Sunday, August 7, 2011

At the credit counselor's office

Counselor: Well if it isn't Uncle Sam! What a surprise to see you here. What brings you by today?

Uncle Sam: My credit rating was downgraded this week. That has never happened to me before. I thought I might need some help fixing that.

C: I had no idea you might be in any kind of financial trouble. You must be getting behind in paying your bills, right?

US: Nothing like that. I always pay all of my bills promptly. There is zero danger--ZERO--that the United States of America will not be able to pay its bills.

C: Well then, maybe you've been extravagant lately with your expenses. Are you taking a lot of fancy vacations, buying a lot of meals out, things like that?

US: Nothing out of the ordinary. If anything, I've been cutting back on that kind of spending. We did spend a few hundred billion to build infrastructure and try to get employment back up, though.

C: But that kind of spending should be making your financial picture stronger.

US: I think so. In fact most of my economic advisers have been telling me we should be making even bigger investments in infrastructure.

C: Then it must be that your income has taken a hit.

US: That is true, my revenues are down quite a bit due to the recession, but I could easily get them back up if I wanted to by changing a few depreciation schedules and grabbing some oil company windfall profits. And I have had no trouble whatsoever borrowing whatever I need to pay all my obligations, at ridiculously low interest rates to boot.

C: So maybe your debt has just gotten too high?

US: The US debt is fairly high in relation to GDP right now, but it was a lot higher during World War II, and nobody lowered my credit rating back then.

C: Hmm. This is hard to figure out. Who was it that lowered your credit rating?

US: S&P.

C: You mean those same bozos who were telling everyone a couple of years ago that all those mortgage-backed securities were perfectly safe. Now they're questioning the credit of the United States of America?

US: One and the same.

C: What reasons did they give?

US: I think it has something to do with our political stalemate in Washington. We just went through a bruising battle in Congress to raise the debt ceiling.

C: Isn't there a big showdown every time the government raises the debt ceiling, and Congress always votes to raise it at the last minute?

US: That is true, but this year was worse because a lot of the new members of Congress were demanding that we enact a plan to reduce the deficit over the next ten years.

C: That seems very unreasonable. So I guess you weren't able to get a plan in place.

US: No, we actually did pass a bill. It wasn't to everyone's liking, but it did make a start in dealing with long term deficits.

C: So you did something completely unprecedented to deal with long term deficits, something that has never been necessary in the past to get an increase in the debt limit, and they still downgraded you?

US: It seems that what we did wasn't good enough for them.

C: So maybe you need to cut back on your spending even more.

US: A lot of people say that, but whenever I ask people what they want to cut, they can hardly come up with anything.

C: So then you need to raise taxes.

US: Well duh. Look at the history of the last thirty years. Every time we cut taxes, the deficit skyrockets out of control.  In the 90's we raised taxes just a smidge, hardly enough to notice, and all of a sudden the deficit disappeared.

C: So you know what to do then. Just get the economy moving again, and then raise enough revenue to get rid of the deficit. And don't pay any attention to these idiots at S&P.

US: Sounds very obvious, doesn't it?


  1. I don't think it was raising taxes in the 90s that increased revenues to the point we balanced the budget. I think it was Clinton and his over zealous pursuit to expand home ownership that made things look rosie for a few years. He and congress started the housing bubble that propelled profits that were nerver anywhere but on paper until Wall Street bundled and sold them.

    It was the Clinton administration with Rubin and others who had Cisneros at HUD convene what he called a "historic meeting" between private and public housing organizations -- and they produced a plan that lead us hurtling toward the eventual bust.

    Looking back at the housing bust, the language in the document that HUD produced is rediculous. Here's an excerpt. Read it closely and you can see the seeds of disaster being planted:

    "For many potential homebuyers, the lack of cash available to accumulate the required down payment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership."

    NICE! There is your creative engine for skyrocketing paper profits, Wall Street profits and the millions of forclosures in the past four years. A house of cards that was perpetuated by Bush, Barney Frank and fannie and Freddie. It was not meager tax increases.

  2. I'm familiar with the theory that the federal government's program of encouraging lenders to reach out to more borrowers so as to encourage more home ownership, was one of the causes of the housing bubble and crash. I don't think that was the whole cause however. There were plenty of entirely private loans that went bad also. The federal government wasn't forcing the banks to make those bad loans.

    More to the point, I have not seen any data that shows that these policies of encouraging more home ownership had anything to do with increasing federal income tax revenues in the 1990's. Remember that most of the housing price increase occurred in the 2000's, not the 1990's. And housing price increases don't seem to have much to do with increasing income tax revenues, anyway. If anything, when you increase the percentage of people who own their own homes, you are probably going to decrease income tax revenue, because more people will be able to deduct the interest on their mortgages, and therefore will pay less in income tax.

    If you have any data that shows that it was housing policy that caused federal income tax revenue to go up in the 1990's, I would be very curious to see it. Otherwise I have to go with the more obvious explanation, that when you increase the marginal tax rate from 35% to 39% you are going to generate a whole lot more revenue. Clinton raised rates to 39%; tax revenue went up. Bush lowered the rates back down; tax revenue went down.

  3. Do you see any relationship to the price of everyone's home doubling in value to the growth in spending and job creation? Krugman swears by the confidence fairy. I am assuming you see that direct link as well. And that you can see that being upside down in a home does little for confidence. And that the fake wealth from the housing bubble did more for growth and resultant revenue that a 4% tax hike. And that the burst of that bubble squashed the fairy.

  4. There was definitely growth in consumer spending as a result of the run-up in home values. A lot of that was caused by people being able to take out second mortgages because their homes had appreciated so much. And indirectly that could create some jobs and lead to some increased revenue for the federal government.

    But we are still talking about two different time periods. The big run-up in housing prices did not take place until the 2000's. And Clinton balanced the federal budget in the 1990's before that happened. He did it by raising taxes, and also by other forms of economic growth in the 1990's, mainly in the tech industry.

  5. That is not what I remember. I bought a home in the late 80s and it doubled in value by the early 90s after Clinton was elected. Everyone used their home as an ATM. Then home prices dropped in value by 20% at the same time the tech surge of the mid 90s took over. Billions of dollars were made as the NASDAQ surged by 40%. Again, people used their stock profits as ATMs, consumer confidence soared and unions forged new entitlement contracts under the assumptioon the good times would roll on. The fake wealth made during the first housing boom and then the NASDAQ boom accounted for the balanced budget of the 90s under Clinton. Not meager tax increases. Granted, any revenue increase in the way if higher taxes has an affect (good or bad) but it is not clear what affect unless one is an ideologue. When the tech bubble burst, the second housing boom took place in the early 2000s, and so did 9/11 and war. Clinton policy of increasing home ownership with liar loans (a good portion of which were fraudulant) was continued under Bush and Congress via Fannie and Freddie. As HUD and Cisneros said "creative" finacing was in full bloom. And when that housing lie burst under Bush we saw Obama and Geitner fraudulantly buy Fannie's toxic assests. We have 60-70 trillion in unfunded liabilities. When will the left stop saying a 4% tax increase will solve this problem. I am for revenue increases but lets keep perspective. It is not a long term fix.

    The Bush tax cuts did not cause the recession any more than Clinton tax increases resulted in a balanced budget. The ups and downs were caused by larger structural forces that are so fucked up in this country that the far left and far right cannot fix them without working together with moderates.