econscius

Posts Tagged ‘Federal Deficit’

$26 Billion Failed To Stop Housing Market Decline

In Economy, Housing Bubble, Obama Administration, Tax Breaks on November 13, 2011 at 12:23 am

I recommend a Marketwatch story, http://www.marketwatch.com/story/the-great-26-billion-real-estate-swindle-2011-11-08 , which follows up on the home purchase tax credit “Stimulus” programs of the Obama Administration.

We are reminded about the $8,000 tax credits that were mailed out to home buyers in 2009 and 2010.  Using recent zillow.com data, we see most of these home buyers are worse off, even with the credit, because of the continued slide in home values.  That is sobering: the government spent $26 billion on home buyer subsidies and the average qualifying buyer made a losing bet even with the government money.  The average home dropped by more than $14,500 since the time of the tax credit, which more than offsets the $8,000 tax credit.  Needless to say, the taxpayer is worse off, too.

The graph below demonstrates this.  The tax credits helped cause a temporary halt of the decline in 2009 as home prices briefly increased.  Then home values went back to their decline after the credit ended in June 2010.  The real estate market had not yet cleared.  All that government money only delayed the inevitable, actually extending the housing recession by pushing back the time when housing would hit its trough. 

 

 

Graph from Wikipedia Commons, retrieved 11/12/11, http://en.wikipedia.org/wiki/File:Median_and_Average_Sales_Prices_of_New_Homes_Sold_in_the_US_1963-2010_Monthly.png

Picture from Wikipedia Commons.

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Death By A Thousand Increases: S&P Lowers USA to AA+

In Economy, Federal Deficit on August 5, 2011 at 11:45 pm

No American can be pleased with tonight’s announcement Standard & Poor’s is lowering America’s credit rating, for the first time ever, from the gold standard “AAA” to “AA+”.  I refer readers back to my July 28 post on why an S&P downgrade has been looming for years: https://econscius.wordpress.com/2011/07/28/us-aaa-credit-rating-downgrade-was-expected/.  There is no joy in being proven right.

We Americans see ourselves as a “shining city on a hill”.  We developed a continent and built an economic empire.  America quite literally saved Europe from itself in WWI and we saved the world in WWII.  American economic might powered our own military and supplied our Allies in Britain, China, the Soviet Union and de Gaulle’s Free French.  The United States bankrolled international organizations like the IMF and World Bank.  Wall Street was the center of world finance.  Hollywood was the center of entertainment.  America’s corporations ruled many industries.  So many people loved the very idea of America they crossed oceans and deserts to immigrate here.  The USA’s economic wherewithal made possible large garrisons in Europe, Japan, Korea and elsewhere to initiate Pax Americana and win the Cold War. 

This downgrade is a hit to our very self-image of America as #1.  Canada is now more highly rated than the USA.  Sure, the Canadians are really nice people, play great hockey, and provided us with cool rock bands like Rush and Night Ranger, but it is an affront to our American psyche to think of Canadians being a better credit risk.

How will the nation respond?  Will we waste our time name-calling and angling for partisan advantage?  Will Republicans only blame Obama and will Democrats only blame G.W. Bush?  Even a cursory look at the Public Debt graphs below shows the deficit grew in fits and starts since WWI, but exploded the past 12 years through two recessions and under Presidents and Congresses of each party.  I assure you arguing about Bush vs. Obama will not get us back to an “AAA” rating.

People will disagree about whether taxes should go up or spending should go down.  When asked if you support a program: ask yourself if you would personally pay more taxes for it?  In some cases, I would give an unequivocal “yes”.  In many others, it is not worth it.  The problem is how we too often have said “yes, I like high-speed rail and I like the idea so much I would be willing to spend $500 billion of SOMEONE ELSE’S MONEY for it.” 

How did we get here? 

This downgrade to AA- has been death by a thousand increases.   It is the result of literally thousands of programs – big and small – mostly well-intentioned… but not fully funded.  It seems many Americans perhaps took our nation’s greatness a bit too much to heart.  We let our seemingly ever-increasing prosperity allow us to be overly optimistic about paying for today’s bills.  We could pay it tomorrow because things always get better in America!  Or perhaps we weren’t really paying attention and our politicians skipped the tough choices and punted the costs to the future. 

America looked to Europe and copied many European social programs.  But we did not copy European levels of taxation.  We wanted to have our welfare state and eat it, too.  We spent for a War on Drugs.  We subsidized our farmers, exporters and college students and all manner of other things, some useful, some not so much.  We dipped deeply into the public till for generous mortgage interest deductions.  Some of us probably borrowed more than we otherwise would – and more than we knew we should – because Uncle Sam sent us a bigger tax refund check each spring if we borrowed more.  Besides, homes always go up in value, right?

We borrowed to cover our wars.  WWI and WWII were extremely expensive in terms of GDP.  Korea, Vietnam, Cold War, Gulf War, Iraq, Afghanistan and many lesser military adventures like Grenada, Lebanon, Panama, Kosovo, Libya all have been costly.   Military strength meant fiscal weakness.

Looking at the $14.3 Trillion Public Debt is seeing only part of the problem.  A sobering look is provided by considering the “off the books” debt.  As discussed by bond investor Bill Gross of PIMCO, the present value of the future liabilities of the United States is a staggering $66 trillion. [1]   Divide $66 trillion by 308 million Americans and the per capita share is a sobering $214,300 per person.  Think about that!  If you have a family of four, your family’s share of the Public Debt is about $186,000 but your share of future Medicare, Medicaid and Social Security is $857,000.  That is over a million dollars per family.  We have made promises – which should be kept – to elderly Americans.  Paying for these promises is tough now and will not get any easier as more Baby Boomers retire.

It is up to you: do you want to cut spending or do you want to pay more in taxes?  Or both?  Whatever we decide, we have to decide on something.  We need big, serious changes.  We need to get our spending under control or S&P will someday lower us again… to “AA”, “AA-” and so forth.

The full text of S&P’s downgrade is available here: http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8

[1] http://www.pimco.com/EN/Insights/Pages/Kings-of-the-Wild-Frontier.aspx

Chicago & New York “Fall Behind” Shanghai & Beijing Without Amtrak?

In Amtrak, China, Federal Deficit, High Speed Rail, Obama Administration on July 30, 2011 at 2:51 am

Imagine increasing the population of the United States by fourfold.   Then squeeze these 1.3 billion imagined Americans into a smaller area:  the area east of the Missouri River south to the Gulf of Mexico.

Keep metro New York City in the same place with the same size metropolitan area but double the population of Staten Island. 

Keep Chicago where it is but increase its metro population by 2.5 times (from 9.5 million to 23.1 million).  Then squeeze this mega Chicago into a much smaller area about three times more densely populated than New York City.  No longer is Chicagoland sprawling but instead a tightly packed, vertical city. [1]

Next, remove most of the cars.  In fact, whereas the United States you know has nearly one car for every man, woman and child, our imagined United States would have only about one car per twenty people. [2] [3]  Take away America’s automotive culture, leaving a society where few drive but most aspire to someday drive.  Essentially, it is a lot like the United States automotive culture circa 1920.  Lastly, remove most of America’s passenger air travel. 

What we have imagined is a lot like China.  The New York -2.5X Chicago pairing is very close in actual distance and imagined densities and populations to the Beijing-Shanghai endpoints on the new Chinese high-speed railroad. 

We also need to imagine a feeder network of other high-speed trains in our imagined 1.3 billion person United States.  Imagine we obtain this extra population by plunking down an extra 200 metro San Antonios anywhere we can find space east of the Mississippi, keep our imagined Chicago of 23.1 million and supersize all other major American cities.  The Chinese municipality of Chongqing has 28.8 million people – about five times the population of metro Miami – so let’s substitute Chongqing for Miami and build a train there, too. [4]

Some believe higher speed Amtrak passenger trains are essential for the United States.  President Obama has repeatedly pushed for high-speed Amtrak, saying we will “fall behind” China if we do not.  Obama warned, “In the race for the future, America is in danger of falling behind. That’s just the truth.” [5]  The President said, “We should be able to agree now that it makes no sense for China to have better rail systems than us”.  On another occasion, Obama stated, “They’re [China] playing for first place, and we need to play for first place.” [6]

But the imagined America example above frames up how China is not like the United States.  Few Chinese can afford a car, China has few expressways and little air travel.  Many Chinese already use conventional passenger rail systems and are habituated to taking a (slow) train between cities.  China is arguably ideal for intercity passenger rail because it is much more populous than the United States and Chinese cities are closely packed along its eastern and southern seaboards and in the Yangtze River valley.   If you live in suburban Tampa and want to visit your parents in suburban Orlando, you can drive your car there in just over an hour, easily find free parking on your parent’s driveway and use your car around town.  If you lived in a Shenzen, a Chinese city of 10 million, and want to visit your parents in nearby Hong Kong, you and your parents are highly unlikely to own a car and most likely live in high-rise apartments lacking parking.  You’d have little choice but a bus or train. 

Amtrak’s Acela rides the most successful of Amtrak’s routes and it is no coincidence the Acela travels through America’s densely populated Northwest Corridor between some of the few American cities where many residents do not own cars.  Wisconsin Governor Scott Walker received much grief for canceling a proposed Milwaukee to Madison high-speed rail line due to cost concerns.  Yet, metro Madison had 561,505 residents in 2010 and metro Milwaukee had 1.6 million [7], not even remotely close to the mega-cities on China’s lines. 

Should we mimic everything China does?  China imprisons those who criticise its government!  China has a fast-growing economy and many positive attributes but the idea that China’s rail system poses a ‘threat’ the United States will “fall behind” is quite a stretch.  Western Europe is also much more densely populated than the United States, meaning the European experience with high-speed trains is not instructive for America.

China’s new rail system is hardly a total success.  It suffered cost overruns, corruption in awarding of contracts [8] [9], priced out customers with higher than expected ticket prices [10], and safety lapses such as last Saturday’s train collision that killed 39 and injured 210 people [11] [12].

Even a high-speed Amtrak proponent, Robert D. Yaro, conceded, “At an estimated $500 billion, a national high-speed rail system won’t come cheap.” [13]  At a time when the nation is suffering a debt crisis with annual budget deficits north of $1 Trillion, can we afford another half trillion for Amtrak?

In a capitalist society like the United States where a number of profitable, well-run freight railroads already run networks between all the major cities, we have to ask why Union Pacific or BNSF aren’t clamoring to do their own high-speed passenger rail trains on the tracks they already own?  If you believe large corporations will always try to make a profit, why wouldn’t CSX and Norfolk Southern be planning their own passenger rail lines if they thought the usage would justify the investment?

China administrative.svg

[1] City data includes 2,812 people/sq. mile in metro NY, 3,023/sq. mile in Beijing municipality and 9,403/sq. mile in Shanghai Municipality.  Note regions like Tibet, Xinjiang and Inner Mongolia in western and northern China are sparsely populated, largely desert, arid and mountainous (e.g. Tibet 3 million people, Xinjiang 22 mil., Inner Mongolia 25 mil.)  http://en.wikipedia.org/wiki/China.  This link is also the source of the public domain map of China.  Shanghai Municipality population is 23.1 million http://en.wikipedia.org/wiki/Shanghai.  Beijing Municipality 19.6 million http://en.wikipedia.org/wiki/Beijing.  New York 18.9 million http://en.wikipedia.org/wiki/New_york . Chicago, 9.5 million http://en.wikipedia.org/wiki/Chicago

[2] The small number of cars produced in China:  http://en.wikipedia.org/wiki/Chinese_car

[3] “Overall, there were an estimated 254.4 million registered passenger vehicles in the United States according to a 2007 DOT study.” http://en.wikipedia.org/wiki/Passenger_vehicles_in_the_United_States

[4] http://en.wikipedia.org/wiki/Chongquing and http://en.wikipedia.org/wiki/Miami.

[5] http://abclocal.go.com/wtvd/story?section=news/local&id=7826410 

[6] http://www.businessweek.com/magazine/content/10_48/b4205042094905.htm

[7] http://en.wikipedia.org/wiki/Milwaukee,_Wisconsin and http://en.wikipedia.org/wiki/Madison,_Wisconsin.  These two small metros are sprawling and lack a subway to bring riders to rail hubs.

[8] “Millions of dollars in funds for China’s high-speed rail link between Beijing and Shanghai were embezzled in 2010, the state audit agency has said.  Officials said 187m yuan ($28.5m; £17.5m) had been stolen by individuals and construction companies. The judicial authorities are investigating.” http://www.bbc.co.uk/news/world-asia-pacific-12828057

 [9] “Those concerns come as Beijing is investigating corruption accusations against high-ranking railway officials and allegations that some unqualified companies may have been awarded contracts for part of the $400 billion project.” http://articles.economictimes.indiatimes.com/2011-07-27/news/29820696_1_high-speed-rail-train-collision-railway-officials

[10] http://www.infrastructurist.com/2011/01/19/is-chinas-high-speed-rail-pricing-out-passengers/

[11] http://www.telegraph.co.uk/news/worldnews/asia/china/8658959/Anger-in-China-as-bodies-fall-from-carriages-during-train-crash-clean-up.html

[12] http://www.nytimes.com/2011/07/27/world/asia/27china.html

[13] http://www.nytimes.com/roomfordebate/2010/10/13/will-we-ever-have-high-speed-trains/an-investment-we-have-to-make