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Friday, August 26, 2011

The Payroll Tax Cut: A Luxury?

Rep. Eric Cantor (R-Va) opposes continuing a tax cut. It is not that which was enacted under George W. Bush that disproportionately benefits the top brackets. That tax cut is good, presumably because it supports the growth of jobs. The tax cut opposed by the U.S. House Majority Leader pertains to the payroll tax. Workers’ contributions to social security were cut from 6.2% to 4.2% until the end of December 2011. A spokesman for the Majority Leader argues that if “the goal is job creation, Leader Cantor has long believed that there are better ways to grow the economy and create jobs than temporary payroll tax relief.” However, it could be argued that whereas the tax cuts at the upper income brackets tend to be saved because the wealthy already have the means to purchase what they want, workers tend to spend any extra disposable income precisely because they don’t have the means to buy even all that they need, particularly in the case of families. Moreover, workers would feel the end of a tax cut more than a rich person would.

It does appear that the Republican party’s support of tax cuts hinges on the financial interest of the rich—tax cuts are not created equal. This asymmetry eclipses the party’s ideological goal of smaller government, for otherwise any tax cut would be sought because it would mean less government taking as well as the possibility of starving government spending. Furthermore, the asymmetry trumps a priority on reducing a deficit that was in 2010 over $1 trillion—that’s the annual addition to the U.S. Government’s debt (which was around $14 trillion at the start of 2011). On the heels of S&P downgrading that debt to AA, continuing any tax-cut, even to prop up the economy, is foolhardy. Only a fool disregards tomorrow for today.

It is possible that Freddie Mac and Fannie Mae could have done more for the economy by allowing homeowners in trouble to refinance to the lower interest rates in 2010 and 2011 than would have been lost from ending the tax cuts. If so, it could be that we could do better in lowering deficits while stimulating the economy. Even with some drag on the economy, the numbers on the baby boomers retiring suggests that the social security fund cannot afford the payroll tax cut in 2012. In fact, it could be that the fiscal impacts of government policy are less significant on the overall economy than on the deficits and debt, which are more immediate to the government (being of the government). The obsession on “revenue,” or whether to continue tax cuts, may itself be excessive with respect to economic growth (and even jobs), while the lack of attention to public debt as a priority may be woefully negligent and irresponsible, whether by Congress, the media, or the citizenry itself.


Jennifer Steinhauer, “For Some in G.O.P., a Tax Cut Not Worth Embracing,” New York Times, August 26, 2011. http://www.nytimes.com/2011/08/26/us/politics/26dems.html

Social Media in Protests and Criminal Activity

Officials from the E.U. state of Britain met with representatives of Twitter, Facebook and Blackberry on August 26, 2011 “to discuss voluntary ways to limit or restrict the use of social media to combat crime and periods of civil unrest.” Theresa May, the state’s home minister, said the aim of the meeting was to “crack down on the networks being used for criminal behavior.” However, reducing the protests, rioting, and looting to such behavior ignores the point that civil unrest can include political protest. So it may be disturbing to some that the discussion, according to some who were present, “was still aimed at reeling in social media and strengthening the hand of law enforcement in gathering information.” What would stop the police from gathering information on people taking part in a political protest against police brutality, for example? It would be convenient for a police department to classify a march as “criminial behavior” in breaching the peace, or simply collect information without any subterfuge.

Jo Glanville, the editor of Index on Censorship, observed, “You do not want to be on a list with the countries that have cracked down on social media during the Arab Spring.” Indeed, Iran sent a human rights delegation to Britain to study human rights violations.” It is worth pointing out that the E.U., of which Britain is a state, has a charter of human rights. Yet as Gordon Scobbie, a senior police employee pointed out, the police’s duty to protect people from being harmed by others should be balanced with human rights rather than simply disregarded. Innocent people in Britain were afraid for their housing and lives during the riots, and it would surely be moral for the police to have protected them. The decisive question is perhaps whether officials’ special access to social media could effectively be limited to this moral purpose, which is delimited by criminal rather than political behavior.

As Lord Acton said, absolute power corrupts absolutely. If the state gains too much control over individual citizens, that alone can act as a pressure-cooker that could explode in political violence and even revolution. What would stop a government from using its inroads in social media to defend itself from the political opposition? Furthermore, to the extent that social interaction and liberty are things that should be valued in a society (and republic), might decreased privacy, such as is already the case on Facebook, be counterproductive in the long run? Might even the potential invasiveness lead people to feel less secure, and thus more susceptible to joining efforts to topple the regime itself? In other words, too much institutional control of individuals can backfire and give rise to a self-fulfilling prophesy.


Ravi Somaiya, “In Britain, A Meeting on Limiting Social Media,” New York Times, August 26, 2011. http://www.nytimes.com/2011/08/26/world/europe/26social.html

Thursday, August 25, 2011

Refinancing Mortgages: Only for the Rich?

According to the U.S. Government, prices of homes with government-backed mortgages fell 5.9% in the second quarter of 2011 from a year earlier. This was the biggest decline since 2009, which was on the heels of the credit crisis of late 2008. In 2011, more than one in five homeowners with mortgages owed more than their homes are worth. That translates to at least 10.9 million families, almost none of whom could refinance. While the Treasury Department and Federal Reserve were able to pump hundreds of billions of dollars into American banks, federal programs to assist homeowners have been regarded as ineffective, according to the New York Times. Out of the $45.6 billion in TARP funds (the total being $800 billion) set aside to help struggling homeowners, only $22.9 billion had been spent by August 2011. Fewer than 1.7 million loans had been modified under federal programs as of 2011. Just over 760,000 permanent mortgage modifications had been initiated under the government programs while at least 5.5 million mortgages were in delinquency or foreclosure. Andrea Risotto, a spokesperson at Treasury, said that the unused portion of the TARP funds for homeowners would be used to reduce the deficit.

So it is perhaps not a surprise that even though mortgage interest rates were around 4%, the Obama administration was hedging in 2011 on whether to direct Fannie and Freddie to allow the existing mortgages guaranteed by those agencies to be refinanced. David Wessel observes that whereas taxpayers bore all the downsides of nationalizing the two housing guarantors, the two firms and their regulators have consistently resisted helping taxpayers over their heads on their mortgages.

Even though the mortgage servicers and banks had been at the very least complicit in the liar’s loans of many of the sub-prime mortgages, the Obama administration was not sure even as late as mid 2011 whether homeowners behind in their payments should be able to refinance. According to the New York Times, despite “record low interest rates, many homeowners have been unable to refinance their loans either because they owe more than their houses are now worth or because their credit is tarnished.” Yet it is “unclear . . . whether people who are delinquent on their mortgages would be eligible or whether lenders would administer it.” So it would appear that only homeowners who don’t need the refinancing will be able to get it.

The priorities showing through both with TARP and the refinancing ideas being floated in 2011 may reflect the anti-borrower bias Countrywide and other mortgage originators, whose meagerly educated sales force and managers believed that the struggling sub-prime borrowers were lazy and dishonest idiots who do not deserve a break from the “sacred contracts” (even if constructed as a liar’s loan—meaning a lender lying about the borrower’s income to secure a double commission). In other words, the imbalance concerning the treatment of the banks and the borrowers by the U.S. Government is consistent with the bankers’ selective attention to culpability. Most likely, the sub-prime crisis had multiple contributing sources. Were the government’s responses to reflect this, both the financial institutions and the borrowers would be given some leeway so as to obviate a collapse of the entire economy. Both the major banks and the struggling homeowners would be attended to because the crisis was larger than any one of them. For the government’s priorities to reflect one of them suggests disproportionate influence, which ultimately is detrimental to the republic itself.


Shaila Dewan and Louise Story, “U.S. May Back Refinance Plan for Mortgages,” the New York Times, August 25, 2011. http://www.nytimes.com/2011/08/25/business/economy/us-may-back-mortgage-refinancing-for-millions.html

David Wessel, “Tracking Missteps Behind World’s Economic Slump,” Wall Street Journal, August 25, 2011. http://online.wsj.com/public/page/news-tech-technology.html?mod=WSJ_topnav_tech_main

Wednesday, August 24, 2011

States Bypassing the E.U.

In August 2011, opposition was mounting among state governments to the Finnish-Greek bilateral deal wherein Greece would pay Finland 500 million euros in cash (in an escrow account) as collateral against Finnish loans. Angela Merkel of the state of Germany objected to one state getting extra collateral. Indeed, other state governments are seeking similar deals as Finland, which could undermine Greece’s ability to repay (and the “preferred creditor” status of the IMF). Furthermore, much of what the state of Greece owned at the time had already been earmarked to be sold for privatization proceeds.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.