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A step in the right direction, but that still leaves a trillion-dollar deficit*

Posted by B. Daniel Blatt at 1:12 am - February 12, 2011.
Filed under: 112th Congress,Big Government Follies,Tea Party

Welcome Instapundit Readers!!

If our elected leaders were responsible guardians of the public treasury, those officials proposing budget cuts more drastic than some dubbed “draconian” would be seen not skinflints, but as skinflints.  These cuts barely scratch the surface of our fiscal problems.  With deficits like those we’ve been running, a $100 billion-dollar cut is little more than a rounding error.

That said, I’m pleased the Tea Party has scored a major victory in pushing House Republicans to cut at least that amount  ”in spending this fiscal year“, but that still leaves us with a deficit larger than any in the Bush years (when that good man’s detractors, including your humble bloggers, were faulting congressional Republicans for their big-spending ways).

(Hill article via Instapundit.)

Indeed, the deficit this year will be at least twice that of any comparable period when we had a Republican president and Congress.  To be sure, these cuts represent a step in the right direction, but given the size of the deficit, they amount to little more than a few drops in a very, big bucket.

*and then some.

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37 Comments

  1. Of course, the carrying on about the “extreme” cuts hasn’t even begun yet. The Democrats have only made a few statements about the cuts being extreme, but we can expect a lot more, including a lot of dramatic stories in the press about how so many people will lose their jobs or their benefits or whatever.

    What bothers me so much about all of this, though, is that so many of the Republicans are acting like $100 billion in cuts is a huge thing. In Washington, it’s a huge thing, but with a $1.5 trillion deficit, it’s still not nearly enough.

    Comment by Kurt — February 12, 2011 @ 1:25 am - February 12, 2011

  2. $100 billion is nothing.

    Would anyone seriously argue that Clinton’s FY2000 budget was “draconian”?

    Then why, in this hour of national financial emergency under crushing $1.5 trillion deficits, can we not simply go back to that budget in all domestic spending matters? That alone (aside from defense matters, as we are also now in a time of war) would save SEVERAL hundred billion. Even without reforming entitlements.

    Comment by ILoveCapitalism — February 12, 2011 @ 1:30 am - February 12, 2011

  3. Kurt, my point exactly.

    Comment by B. Daniel Blatt — February 12, 2011 @ 2:06 am - February 12, 2011

  4. For what it’s worth, my plan for reducing the deficit:

    1: Reduce non-defense discretionary spending all the way back to Clintonian levels, then limit its growth to inflation.

    2: Withdraw troops from nonessential areas, and do make some defense cuts.

    3: The most implausible, but still effective one. Fold Medicare, Medicaid, and Social Security into “General Welfare Block Grants”. This allows a fixed, predictable budgeting instead of runaway entitlements, promotes state creativity, and saves money.

    Comment by NYAlly — February 12, 2011 @ 10:07 am - February 12, 2011

  5. Harry Reid and Chuck Schumer are already ramping up the hysteria, comparing these relatively modest cuts to amputating limbs. Democrats are like heroin junkies when it comes to spending.

    Comment by V the K — February 12, 2011 @ 10:10 am - February 12, 2011

  6. [...] noted by B. Daniel Blatt, it might be great start but it is nothing more than a drop in the bucket. This is a point worth considering, especially when you consider that the deficit for this year if [...]

    Pingback by Tea Partiers rack up first budgetary victory. | The Western Experience — February 12, 2011 @ 10:15 am - February 12, 2011

  7. I love Tea Party America!

    All the Ruling Class is doing is looting, pillaging, plundering, lying, deceiving and killing babies both inside and outside the womb.

    Tea Party America has had enough of the devastating destruction; we want our lives back!

    Comment by Susan — February 12, 2011 @ 11:42 am - February 12, 2011

  8. NYAlly, good plan! The devil will be in the details, but it sounds good thus far.

    Comment by ILoveCapitalism — February 12, 2011 @ 1:26 pm - February 12, 2011

  9. [...] This post was mentioned on Twitter by Nally Voik, DNC Fail!. DNC Fail! said: A step in the right direction, but that still leaves a trillion-dollar deficit* http://bit.ly/dFg6RJ #tcot #tlot [...]

    Pingback by Tweets that mention GayPatriot » A step in the right direction, but that still leaves a trillion-dollar deficit* -- Topsy.com — February 12, 2011 @ 3:45 pm - February 12, 2011

  10. I agree, ILC, but I’d add that the real devil is not just in the details but in trying to do anything about Social Security and Medicare. I still remember what happened in 2005 when Bush proposed changes to reform Social Security. The Democrats (and enough Republicans) wouldn’t let it go anywhere. It could have been a starting point for beginning to talk about reform, but instead the Democrats and their allies in the media used it as another tool for trying to bludgeon Bush at the start of his second term.

    Comment by Kurt — February 12, 2011 @ 3:59 pm - February 12, 2011

  11. Hi ILC,
    “Then why, in this hour of national financial emergency under crushing $1.5 trillion deficits, can we not simply go back to that budget in all domestic spending matters?”
    Because this will amount to large cuts in government spending in these areas, given the subsequent increases in spending that have happened over the last ten years. As polls show, http://pewresearch.org/pubs/1889/poll-federal-spending-programs-budget-cuts-raise-taxes-state-budgets, people like the idea of cutting government spending right up to the point where you start mentioning programs. Once you do that, it gets ugly, real fast. There are good reasons why the Rep leadership wanted the appearance of meaningful cuts rather than the reality of them. They are unpopular, when you start making them concrete. Of course, people want more spending and less taxes as well, so go figure… It maybe the case that the electorate will appreciate the pain that Reps will want to push upon them, but my guess is that they will be rewarded the same way that Dems were rewarded at the last election, if they succeed.

    Comment by Cas — February 12, 2011 @ 5:14 pm - February 12, 2011

  12. I’m on record here as a huge Bernanke-basher; his policies have been so stupid and destructive. But, I gotta give credit where it is due. The other day, Bernanke said something sensible. With CNBC speaking, and quoting him:

    Official Congressional budget estimates understate the peril of rising debt, Fed chair Ben Bernanke told the Budget Committee on Capitol Hill today…

    From Bernanke’s prepared remarks:

    “…the unsustainable trajectories of deficits and debt that the CBO outlines cannot actually happen [i.e. are too optimistic, even being as bad as they are], because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit. One way or the other, fiscal adjustments… must occur… The question is whether these adjustments will take place through a careful and deliberative process… or… as a rapid and painful response to a looming or actual fiscal crisis.”

    Bernanke explained that the Congressional Budget Office’s calculations miss an important reality. *As the government’s debt and deficits rise, the economy will slow down*—an effect not taken into account by the CBO…

    Here’s Bernanke on the effect of rising debt:

    “Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living. Moreover, diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates… caus[ing] debt-service payments on the federal debt to grow even faster…”

    Emphasis added. But there you have it, from Mr. Inflation himself: government deficits and debt burden the economy. Something the Tea Party knows intuitively.

    Comment by ILoveCapitalism — February 12, 2011 @ 5:40 pm - February 12, 2011

  13. “Then why, in this hour of national financial emergency under crushing $1.5 trillion deficits, can we not simply go back to that budget in all domestic spending matters?”
    Because this will amount to large cuts in government spending

    Duh… that’s the goal.

    people like the idea of cutting government spending right up to the point where you start mentioning programs

    Which does not answer my question, “Would anyone seriously argue that Clinton’s FY2000 budget was “draconian”?”

    It’s not a question of what people might “like” according to polls. It’s a question of fiscal and economic reality – or what is necessary to save the Republic. Our leaders are supposed to lead. (There might even be a term for it… I think it’s called “leadership” or something.)

    Comment by ILoveCapitalism — February 12, 2011 @ 5:45 pm - February 12, 2011

  14. Here is one example of why I normally regard Bernanke as a dangerous nut:

    In congressional testimony on Wednesday, Federal Reserve Chairman Ben Bernanke said “overall inflation is still quite low and longer-term inflation expectations have remained stable.”

    Like disease, inflation is a process. The visible symptoms come last. Inflation starts with the Fed expanding the monetary base… the new money hits asset markets (the fun part – everyone’s stock and home values are goosed)… then commodity markets… then the PPI… then the official, government-measured CPI… then wages (the “wage-price spiral”) the very last of all. By the time inflation hits the CPI at step 5, it is already too late to stop it without great pain (the moral equivalent of heart surgery). We are a little over halfway through the cycle (exiting step 3, entering step 4) and Bernanke seemingly has no idea.

    Comment by ILoveCapitalism — February 12, 2011 @ 6:05 pm - February 12, 2011

  15. Like disease, inflation is a process.

    ILC, you would probably like the story on Thomas Hoenig, the President of the Kansas City Federal Reserve Bank. The guy is sharp and a realist, and points out exactly what you’re talking about — inflation is a multiyear process.

    Comment by North Dallas Thirty — February 12, 2011 @ 8:31 pm - February 12, 2011

  16. My bad. The story is in the February 14th edition of Time, and is of course, only available by pay now.

    Comment by North Dallas Thirty — February 12, 2011 @ 8:32 pm - February 12, 2011

  17. people like the idea of cutting government spending right up to the point where you start mentioning programs

    People would like the idea of cutting programs more if politicians explained to them exactly how large the tax increases would have to be to sustain the bloated programs. Currently, that would be about a fifty percent across-the-board tax hikes for all income levels.

    Comment by V the K — February 12, 2011 @ 9:38 pm - February 12, 2011

  18. They are unpopular, when you start making them concrete. Of course, people want more spending and less taxes as well, so go figure…

    Of course. But that isn’t possible – it was only possible for politicians of recent decades by kicking the contradiction down the road, then building statues of themselves and retiring.

    So now we’ve almost arrived at the absolutely inavoidable forced-reckoning point. And the question is, what do people really want: tax cuts or spending cuts? That isn’t measured by polls, but by elections. What is more likely to cost an incumbent his job, raising taxes or cutting programs? I think only very deep cuts to SSI and Medicare are more politically perilous than raising taxes.

    Comment by hitnrun — February 12, 2011 @ 11:55 pm - February 12, 2011

  19. Hi ILC,
    “Which does not answer my question, “Would anyone seriously argue that Clinton’s FY2000 budget was “draconian”?”” It does make them draconian in 2011. Would you like to wind back defense spending to Clinto era levels? In any case, we are looking at cutting monies by approx 30% +. So, I think that is pretty major.
    Also, what I find interesting is that the cuts are supposedly easy–so called, because they are aimed at programs that are meant to foster future growth, like energy efficiency, science research, infrastructure, WIC. or aimed at regulating the health of the nation like the CDC or food inspections. It is not clear to me that this path makes any real economic sense. I would much rather prefer that the government take away subsidies from business production (especially agriculture, including ethanol subsidies), and maybe scrap certain tax breaks that distort incentives like the mortgage interest deduction.

    Hi hitnrun,
    “tax cuts or spending cuts? That isn’t measured by polls, but by elections… I think only very deep cuts to SSI and Medicare are more politically perilous than raising taxes.”
    You could be very right in that regard. We will see, because my guess is that we are moving to a government shutdown that will dominate the next election cycle… what think you?

    Comment by Cas — February 13, 2011 @ 3:36 pm - February 13, 2011

  20. hey are aimed at programs that are meant to foster future growth

    Your naivete is touching if you really believe that’s the purpose of the pork barrel spending you list.

    The private sector is plenty capable of taking care of its future growth on its own, thank you.

    Comment by V the K — February 14, 2011 @ 8:31 am - February 14, 2011

  21. And considering deficit spending is currently >40% of the Federal Budget, a 30% spending cut seems pretty reasonable.

    Comment by V the K — February 14, 2011 @ 10:59 am - February 14, 2011

  22. Hi VK,
    One man’s pork is another’s essential spending, and one man’s essential spending is another’s pork…

    Comment by cas — February 14, 2011 @ 7:34 pm - February 14, 2011

  23. One man’s pork is another’s essential spending, and one man’s essential spending is another’s pork…

    Only in the world of people trying to justify pork spending.

    It’s your basic subjectivist argument, the fallback of the cornered. “Well who can know what truth really is? It’s all subjective.” No actually… it isn’t. In this case, we have a Constitution that delimits what can and can’t be spent on, what is and isn’t essential for government.

    And in case there is any argument about that, we have Founders who explained in speeches and papers what they meant, when they wrote it in the Constitution. James Madison is generally recognized as the Father of the Constitution. He said:

    I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on the objects of benevolence, the money of their constituents.

    That’s pretty clear. If spending doesn’t fall directly under an enumerated (by Madison et. al.) power of Congress or the original Federal government… it’s pork. Question settled.

    But here’s more: http://econfaculty.gmu.edu/wew/articles/fee/constitution.html

    A few years later, James Madison’s vision was expressed by Representative William Giles of Virginia, who condemned a relief measure for fire victims. Giles insisted that it was neither the purpose nor a right of Congress to “attend to what generosity and humanity require, but to what the Constitution and their duty require.”

    In 1827, Davy Crockett was elected to the House of Representatives. During his term of office a $10,000 relief measure was proposed to assist the widow of a naval officer. Davy Crockett eloquently opposed the measure saying, “Mr. Speaker: I have as much respect for the memory of the deceased, and as much sympathy for the suffering of the living, if there be, as any man in this House, but we must not permit our respect for the dead or our sympathy for part of the living to lead us into an act of injustice to the balance of the living. I will not go into an argument to prove that Congress has not the power to appropriate this money as an act of charity. Every member on this floor knows it. We have the right as individuals, to give away as much of our own money as we please in charity; but as members of Congress we have no right to appropriate a dollar of the public money.”

    In 1854, President Franklin Pierce vetoed a popular measure to help the mentally ill saying, “I cannot find any authority in the Constitution for public charity.” To approve the measure “would be contrary to the letter and the spirit of the Constitution and subversive to the whole theory upon which the Union of these States is founded.” During President Grover Cleveland’s two terms in office, he vetoed many congressional appropriations, often saying there was no constitutional authority for such an appropriation. Vetoing a bill for relief charity, President Cleveland said, “I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the General Government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit.”

    There’s more, including Madison’s and Jefferson’s clarifications of what (little) they meant by “general welfare”. RTWT.

    Comment by ILoveCapitalism — February 14, 2011 @ 11:31 pm - February 14, 2011

  24. One man’s pork is another’s essential spending, and one man’s essential spending is another’s pork…

    Only in the idiotic world of liberal relativism. In fact there is quite clearly essential Government spending in the form of, as ILC pointed out, enumerated powers and in functions only the Government can perform, such as administering the Justice System and providing for National Defense.

    Then, there are programs to teach African men to wash their pee-pees, provide sonorous radio programming for elderly liberals (NPR), set up inefficient programs to burn food for fuel (ethanol subsidies), high-speed rail projects, all Federal education spending, “green energy” projects, subsidies for art (essentially a welfare program for urban hipsters), mass transit subsidies, foreign aid, water subsidies, block grants to states, John Murtha’s airport, Federal Housing projects, cash for clunkers … and one could go on and on.

    This is not to say I object to all extra-Constitutional Government spending. The Interstate Highway System is worthy, and I’m okay with the idea of a social safety net even if I believe its execution is flawed. BUT I don’t think the Government needs to do everything. And the more things it tries to do, the worse it performs its limited, enumerated, necessary functions.

    Comment by V the K — February 15, 2011 @ 6:11 am - February 15, 2011

  25. HI ILC and VK,
    Thank you for your replies. Unfortunately for you, Supreme Courts (a branch of the US Government set up in the Constitution) mostly do not interpret the Constitution in a “strict constructionist” manner that you favour. They look at the Elastic Clause: “To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof;” and apply a different interpretation to the one that you would like. They also do not interpret the 10th Amendment in the manner that you would like them to do. Throw in differing interpretations of the Preamble, Commerce, and Taxing Clauses for good measure.

    In the world of SCOTUS, I am sure that past justices would listen to your view politely, (and some sympathetically, I am sure) then rule (as a bench) as they have mostly done–to expand the reach and scope of Federal power, using the Elastic Clause as the basis for so doing.

    So, you can assert that only in this “idiotic” world, can pork be considered essential spending–but then, take it up with SCOTUS. They think the same thing; and even if Madison was the Father of the Constitution, they ended up disagreeing with him, because their interpretation of the Constitution differed with his.

    By the way, I think that many of the things you point to as pork are essential expenditures–like the US highway system (though it isn’t exactly supported in the Constitution) and also some of the things you don’t like (like foreign aid). I am, sigh, apparently a loose constructionist, if labels be used.

    I agree that subsidies should go (except in so far as they increase net economic efficiency), as well as that awful home mortgage interest tax deduction. You know, that saves almost $600 billion between 2009 an 2013. It worsens income and wealth inequality. It certainly does not promote “the general welfare” in my opinion.

    Comment by cas — February 15, 2011 @ 11:30 am - February 15, 2011

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  27. I agree that subsidies should go (except in so far as they increase net economic efficiency), as well as that awful home mortgage interest tax deduction. You know, that saves almost $600 billion between 2009 an 2013. It worsens income and wealth inequality. It certainly does not promote “the general welfare” in my opinion.

    That’s interesting, because the purpose of the mortgage interest tax deduction is to encourage borrowing and home ownership — both of which liberals SAY they want.

    Furthermore, it is hilarious that Cas is whining and screaming about how encouraging home ownership and borrowing “worsens income and wealth inequality” when Cas is pushing hundreds of billions of dollars in Federal subsidies already to encourage home ownership and borrowing.

    The reason Cas and the Obama Party whose talking points Cas is repeating stays away from this is relatively simple. The mortgage interest tax deduction has been in place for decades through both booms and recessions, indicating that it, in and of itself, seemingly does very little to artificially manipulate markets and the economy. That makes perfect sense; the amount of the deduction, after all, is limited, and it is not factored into the financial decision of whether or not you can actually afford the mortgage.

    Yet, when Cas and the Obama Party Keynesians that it represents decided to “roll the dice” and vastly increase subsidies and securitization guarantees on mortgages through Fannie Mae and Freddie Mac, within less than a decade we had massive market distortion and collapse. For some reason, the government guaranteeing that it would buy risky mortgage loans, would back these loans when they were securitized, and would punish those who did not make more risky loans led to — surprise — more issuance of risky mortgage loans.

    That hilarious contradiction really exposes the underpinnings of the leftist “logic” that Cas employs. The classic example is the money-back coupon versus the price reduction. In Cas’s world, everything is a money-back coupon; you must pay full price to the government, then apply for a percentage of that to be redistributed back to you under their full terms and conditions, all of which can be changed at any time and in their sole discretion.

    The belief of Keynesians like Cas is that money not spent by the government is inefficient and wasted, while money spent by the government is never inefficient and wasted. Once you recognize that, you can see why Cas is incapable of acknowledging government waste and inefficiency; that would be a crack in the fundamental bedrock of its Keynesian universe. Thus, Cas and its ilk spend all their time designing fanciful pipe dreams of how they are “investing”, without ever once coming up with a real analysis of what the return on that investment will be. Then, when they try to do an analysis and it shows them to be wanting, they invent fanciful statistics like “saved or created”, or they divorce themselves from reality entirely and insist that the results aren’t important as long as the money was spent.

    Once you recognize that fact, you can see why Obama Party members like Cas aren’t overwhelmingly represented in the business world. If you walked into a bank or venture firm with the kind of airy-fairy crap that Obama sells for “investments”, the only question would be how far from the front door you’d land when they threw you out.

    Comment by North Dallas Thirty — February 16, 2011 @ 3:23 pm - February 16, 2011

  28. Hi NDT,
    “That’s interesting, because the purpose of the mortgage interest tax deduction is to encourage borrowing and home ownership — both of which liberals SAY they want.”
    Just because it is an intended consequence, doesn’t mean that there are not unintended consequences as well. What I dislike about it, apart from inequality effects, is that it acts as a subsidy for real estate agents and for those who already own houses. It is a disincentive to prospective homeowners, in so far as it increases the cost of housing above its market value (in the absence of the subsidy). Also, it acts as a distortion on the economy, creating an incentive to OVER-INVEST in housing, when these resources would be better spent investing in other areas (i.e., in productive assets that make the economy grow over time).
    “when Cas is pushing hundreds of billions of dollars in Federal subsidies already to encourage home ownership and borrowing.”
    I have no idea where you came up with this from what I posted. You are referring to some one else, I think?

    “seemingly does very little to artificially manipulate markets and the economy. That makes perfect sense; it is not factored into the financial decision of whether or not you can actually afford the mortgage.”
    Actually, this is not true. Since it is a sizeable amount of money, the tax deduction has a sizeable impact in effectively lowering the actual interest rate you pay for the money you are loaned. For example, check out, http://www.bankrate.com/calculators/mortgages/loan-tax-deduction-calculator.aspx, visited 16 February 2011. You will notice that the mortgage interest deduction on $200,000 lowers APR effectively from 6.476% to 4.468%. We know for a fact that people borrow more money when interest rates are lower. The tax deduction effectively does that. QED: the tax deduction on mortgage interest skews peoples buying decisions towards more housing, when the economy would be better served by having that money invested in other areas. After all–600 billion is a lot of money don’t you think?

    Believe me, if I had a mortgage today, I would want to keep the mortgage interest deduction, but that is because the presence of it inflates demand, raises housing prices above what they should be, and losing the deduction (after I bought a house assuming it would continue to be there) would mean that the value of my house would fall in real terms (and I would lose money on the capital value of my house). But, it is not an economically efficient or fair piece of social engineering! Because that is what it is: social engineering. And it amazes me that some folks who rail against “social engineering” in other places would actually support this thing. It is an awful boondoggle.

    “Yet, when Cas and the Obama Party Keynesians that it represents decided to “roll the dice” and vastly increase subsidies and securitization ” I just want you to know that I have never worked in the mortgage securitization industry. So, again, I have no idea why you think I have? Also, the narrative you want to push concerning the causation of the housing market collapse, though it has elements of the causation of the crisis, doesn’t give a complete enough picture of what happened. It might be helpful to read something like Fool’s Gold by Gillian Tett, as this would give you a fuller image of what happened.

    Comment by Cas — February 17, 2011 @ 2:16 am - February 17, 2011

  29. Again, Cas, you are simply repeating leftist talking points without a bit of thought being involved.

    For example, you claim this:

    It is a disincentive to prospective homeowners, in so far as it increases the cost of housing above its market value (in the absence of the subsidy).

    But then you claim this.

    You will notice that the mortgage interest deduction on $200,000 lowers APR effectively from 6.476% to 4.468%. We know for a fact that people borrow more money when interest rates are lower. The tax deduction effectively does that. QED: the tax deduction on mortgage interest skews peoples buying decisions towards more housing

    You are claiming that the deduction is bad because it makes housing too expensive at the same time you are arguing that the deduction is bad because it makes housing too cheap.

    Furthermore, you missed the figure that the deduction saves $4,474 in the first year — which is money that stays in the homeowner’s pocket and can thus be used, by your logic, to stimulate “aggregate demand”. But you then contradict yourself by taking away this money, which, by your logic, would cause a negative economic impact by reducing “aggregate demand”.

    Of course, the reason for all this contradictory behavior is best explained in this sentence right here.

    QED: the tax deduction on mortgage interest skews peoples buying decisions towards more housing, when the economy would be better served by having that money invested in other areas.

    You think people are too stupid to spend their own money.

    You think people should be required to send everything to the government because the government is the only entity that can intelligently spend money.

    You believe that government needs to confiscate individual wealth and make buying decisions for people because they won’t make what you think are the “right” ones.

    Comment by North Dallas Thirty — February 17, 2011 @ 3:13 am - February 17, 2011

  30. Hi NDT,
    You raise a good point that shows I need to explain my position a little more:
    “You are claiming that the deduction is bad because it makes housing too expensive at the same time you are arguing that the deduction is bad because it makes housing too cheap.”

    You may or may not have had a mortgage, but one of the things the that a prospective mortgage loan applicant has to have is a down-payment. Something like 20% of the loan, in normal times. Why is that important? Let me explain.

    In normal times (without the subsidy), given what I said, your mortgage would be $200,000 at 10%, let us say you owe $20,000 a year in interest (I am keeping this simple for illustrative purposes, so let us keep the repayment of the principal out of this; adding it complicates the maths but doesn’t add any extra insight). That is the capital amount you could pay interest on, and make your monthly mortgage. With the subsidy (say 50%, again for illustrative purposes), you could get back %50 of your interest, so $10,000. That means you could actually “afford” a mortgage that required you to pay $40,000 a year in interest, since with the tax break, you only actually pay $20,000.

    Why does this matter? Because, since you know this, this allows you to put forward offers for the house you want at a higher price point then the $200,000 you originally had. After all, the tx deduction helps cover your mortgage interest cost. SO, you could “afford” a $400,000 home.

    But the dow npayment, at 20% is not $40,000 but $80,000. Buyers might not be able to afford that. But others can–so, AT THE MARGIN, some people who could otherwise afford to buy a house can’t do so. Now, in strange times, when you don’t have to have any downpayment, then this is a recipe for speculation and flipping houses. This also drives prices up.

    Subsidies: Picture a supply and demand diagram. Impose a subsidy, and move the demand curve to the right. Equilibrium price and quantity both rise. Suppliers need to build more houses, bidding up factors of production in the process–which they can do, because consumers are willing to pay more for the right to own a house. Demanders get the subsidy, so they can pay a higher mortgage. The only thing not taken into account is the social deadweight loss that the subsidy causes. It is caused because the value to society of spending that extra money on housing is LESS than the value to society of the resources spent on that housing.

    The “cash for clunkers” program, which many folks on this site (perhaps even you, NDT?) despised works on the same principle. Its a subsidy. The mortgage interest deduction is a subsidy. So, when you say: “You think people are too stupid to spend their own money.” you are very mistaken. I think that people are pretty smart when it comes to weighing incentives and calculating what will make them, individually, better off. People respond to incentives. Give them an incentive, and they will change their behaviour. Give them a subsidy to trade in a clunker, and at the margin, more people will. Same with housing. It is just that the economy as a whole suffers for this. Without a relevant positive externality to offset this subsidy’s economic impact (we need to increase housing/home ownership because of the extra social value it brings), it is ECONOMICALLY INEFFICIENT.

    NDT–do you have a mortgage? If so, congrats on using the subsidy. But it is a piece of social engineering. It was designed to get more people into houses–more stability, you know, using the tax code to achieve that purpose. However, the fact that so many people are in underwater mortgages right now is a major reason why we don’t have the labour mobility we used to with people moving to were there are jobs. And that increases instability. SO, that social experiment hasn’t gone so well!

    I just find it strange that some folks here approve of one form of social engineering, like the housing mortgage interest deduction, when it seems to fly in the face of otherwise deeply held views concerning the inefficacy of government; and a piece of social engineering that is easy to show IS ECONOMICALLY INEFFICIENT.

    Comment by Cas — February 17, 2011 @ 12:10 pm - February 17, 2011

  31. (I am keeping this simple for illustrative purposes, so let us keep the repayment of the principal out of this; adding it complicates the maths but doesn’t add any extra insight)

    Actually, it adds a great deal of insight, since the size and repayment of the principal are by far the primary drivers in terms of affordability and whether or not a loan would be made in the first place.

    However, the problem is, Cas, you are hell-bent on trying to prove your predetermined ideology-based conclusion, and thus will do anything, including ignoring reality, to get there.

    Call me back when you are willing to intelligently discuss the problem and when you can include the full value of repayment of principal. Until then, you’re merely exposing yourself as a delusional ideologue who is either spectacularly uninformed or completely duplicitous.

    Comment by North Dallas Thirty — February 18, 2011 @ 1:14 am - February 18, 2011

  32. Hi NDT,
    Thanks for the gratuitous ad hominem attack.

    “Actually, it adds a great deal of insight, since the size and repayment of the principal are by far the primary drivers in terms of affordability and whether or not a loan would be made in the first place.”

    Feel free to make your point with an illustrative example, NDT. You make a claim, back it up with numbers. If you think it really makes a difference, show me how the example you have in mind, negates the claim I made. At the moment, I have no idea why you think your position trumps mine. I, at least, gave you the courtesy of an illustration of my point of view. You may not agree with it, but you offer nothing in return. I will read with interest the example you have in mind that negates my reasoning.

    Comment by Cas — February 18, 2011 @ 3:22 am - February 18, 2011

  33. Feel free to make your point with an illustrative example, NDT. You make a claim, back it up with numbers.

    With pleasure.

    You claimed that the difference in principal payment and amount is irrelevant between a $200k home and a $400k home.

    That simply is mathematically delusional.

    Furthermore, Cas, based on previous experience with you, I know you are delusional and simply lie, such as the time you stated Texas had a state property tax, which it does not, and that senior citizens paid no property tax, which is an outright lie.

    So what is being done here is that I am exposing your utter stupidity to others. You are upset because you are being humiliated by having your logic actually assessed and found wanting — which, given your whining response, demonstrates that this is the first time in your life you’ve actually been held accountable for your behavior.

    Comment by North Dallas Thirty — February 18, 2011 @ 11:50 am - February 18, 2011

  34. Hi NDT,
    How annoying. My post didn’t go up. Anyhow, let me quickly restate what I said:

    1. If you want to take a ceteris parabis thought experiment looking at one aspect of a problem for the clarity it brings “(I am keeping this simple for illustrative purposes, so let us keep the repayment of the principal out of this; adding it complicates the maths but doesn’t add any extra insight)”, and condemn me for not doing a global comparison (“irrelevant “) with all the bells you want, that is your call. Feel free to do that more complicated set of mathematical calculations for yourself.

    But in case you don’t want to do that, consider the following:
    How mortgage payments are put together, and the makeup of interest and principle. Bottom Line: They start heavy in interest payments and over time, as the mortgage winds down, become mainly about principle repayment. What this means is that a “flipper” who buys a house, is mainly paying interest at the beginning of their mortgage. As such, since their strategy (at least in the last housing boom) was to hold it, slap some paint on it, then resell at a profit, such folks, or even those who hold a fixed 30 year mortgage for a few years only, are closer to my thought experiment than you would at first think. So, that is worth considering on its own merits as an example.

    2. As for Texas, I checked the thread you alluded to. When I was offered further information to consider by those commentators I was talking with, I did further research, came back and amended my claims, and moved on. Clearly, that is not enough for you.

    Finally, I still note you have said nothing about subsidies and how they work. So, what do you think? Are subsidies something you support ot not? And why? What makes the housing interest subsidy better than another subsidy from an economic standpoint? I ask this because even as you rail against my analysis, it is also an analysis that is held by many on the right wing. Check googling : “mortgage interest”, Economic efficiency. Afterwards, add in “Cato Institute”, or some other favourite right wing economic think tank you like.

    Again, I note the gratuitous ad hominem “arguments.”

    Comment by Cas — February 18, 2011 @ 8:33 pm - February 18, 2011

  35. NDT, can’t post the link to the mortgage payment make-up–the system won’t let me. Maybe if I put it this way, it will post (just pull out the spaces).
    http://www. investopedia.com/articles/pf/05/022405. asp

    Comment by Cas — February 18, 2011 @ 8:35 pm - February 18, 2011

  36. Gee, Cas, that article doesn’t agree with you. It says the principal value of the loan is relevant in determining the affordability of the loan.

    Better luck next time.

    Comment by North Dallas Thirty — February 19, 2011 @ 12:57 am - February 19, 2011

  37. Hi NDT,

    It is clear to me you aren’t serious about arguing this on the merits. Subsidies, dude. I have asked you repeatedly, but you cannot bring yourself to address the central issue, and I think that is just sad. You are clearly for them, at least with respect to mortgage interest deductions. I support them as well, in clearly defined circumstances (but not in this mortgage interest deduction case). But you cannot explain why you think they are so good GIVEN THAT THEY ARE A GOVERNMENT SUBSIDY THAT BREEDS ECONOMIC INEFFICIENCY. You are clearly FOR government run social engineering in this case. Maybe you have a mortgage, and you need some of that government pork to keep afloat? If that is the case, I do not begrudge you; everyone has to make it through in their own way. It reminds me of that tea party individual who in all sincerity said at a town meeting: “Keep your government hands off my Medicare,” unwilling to acknowledge that Medicare IS a government program.

    You have always come across to me as if you followed a sharp and reasonably coherent conservative and/or libertarian ideology. Maybe I was wrong. I’m done.
    Cheers

    Comment by Cas — February 19, 2011 @ 2:54 am - February 19, 2011

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