Author: James Kwak

Tax Cut Ironies

By James Kwak

From The New York Times:

“Congressional Republicans in recent days have blocked efforts by Democrats to extend the jobless aid, saying they would insist on offsetting the $56 billion cost with spending cuts elsewhere.”

Instead, as it turns out, they agreed to offset the cost with tax cuts elsewhere.

Still, though, I place the blame for this one squarely on the White House. The Republicans are just doing what Republicans do: arguing for lower government spending and lower taxes. The fact that they justify the former by saying it will cut the deficit and the latter by saying it will stimulate the economy (when you could just as easily switch the arguments and make them point the other way) is just a detail.

Continue reading “Tax Cut Ironies” →

How Are the Kids? Unemployed, Underwater, and Sinking

This guest post is contributed by Mark Paul and Anastasia Wilson. Both are members of the class of 2011 at the University of Massachusetts-Amherst.

In some cultures asking how the kids are doing is a colloquial way of asking how the individual is faring, acknowledging that the vitality of the younger generation is a good metric for the well-being of society as a whole. In the United States, the state of the kids should be an important indicator. Young workers bear the significant burden of funding intergenerational transfer programs and maintaining the structure of payments that flow in the economy. Today, the kids’ outlook is almost as bleak as the housing market; they are unemployed, underwater on student debt, and out of luck from a reluctant political system.

Currently, even after a slight boost in jobs growth, unemployment for 18-24 year olds [correction: should be 18-19 year olds] stands at 24.7%. For 20-24 year olds, it hovers at 15.2%. These conservative estimates, using the Bureau of Labor Statistics U3 measure, do not reflect the number of marginally attached or discouraged young workers feeling the lag from a nearly moribund job market.

The U3 measure also does not count underemployment, yet with only 50% of B.A. holders able to find jobs requiring such a degree, underemployment rates are a telling index of the squeezing of the 18-30 year old Millennial generation. While it appears everyone is hurting since the financial collapse, young adults bear a disproportionate burden, constituting just 13.5% of the workforce while accounting for 26.4% of those unemployed. Even with good credentials, it is difficult for young people to find work and keep themselves afloat.

Continue reading “How Are the Kids? Unemployed, Underwater, and Sinking” →

“We Have Good Processes and Good Controls”

By James Kwak

One of the things I can’t stand about the corporate world is the tendency of senior executives to say things that they wish were true, without verifying whether they actually are true or not. Perhaps my favorite example of all time is Stan O’Neal’s internal memo from mid-2007:

“More than anything else, the quarter reflected the benefits of a simple but critical fact: we go about managing risk and market activity every day at this company. It’s what our clients pay us to do, and as you all know, we’re pretty good at it.”

But here’s another good one from Barbara Desoer, head of Bank of America’s home loan division (to Bloomberg):

“We believe that our assessment shows the basis for past foreclosure decisions is accurate. We have good processes and good controls.”

And apparently she’s sticking with this line. This week she told Congress, “Thus far we have confirmed the basis for our foreclosure decisions has been accurate.”

Continue reading ““We Have Good Processes and Good Controls”” →

The Law of Software Development

By James Kwak

I recently read a frightening 2008 post by David Pogue about the breakdown of homemade DVDs. This inspired me to back up my old DVDs of my dog to my computer (now that hard drives are so much bigger than they used to be), which led me to install HandBrake. The Handbrake web site includes this gem:

“The Law of Software Development and Envelopment at MIT:
Every program in development at MIT expands until it can read mail.”

I thought of that when I heard that Facebook is launching a (beyond) email service.

(The side benefit of this project is that now I get to watch videos of my dog sleeping whenever I want to.)

Why Our Tax Code?

By James Kwak

In honor of the deficit commission, Ezra Klein is running a number of posts about the commission’s proposals and our tax code, including one about the mortgage interest tax deduction. Although this is often defended as a middle-class tax break, on a percentage-of-income basis it mainly benefits people between the 80th and 99th income percentiles; above that they make so much money that they can’t buy big enough houses to keep up. (On a dollar basis, of course, the correlation between income and tax savings is perfect.)

This should not be surprising, since like any itemized deduction (a) it’s worthless if you have a small house and take the standard deduction instead, (b) it’s proportional to the size of your mortgage, and (c) it’s proportional to your tax bracket. Klein says, “I’m not really clear why we’re giving people making hundreds of thousands a year large subsidies to buy a house, but I’m sure there’s a good reason.” I’m sure he knows the reason, but I’ll spell it out anyway.

Continue reading “Why Our Tax Code?” →

Dear Mr. President

By James Kwak

There have been (admittedly unclear) indications from your administration that you may accede to the Republicans’ demand to extend the Bush tax cuts for everyone.  I urge you not to do this.

The question is: Is it better to extend the tax cuts for everyone or for no one? The answer is to extend them for no one.

The Bush tax cuts have always overwhelmingly benefited the rich, not the middle class, and that is no less true today than when they were enacted. They were bad policy then and they are bad policy today. Extending the tax cuts would dramatically enrich the wealthy relative to everyone else. 65.5 percent of the total benefit would go to the top quintile by income, 26.8 percent to the top 1 percent, and 14.7 percent to the top 0.1 percent.*

Leaving aside discredited, Reagan-era theories about trickle-down economics, there are two main arguments for extending the tax cuts:

Continue reading “Dear Mr. President” →

B of A Doublespeak

By James Kwak

Investors are claiming that Bank of America’s servicing operations are milking delinquent mortgages to earn fees rather than either foreclosing or modifying the mortgages. Bank of America’s defense?

“We have no financial incentive to keep mortgages on the books longer. Isn’t it better to modify the loan and keep people in their homes rather than foreclosing?”

I’m glad you feel that way. Then why do you have the second-lowest permanent modification rate of the seventeen servicers and two other servicer categories whose data have been released by Treasury?

Is This What You Voted For?

By James Kwak

In What’s the Matter with Kansas? Thomas Frank described how the Republican Party was able to take advantage of the conservative, values-focused, evangelical-driven movement to come to power–and then paid lip service to the priorities of the “base,” instead pursuing policies that helped established business interests and the rich. On a national scale, this was one major reason why conservatives became so disillusioned with George W. Bush.

It’s no surprise to anyone that this is happening again, only substituting “Tea Party” for “evangelical conservatives” and “United States” for “Kansas.”

Spencer Bachus, the likely new chair of the House Financial Services Committee, has announced that he is planning to use whatever powers he can to gut the Dodd-Frank financial reform bill. Why? According to the Financial Times, Bachus “expressed concern that shareholders of Goldman Sachs and JPMorgan Chase will be hurt because the banks will be less profitable.”

So one major effect of the Tea Party movement will be to further enrich Wall Street banks and the bankers who work there. (Which, I guess, is consistent with the common Tea Party insistence on reducing taxes for the rich.)

Is this what you voted for?

(If not, Mike Konczal reminds us that tomorrow is the deadline to submit comments on the implementation of the Volcker Rule.)

Panel with Blogging Luminaries

By James Kwak

For those of you lucky enough to live in Western Massachusetts, the Political Economy Research Institute is hosting a panel tomorrow (Friday) from noon to 1:30 with not one, not two, but three prominent econobloggers: Doug Henwood of Left Business Observer, Mike Konczal of Rortybomb, and Yves Smith of naked capitalism. And your humble blogger will be moderating. It’s at the University of Massachusetts, on the third floor of Gordon Hall.

Interview in The Straddler

By James Kwak

The Straddler, an online interdisciplinary publication, has an extended interview with me, of all people, so you can see what I talk like.

This is one section I’m proud of:

“Middle class wages have been declining for ten years and stagnant for thirty years, and if you have a financial system that allows people making $15,000 a year to take out $400,000 mortgages, I don’t think that’s the fault of the guy making $15,000.  I think it’s the fault of the financial system.

“But, let’s say I’m a guy who makes $15,000 a year.  I realize, wow, I can get a $400,000 mortgage and I can live in this house for a few years, and if housing prices go up, I can flip it and I can actually make a couple hundred thousand dollars.  And let’s say I’m really clever, and I say, if housing prices go down, I’ll just walk away and I will have gotten to live in a really nice house for three years at no cost to myself.  I mean, that’s the worst, most cynical spin you can put on it, right?  But this is exactly what people on Wall Street do.  The person who is criticizing the janitor for doing this is the same person who thinks that businesses should exploit every legal opportunity to make profits.  So even if you attribute the worst possible state of mind to the guy making $15,000, he’s still just doing what any businessman should do under the circumstances.  But our national ideology somehow doesn’t allow us to think about it in those terms.”

Enjoy.

Telecom Tech Support

By James Kwak

I’ve recently been making you suffer through my struggles with the telecom industry. To show that I appreciate your patience, I wanted to recommend to you a brilliant cartoon on telecom tech support, from the inimitable XKCD. I would reproduce it here, but that seems like it would violate fair use, so you’ll have to go over there.

Don’t forget to check out the mouseover (place your pointer over the cartoon and wait for a few seconds).

Beyond Crazy

By James Kwak

Daniel Hamermesh points out a Wall Street Journal article on how colleges and universities are trying to increase accountability and productivity by measuring costs and benefits quantitatively. The “star” example is Texas A&M, which created a report showing a profit-and-loss summary for each professor or lecturer, where revenues are defined as external grants plus a share of tuition (if you teach one hundred students, you are credited with ten times as much revenues as someone who teaches ten students).

Let’s not argue about whether our colleges and universities are doing a good job. Let’s not even argue about whether we need more transparency and accountability in higher education. Assuming we do, this is just about the most idiotic way of doing it that I could imagine. No, wait; there’s no way I could have imagined something this stupid.

Continue reading “Beyond Crazy” →

Shape-Shifting Deficit Hawks

By James Kwak

We appear to be a week way from an election that, while really about persistent high unemployment, on the talking-point level is largely about deficits, with the Republicans continuing their usual posturing about cutting deficits without raising taxes or explaining what spending programs they are going to cut. Robert Pollin has contributed an analysis of the deficit hawks’ argument that is valuable for pointing out that there actually four deficit hawk arguments. In his words:

“1. The traditional view. Large fiscal deficits will cause high interest rates, large government debts, and inflation.

“2. Declining business confidence is the real danger. Even if the current deficits have not caused high interest rates and inflation, they are eroding business confidence. When business confidence is low, the economy is highly vulnerable to small changes in conditions, what some economists call ‘non-linearities.’

“3. Fiscal stimulus policies never work. New Classical economists, Robert Barro most notably, have long argued that the multiplier for fiscal stimulus policies is zero or thereabouts.

“4. A long-term fiscal train-wreck is coming. Regardless of short-term considerations, we are courting disaster in the long-run with structural deficits that the recession has only worsened.

Pollin also has the grace to point out that, for the deficit hawks to be correct, only one of these arguments has to be correct.

Continue reading “Shape-Shifting Deficit Hawks” →

Food and Finance

By James Kwak

I just read Michael Pollan’s book, In Defense of Food, and what struck me was the parallels between the evolution of food and the evolution of finance since the 1970s. This will only confirm my critics’ belief that I see the same thing everywhere, but bear with me for a minute.

Pollan’s account, grossly simplified, goes something like this. The dominant ideology of food in the United States is nutritionism: the idea that food should be thought of in terms of its component nutrients. Food science is devoted to identifying the nutrients in food that make us healthy or unhealthy, and encouraging us to consume more of the former and less of the latter. This is good for nutritional “science,” since you can write papers about omega-3 fatty acids, while it’s very hard to write papers about broccoli.

Continue reading “Food and Finance” →

Finance and the Housing Bubble

By James Kwak

Adam Levitin and Susan Wachter have written an excellent paper on the housing bubble with the somewhat immodest title, “Explaining the Housing Bubble” (which has been sitting in my inbox for a month). My main complaint with it is that it’s eighty-one pages long (single-spaced), which is most likely a function of law review traditions; had it been written for economics journals, it could have been one-third the length. I also have some quibbles with the seemingly obligatory paean to the importance of homeownership, which I think is an assumption that deserves to be contested. But overall it presents both a readable overview of the history and the issues, and a core argument I have a lot of sympathy for.

The argument is that the motive force behind the credit bubble was an oversupply of housing finance—in other words, the big, bad, banking industry. Levitin and Wachter’s key evidence is that the price of residential mortgage debt was falling in 2004-06 even as the volume of such debt was rising. As Brad DeLong’s parrot would say, that can only happen if the supply curve is shifting outward, not if the demand curve is shifting outward (which is what would happen if it were all the fault of greedy borrowers who wanted to flip houses).

Continue reading “Finance and the Housing Bubble” →