Homeowner's Blog

Regardless Of The Health-Care Summit Outcome, The Political Math Is Pretty Easy

The political math on this issue is really very simple. The public supports a health care bill, but believes the current Democratic alternatives are too expensive and the current Republican alternatives are too stingy. The public wins if both sides meet each other half way and Congress passes a consensus bill, which would also give Congress and both parties a badly needed boost in the public's eye. This would be the safe route for both parties. In alternative scenarios, either party could lose big time at the polls this fall, depending on how things play out.

Democrats will certainly lose a lot of seats this fall if they game the reconciliation process in order to pass a bill that the public perceives is too expensive. Republicans will hammer them mercilessly on both the cost of the measure and the unfairness of the process. Moderates will desert the Democratic party in droves, whether the healthcare bill passes or not. Conversely the Republicans risk losing their current polling advantage on this issue if they refuse to meet the Democrats in the middle and the Democrats then take the more moderate approach in order to pass a health care bill without gaming the process. The risk for Republicans is that the Democrats might voluntarily reduce the cost and coverage of their bill as much as it takes to get 60 votes in the Senate, which would require the vote of one moderate Republican and make it a "bipartisan bill" in Washington parlance. The bill would only have to be affordable and just a little better that the Republican alternatives to achieve wide public support, and that is not a big challenge.  If the Democrats took the latter approach and succeeded, the current Republican polling advantage on this issue would evaporate.

Of course the latter approach also assumes that the liberal House Democrats would support such a Senate bill. Betting against such an outcome could be a smart move from a Republican perspective. The resulting bill could easily fail because of Democratic intraparty fights, and the outcome could be a disaster for the Democrats in November. Democrats would deserve the punishment because of their failure to respond to the need for moderate support.

The risk for Republicans of betting on Democratic self destruction is that the Republicans then have no control over the outcome. If the Democrats do manage to pass a bill that is broadly perceived as both affordable and better than the Republicans are offering, they will recapture public support on this issue. The polling advantage could turn against the Republicans if the public also perceives the failure to reach a compromise in the current discussions was more because of Republican inflexibility than Democratic inflexibility.  

As the Olympic games in  Vancouver wind down, the health care policy game finals are starting in Washington. Step right up and place your bets, folks. The final score will be announced this November.

Some Proposed Administration Tax Increases are Needed; Others are Bad Policy

The Obama administration has proposed a number of new tax increases. The President deserves credit for recognizing that the ballooning federal deficit, resulting both directly and indirectly from the subprime mortgage crisis that preceded his election, must be addressed. It cannot be addressed by the needed budget cuts alone, and unfortunately some tax increases will be necessary. However, reducing tax system support of home ownership by cutting home mortgage interest and real estate tax deductions for high-income individuals and couples for housing is the wrong way to raise taxes.

Allowing the Bush tax cuts for high income individuals (over $250,000 per couple) makes more sense. At that income level those couples currently pay about 20% of their income in federal income taxes after deductions. Not that taxing people is a desirable goal, but the average total federal income tax currently paid by U.S. couples in that bracket is among the lowest in developed countries. While the wealthy owe President Bush their thanks for cutting their taxes by much more than they were cut for an average taxpayer, the expiration of the Bush tax cuts will only raise the effective tax rate on the wealthy to 22%. This should not cause an undue hardship on individuals at that income level, and they will still pay among the lowest federal income taxes compared to their peers in other countries. The new tax rates will also help home values and encourage home ownership in one respect, because the mortgage interest deduction will be worth more to high income individuals and couples at the higher tax rates.

While the expiration of the Bush tax cuts will raise the value of mortgage interest and real estate tax deductions for high income individuals, the Administration's proposal to cap those deductions for those high income individuals and couples is not a smart idea timing wise in the current weak real estate market. It is also unfair to those who had bought their home with the reasonable historical expectation that the mortgage interest and tax deduction would remain sacrosanct. Better revenue generation alternatives are to raise the capital gains rate on high income individuals after first giving them a reasonable time to dispose of fairly liquid capital assets, such as stocks and bonds. However, such capital gain tax increases should not be applied to residential real estate investments, whose values have dropped substantially in the current market, for the aforementioned reasons.

Home equity has historically been the single largest form of savings for most homeowners. With home values down dramatically, their savings rates at near all time lows, and their stock market and retirement plan investments devastated by irresponsible financial services sector practices, this is not the time to adopt any tax policies that would discourage home ownership.

Is More Job Stimulus Legislation Needed?

More job stimulus legislation is needed to help displaced workers and perhaps more importantly, to prevent the recession from getting worse. How it is structured is less important than other priorities. Most government job stimulus programs are inherently inefficient, no matter what the delivery vehicle. So were the financial services firm bailouts by Presidents Bush and Obama, which have also created a moral hazard that must now be addressed. Senior financial services executives have effectively been rewarded for their bad decisions with bigger bonuses, while the firms' losses have been socialized to taxpayers, and their stockholders have suffered badly as well.

The government bailouts by both Presidents were necessary to prevent another Depression, and job stimulus programs are necessary until we get beyond the risk of a worsening recession. At this point the more important debate should not be about which job stimulus program will work better, but over which financial services reform legislation will be the most effective in preventing  senior financial services executives from taking further advantage of the current moral hazard. Once we've precluded the kinds of irresponsible decisions that caused the current economic crisis in the future, we will have prevented the need for both inefficient future financial services firm bailouts and job creation programs.

A New World Financial Order

The world's foremost annual international gathering of government and financial services leaders finished a five-day meeting in Switzerland on January 30. There was almost universal agreement among world political leaders attending the World Economic Forum that the root cause of a near global economic crash was irresponsible risk taking by bankers all over the world. French President Nicolas Sarkozy summed up the sentiments of both government leaders and voters world-wide in calling for a return to ethics and morality in the financial services sector. Some bankers in attendance agreed. "The banks who stayed strong are angry at the banks who had poor management," said Robert Diamond, President of Barclays, a large British bank.

Just as happened in the last 100 international financial crises, financial services firms have managed to socialize the losses by passing them on to taxpayers while retaining their profits, according to the World Bank. This moral hazard must be stopped through unified international regulation, and financial services sector leaders must relearn that the purpose for their sectors' existence is to efficiently provide credit for the real world. In our increasingly integrated world economy. New regulations that will force senior financial services executives who caused the problem to recognize their fiduciary responsibility to their stockholders and moral and ethical responsibility to society should be coordinated internationally to provide consistency.