defined Downtown. As the article points out, many think the program has had an impact improving the residential demand Downtown.
The LERTA is actually just one tax abatement program impacting some city neighborhoods. There exists a separate program that abates the tax on investments in residential investment in 28 city of Pittsburgh neighborhoods.
Want to make a real impact on the future growth of Pittsburgh? There is something we almost have to try at some point. My point a few years ago was to make the city’s tax abatement universal!
There is no real reason not to. The argument against expanding it city-wide is that the city might forgo some new incremental tax revenues on new residential investment going on in the non-tax-abated neighborhoods. Guess what? The level of non-subsidized residential construction within the city of Pittsburgh is about as low as it can get. In fact, most new housing in the City in the last decade have come entirely from Summerset and all the highly subsidized housing stock Downtown. That’s it pretty much. I am not sure we have any more slag heaps needing redevelopment, and there isn’t much new money for more condo subsidization, so what does the future hold for the future of housing in Pittsburgh? Without any incremental jumps in property tax in the pipeline the cost of expanding the abatement program across the city are limited. Yet the benefits could be spurring a new level of investment in residential construction or improvements that really are key to ever get the city of Pittsburgh population decline to itself abate.
To abate, or not to abate? It all depends what you want to abate.
Philly’s tax abatement program has been credited with a revival in residential housing in Philadelphia and the census shows that Philadelphia’s population trend has literally reversed over the last decade. At the same time Pittsburgh’s population continues to drop rapidly. The presence of children is a decent proxy for future household population in the City of Pittsburgh, and the trend there is worse than the overall population trend. Bottom line, if the city does not build out a housing stock attractive to new families then there is no reason to think the city’s population trend will reverse any time soon.
There has never been a place that has less to lose and more to gain from an omnibus tax abatement on new residential real estate investments than Pittsburgh.
OK, maybe we do have some other slag heaps out there to redevelop… but I at least am unaware of any bold initiative out there to repeat any time soon what was done with Summerset.
By Simon Grey, on May 6th, 2011
That is a big part of the problem. It is not politically possible for either the Federal Reserve or the Obama administration to leave the economy alone and let it recover on its own.
Both are under pressure to “do something.” If one thing doesn’t work, then they have to try something else. And if that doesn’t work, they have to come up with yet another gimmick.
All this constant experimentation by the government makes it more risky for investors to invest or employers to employ, when neither of them knows when the government’s rules of the game are going to change again. Whatever the merits or demerits of particular government policies, the uncertainty that such ever-changing policies generate can paralyze an economy today, just as it did back in the days of FDR.
There are two ways in which government tinkering promotes systemic uncertainty: by discouraging investment or by encouraging malinvestment.
The government discourages investment when it increases taxes and/or the cost of regulatory compliance. The state also discourages investment when it constantly reverses its own policies or is erratic in the enforcement of already existing policies. A continual state of flux discourages long-term investment because no one is able to feel certain about forecasting. One of the main reasons why ObamaCare and its counterpart RyanCare is so damaging is imply due to the fact that businesses aren’t able to feel certain about the future. The vociferousness with which RyanCare was debated helped to fuel systemic uncertainty, to a limited extent, because economic actors weren’t able to tell if any (or all) of the proposal would become law, and were thus unable to also determine what sort of long- and short-term plans would be viable.
But beyond that, the constant flux of change that is government tinkering also has a tendency to encourage malinvestment and market timing. Virtually every subsidy speaks as evidence for the former; Cash for Clunkers speaks as evidence for the latter.
Subsidies encourage malinvestment because they eliminate what economists refer to as moral hazard. Moral hazard is simply a fancy way of saying that people are more careful when investing their own money. When the government, for example, subsidizes corn-based ethanol, farmers have an incentive to grow more corn and venture capitalists have an incentive to invest in companies that will turn corn into ethanol-based fuel. This is generally unsustainable by market means because corn-based ethanol is energy negative, which simply means that producing ethanol burns more energy than it creates. Malinvestment can also be encouraged by indirect subsidies, like tax breaks or regulatory exemptions. This lowers the cost of doing business and increases profits, encouraging companies to pursue certain ventures.
When people think that the government may subsidize them, directly or by tax breaks, they have a tendency to wait until they qualify for the terms of the subsidy. This is true especially of temporary programs, like Cash for Clunkers, as mentioned before, or special tax breaks, like the first-time homeowners tax credit. These programs were ultimately failures because all the accomplished was pulling demand forward by a couple of months. They did not jump start the economy or increase long-term demand. Temporary subsidies, then, contribute to systemic uncertainty because economic actors try to time the market in order to get the most favorable deal. Businesses hold inventories to take advantage of greater demand later on. Consumers delay spending money in order to purchase things later on. Instead of allowing the market to function as it ought and smooth demand over time, government interference causes people to time the market and upset long-term plans.
Incidentally, the reason why temporary government programs generally become permanent is because there are some people who find temporary programs to be personally beneficial. When you have programs that offer lower prices to consumers and larger profit margins to businesses, most of the parties involved want to continue taking advantage of that system. Because of this, politicians vote to make temporary programs permanent because it is politically popular with their constituents, and because the political costs are widely dispersed and indirect.
Of course, the possibility of a temporary program becoming permanent also encourages systemic uncertainty because economic actors are unsure which specific programs will become permanent and if the terms of those programs will be altered in the process of attaining permanence.
In sum, it is simply best to let the market correct itself. Tinkering is futile at best and counterproductive at worst. Therefore, simply letting the market be is the best strategy, even if it is somewhat painful from time to time.
By B.P.T., on April 18th, 2011
From whitehouse.gov:
In his State of the Union Address, President Obama promised that this year, for the first time ever, American taxpayers would be able to go online and see exactly how their federal tax dollars are spent. Just enter a few pieces of information about your taxes, and the taxpayer receipt will give you a breakdown of how your tax dollars are spent on priorities like education, veterans benefits, or health care.
I think this is a great idea, since it will clearly show the priorities of our federal government, so I went to the site and entered my information. Once I had done that, I entered information for several other common scenarios, and found a problem:
Oops! Given that over 40% of American households pay negative income tax, it seems unfair that they wouldn’t be able to use this calculator. Someone should tell the White House about this accessibility error, since I am sure they would like every person in the nation to be able to use this handy tool, and not only those with a positive income tax bill.
By Simon Grey, on April 13th, 2011
“He thinks it’s fundamentally wrong for a society to pin people’s best hope for a better life on something that is by definition exclusionary. “If Harvard were really the best education, if it makes that much of a difference, why not franchise it so more people can attend? Why not create 100 Harvard affiliates?” he says. “It’s something about the scarcity and the status. In education your value depends on other people failing. Whenever Darwinism is invoked it’s usually a justification for doing something mean. It’s a way to ignore that people are falling through the cracks, because you pretend that if they could just go to Harvard, they’d be fine. Maybe that’s not true.”
The question is, why doesn’t Thiel make it possible for anyone who wants to go to Harvard to be able to do it? After all, Thiel has made his fortune disrupting other hidebound institutions. Making it possible for motivated individuals to get the same quality of education that exists at the nation’s best universities without having to attend them would be the kind of disruption that would fit into Thiel’s social views and his economic ones.
We know from past history that highly motivated persons exposed to a quality education system will self-select for success. New York’s fabled City College is only one example.
The mistake that Barry makes here is that he mistakes schooling for education. Signaling theory holds that schooling exists primarily to show employers that one who has been schooled (as evidenced by possessing a diploma) is a superior candidate for employment. The more people that possess a diploma, the more the signal is distorted, and the less valuable schooling becomes. This is basic economics, for if supply increases more rapidly demand, the price will necessarily drop all else being equal. Schooled labor is no exception. If every worker has a Harvard diploma, a Harvard diploma necessarily becomes worth less. And the workers that possess said diploma are also worth less.
On the other hand, receiving a Harvard-level education is desirable. This doesn’t necessarily make it valuable, at least in the sense of getting a better-paying job, but it is desirable nonetheless. The mistake that Ritholtz makes, then, is that he views education as an investment when it should properly be viewed as a consumer good. Thus, the difference between schooling and education, though subtle, is important: schooling is an investment; education is a consumer good.
Within this framework, it becomes easier to analyze whether one should go to school and get a diploma. If one wants schooling, then one simply has to weigh the costs of college (including opportunity costs) against the benefits of college. If one wants education, one merely weighs the costs of college against alternative educational systems. I would imagine that college is the less desirable option in both cases, since college-educated workers are seeing their real wages decline while tuition costs are rising. Additionally, public libraries contain a wealth of information and are considerably cheaper than college.
Education is good, as is schooling. It doesn’t stand to reason, though, that one must go to school in order to be educated. It is likewise foolish to think that the laws of supply and demand don’t also apply to schooling. As it stands, it is generally best to recommend that young people spend more time in the library and less time worrying about getting into college.
By Thomas Knapp, on December 9th, 2009
Simply put, it’s like this: If you’re a member of Generation X or Y or whatever the hell they’re calling the various post-Boomer generations these days, you are to be boiled in hot water until you’re nice and tender and your meat and bones have separated.
The insurance companies receive the meat (“individual mandate”).
The Boomers get the bones (“Medicare buy-in”).
Beautifully efficient as cannibalism schemes go, don’t you think?
Unlike the previously considered “public option” — which might have had loopholes through which a clever youngster could have navigated his or her wallet to some semblance of safety — the “Medicare buy-in” automatically gets the older, higher-risk types out of the insurance companies’ way while pushing the younger, lower-risk population right into their gaping maws with the “individual mandate.” Lower risks! Higher profits!
And watch for ObamaCare’s approval ratings to jump way up since that older, higher-risk group — the over-55 set, which almost certainly constitutes an absolute majority of voters — gets its health care subsidized by the younger, lower-risk group, too (through the payroll tax system, which is already tried, tested and and as escape-proof as anything the government’s ever come up with … just wait, it won’t be long before the younger group’s “insurance premiums” get folded into that scheme as well).
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