Reason Foundation

How Obama’s Plan to Encourage Homeownership Will Hurt the Poor the Most

Posted on April 3, 2013, 5:33pm | Cathy Reisenwitz

This morning the Washington Post reported:

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

…administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.

Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.

The Obama administration is concerned that even in the midst of the housing market’s recovery, many young people and people with bad credit can’t borrow money to buy homes. Yes, this sounds eerily similar to the policies that helped create the housing bubble in the first place. And yes, while ensuring that homes loans are available to all borrowers is a well-intentioned plan to help low-income families, it will likely hurt them.

This is a bad policy idea for at least three reasons:

First, it’s important to note that the administration is only promising to bail out banks, not borrowers. These loans would be going to people who probably don’t qualify for a standard mortgage and may struggle to make their payments. As a result, many of the borrowers are likely to default. If they do, they’d suffer financial losses and damaged credit ratings that could haunt their families for years to come. Meanwhile, if the loans go bad, the bank executives receive bailout checks.

Second, subsidizing things makes them more expensive. In looking at the Obama administration’s previous mortgage programs, Reason’s Anthony Randazzo noted there was “clearly visible bump in the [price of housing] starting in March 2009 when a number of the programs to help housing started to kick in, including low interest rates and the first-time homebuyers credit.” Guaranteeing home loans encourages low-income individuals to take out bigger loans for the same amount of house. This in turn makes their coming defaults even more ruinous than they would have been in an unsubsidized market.

Third, buying a house limits labor mobility, or the ability to pack up and move when you need a new job. Labor mobility is especially important to low-income, low-skill individuals.

What’s wrong with renting? Many low-income or young people would actually be better off with the flexibility that renting brings. Renting gives people a lot more freedom to move from job to job without being tied to a home and mortgage. Financially, renting doesn’t require the upfront costs of many home purchases and if you need to move it is often much easier to get out of a lease than it is to sell a home.

The housing bubble helped cause the last recession; we shouldn’t be rushing to repeat the mistakes that were made.

Economy Declined as Government Spending Rose

Posted on February 28, 2013, 11:17am | James D. Agresti

In the wake of stunning news that the U.S. economy shrunk by 0.1% in the last quarter of 2012, prominent media outlets and commentators are reporting that lower government spending is the cause of the economic decline. In reality, however, government spending rose by 0.8%, and the claim that it fell stems from a federal report that defines "government spending" so narrowly that it excludes 47% of all government spending.

On January 30^th, the U.S. Bureau of Economic Analysis (BEA) issued a preliminary report stating that gross domestic product (GDP) decreased by 0.1% in the fourth quarter of 2012. The report emphasized that this is an "advance estimate ... based on source data that are incomplete or subject to further revision..." The report also stated that the decrease in GDP "reflected negative contributions from private inventory investment, federal government spending, and exports..."

Seizing upon the "federal government spending" aspect of this report, some journalists, commentators and organizations have claimed that reduced government spending is dragging down the economy. This was the focal point of a combative exchange on CNBC between on-air editor Rick Santelli and senior economics reporter Steve Liesman. Attributing the decline in GDP to left-leaning government policies, Santelli stated, "When you act like Europe, you get growth rates like Europe, and our discussions with economists sounds like we're in Europe!" To which Liesman shot back, "We reduced government spending by 15 percent! That's not Europe!"

In fact, government spending rose by 0.8%, and the decline that Liesman and others are citing only applies to a narrow segment of spending that excludes most social program benefits. This is shown in BEA's report on GDP, which reveals that the "government spending" in this report consists of "government consumption expenditures and gross investment." This is merely a subset of government spending that excludes 69% of all federal spending and 20% of all state and local spending. As BEA explains in its "Primer on Government Accounts" and its webpage on measures of government spending":

 

• "Consumption expenditures include what government spends on its work force and for goods and services, such as fuel for military jets and rent for government buildings and other structures."
• "Gross investment includes what government spends on structures, equipment, and software, such as new highways, schools, and computers."
• "Government consumption expenditures and gross investment ... is a measure of government spending on goods and services that are included in GDP."
• "Total spending by government is much larger than the spending included in GDP."

 

In sum, what BEA categorizes as "government spending" in its GDP reports doesn't include items such as unemployment benefits, food stamps, welfare payments, subsidized housing, Medicaid benefits, Social Security benefits, Medicare benefits, foreign aid, and interest on the national debt. This amounts to 47% of all federal, state and local government spending, largely consisting of social programs that advocates for more government spending say will spur economic growth.

The BEA report in question estimates that "government spending" declined by 15% in the fourth quarter of 2012, consisting of a 22% decline in national defense, a 1% increase in other federal spending, and 1% decrease in state and local spending. Again, these figures are preliminary, they only apply to selected categories of government spending, and real total government expenditures actually increased by 1%.

Hence, if one were to draw a simplistic conclusion from this data (as reporters and analysts have done), an accurate assessment would be that increased overall government spending-with more spending on social programs and less on national defense-accompanied the decline in GDP.

It is important to note that the above-cited figures are comparisons between the third and fourth quarters of 2012, and quarterly figures on government spending tend to fluctuate. Thus, when journalists and commentators focus on short-term data as they have done in this case, they obscure the larger picture of what has taken place in the past several years and over the longer term. Consider the following.

As shown in the graph below, total government spending rose dramatically in 2008 and 2009 and has since consumed more of the nation's economy than at any time since 1960, which is as far back as this BEA data goes. BEA also tracks a slightly less inclusive measure of government spending (called current expenditures) that dates back to 1929. By this measure, government spending consumed more of the nation's economy during 2009-2011 than ever recorded in the history of the nation, including the peak of World War II. And in 2012, current spending was just a hair below the peak of World War II.

James D. Agresti is the president of Just Facts, a nonprofit institute dedicated to researching and publishing verifiable facts about public policy.

 

Reform California’s Tax System to Boost Economy

Posted on February 13, 2013, 6:26pm | Adam Summers

In my most recent policy study study, co-published by Reason Foundation and the Howard Jarvis Taxpayer Foundation, I analyze what I consider to be some of the more egregious special-interest corporate and sales and use tax carve-outs in California and argue that the state could improve its woeful business climate—and, thus, the economy in general—by eliminating such tax breaks and lowering the general corporate tax rate by an amount equal to that of the "extra" tax revenues that the state might expect to get without these tax breaks.

As I note in the study, the impact of reducing California's corporate tax rate in a revenue-neutral way by eliminating these targeted and unfair tax breaks could be significant. As Howard Jarvis Taxpayers Foundation chairman Jon Coupal and I note in a recent Orange County Register column,

The Franchise Tax Board says the corporate tax rate could be reduced 14 percent across the board, without losing any net tax revenue, simply by getting rid of one tax break—the Research and Development Tax Credit.

Furthermore, the Reason-Howard Jarvis study shows that eliminating other corporate tax breaks for things like movie companies, computer software, timber growing, farm machinery, and the "Accelerated Depreciation of Research and Experimental Costs" credit would allow the state to reduce the overall corporate tax rate by 20 percent or more.

Each time state lawmakers carve out a special tax credit or implement policies that favor certain businesses or industries through the tax code or through regulation, they also harm other industries.

[. . .]

The error of such tax breaks is compounded when one considers that they are effectively subsidizing many business activities that would have taken place even without the tax breaks. It's corporate welfare that California doesn't need and can't afford.

In addition, the state is notorious for its lack of oversight of these tax policies. A Department of Finance analysis of state tax credits concluded that the legislative intent was "not specified" for 70 of the 82 tax expenditures reviewed.

California's terrible business climate—due primarily to its burdensome taxes and regulations—has played a significant role in its economic stagnation and malaise. California has the ninth-highest corporate tax rate in the nation, at 8.84%, and the highest rate in the entire western half of the continental United States (which gives one an idea why so many businesses are fleeing to states like Texas, Utah, Nevada, Idaho, and North Dakota).

According to Chief Executive magazine's Best/Worst States for Business survey, California's business climate ranked dead last for the eighth year in a row. Among the responses from the CEOs surveyed were the following:

• “California continues to head in the wrong direction as its tax policies will drive more businesses and people to relocate in other states. State politicians feel business and commerce are ‘necessary evils’ that provide the funds to enable pursuit of their misguided agendas.”
• “California government is difficult to work with and very bureaucratic. Taxes and regulation are high and unruly.”
• “California is begging for businesses to leave its state.”
• “California is going in the wrong direction if that’s even possible.”
• “California is out of control. They have too much government who have nothing better to do than to harass businesses in the state. They need to cut the size of their regulatory bodies in half.”
• “California is the worst! They are doing everything possible to drive a business out of their state. If the environment in CA was not so good, they would have lost half of their population.”
• “California regulations, taxes and costs will leave only tech, life sciences and entertainment as viable. If you aren't an elitist no room here for the middle or working classes.”
• “California’s regulation and specifically labor regulation is a job killer. We will be moving our business out of CA and the State will lose 100’s of jobs simply due to the poor regulatory environment.”
• “California’s taxes and ongoing changes for regulations are devastating. One never knows from even day to day what new interpretation of an existing regulation or new regulation will befall you and your small business.”

It is time policymakers in California realize the more taxes and more regulations are not getting the job done. If they truly want to jump-start the state's economy and "create jobs" (which, of course, only private-sector businesses—not the government—can do), they should reverse the many years of failed policies by reducing the high taxes and voluminous red tape that are strangling the state's economy. A good place to start would be to level the playing field by getting rid of special tax breaks for politically-favored industries and cutting business taxes across the board.

» See the full op-ed article here.

» The Reason Foundation-Howard Jarvis Taxpayers Foundation California tax credits study is available here.

» See my previous blog post about the California tax credits study here.

New Reason Study Calls for California Tax Reform

Posted on January 30, 2013, 2:04pm | Adam Summers

In his State of the State Address last week, California Governor Jerry Brown asserted, "California is back, its budget is balanced, and we are on the move." Sadly, economic reality belies the governor's optimism. California still has the third-highest unemployment rate in the nation at 9.8%, a rate 26% higher than the national average of 7.8%. It has the highest income tax rate in the nation, the highest state sales tax, the highest gas tax (tied with New York), and the eighth-highest corporate tax rate (and the highest rate west of the Mississippi River, making it even less competitive with its neighboring states). Add to this the fact that California has the worst credit rating in the nation (now tied with Illinois), mainly due to its significant debt and hundreds of billions of dollars in unfunded pension and retiree health care liabilities, and one of the worst—if not the worst—business climates in the country. The passage of Proposition 30, with its roughly $50 billion in new tax increases over the next seven years, last November certainly won't help matters. This is certainly not the track record of an economic powerhouse, or even a state on the upswing.

There are many ways to turn around the California's fiscal and economic fortunes—cutting spending, eliminating burdensome regulations, privatizing government services, ditching boondoggles like the California high-speed rail plan, implementing real pension reform, etc.—but today I would like to focus on how tax reform could help to revitalize the state. In addition to its high general personal income, corporate, and sales tax rates, California's tax code is plagued by numerous special carve-outs for politically-favored businesses and industries. In a new study by Reason Foundation and the Howard Jarvis Taxpayers Foundation, I highlight some of the more egregious corporate and sales and use tax credits, exemptions, and deductions offered by the state and argue that eliminating such tax breaks and using the "savings" to lower the overall corporate tax rate would promote a better business climate, and thus help improve the state's economy.

The results of such tax reforms could be significant. The Franchise Tax Board estimates (see page 10 of this California Senate Office of Oversight and Outcomes report) that if the Research and Development Credit alone were eliminated, the overall corporate tax rate could be reduced by about 14 percent, thus improving the business climate for all industries. If some of the other tax breaks discussed in this report were also eliminated—including the Accelerated Depreciation of Research and Experimental Costs, Double-Weighted Sales Factor, Film Credit, Low-Income Housing Credit, Hiring Credit, Percentage Depletion of Mineral and Other Natural Resources, and Expensing of Timber Growing Costs breaks (see Table 1 on page 14 of the study)—the Reason-Howard Jarvis report finds that California could likely reduce its overall corporate tax rate by more than 20 percent.

The infamous Solyndra case is a perfect example of why tax breaks are a bad idea. In addition to the $528 million in federal loan guarantees that taxpayers lost when the company went belly-up, the company also wasted $25 million in California state tax exemptions from a "green energy" tax credit program. Rather than trying to play favorites or cater to special interests through preferential treatment in the state's tax code, politicians should ensure that the playing field is level, and that tax rates are as low as possible, and otherwise let the free market and the choices of consumers and entrepreneurs—through the forces of supply and demand—determine which businesses and services are most desirable and best meet their needs.

When the state encourages economic activity in one segment of the economy—be it through tax breaks or direct subsidies—it necessarily discourages economic activity in all other segments of the economy by making them relatively less competitive. These opportunity costs are often ignored by policymakers. The error is compounded when you consider that much of the tax breaks end up being used for business activity that would have occurred with or without the tax breaks.

If this were not enough, another negative consequence of such tax breaks is that they breed even more special-interest lobbying. The more industry groups, environmental lobbys, or other special interests see that lobbying "investments" pay off, the more money is directed to lobbying Sacramento and the less is put to productive use in the economy.

If California wants to jump-start its economy and become a place that Gov. Jerry Brown and taxpayers across the state can be optimistic about, a good start would be to simplify and reduce its onerous taxes. The new Reason-Howard Jarvis study offers some recommendations about how to go about this:

 

• Eliminate special tax treatment wherever possible, particularly in cases where:

 

a)     The tax break’s purpose is not clearly defined,

b)     The tax break is not serving its intended purpose or has outlived its intended purpose,

c)     The tax break is narrowly tailored to benefit a specific industry or type of business, or

d)     The tax break is clearly an example of the government picking winners or losers for ideological or special-interest reasons.

• Wherever possible, lower broad tax rates down to tax break levels, rather than raise tax break levels up to broad tax rates.

 

• Require a clear statement of purpose and performance measures for each tax break—including existing tax breaks without a clear statement of purpose or relevant performance measures—in order to facilitate evaluations of the impact of tax breaks on taxpayers and the state budget.

• Eschew static analysis of state tax breaks and return to dynamic analysis of their effects on taxpayers and the state budget.

• Establish a sunset commission to periodically evaluate tax breaks and other state regulations. A citizen’s commission would aid the legislative sunset commission similar to the state of Washington model. Adopt legislation requiring that both existing and future tax breaks must be evaluated every 5 or 10 years. Tax breaks not acted upon within this period would automatically be repealed.
• Adopt a BRAC-style commission (similar to that used to close unneeded federal military bases) to evaluate existing tax breaks and regulations. The two-thirds supermajority makes it difficult enough to repeal existing tax breaks. Under such a process, an independent panel of taxpayers, perhaps with additional representatives from the Franchise Tax Board, State Board of Equalization, and Legislative Analyst’s Office, would be appointed to evaluate and recommend tax breaks for elimination. The recommendations, once approved by the governor, would be submitted to the legislature, which would not be allowed to make any amendments and could only vote up or down on the entire package. A simple majority of both houses would be required to approve the recommendations.

 

See the California tax credits study here.

California Shouldn't Raise Minimum Wage

Posted on January 28, 2013, 2:31pm | Adam Summers

Democratic lawmakers in Sacramento, emboldened by their new supermajority status, are now tempted to use their added power to push an aggressive legislative agenda. One such effort, which they have tried, but failed, to implement during the past several years is an increase the state’s minimum wage, currently $8 an hour. Assemblyman Luis Alejo (D-Salinas), has introduced AB 10, which would increase the minimum wage to $9.25 an hour over three years and tie additional increases to inflation growth thereafter.

In a recent column for the Orange County Register, I argue that while a minimum wage might sound like a good and compassionate policy, it actually destroys job opportunities for many (not to mention the damage it does to the freedom to voluntarily agree to the price of one's labor).  The recent imposition of a living wage ordinance on large hotels in the City of Long Beach, California, is a case in point.  Consider the following excerpts from the O.C. Register article.

In the November 2012 election, voters in Long Beach overwhelmingly passed Measure N with 64 percent of the vote. The measure, pushed by labor unions such as Unite Here 11 and the Los Angeles County Federation of Labor, AFL-CIO, requires hotels with 100 or more rooms to pay their employees at least $13 an hour and guarantee annual raises.

After the passage of Measure N, Christine Petit of the Long Beach Coalition for Good Jobs and a Healthy Community, which sponsored the measure, crowed, “This ordinance means a lot to the workers, who will get the wage increases just in time for the holidays.” But this was a case of “Be careful what you wish for.”

In response to the measure's passage, some hotels were unable, or unwilling, to shoulder the extra financial burden. Instead of paying their employees more, they announced they'd lay off workers and reduce their number of available rooms so they would not have to comply with the new rules. The 174-room Best Western Golden Sails and the 143-room Hotel Current plan to dramatically reduce their number of available rooms to 99 rooms each to avoid the ordinance.

In December, just before the rules went into effect, the Best Western Golden Sails also reportedly posted a notice that "all employees will be considered terminated after their last shift of duty on or before Dec. 15." The Long Beach Press Telegram reported that "some" of the employees would be rehired but around 75 people were expected to permanently lose their jobs.

[. . .]

When a minimum wage law is imposed, or increased, business owners have a choice to make. They can reduce their costs, usually by laying off employees or cutting employees' hours, or they can try to increase their revenues by hiking prices and hoping customers will pay the higher prices.

[. . .]

Politicians in Sacramento should think long and hard about the fragile economy before pushing a minimum wage increase. For local and state businesses teetering on the edge of survival, the increased costs could be the last straw.

The good intentions of those who propose raising the minimum wage cannot outweigh its unintended consequences and economic reality. Try as they might, politicians can change the laws with regard to the minimum wage, but they cannot repeal the laws of supply and demand.

If the minimum wage was truly a wise and compassionate policy, then why stop at $9.25 an hour, as AB 10 proposes, or $13 an hour, as Long Beach mandated for large hotels? If arbitrarily raising the minimum wage to $13 an hour could magically create prosperity, why not raise it to $100 an hour? Wouldn't we all be rich if the minimum wage was raised to $100 an hour? The answer is obvious: business owners simply could not afford to pay $100 an hour, people would lose their jobs, stores would go out of business in droves, and commerce would grind to a halt. The fact that a minimum wage of $9.25 an hour or $13 an hour will not destroy quite as many jobs and businesses as a $100 an hour minimum wage is hardly reason to support it.

If simply passing laws could create wealth and eradicate poverty, politicians would be the most popular and celebrated people on the planet and people would avoid being poor without even having to work their way up the economic ladder. But take a good look around and ask yourself: Is this the way the world really works?

See the full op-ed article here.

Video: Colorado Marijuana Legalization Update

Posted on December 14, 2012, 11:12am | Harris Kenny

Last month Colorado voters passed Amendment 64 to the state Constitution, which essentially legalized recreational marijuana in Colorado. My colleague Leonard Gilroy and I explained the implementation hurdles that policymakers face in the months and years ahead at Real Clear Markets, we wrote:

Cash strapped states no doubt are salivating at the potential deluge of new revenue. (Both measures are unique, so for clarity this piece will focus on Colorado.) The Colorado Center on Law and Policy estimates Colorado's Amendment 64 will generate $60 million annually, a figure that could double after 2017. This fiscal bonanza would come primarily from new tax revenue generated from excise taxes on wholesalers and new state and local sales taxes -- but also avoided costs to the criminal justice system. However, these revenues will materialize only if the legalization is done right.

The piece goes on to explain the various tax and regulatory concerns that constitute legalization being "done right."

More recently, I appeared on Devil's Advocate with Jon Caldara (a program hosted on Colorado Public Television) to discussion the subject in depth. I appeared on the program alongside Joe Megyesy who consulted the Yes on 64 campaign and will remain involved to oversee its implementation efforts. This episode is approximately 27 minutes long, watch it online below:

For more of Reason Foundation's work on implementing marijuana legalization, see our Real Clear Markets piece here (which also appears on reason.com here) and this blog post (which I wrote the day after the election after attending a press conference held by Yes on 64 across from the State Capitol.)

---

Follow Harris Kenny on Twitter @harriskenny.

Obama Leads Romney 52-45 In New Reason-Rupe Poll; In Three-Way Race Obama Leads Romney 49-42, Johnson Gets 6 Percent

Posted on September 21, 2012, 9:00am | Emily Ekins

A new national Reason-Rupe poll of likely voters finds President Barack Obama leading Republican Mitt Romney 48 percent to 43 percent in the presidential race. When undecided voters are asked which way they are leaning Obama’s lead over Romney grows to 52-45.  

President Obama holds large advantages among women (53-37), African-Americans (92-2) and Hispanics (71-18). Fifty-two percent of likely voters view Obama favorably, while 45 view him unfavorably. In contrast, 49 percent of likely voters have an unfavorable view of Mitt Romney and 41 percent have a favorable view of him. 

In a three-way presidential race, Obama drops to 49 percent among likely voters and Romney falls to 42 percent as the Libertarian Party’s Gary Johnson gets six percent of support. Johnson is already on the presidential ballot in 47 states.

The Reason-Rupe poll conducted live interviews with 1,006 adults, including 787 likely voters, via landlines  (602) and cell phones (404) from September 13-17, 2012. The margin of error is plus or minus 3.8 percent, 4.3 percent for the likely voters sample. Princeton Survey Research Associates International executed the Reason-Rupe poll.

Government’s Role and Influence 

As the presidential candidates debate the role of government, the Reason-Rupe poll finds 55 percent of Americans believe the federal government has too much influence over their lives, 36 percent say the amount of influence is about right and just 7 percent say the government does not have enough influence.

Over two-thirds, 67 percent, of likely voters say it is not the government’s responsibility to reduce income differences between Americans, while 29 percent say it is the government’s responsibility.  Similarly, 61 percent of likely voters tell Reason-Rupe that today’s levels of income inequality are an acceptable part of America’s economic system, 35 percent say income inequalities need to be fixed. 

Today, 59 percent of voters believe all Americans have equal opportunities to succeed, whereas 39 percent do not believe everyone has equal opportunities.

When asked if they are better off than they were four years ago, 44 percent of likely voters feel they are better off, 41 percent say worse off. 

Taxes

A majority of Americans, 57 percent, support raising income tax rates on incomes over $250,000.  However, the very same number—57 percent—says the top 5 percent of earners shouldn’t have to contribute more than 40 percent of the total federal income taxes paid to government. In 2009, the top 5 percent of earners contributed 59 percent of total federal income taxes paid.

Medicare

When it comes to future Medicare benefits, 68 percent of voters say they’d be willing to accept some cuts to their own Medicare benefits as long as they’re guaranteed to receive benefits equal to what they and their employers pay into the system.  When presented with the basic details of Rep. Paul Ryan’s Medicare plan, 61 percent of voters think out-of-pocket health care costs would go up for seniors as a result of the plan. Yet, despite assuming out-of-pocket costs would rise, voters prefer Medicare reforms built around giving seniors a credit to purchase health insurance over reforms like President Obama’s, which include a payment board to help determine which medical treatments are effective and covered. By a margin of 47 percent to 38 percent, voters favor a Medicare credit system over a payment board system.  

Audit the Fed

Just 16 percent of voters approve, and 77 percent disapprove, of the job Congress is doing. And though many pundits say this has been a “do-nothing” Congress, Americans think that’s a feature not a bug. In fact, 45 percent of Americans wish Congress would pass even fewer laws than it does now, while 27 percent would like Congress to pass more laws. There is, however, one law Americans would overwhelmingly like to see: 70 percent tell Reason-Rupe they are in favor of auditing the Federal Reserve. Twenty-one percent are opposed to a congressional-led audit of the Fed.

Full Poll 

The complete Reason-Rupe survey is online here and here.

 This is the latest in a series of Reason-Rupe public opinion surveys dedicated to exploring what Americans really think about government and major issues.  This Reason Foundation project is made possible thanks to the generous support of the Arthur N. Rupe Foundation.

UC Salaries and Administrators Grow Rapidly Despite Huge Budget Shortfalls

Posted on September 11, 2012, 10:58am | Lisa Snell

Even as California suffers through huge ongoing budget deficits and raises tuition at UC campuses across the state, the Orange County Register finds that salaries in the UC system have climbed by 29 percent in the last six years.

One area that seems to be recession-proof is employment in the UC system. The Register reported, "Spending on University of California salaries has climbed nearly 29 percent over the past six years, even as the public system grapples with ballooning retiree expenses that have created a long-term $24.6 billion shortfall.

"The 10-campus system paid $10.6 billion for 259,043 jobs last year, up from $8.2 billion in 2006, according to an Orange County Register analysis of the latest UC pay data. Staff numbers grew by about 6 percent over the same period, and student enrollment increased by about 10 percent."

I argue in the Orange County Register story that while large salaries could be a problem, the larger problem is the rapid growth in school administrators in the UC system.

The real problem with UC is not the high salaries of marquee teachers and coaches, Lisa Snell told us, but the "huge evidence that the number of administrators has grown astronomically in recent years." Snell is the director of education at the Los Angeles-based Reason Foundation.

She pointed us to a study by Keep California's Promise, a project of the Council of UC Faculty Associations. It found that, from 1994-2009, faculty rose about 33 percent, from about 6,500 to 8,669. But the number of senior managers rose 194 percent, from about 3,000 to 8,822 in the same period, a near-tripling of managers.

Indeed, the 8,822 managers in 2009 were more than the 8,669 faculty. Does every professor need his hand held in class by a manager?

 

 

 

 

Picking Apart Krugman's Ridiculous Housing Op-Ed

Posted on August 3, 2012, 4:49pm | Anthony Randazzo

Most of the time when I read Paul Krugman's op-eds I disagree with him. I shake my head in frustration that he is misleading tens of thousands of people. I wrestle with the question of why economists can look at the same data and come up with different results (psychology has the answers by the way). And then I go on with life because it is just not worth it to dwell.

Today's post "Debt, Depression, DeMarco" is so ridiculous that I can't just go on. So I'm going to break down all of the manipulations and inaccuracies point by point, for my own mental relief if anything else. I will include every line of his post so nothing is taken out of context. 

"There has been plenty to criticize about President Obama’s handling of the economy. Yet the overriding story of the past few years is not Mr. Obama’s mistakes but the scorched-earth opposition of Republicans, who have done everything they can to get in his way — and who now, having blocked the president’s policies, hope to win the White House by claiming that his policies have failed."

Not that I'm a big fan of the GOP, but that is what minority parties do. They get in the way of majority parties. It is up to the leading party to, well, lead. We'll move past the sob story about the GOP beating Obama at the political game though, because that is not the point here.

"And this week’s shocking refusal to implement debt relief by the acting director of the Federal Housing Finance Agency — a Bush-era holdover the president hasn’t been able to replace — illustrates perfectly what’s going on."

Nothing was shocking about this refusal. This is not the first time that FHFA has rejected the idea of universally writing down principal on mortgages backed by Fannie Mae and Freddie Mac. All acting-director of FHFA Ed DeMarco did was maintain the agency's position. To set this up as "shocking" is to prime the reader for assuming what follows is outside normality. It is playing on psychological impulses and misframing the argument.

"Some background: many economists believe that the overhang of excess household debt, a legacy of the bubble years, is the biggest factor holding back economic recovery."

True. Count me as one who also believes that household debt is one of the largest problems holding back recovery.

"Loosely speaking, excess debt has created a situation in which everyone is trying to spend less than their income. Since this is collectively impossible — my spending is your income, and your spending is my income — the result is a persistently depressed economy. How should policy respond? One answer is government spending to support the economy while the private sector repairs its balance sheets; now is not the time for austerity, and cuts in government purchases have been a major economic drag."

You do have to give it to Krugman for never failing to push his anti-austerity argument. A challenge with this argument is that I can push back by saying, the government has supported the economy by spending hundreds of billions (both through the stimulus and the bailout) and providing dirt cheap loans through the Fed, not to mention supporting housing prices and attempting to invest in green technology. That hasn't created a recovery. Krugman will respond that we didn't spend enough. But that is an easy come back if spending doesn't succeed at its goal.

"Another answer is aggressive monetary policy, which is why the Federal Reserve’s refusal to act in the face of high unemployment and below-target inflation is a scandal."

The Federal Reserve has been acting. Krugman makes it seem like the Fed has been just standing on the sidelines for the whole faux-recovery period. Most readers of his column will know that is not true. What Krugman really means to say is that the Federal Reserves refusal to do even more is a scandal. He'll get his wish in September I think, but there is so much debate about whether QE3 could be effective in any form that calling it a scandal is absolutely ridiculous. The Fed's holding steady on course is extreme as it is, going further necessitates a substantial debate. 

"But fiscal and monetary policy could, and should, be coupled with debt relief. Reducing the burden on Americans in financial trouble would mean more jobs and improved opportunities for everyone. Unfortunately, the administration’s initial debt relief efforts were ineffectual: Officials imposed so many restrictions to avoid giving relief to “undeserving” debtors that the program went nowhere."

How terrible of the government to try and protect taxpayer money by preventing fraud and attempting to limit moral hazard. More to the point though, it is far from a widespread view that debt relief is a "should" for government policy. A debt jubilee would probably have positive effects for households free of their financial burdens, but the gains are washed out by an equal net loss to the creditors that will no longer get back the money they owed. That is a policy debate very much up in the air, not a "should."

"More recently, however, the administration has gotten a lot more serious about the issue. And the obvious place to provide debt relief is on mortgages owned by Fannie Mae and Freddie Mac, the government-sponsored lenders that were effectively nationalized in the waning days of the George W. Bush administration."

Again, I respect the rhetorical flourish of Krugman painting the GOP as always the bad guys. I don't respect him for playing politics when he should be acting like more of an professional economist though. Krugman is right that the GOP are the bad guys who nationalized the GSEs. But I would have added to that sentence, "and have continued on in government conservatorship for more than three years under the Obama administration who has failed to make a concerted effort to deal with the defunct mortgage giants." Both sides share a lot of blame for being stuck in the political mud and not wanting to take on the very powerful American housing lobby.

"The idea of using Fannie and Freddie has bipartisan support. Indeed, Columbia’s Glenn Hubbard, a top Romney adviser, has called on Fannie and Freddie to let homeowners with little or no equity refinance their mortgages, which could sharply cut their interest payments and provide a major boost to the economy. The Obama administration supports this idea and has also proposed a special program of relief for deeply troubled borrowers. But Edward DeMarco, the acting director of the agency that oversees Fannie and Freddie, refuses to move on refinancing. And, this week, he rejected the administration’s relief plan."

This is the point in Krugman's op-ed that my ears started to bleed. Bipartisan support my ass! That is like calling the stimulus bipartisan because it got a few Republican votes in the Senate. There are a few center-right economists supporting widespread principal reduction. But most of the center right is opposed. That is just plain wrong and Krugman knows it. Again, it is priming the audience to see Ed DeMarco as the evil government technocrat out of touch with the mainstream. The ironic thing is that principal reductions are something that needs to be painted as "bi-partisan" at all. This is not a political issue. It is an accounting and financial analysis issue. Sometimes reducing a borrowers principal will yield a net positive return to the lender because the borrower won't go into complete default and foreclosure. Other times not. It is a case-by-case basis. Not a left-right political debate. 

"Who is Ed DeMarco? He’s a civil servant who became acting director of the housing finance agency after the Bush-appointed director resigned in 2009. He is still there, in the fourth year of the Obama administration, because Senate Republicans have blocked attempts to install a permanent director."

At this point my eyes started to bleed with frustrated fury. It is when elements of truth are twisted to create a false reality that we should really question the legitimacy of public commenters. I am certain that I have made this error in the past and would honestly own up to it if pointed out. But Krugman could at least make an honest attempt to tell the story right here. Yes, DeMarco became acting-director after James Lockhart quit. But Obama didn't try to appoint a permanent director until November of 2010. There were legitimate concerns about whether Joseph Smith should step into the FHFA top post, and the out going GOP asked those questions. The lame duck congress in the fall of 2010 was not able to push through Smith's nomination, and it was left up to the next Congress, incoming for January 2011. But Obama decided to not renominate Smith for the 112th Congress to take a vote on one way or the other. And since then the Obama administration has not tried to reappoint anyone to the post. Krugman makes it seem that the White House has been trying hard to create replace DeMarco, but largely they've been afraid of the politics of having to honestly vet a candidate that would take the role of GSE conservator seriously vs. just being a technocratic tool of the administration. VERY different story than Krugman paints.

"And he evidently just hates the idea of providing debt relief."

Patently false. Ad hominem attack. DeMarco is on the record as saying principal reduction has the capacity to save taxpayers money. But he has argued the risks would be too high for the taxpayers. He has even written about debt forbearance a good option. He does not "evidently" hate debt relief. Either a research failure for Krugman or a misleading sentence that he should apologize for.

"Mr. DeMarco’s letter rejecting the relief plan made remarkably weak arguments. He claimed that the plan, while improving his agency’s financial position thanks to subsidies from the Treasury Department, would be a net loss to taxpayers — a conclusion not supported by his own staff’s analysis, which showed a net gain."

What DeMarco's letter actually said was that under his estimated scenario (and he is the acting-director that has been doing this for more than three years now), taxpayers might only get a savings of $500 million under a best case scenario. More optimistic estimates have suggested closer to $1.8 billion in savings to the taxpayer. DeMarco's argument was that the $500 million estimate was such a narrow margin for the calculations being discussed that it was not worth the risk. Krugman paints DeMarco as a single rouge operator in his organization. Not true at all.

"And it’s worth pointing out that many private lenders have offered the very kinds of principal reductions Mr. DeMarco rejects — even though these lenders, unlike the government, have no incentive to take into account the way debt relief would strengthen the economy."

Yes, that is worth pointing out. But it is also worth pointing out that the Red Sox have been slowly gaining ground on the Yankees in the AL East race, but will still wind up breaking my heart with failure down the stretch. Banks doing individual principal reductions on a case-by-case basis is VERY different from the GSEs just writing down principal in bulk on mortgages in a large program. The banks are not doing "the very kind" of reductions being discussed here.

"The main point, however, is that Mr. DeMarco seems to misunderstand his job. He’s supposed to run his agency and secure its finances — not make national economic policy."

No, Mr. Krugman misunderstands Mr. DeMarco's job. It is explicit in the conservatorship agreement that FHFA manage the GSEs to reduce losses to the taxpayers. If DeMarco were to bend to the push for principal reductions despite his best estimate that taxpayers might lose on the deal, then he would be setting national economic policy. There are plenty of arguments against principal reduction from a moral hazard perspective, from a rule of law perspective, from a data perspective (at least half of HAMP's modifications have re-defaulted the last I looked). But DeMarco is taking his job very seriously and considering not the housing market, but just taxpayer well-being from GSE specific losses.

"If the Treasury secretary, acting for the president, seeks to subsidize debt relief in a way that actually strengthens the finance agency, the agency’s chief has no business blocking that policy. Doing so should be a firing offense."

Again, wrong. That might be how some would like to view the FHFA director post. But that is not what the law says. If taxpayers really would be better off from a program like this, and it could be designed to avoid moral hazard and there was no violation of contracts, then I'd say go for it. Until that is the case, though, DeMarco should stand firm... and that is not a fireable offense.

"Can Mr. DeMarco be fired right away? I’ve been seeing conflicting analyses on that point, although one thing is clear: President Obama, if re-elected, can, and should, replace him through a recess appointment. In fact, he should have done that years ago. As I said, Mr. Obama has made plenty of mistakes. But the DeMarco affair nonetheless demonstrates, once again, the extent to which U.S. economic policy has been crippled by unyielding, irresponsible political opposition. If our economy is still deeply depressed, much — and I would say most — of the blame rests not with Mr. Obama but with the very people seeking to use that depressed economy for political advantage."

Nothing more need be said. A very frustrating article to read indeed. Send complaints to anthony.randazzo@reason.org

Update: An earlier version of this post mistakenly cited Obamacare as receiving a few GOP votes in the Senate, it was the American Recovery and Reinvestment Act that received three Republican votes (one of which was Arlen Specter who later switched to the Democrat party) and was therefore claimed to be "bipartisan." 

Brain Hubs and the Case for Labor Mobility

Posted on July 27, 2012, 10:44am | Tom Clougherty

Over at The American, Nick Schultz has posted an interview with Enrico Moretti, an economics professor at UC Berkeley and the author of "The New Geography of Jobs". Moretti's thesis is that new jobs and opportunities are increasingly clustered around 'brain hubs' - cities with well-educated workforces and strong innovation sectors. While old industrial areas decline rapidly, these 'brain hubs' thrive. According to Moretti's research, each new 'innovation job' brings with it five non-innovation jobs.

If this is true, then one obvious implication is that labor mobility is vitally important. People need to be able to move where the work is. As Moretti puts it:

The United States is a large and diverse nation. Economic differences across American cities (for example, unemployment rates and salary levels) are very large and keep growing. These growing differences mean that the economic returns to economic mobility have never been higher. But not all American workers are equally mobile. College graduates have the highest mobility of all, workers with a community college education are less mobile, high school graduates are even less, and high school dropouts come at the bottom of the list.

He goes on to make a crucial point:

Government policies are part of the problem. The unemployment insurance system does not provide any incentive for unemployed workers to look for jobs in places with better labor markets. If anything, it discourages mobility from high-unemployment areas to low-unemployment ones, because it does not compensate for the difference in cost of living. If you are living off an unemployment check in Flint, you do not have a lot of incentives to move to San Francisco to look for a new job, because your housing expenses would triple, but your check would still reflect the cost of living in Flint.

This is really one of the core problems with modern welfare states: they do not sit well alongside dynamic market economies, in which change is constant, and creative destruction drives progress and prosperity. Rather than encouraging people to seek out new opportunities, state welfare seeks to sustain people in their present circumstances. This may be more comfortable in the short term, but its long term implications are very worrying.

The solution Moretti hints at - redirecting welfare spending to help people move - reminds me of this excellent study, which was published by Policy Exchange, a British think-tank, several years ago. It advocated a hard-headed assessment of redevelopment policies, and an acceptance that once cities "have lost much of their raison d'etre... it is hard to imagine them prospering at their current sizes." The policy emphasis should instead be placed on removing barriers to growth in prospering areas, and making it easier for people to relocate there. Rather than trying to buck the market, governments should get out of its way.

Yet that study also highlights the political pitfalls of such an approach. Policy Exchange, at that point a favorite of soon-to-be-British-prime-minister David Cameron, was widely condemned for wanting "shut down Sunderland" and other struggling post-industrial towns in the North of England. Politicians, predictably enough, couldn't run away from the idea fast enough.

Likewise, it would take a very brave US policymaker to stand up and say that glory days just aren't coming back for some rust belt towns, and that no amount of bailouts, subsidies, tariffs, or stimulus checks are going to change that sad fact. Nevertheless, the case for labor mobility - not just for highly-educated Americans, but for everyone who wants to work - is a case that deserves to be made.

The Time-Bomb Keeps Ticking

Posted on July 25, 2012, 5:31pm | Tom Clougherty

The Wall Street Journal recently carried an essay by David Wessel, author of the forthcoming book, "Red Ink: Inside the High-Stakes Politics of the Federal Budget". It provides an excellent breakdown of the budget crisis looming over the federal government.

Perhaps the most striking fact contained in the essay is that 63 percent of the budget is on auto-pilot: "Social Security benefits get deposited. Health-care bills for Medicare for the elderly and Medicaid for the poor are paid. Food stamps are issued. Farm-subsidy checks are written. Interest payments are dutifully made to holders of Treasury bonds." In technical jargon, this is non-discretionary spending - unless Congress actively stops it, such spending continues every year without the need for any further authorization. Throw in an ageing population and inexorably rising healthcare costs, and it becomes clear that such spending is only heading in one direction - skywards.

What is most worrying is that the federal government currently only funds 66 percent of its spending through taxes. For the rest, it has to borrow. And while that may be bearable in the short-term, as nervous investors around the world pile into US Treasuries and push bond yields to record lows, it spells big trouble in the medium- to long-term. Every cent the government borrows now means more debt interest payments - and even more non-discretionary spending - in the future.

For an idea of just how bad it could get, take a look at this 2010 working paper from the Bank of International Settlements. Its projections indicate that without a policy shift, US public debt would rise to more than 400 percent of GDP by 2040. That would translate into annual debt interest payments equaling 23 percent of GDP - well in excess of total federal tax revenues, which have averaged a little over 18 percent of GDP since the Second World War. Such a scenario is plainly impossible: the US would be forced to default on its obligations long before things reached that point.

The policy implication here is straightforward enough: non-discretionary spending programs like Social Security, Medicare and Medicaid need urgent, drastic reform to put them on a more sustainable footing. The problem is politics: neither party is really serious about dealing with this fiscal time-bomb. Politicians' electorally-driven time horizons are just too short to permit the sort of significant, structural changes that are required.  Perhaps a rise in Treasury yields will force the issue. Maybe another showdown over the debt ceiling will do the trick. But I won't be holding my breath. As the Austrian economist Detlev Schlichter puts it, when it comes to debt, governments around the world are determined to "extend and pretend".  Sadly, it is only a matter of time before reality catches up with them.

Stockton Begins Legal Battle in U.S. Bankruptcy Court Today

Posted on July 6, 2012, 12:53pm | Harris Kenny

Updated on Friday July 6, 2012 at 1:28 PM Eastern.

Last week Stockton, California became the largest city (by population) to file for bankruptcy in U.S. history. The initial hearing is today in U.S. bankruptcy court in Sacramento. The trial is especially significant because the city’s lawyers are attempting to use bankruptcy to impose losses on its bondholders, which include private financial institutions and the state of California. Steven Church of Bloomberg reports:

No U.S. municipality has used bankruptcy to force bondholders to take less than the full principal due since at least 1981, and possibly as far back as the 1930s, according to lawyers and court records.

Church reports the city’s three largest creditors include:

1. California Public Employee Retirement System (CalPERS), $147.5 million;
2. Wells Fargo Bank NA as trustee for $124.3 million in pension obligation bonds; and
3. Wells Fargo Bank NA as trustee for three other sets of bondholders owed $107 million.

One of the most interesting subplots will be the legal battle between CalPERS, and Wells Fargo Bank North America and Assured Guaranty Ltd. Cate Long, a guest contributor to Reuters’ MuniLand blog, speculated on Twitter today whether or these calculations are accurate though. Assured Guaranty Ltd. insured $161 million of Stockton’s bonds. Meanwhile, National Public Finance Guarantee, which has insured about $224 million of Stockton's debt, is owned by MBIA Inc. Combined, MBIA Inc. and Assured Guaranty Ltd. hold approximately $385 million in Stockton's debt, and at this point they are allowed to argue together in court. In the case of principal reduction, these parties arguably have the most to lose.

This morning, Church wrote:

Bondholders will be limited to two main options if they are to block Stockton in court, said Lee Bogdanoff, a bankruptcy attorney: get the case thrown out or defeat the city’s reorganization proposal.

“The most important power they have is a seat at the negotiating table,” Bogdanoff, a founding partner of Klee, Tuchin, Bogdanoff & Stern LLP in Los Angeles, said in a telephone interview. “They can try to influence the decision makers.”

Today’s hearing will differ from a typical corporate case, Bogdanoff said. Unlike a company, the city doesn’t need to ask U.S. Bankruptcy Judge Christopher Klein for permission to pay any bills it ran up before filing for court protection, such as wages, utility bills or rents. As a result, creditors won’t be able to use the hearing to pressure the city on its spending habits, Bogdanoff said.

The first legal question today is about the city's mediation process. California Assembly Bill (AB) 506 passed earlier this year requiring distressed municipalities to enter mediation before declaring bankruptcy. While Wells Fargo Bank NA was awarded three city parking garages and city hall, the parties failed to resolve their differences. The intention behind AB 506 was for future cities filing for bankruptcy to avoid the flurry of lawsuits that ensued after Vallejo, California’s filed for bankruptcy several years ago.

Scott Smith of The Stockton Record reports:

Marc Levinson, the lead attorney hired to represent Stockton, will ask U.S. District Judge Christopher Klein to unseal a 790-page document at the heart of a three-month-long, closed-door mediation process that attempted, yet failed, to avert bankruptcy.

Levinson argues in court papers that this massive document, which resembles a bankruptcy plan, lays out in detail what the city in mediation asked its major creditors to give up...

Proving in court that a municipality first tried to avoid bankruptcy and that it is, in fact, broke are basic facts that must be established before moving ahead with a bankruptcy case...

(U.S. District Judge Christopher Klein) is expected to rule from the bench today on two other motions that Stockton filed:

• First, the city wishes to set an Aug. 9 deadline for any challenges to the legitimacy to Stockton's bankruptcy.
• Second, the city has asked to maintain a website designed to tell each of the 6,000 stakeholders of upcoming hearings and filings, rather than having to send each a notice by overnight mail, which would be costly and labor intensive."

For more on California municipal finance issues, see my previous posts on Stockton and Mammoth Lakes. For the latest on Detroit, Michigan, see Detroit and Michigan: A Fragile Bargain and Detroit and Its Unions Fight Over Work Rules from Melissa Maynard of Stateline.

Mammoth Lakes, California Files for Bankruptcy

Posted on July 5, 2012, 2:56pm | Harris Kenny

Earlier this week Mammoth Lakes, California filed for bankruptcy, news largely missed in the run up to the Fourth of July holiday. The Mammoth Lakes Town Council voted unanimously on Monday July 2 to authorizing the filing of a petition for relief under Chapter 9 of the Bankruptcy Code in U.S. federal court. Mammoth Lakes has 7,700 permanent residents and is located about 300 miles north of Los Angeles. Mammoth Lakes is Mono County’s only incorporated community and it is best known for its proximity to Mammoth Mountain Ski Resort.

On June 27 the town issued the results of its AB 506-mandated mediation, which included 16 total parties but did not include its largest creditor, Mammoth Lakes Land Acquisition (MLLA). The mediation lasted 60 days and a full list of agreements reached is available on the town’s website here. Parties include groups like CalPERS (California Public Employee Retirement System), public employee unions, non-profit organizations, contractors, bodies of government, for-profit developers and financial institutions. MLLA was one of several parties that did not participate in mediation.

According to a statement issued by the town:

Bankruptcy, unfortunately, is the only option that the Town is left with, after its largest creditor, Mammoth Lakes Land Acquisition (MLLA) repeatedly refused to mediate its $43 million judgment against the Town, and obtained a State court order requiring payment of the full judgment by June 30, 2012.

City officials distill their fiscal woes down to two problems:

1. "A lack of sufficient revenue to pay its current and anticipated obligations, as evidenced by a $2.7 million initial shortfall in its 2011-2012 fiscal year budget, balanced through painful measures in June 2011, an additional unanticipated shortfall of $0.9 million in the same 2011-2012 fiscal year that forced the Town to reduce its already low available cash, and a projected $2.8 million budget shortfall in its 2012-2013 fiscal year.
2. A Writ of Mandate issued by a State Court ordering the Town pay a $43 million judgment owed to MLLA by June 30, 2012.”

The $43 million judgment owed to MLLA appears to be what pushed Mammoth Lakes over the edge. The Los Angeles Times reports:

A state appellate court decision in December 2010 upheld the judgment and chastised the town for trying to back out of the agreement it signed in 1997 with Mammoth Lakes Land Acquisition.

The agreement required the developer to make improvements to nearby Mammoth Yosemite Airport’s fixed-based operations. In return, it would receive rights to develop a $400-million Hot Creek hotel project on 25 acres at the airport and an option to buy the land.

The court found that Mammoth Lakes changed its priorities in 2007 after it determined the project would interfere with Federal Aviation Administration policy governing the use of the airport property for aeronautical purposes and, as a result, derail the town’s plans to extend the runway to accommodate Boeing 757 passenger jets.

The developer, which had invested in some improvements at the airport, filed a breach of contract lawsuit against the town after it refused to move forward with the hotel project until the FAA policy issues were resolved.

The court found the city had not lived up to its end of the bargain.

This filing is reminiscent of Stockton, California’s recent filing, in that the city was ill equipped to handle the economic downturn and aggressive economic development projects initiated during the boom years went sour. It's important to note that every city is unique and this reinforces that we are not seeing contagion at the local level. Mammoth Lakes is hoping that through bankruptcy they can solve fiscal woes and either free up revenue, or issue additional bonds, to pay its creditors over the next ten years.

The following public services will remain open and/or available:

• The Police and Fire Departments, along with other safety partners such as paramedics and Sheriff's office, will provide high levels of response and care;
• Road, parks, and airport maintenance services will continue as scheduled;
• Town Office business hours and service deliver will continue as usual without interruption of services;
• Community services and providers such as Mammoth Hospital, Mammoth Community Water District, and Mono County are separate from the Town and are not impacted.

For more on municipal finance issues, see my previous posts on Stockton, California and Jefferson County, Alabama. For an update on Harrisburg, Pennsylvania, see this post by Maggie Clark of Stateline (in short, the state barred the city from declaring bankrupcty until November 30.) For an update on Detroit, Michigan, see this post from Melissa Maynard of Stateline (in short, officials continue to hammer out the details of the consent agreement signed in April by Michigan Governor Rick Snyder and Detroit Mayor Dave Bing.)

What Happened in Stockton?

Posted on June 27, 2012, 3:41pm | Harris Kenny

Last night the Stockton, California City Council voted 6-1 to adopt a spending plan for operating under bankruptcy protection, and to file a motion with the courts to share information from the confidential mediation. With almost 300,000 residents, Stockton is the largest city to file for bankruptcy in U.S. history.

In February 2012 Stockton voted to enter bankrupcty mediation. Policymakers negotiated with the city's creditors for months starting in late March 2012 and ultimately failed to prevent the filing. Negotiations were in compliance with AB 506, a new California law requiring municipalities file for reorganization of debt, and Stockton was the first city to file for use the law since its passage. Negotiations may not have been a waste of time though because they may help the city avoid a string of lawsuits, according to the Los Angeles Times, which is what happened after Vallejo, California’s filing in 2008.

While high profile stories like this signal blood in the water for narrative-hungry national media outlets, think tanks and pundits, there are often layers of complexity. So, what happened in Stockton? And is it happening anywhere else?

The most important takeaway right now is that no, Stockton’s decision to file bankruptcy is not necessarily a harbinger of things to come. The city’s financial situation is unique and does not reflect the financial standing of a significant number of municipalities in the U.S. That being said, there are relevant themes that policymakers and investors should recognize.

California Common Sense issued the definitive report on Stockton's financial situation entitled, "How Stockton Went Bust: A California City's Decade of Policies and the Financial Crisis that Followed." The report details the three most significant factors, which are distinct but interrelated, contributing to Stockton’s bankruptcy.

1. The housing and financial collapses.

The housing bust decimated Stockton’s housing prices, and so went the city’s property tax (and related) revenues. Housing prices plunged from nearly $400,000 in median home prices in 2006, down to $110,000 in 2009 (where median prices were in 2000 before the bubble.) Meanwhile the city has the second highest rate of foreclosures in the country. Revenues from related areas, such as: sales taxes, utility user’s taxes and housing permit fees also plunged.

The city burned through emergency cash funds and took efforts to rein in spending that weren’t enough. For example, they issued a hiring freeze for open positions in May 2008 and cut the general fund by $90 million in the last three years. Despite those efforts they continued to run budget deficits.

2. Excessive optimism and unsustainable compensation promises.

City policymakers appear to have mistaken the real estate bubble for real growth. (The Los Angeles Times reports that state mediation law requires assigning blame in cases of bankruptcy, which will determine whether this was an honest mistake or if there was corruption at play.) This reported optimism led to breakneck pace spending on various redevelopment initiatives. The city sold $129 million in bonds to fund rehabilitating the Philmathean building’s rehabilitation, the downtown marina and waterfront’s development and the Hotel Stockton’s renovation.

California Common Sense found that the city also renegotiated generous compensation for city employees, when employee services compose approximately three fourths of the city’s almost $200 million budget. For example, city employees receive a guaranteed salary increase from 2.5-7%, depending on General Fund revenue growth—even if the General Fund shrinks from the previous year. Meanwhile employee healthcare costs are also rising, growing at a rate of almost 10 percent over the past decade. Other post-employment benefits (OPEB), including pensions, are also rising steadily. The city now faces more than $800 million in unfunded liabilities for pensions and OPEB.

3. An ill-timed bond offering.

In 2007 the city sought to lower it’s pension costs, so policymakers undertook a bond offering to lower interest payments on roughly $125 million of its pension obligation. The proceeds of these pension obligation bonds were given to the California Public Employees’ Retirement System (CalPERS) to manage. California Common Sense found that CalPERS was overexposed to the real estate and stock markets, so it was unable to meet the expected returns. The original pension obligation bond money is now worth under $100 million while the city owes $248 million.

Increased debt payments, combined with multiple years of negative net annual activity, ultimately pushed Stockton over the edge. While bankruptcy will sort out the details of the city’s restructuring, it’s safe to say that employee services (namely police and fire) will be at-risk throughout the process. Public safety represents 80%, or almost $160 million, of the city’s nearly $200 million annual budget. Stay tuned to Reason Foundation’s Out of Control Policy Blog for more on Stockton in the days and weeks ahead.

We Must Take UN’s Internet Grab Seriously

Posted on June 21, 2012, 5:06pm | Steven Titch

Thanks to our friends Jerry Brito and Eli Dourado at George Mason University's Mercatus Center, and the anonymous individual who leaked a key planning document for the International Telecommunication Union's World Conference on International Telecommunications (WCIT) on Jerry and Eli's inspired WCITLeaks.org site, we now have a clearer view of what a handful of regimes hope to accomplish at WCIT, scheduled for December in Dubai, U.A.E.

Although there is some danger of oversimplification, essentially a number of member states in the ITU, an arm of the United Nations, are pushing for an international treaty that will give their governments a much more powerful role in the architecture of the Internet and economics of the cross-border interconnection. Dispensing with the fancy words, it represents a desperate, last ditch effort by several authoritarian nations to regain control of their national telecommunications infrastructure and operations

A little history may help. Until the 1990s, the U.S. was the only country where telephone companies were owned by private investors. Even then, from AT&T and GTE on down, they were government-sanctioned monopolies. Just about everywhere else, including western democracies such as the U.K, France and Germany, the phone company was a state-owned monopoly. Its president generally reported to the Minster of Telecommunications.

Since most phone companies were large state agencies, the ITU, as a UN organization, could wield a lot of clout in terms of telecom standards, policy and governance--and indeed that was the case for much of the last half of the 20th century. That changed, for nations as much as the ITU, with the advent of privatization and the introduction of wireless technology. In a policy change that directly connects to these very issues here, just about every country in the world embarked on full or partial telecom privatization and, moreover, allowed at least one private company to build wireless telecom infrastructure. As ITU membership was reserved for governments, not enterprises, the ITU's political influence as a global standards and policy agency has since diminished greatly. Add to that concurrent emergence of the Internet, which changed the fundamental architecture and cost of public communications from a capital-intensive hierarchical mechanism to inexpensive peer-to-peer connections and the stage was set for today's environment where every smartphone owner is a reporter and videographer. Telecommunications, once part of the commanding heights of government control, was decentralized down to street level.

There's no going back. Even authoritarian regimes understand this. Fifty years ago, when a third-world dictatorship faced civil strife, it could control real-time information by shutting off its international telephone gateway switch. Not so today. So much commerce, banking, transportation and logistics depends on up-to-the-second cross-border data flow that no country, save for truly isolated regimes such as North Korea, can afford to cut themselves off the global Internet, even for one day.

That's why it's no surprise that the authoritarian regimes of China and Russia, supported by even more despotic states such as Iran, are spearheading the UN/ITU effort. Their politically repressive regimes can't function with the Internet, but their economic regimes, tied as they are to world trade, can't function without it. That's why attempts at Internet control have to be more nuanced and cloaked in diplomacy. 

As we see in the leaked documents, their agenda is masked as concerns about computer security and virus and malware detection, or in arguments about how nation-states have a historically justifiable regulatory responsibility for setting technical standards for IP-to-IP connections. But dig deeper and you find their proposed solutions would give them the power to read emails, record browser habits and extort fees from web sites and services such as Google, Facebook and Twitter (if they aren't going to block them completely).

In the long run, it is doomed to fail. As an organism, the Internet defies top-down control. Every time a country attempts to impede certain types of Internet communications, via firewalls, filters, or outright domain name blocks, individuals create workarounds. It's not that difficult.

That simple fact might engender complacency among netizens here in the U.S. And besides, speaking out against ominous plots by UN agencies makes us sound too much like the nutty neighbor with the backyard bunker.

But there are serious risks to what the ITU and the UN are attempting. Even if only gets part of what it wants, the ITU's Internet grab stands to seriously damage the global free and open Internet.

First, as a multi-lateral "international" agreement, the ITU plan will give repressive regimes cover for Internet clampdowns. Even if the U.S. does not sign on, all it will take is buy-in a few other Western governments, who might just see the treaty as convenient (see the U.K.'s recent Home Office ideas), to allow the more egregious dictatorships in the world to take repressive action.  

The U.S. should be leading all democratic governments in speaking out against the ITU plan. A weak-willed "I'm-OK-you're-OK" approach, or worse, a non-judgmental relativism that suggests American ideas of Internet freedom should defer to a more repressive country's "national culture," are simply not acceptable.  

It seeks to displace multi-stakeholder development. The collaborative culture of the Internet, driven by consensus and undergirded with a commitment to open standards and platforms, is the ITU's primary target. When a nation-states make rules for phone networks, they can specify equipment, favor their domestic manufacturers, create cumbersome compliance rules, and ban possession of non-compliant devices all with the force of heavy-handed law. This is hardly far-fetched. Ethiopia has made Internet phone calls (i.e. Skype) illegal.

It seeks to normalize government regulation of the Internet. For more than 30 years, deregulation has been the predominant policy toward the Internet. This trend has managed to hold on despite numerous attempts at censorship, "neutrality" regulation and price controls. The most common proposition we hear runs to the effect of the Internet has become so important that it needs regulation. Frankly, the Internet has survived and thrived since its beginning without top-down state regulation. Worldwide access continues to grow. By and large, international data networks operate reliably and inexpensively. If anything, the burden of proof for regulation of the 'Net should be ever higher. Why, exactly, do we need an international regulatory regime for the Internet? So far those who would impose one haven't said so. And sorry to say, because citizens are taking to the streets with their iPhones and demanding basic freedoms is not an acceptable reason.

 

Exciting Investment Opportunities Await In… Public Parking

Posted on June 21, 2012, 2:20pm | Harris Kenny

Today my colleague Leonard Gilroy and I published a piece on Real Clear Markets entitled, “Exciting Investment Opportunities Await In… Public Parking.”

The piece begins:

U.S. policymakers in Chicago, Indianapolis and elsewhere have recently begun to unlock value trapped in a neglected treasure: municipal parking assets. This might not seem like a hot topic, but for investors seeking new places to park capital, creative partnerships to invest in and manage city parking garages, meters and lots are increasingly attractive.

Next, we explain that parking is a historically commercial enterprise that’s being crowded out, or captured, by the public sector. But investors drawn by steady returns in the 10-14 percent range are being lured into the market amid the post-recession flight to quality.

The piece continues:

American automobile ownership slowly proliferated in the early 20th century, and by the 1930s, cities began to face traffic congestion. In 1935, a private company installed the first Park-o-Meter, charging motorists five cents an hour to park in Oklahoma City's downtown business district. New private meters successfully promoted higher turnover of parking spaces, satisfying the needs of retailers and customers who wanted access to them.

Over the next decade over 140,000 meters were installed across the nation. Unfortunately, innovation was subsequently stymied as the public sector assumed increased ownership and operation of parking assets, including meters, street-level lots and garages. The private parking market didn't disappear; it simply calcified under public sector capture. But now it's being reborn.

Today, the private sector is partnering with governments to deploy disruptive technology, from real-time parking meter sensors accessible via smart phones to variable pricing that more accurately values spaces. Meanwhile, investors are starting to pour capital into government-owned parking infrastructure.

We go on to walk through Chicago’s groundbreaking public-private partnership for most of publicly owned parking meter system. Chicago signed a 75-year concession (lease) agreement that netted the city an up-front $1.1 billion payment from a Morgan Stanley-led consortium in 2009. We also highlight the adapted approach taken in Indianapolis, who inked a 50-year lease of 3,700 of the city’s parking meters, opting for a $20 million up-front payment and revenue sharing agreement that will net between $300-600 million.

Next, we detail Ohio State University’s pending partnership, which is expected to yield $483 million for almost 36,000 spaces over a 50-year contract. Finally, we explore New York City’s new plan, which is in its embryonic stages, but at this point is likely to resemble a contract for management with guaranteed revenue to the city, alongside capital reinvestment for new technology.

The piece concludes:

Municipal parking assets haven't been fully released into a free and competitive market, but innovative policymakers are finally unlocking value they've been sitting on for years. Meanwhile governments retain legal ownership of core assets, and important controls on things like meter rates and operating hours, for the duration of these agreements.

The increasingly relevant question in parking - and in public policy more broadly - is this: what other public infrastructure assets hidden in plain sight offer similar privatization opportunities?

Read the full piece available online here. For more of Reason’s work on parking, see Leonard’s recent post on New York City entitled, "Don't Believe the Hype About NYC Parking Privatization." For related infrastructure research, see our previous Real Clear Markets piece entitled, “States and Cities Going Private With Infrastructure Investment.”

What Twists Will We See from the FOMC Tomorrow?

Posted on June 19, 2012, 1:36pm | Victor Nava and Anthony Randazzo

Rumors are flying everywhere that the Fed is going to ease policy again after its meetings today and tomorrow. The Financial Times declared yesterday that "the doves are ready to act." And a report in Forbes suggests that more Fed easing is likely to come sooner rather than later, in the form of an extension of the Feds Operation Twist program. JP Morgan Chase and Barclays are also both expecting the FOMC will extend the $400 billion dollar (to this point) bond swap program known as Operation Twist.

These rumors are not terribly unexpected. Nor would Fed action tomorrow be shocking. The economy has been deteriorating this year steadily and financial markets have been tightening up. Chairman Bernanke has reiterated time and again this year that the Fed was willing to act if it needed to, but that they wanted to wait to see if their previous QE efforts could help recovery take hold. No such luck so far though.

More than two months ago Reason's James Groth predicted that rising yields in long-dated treasury bonds would likely lead to a new bond purchasing program or an extension of Operation Twist. It is looking like this is going to put more QE very much back in the cards—if not tomorrow then in coming months, as the global economy and U.S. economy are not going to hit an upswing soon. 

To date, 30-year US Treasury Bond yields have only gone down 9 basis points since the bond swap program began in October of 2011, and at many points during the programs original run 30-year US Treasury Bond yields were actually higher than before the program started. With economic conditions slowing (Barclays forecasts Q2 GDP to grow only 1.8% and May saw only 69,000 new jobs added) it's not surprising that this Fed would seek more easing.

One possible wrinkle, mentioned in the Forbes piece, in the program were it to be extended is that the Fed could move to purchasing more mortgage-backed securities and fewer treasuries (in order to limit the impact on the treasury market). If this turns out to be the case, you can add "a slowing of housing prices declining to normal levels" to the laundry list of Operation Twists negative side-effects.

The rest of the list (as illustrated by Dallas Federal Reserve Bank President Richard Fisher), first blogged about here:

1. "Embarking on an Operation Twist would provide an even greater incentive for the average citizen with savings to further hoard those savings for fear that the FOMC would be signaling the economy is in worse shape than they thought. They might view an Operation Twist as setting the stage for a new round of monetary accommodation-a QE3, if you will. Such a program was considered redundant by business operators given their surplus of undeployed cash holdings and bankers' already plentiful excess reserves. In addition, such a program might frighten consumers by further driving down the yields they earn on their savings and/or lead to long-term inflation that would erode the value of those savings;
2. The earning power of banks, both large and small, would come under additional pressure by suppressing the spread between what they can earn by lending at longer-term tenors and what they pay on the shorter-term deposits they take in;
3. Pension funds would have to reassess their potential returns, with the consequence that public and private direct-benefit plans would have to set aside greater reserves that might otherwise have gone to investments stimulating job creation;
4. Expanding the holdings of the Fed's book of longer-term debt would likely compound the complexity of future policy decisions. Perversely, the stronger the economy, the greater the losses the Fed would incur as interest rates rise in response and the prices of those longer-term holdings depreciate. The political incentive to hold rates down might then become stronger precisely when we want to initiate tighter monetary policy. This concern, of course, would be a good news/bad news issue: The good news is that it would stem from a stronger economy; the bad is that might hurt our maneuverability and, in doing so, might undermine confidence in the Fed to conduct policy independently."

Something that had not escaped some analysts is that the above discussion didn't factor in where inflation is at. As the FT shows in a chart, a number of inflation indicators are heading downward or hovering around 2 percent. However CPI has been on steady march up and hasn't slowed down since the middle of the first quarter of 2012. Concerns about economic and financial conditions could overshadow inflation fears at the FOMC meetings this week, but most are expecting some kind of action tomorrow. 

We'll have to wait for news tomorrow, but in the mean time, please ponder why since the "twist" dance went out of style 60 years ago, why this approach to monetary policy can't go out of style as well? 

 

Alnnor Ebrahim Want His 15 Minutes Like Rajan Gupta

Posted on June 19, 2012, 12:50pm | Anthony Randazzo

With Europe falling apart but Obama v. Romney quiet at the moment, it is not clear whether the media is going to fill its air time with the story of Alnoor Ebrahim. If this story does take top headlines—or better, get featured as a punchline on The Daily Show—hopefully it can move beyond the old hat debates about insider trading as policy and focus more on the complex ways in which different people view insider trading.

Let's start with what we know of this story: Alnoor Ebrahim is a former AT&T executive and he admits that he was paid to give information about cell phone sales to particular hedge funds looking into whether or not to invest in the likes of Apple, RIM, and perhaps AT&T itself. According to BizJournal and AP: "federal authorities said Ebrahim was paid more than $180,000 to serve as a consultant for employees of Manhattan-based investment firms."

We've made it pretty clear on this blog before that we tend to stand with the "let insiders trade" side of this debate. Insider trading is about as illegal in a universal justice sense as getting called for a blocking foul (when you throw your body in front of another player's path) in basketball. It is an arbitrary law set up to try and create a greater sense of fairness. Here is a sterilized break down of what happened.

1. Potential investor in Apple seeks information about the success of Apple products
2. Potential investor reads industry reports, looks at publicly available data, analyzes news reports, pays to attend conferences where Apple executives are presenting their products, pays to fly out and visit Apple production sites, pays assistants to gather intelligence from their friends on how much they like the product.
3. Potential investor then pays an AT&T executive for data about the sales of Apple products. 
4. Potential investor uses all of this information to make a decision.

So, what was the illegal activity here? The law says that investors should have a level playing field, they should have the same opportunities. It is obvious that not every potential investor in Apple has the same resources. They can all technically attend the conferences, and spend time reading the reports, and pay some recent graduates to survey their friends (even if in reality few people have those resources), but they can't all have the same AT&T friend and pay him for special information. 

Step three is what we've declared illegal. Now, I could get into semantic arguments about how there are logistical problems with items in step 2 that, by the same logic is making insider trading illegal should make them illegal, but that is the old debate. We probably should still make those points to keep the flag in the sand established. But what new could we consider?

How about thinking on reasons why we have the divide? Often times in this debate (as nearly every other) it seems as if people have made their decision whether they think this should be illegal and then justify it some how. Many justifications for keeping insider trading illegal are flimsy and disprovable concerns—like "its not fair to trade if you have special knowledge" even though that is basically what professional investors do for a living... trade on special knowledge. Some are based in very sound reasoning that are balanced on a single point of debate from which different opinions must necessarily diverge—like "insiders are part owners in a company who have a fiduciary responsibility to their fellow owners and should not seek to gain special financial privilege by selling the group's information" where the debate rests on whether owners should have equal financial outcomes from a business and whether all insiders have fiduciary responsibilities. 

The roots of people's justifications here rest on where their values and morals have evolved to place emphasis. As Jonathan Haidt wrote about in the May 2012 issue of Reason, there are six clusters of moral concern that all political cultures and movement base their moral appeals: "care/harm, fairness/cheating, liberty/oppression, loyalty/betrayal, authority/subversion, and sanctity/degradation." We would need to do a psych study (or if one has been done, please forward me the information) on exactly how individuals with particular value sets would fall in this matrix, but my hypothesis is that individuals who place a heavy value on fairness and care are those seeking to maintain insider trading rules. The more liberty focused would come up with justifications for making it legal. 

We'll have to wait for more details on Mr. Ebrahim's case to come forward. Perhaps he is owning up to this so he can get his name in the papers like Rajan Gupta. Perhaps he has come to see his own activities as illegal. Perhaps he's just trapped with no way out. In any case, this story really should be about Ebrahim. Rather we should take this as an opportunity to understand why there are differences on insider trading, identify the root source concerns, and then many figure out if there is a way we can reform the rule which is nearly impossible to defend and restricts the rights of individuals to pursue life, liberty, and happiness.

Private Sector's Increasing Role in Infrastructure Investment

Posted on May 17, 2012, 9:16pm | Harris Kenny

Today my colleague Leonard Gilroy and I published a piece on Real Clear Markets entitled, "States and Cities Going Private With Infrastructure Investment," which explains "...that new infrastructure financing models and sources of capital will be the only viable option to support and sustain growth." The challenge is simple: while governments at all levels are strapped for cash and continue to feel the effects of the Great Recession, they face pressing infrastructure needs.

Enter the private sector, where investors are demonstrating a willingness and capability to partner with governments to modernize and expand infrastructure, according to Reason Foundation's recent Annual Privatization Report 2011. The report finds that the amount of capital available in private infrastructure equity investment funds reached a new all-time high last year. And since 2006, the 30 largest global infrastructure investment funds have raised a total of $183.1 billion dedicated to financing infrastructure projects; the bulk coming from U.S., Australian and Canadian inventors. In fact, eight major privately financed transportation projects were under construction in the U.S. in 2011 totaling over $13 billion.

Historically, U.S. policymaker interest in public-private partnerships has been in surface transportation, however 2012 ushered in a wave of new social infrastructure considerations (along the lines of what is already seen across in the developed world.)

For a preview of the future, just look to Puerto Rico, where innovative infrastructure financing has been a priority of Governor Luis Fortuño's administration. Prior to his tenure, massive budget deficits and weak credit ratings left the territory with a limited ability to finance infrastructure. In fact, public infrastructure investment (as a share of GDP) had been on a steep decline in Puerto Rico since 2000.

Put simply, if Puerto Rico was going to maintain-much less expand and modernize-its infrastructure, it was going to need outside help. Policymakers proactively adopted a 2009 law authorizing government agencies to partner with private firms for the design, construction, financing, maintenance and/or operation of public facilities across a wide spectrum that includes transportation, ports, schools and other asset classes. The law also established a Public Private Partnership Authority (PPPA), a new unit of the Government Development Bank, to conduct due diligence on these infrastructure partnerships and take worthy projects to market in competitive procurements.

The piece goes on to highlight promising new efforts in Chicago, Texas, Connecticut and elsewhere, continuing:

Puerto Rico isn't alone though. For example, Chicago Mayor and former Obama chief of staff Rahm Emanuel stood with former President Bill Clinton last month to propose an ambitious $7.2 billion infrastructure program that will rely heavily on public-private partnerships and private financing for a broad spectrum of projects including roads, water, transit and more. To implement this program, city policymakers recently created a new Chicago Infrastructure Trust, a nonprofit infrastructure bank that can package deals and blend public and private financing to advance projects. Early pledges of up to $1 billion in private capital from several financial institutions, including Citibank, Macquarie and JPMorgan suggest the model may be viable.

Elsewhere, both Texas and Connecticut enacted broad-ranging laws to authorize private sector financing for state and local assets in 2011. In New York, The Yonkers Public Schools recently hired a team of financial, legal and technical consultants to evaluate the potential to tap private financing to help deliver a $2 billion K-12 school modernization program. Like Puerto Rico, Yonkers has a number of aging facilities over 70 years old that need reconstruction, yet lacks the ability to undertake large-scale renovation through traditional taxes and bonds given current fiscal and financial constraints.

We ultimately conclude that, "Infrastructure represents the arteries and capillaries of our economy, and if we let those deteriorate, the heart itself will soon follow." Read the full piece available online here. For more on this policy area, read my colleague Leonard Gilroy's previous post on Puerto Rico here.

Fannie Mae Breaks Its 14 Quarter Bailout Streak

Posted on May 11, 2012, 12:02pm | Anthony Randazzo

 

Fannie Mae performed a magic trick this past quarter: they made a net profit including their dividend payment to Treasury for the first time since the fall of 2008 when they were taken into conservatorship. This week, Fannie Mae's 1Q 2012 earnings statement was actually an earnings statement. They posted a $2.7 billion profit, and were able to make a $2.8 billion payment to Treasury, covering the balance of the payment with a few hundred million built up in positive net worth, according to The Wall Street Journal. 

Last year, Fannie Mae lost a net of $16.4 billion. With the $0 loss figure through the first quarter of 2012, that means the updated complete taxpayer bailout total (3Q2008 to 1Q2012) for Fannie Mae remains:

$116.2 billion

So while a few kudos are in order for not having to go hat in hand to taxpayers for a 14th straight quarter, Fannie Mae is far from being out of the woods. Of that $116.2 billion bailout given to Fannie Mae, $22.6 billion has been paid back, leaving a remaining balance of $93.6 billion.  

There were a few different reasons that Fannie was able to turn a profit. The WSJ reports:

Part of the profit is due to gains that resulted from an upswing in interest rates earlier in the year, according to Jim Vogel of FTN Financial. He pegs the contribution to profit at around $1 billion. With rates having retreated recently, this could reverse in the current quarter.

Another factor was an improvement in credit quality leading Fannie to set aside less money to cover souring mortgages. That the company needed $2 billion in provisions for credit losses, compared with $10.5 billion a year earlier, is positive. It shows Fannie's losses are growing at a slower rate, while profit from more recent, better-quality loans should bolster results going forward.

Fannie also said the serious delinquency rate for single-family mortgages declined to 3.67% in the first quarter from 5.47% a year earlier. A slower rate of home-price declines has helped on this front. 

The challenge for the future is that the Fed is promising continued low interest rates for the coming years, and there are million of homes that will be foreclosed on in the coming years as well. Losses will likely slow, but continue to mount in coming quarters. 

Freddie Mac also had a relatively good quarter, asking for "just" $19 million to cover losses from the first three months of the year. The combined total taxpayer bailout from 3Q2008 to 1Q2012 for Fannie and Freddie is now:

$71.365 billion (Freddie) + $116.2 billion (Fannie) = $187.565 billion

Here is an updated list of Fannie Mae's quarter bailout needs:

• 1Q 2012 — $0B
• 4Q 2011 — $4.6B
• 3Q 2011 — $7.8B
• 2Q 2011 — $5.1B
• 1Q 2011 — $8.5B
• 4Q 2010 — $2.6B
• 3Q 2010 — $2.5B
• 2Q 2010 — $1.5B
• 1Q 2010 — $8.4B
• 4Q 2009 — $15.3B
• 3Q 2009 — $15B
• 2Q 2009 — $10.7B
• 1Q 2009 — $19B
• 4Q 2008 — $15.2B
• 3Q 2008 — $0B

See last quarter's post on Fannie Mae's losses here.

See full coverage of Fannie Mae and Freddie Mac here. 

 

A Long Slog Ahead on Unemployment

Posted on May 10, 2012, 4:10pm | Anthony Randazzo

There have been a lot of stories lately about the challenges of college graduates finding a job. They aren't without merit. Here is a snapshot of the problem from The Wall Street Journal:

Graduating college students face a mixed job market at best this year, and most will leave school without an offer in hand, despite an uptick in hiring by on-campus recruiters... In a study to be released Thursday, the John J. Heldrich Center for Workforce Development at Rutgers University found that recent graduates are taking awhile to find work. Only 49% of graduates from the classes of 2009 to 2011 had found a full-time job within a year of finishing school, compared with 73% for students who graduated in the three years prior.

Daunting numbers. Here is how BLS April 2012 unemployment numbers look— 

• 20 to 24 year-olds: 13.2 percent 
• Men 20 to 24 years-old: 14.1 percent
• Women 20 to 24 years-old: 12.3 percent
• New entrants to labor force: 11 percent
• Overall unemployment: 8.1 percent

The links to those numbers will update each month so if you're reading this in June 2012 or later follow the link to see what the status is.

As bad as these numbers are, the unemployment problem is really worse than this. To start, the labor force participation numbers are artificially reducing the headline unemployment number, so there is more than 8.1 percent of the work force that is unemployed. Beyond that, there are several long-term demographic trends that are weighing on the labor force today. In a column over at Reason.com this afternoon I outline these trends and frame up a pretty negative outlook for the employment market.

(Video) Interview on Reason's New Mortgage Reform Study

Posted on May 10, 2012, 2:12pm | Anthony Randazzo

Earlier this week I appeared on Fox Business to discuss our recent Reason Foundation study "Restoring Trust in Mortgage Backed-Securities." We argue that to end the government housing monopoly and reduce the $5.8 trillion in mortgage debt liability taxpayers have as a result, that Congress should authorize MBS investors to have access to more information about the mortgages they are buying, and that the mortgage industry should create a group to create clear mortgage definitions that do not rely on federal regulations like the qualified residential mortgage.

Read the full study here

See our press release here.

Also, read our summary op-eds at RealClearMarkets and the DailyCaller.

Bair on U.S. Bond Bubble Possibility

Posted on May 9, 2012, 9:09am | Victor Nava

The United States government, the Fed and financial markets don't have a great track record when it comes to spotting bubbles. The financial markets missed the dot com bubble in the late 90's and, more recently, the Fed didn't pay close enough attention to the housing bubble, which peaked back in 2006. Is it possible that we could be in the midst of yet another bubble?

There are potentially multiple bubbles starting to inflate, but In a column published last week in Fortune, former FDIC chairwoman, Sheila Bair (whom we've highlighted opinions from in the past), focuses  on one potential bubble in which we may be in the middle of. She argues that the U.S. is currently experiencing a bond bubble that is being fueled by the Federal Reserve. Bair argues:

"The Fed has maintained interest rates at or near zero for four years running, even though the financial system has been relatively stable since 2009. The Fed's actions have kept Treasury bond prices high (while keeping the government's interest costs low), but the fundamentals do not support the high valuations, given the fiscal mess we are in."          

Her argument is dead on. The Fed has maintained a zero interest rate policy since late 2008 and actively pursued policies designed to further lower interest rates on bonds (ex. Operation Twist, though it didn't quite work). What has been the result? When you look at countries in terms of their debt-to-GDP ratios, the United States (estimated at 104.8%) is among the likes of Ireland (104.9%), Portugal (110%), and Italy (120%).  But unlike our undistinguished company, we have fairly low bond yields on  10-year treasury bonds compared with the yields on comparable 10 year (9 year for Ireland) government issued bonds from the previously mentioned countries  (1.88% compared to 6.82%, 11.06%, and 5.44% respectively). This translates to higher prices on U.S. bonds (hence the inflating bubble analogy) than we should theoretically have.

Bair acknowledges that defenders of the Fed's policies will point to Japan as an example of a country, which has run up huge debts without experiencing a bond bubble burst. And in some respects we are similar to Japan, which has an astronomically high debt to GDP ratio (at 233.1%), yet only a 0.92% yield on its 10-year bonds. But Bair points out some key differences.

"Japan enjoys a trade surplus, and its debt is held domestically. In contrast we run persistent trade deficits, and foreigners hold over half our public debt. To the extent foreigners keep buying Treasuries, it is because Europe's problems are worse. In short, we are the best-looking horse in the glue factory. "

You know the country is in bad shape and there is some economic danger when defenders of the Fed's policies have to justify themselves by pointing to Japan, a country which has been economically stagnate for decades, as an economic role model. Beware the bubble bond. 

Freddie Mac Takes $19 Million More from Taxpayers

Posted on May 8, 2012, 7:01pm | Anthony Randazzo

Freddie Mac reported last Thursday it needs $19 million from the U.S. taxpayers to remain solvent after making a dividend payment to the Treasury department following first quarter 2012 financial reporting. The government-sponsored enterprise made a net profit in the first quarter, but that was before factoring in the dividend payment they have to make to Treasury for the luxury of being bailed out of losses from previous quarters. Freddie asked for a total of $19 million from Treasury for for the first quarter of 2012. 

In total, Freddie Mac has received $71.365 billion in bailout money from the U.S. Treasury since FHFA took the GSE into conservatorship in late August 2008. Here is the most recent breakdown of taxpayer quarterly checks for Freddie Mac:

• 1Q 2012 — $0.019 billion
• 4Q 2011 — $0.146 billion
• 3Q 2011 — $6 billion
• 2Q 2011 — $1.5 billion
• 1Q 2011 — $0
• 4Q 2010 — $0.5 billion
• 3Q 2010 — $0.1 billion
• 2Q 2010 — $1.8 billion
• 1Q 2010 — $10.6 billion
• 4Q 2009 — $0
• 3Q 2009 — $0
• 2Q 2009 — $0
• 1Q 2009 — $6.1 billion
• 4Q 2008 — $30.8 billion
• 3Q 2008 — $13.8 billion

Last quarter Freddie asked for $146 million, so at least their asks have been declining since the third quarter of 2011. (See full details here.)

See our full coverage on Fannie Mae and Freddie Mac here.

Video: French and Greek Elections Were Not Proof Austerity Doesn't Work

Posted on May 8, 2012, 10:18am | Anthony Randazzo

Over the weekend France elected a new president, the Greeks shuffled their parliamentary make up, and Germany's leading party lost some local elections. The votes are viewed as a push back against the way European governments have handled the continent's sovereign debt crisis. Some analysts have been quick to argue that this proves austerity doesn't work. 

And that is the basis of the debate in the video below, a panel discussion from RT last night. However, I argue that this doesn't prove much of anything about austerity in general. Citizenry are not to be blamed for being upset with austerity measures. The whole point is that it doesn't feel good to get your fiscal house in order after a spending binge. The democratic reaction doesn't suggest the viability of the plan's capacity to achieve its goal of reducing government debt. 

While the elections don't say anything about the viability of the idea of austerity, at least the Greek election suggests that the form that austerity has taken in Greece is not the best approach. The big winners in the parliamentary elections were groups that despise outsiders and want to take back control of their country. Their win was the Greek people (at least the very low 65 percent of them that turned out to vote) saying it is unfair for Greece to take sharp budget cuts while still being saddled by the Euro so that the rest of Europe can avoid GDP losses that would occur if Greece left the European monetary union today. Eventually they will have to leave, but for now Europe gets to wall off that threat and plan for an orderly break.

In France, the election could also be seen as a nationalistic movement. All indications are that the vote was more anti-Sarkozy then pro-Hollande. There is a bit of populism that likes his tax the rich mentality. But Hollande seem to win over France with his Mr. Normal pitch vs. Sarkozy's flashy style that has worn out its welcome in France. Moreover, there could be some frustration in France that Sarkozy allowed Germany so much run of the house on the debt crisis negotiations. Germany will now have to deal with a more nationalistic government when sorting out coordinated actions to bail each other out.

(Side note on Greece: it is unlikely they will be able to form a government that lasts. The two parties receiving the most votes only form about 30 percent of the parliament, making it necessary for a big tent coalition to work out in order to avoid a new election. And even if that happens, such a coalition will be very susceptible to the need to make big decisions on budget cuts and handling negotiations with the rest of Europe. Further complicating the matter is the scatter shot approach that the Greek populace took in their choice of representatives this year. Not only did a far-right, neo-nazi group get 20 seats, but a far-left, old line communist group also got more votes then they'd seen in a long time. History does not need to be consulted that far back to suggest that the combination these two failed ideologies mixing as one is not likely to be the chemistry needed to get Greece on solid footing.)