Tag Archives: jack heidel

Preventing the Next Housing Crisis: Shared Responsibility Mortgages

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It is now commonly agreed that the Financial Crisis of 2008 was caused by the collapse of the housing bubble beginning in 2007. There were three main aspects to the huge collapse of wealth caused by the Financial Crisis:
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  • It Destroyed Mainly Middle Class Wealth. During the Great Recession housing values collapsed by $5.5 trillion, a large fraction of the total $14 trillion economy. As shown in the above chart, most of this loss of wealth came at the expense of middle- and lower-income families.
  • Foreclosures on Underwater Mortgages Lowered Housing Values across the Board. When foreclosed houses are sold at steeply discounted prices, the appraised value of all other houses in the area are lowered as well.
  • The Loss of Wealth of Indebted Households Forced Them to Cut Back on Their Overall Spending. The decline in aggregate demand due to wealth loss of the indebted then becomes a problem for everyone in the economy.

In a new book, the economists Atif Mian and Amir Sufi have proposed a new way to set up mortgages, called Shared Responsibility Mortgages (SRM), to protect holders of underwater mortgages during a housing crisis.
Consider a house bought for $100,000 with a 20% down payment and a 30 year mortgage of $80,000 at 5% interest.  The annual mortgage payment is $5,204 per year.  Suppose the value of the house drops 30% to $70,000.  With an SRM the owner’s equity drops to 20% of $70,000 or $14,000.  The annual mortgage payment would also drop 30% to $3,643.  It would continue to be adjusted each year until the house returns to 100% of original value at which point the payment would revert to and remain at the original amount unless the value again drops below 100% of original value.
In return for sharing in the loss caused by a drop in value, the mortgage holder would receive 5% of any capital gain realized whenever the house was sold or refinanced in the future.
Suppose that all mortgages in 2007 had been SRMs.  All three of the problems outlined above would have been avoided.  The financial crisis would have been much less severe!

The Future of American Higher Education

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President Obama’s proposal, to make community college free of cost for all Americans, is generating a lot of controversy.  Major complaints are that:

  • The projected cost of $6 billion per year is too high and the program is highly duplicative with other scholarship programs such as Pell grants.
  • Education is primarily a state and local responsibility, not federal.
  • The graduation rate at community colleges is only 21%, much lower than at other types of educational institutions.
  • There is a whole new marketplace of non-degree credentials such as competency-based programs and micro-certifications which often provide greater variety, quality and monetary value than community college programs.

These criticisms are largely valid and should largely be incorporated into the guidelines of the President’s proposal as they are drawn up and submitted to Congress.
CaptureBut they miss the larger point.  Today, about 30% of young people in the U.S. graduate from a four year college.  Tuition and fees at public college averages $9,000 per year while the comparable cost at private colleges is $31,000.  Loan debt for college graduates averages $27,000 per year, and is much higher for many.  And, according to the above chart from the New York Times, educational attainment in the U.S. lags behind the rest of the developed world.
Today’s increasingly high-tech and interconnected world puts a huge premium on educational attainment and America’s system of higher education is not meeting the challenge.  It is too expensive and not educating enough people, especially minorities and those with low-incomes.
The best way to address this problem in a cost-efficient manner, which is a necessity in today’s fiscal climate, is to expand opportunities at our 1100 community colleges. Community colleges are not only incredibly low cost operations, they accept all students and start them out at whatever academic level is necessary.  They provide the ideal venue to lift up large numbers of average and previously-failed students and turn them into productive members of society.  Boosting community college enrollments will, in turn, give our economy a big boost.
This is the real reason why President Obama’s free tuition plan should be taken seriously.  It will shine a strong light on an educational sector whose potential is greatly under-appreciated by many Americans.

Is Universally Free Community College a Good Idea?

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President Obama has just proposed that two years of community college be free for all Americans “willing to work for it.”  Forty percent, or about nine million, of today’s college students are enrolled at one of America’s more than 1100 community colleges which have an average annual tuition of $3800.  First estimates are that such a program would cost about $6 billion per year when fully implemented. The advantages of such a program are:
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  • The biggest advantage is to greatly increase college enrollments especially for the low-income, minority and first generation college students who typically attend community colleges.
  • It will make a contribution toward solving the college affordability issue. With tuition averaging $9,139 at public four-year colleges and universities and $31,231 at private institutions, students unsure of their future plans can start out with much lower expenses before deciding if they really want a four year degree. Equally important, it will put pressure on four-year institutions to do a better job of controlling their costs and focusing more strongly on what they do best.
  • Finally, such a plan will put great pressure on expensive for-profit educational institutions, whose primary source of income is from federal student loans, to demonstrate much more clearly their true educational value. Community colleges are likely to expand their course offerings under a big influx of new students and expand into specialized practical subjects where the for-profit institutions now have a virtual monopoly.

There is, of course, one nitty-gritty little thing to be concerned about with such an ambitious new education program.  How is it going to be paid for in our current era of high federal deficits and exploding debt?
I think there are two ways to approach this question.  First of all, the federal education budget is quite large, $141 billion for FY 2014.  We should be able to trim other education programs in order to pay for this new initiative.  This kind of budget discipline, which is absolutely necessary, might require cutting back the President’s proposal in order to reduce its cost.  This is quite appropriate.
There will always be good ideas for new programs which could prove to be quite valuable.  But they will need to be implemented very efficiently!

Is Europe’s Decline an Indication of America’s Future?

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One of my favorite writer’s on current affairs is Arthur Brooks from the American Enterprise Institute.  His article in yesterday’s New York Times, “An Aging Europe in Decline” gives a good explanation for the current malaise in Europe.  “The optimists see the region’s economy growing by just 1% in 2015: many fear that a triple-dip recession is in the offing. … Predictions of decade-long deflation, low productivity and high unemployment are becoming conventional wisdom.” But Mr. Brooks makes a strong case that Europe’s core problems are as much demographic as economic:

  • In 2014, the average number of children per woman in the European Union was 1.6, well below the replacement rate of 2.1.
  • The labor participation rate in the EU in 2013 was just 57.5%, much lower than the 62.7% in the U.S..
  • In 2012 the median age of the national population in the EU was 41.9 while the average age of foreigners living in the EU was 34.7. But “anti-immigration sentiment is surging across the continent.”

In other words, Europe is “rejecting the culture of family, turning its back on work and closing itself off to strivers from the outside.”  This is a powerful indictment of contemporary European culture.
Capture1To a certain extent these same trends are evident in the U.S. although to a somewhat lesser degree:

  • Our own fertility rate (see the above chart) is down to 1.9 children per woman in 2012, and is dropping among all racial groups.
  • Our labor participation rate is better than Europe’s but is our own lowest in 36 years.
  • We admit over a million legal immigrants per year who lower the average age of our population. However we fail to accept many highly educated and skilled workers who would be able to give our economy a huge boost.

Demographics are a problem for the U.S. just as they are for Europe.  The only way to counteract strong demographic trends is with smarter economic policies.

Where Should the New 114th Congress Focus Its Attention?

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The two main themes of this website are how to boost economic growth and how to get our national debt under control.  Faster economic growth will put more people back to work by creating more jobs.  Faster growth will also bring in more tax revenue and therefore potentially reduce deficit spending.
The latest monthly unemployment rate, 5.8% for November 2014, is much higher than it should be almost six years after the end of the Great Recession in June 2009.  The best thing that Congress could do to boost economic growth is to adopt broad-based tax reform, lowering tax rates in a revenue neutral way by closing loopholes and limiting deductions.  I’m still in favor of doing this but I no longer consider it to be the top priority for the following reason.
The huge drop in the price of gasoline is already providing a big economic stimulus.  At the current price of $2 per gallon, the average American family will save about $750 per year in driving expenses.  This is even more relief than a tax cut would provide.  The economy has already picked up steam in 2014 and is predicted to grow at the rate of 3% in 2015.  This will keep the unemployment rate decreasing steadily throughout 2015 and beyond, which represents much progress.
Capture1It’s now time for Congress to focus more strongly on putting the debt on a downward path.  This can only be done by shrinking our annual budget deficits well below the $483 billion deficit for the last (2014) budget year.  As the above chart from Fix the Debt shows, our current fiscal path leads inexorably to a growing debt which is completely unsustainable in the long run.  Annual deficits will have to be at least cut in half to be able to turn the debt trajectory downwards.
Getting this done will require much dedication and hard work by Congress.  Many programs will have to be eliminated.  Surviving programs will need to operate more efficiently.  The entitlement programs of Social Security, Medicare and Medicaid will have to be greatly tightened up.
Is Congress up to this task?  The future of our country depends on it!

The Legacy of Senator Tom Coburn

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Oklahoma’s Senator Tom Coburn has just retired from Congress after serving six years in the House of Representatives and ten years in the Senate.  He will be sorely missed because his achievements were legion.
By ridiculing the “Bridge to Nowhere” in Alaska in 2006, he eventually prevailed upon Congress to totally eliminate earmark spending by 2011.
Beginning in 2010 his staff compiled an annual “Wastebook” each year listing numerous examples of wasteful spending by the federal government.  The “2014 Wastebook” gives 100 such examples totally $25 billion ranging from laughing classes for college students to a State Department program to dispel the perception abroad that Americans are fat and rude!
CaptureBeginning in 2011, Senator Coburn has prevailed upon the Government Accounting Office to issue annual reports entitled “Actions Needed to Reduce Fragmentation, Overlap and Duplication and Achieve Other Financial Benefits.”  Now, after four years, a total of 226 specific actions have been recommended by the GAO.  GAO’s Action Tracker shows that the government has addressed about 19% of the efficiency recommendations made by the GAO.  Be thankful for small progress!
His latest, finest and presumably last major effort along these lines is a 320 page report, the “Tax Decoder” which is intended to “decode the tax code for every taxpayer.  It reveals more than 165 tax expenditures costing over $900 billion this year.”  Although more than $1.7 trillion in tax revenue was collected by the government in 2014, the IRS will be unable to collect an additional $500 billion that is owed.  This would have been enough to cover the $483 billion deficit for fiscal year 2014!
As Senator Coburn points out in the introduction to this document, “ideally Congress would throw out the entire tax code and start over.  But at the very least, Congress should make the tax code simpler, fairer and flatter.”
It is rare that a single member of Congress makes such an extraordinary contribution to our country’s welfare!

We Agree There Is a Huge Debt Problem! How Do We Fix It?

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Yesterday I gave my second “Fix the Debt” presentation, this time to the Greater Omaha Kiwanis Club.  The main slide (just below)
Captureis all they needed to appreciate the magnitude of the problem.  Their main interest was “How do we fix it?”  They listened politely to a bipartisan list of possible actions:

  • Policies that grow the economy
  • Health care cost containment
  • Social security reform
  • Defense spending cuts
  • Other spending cuts
  • Tax reform and tax expenditure cuts
  • Budget process reform

Then one member asked, “How about a balanced budget amendment?” and this became the focus of the discussion. A balanced budget amendment going forward would not pay off the debt but would stop adding to it.  It would shrink the debt over time as a percentage of GDP as the economy continues to grow.  This is the best we can do in a practical sense and represents a satisfactory solution. There are lots of problems, however, associated with passing a Balanced Budget Amendment:

  • First of all, it will be difficult to accomplish. It requires approval by a 2/3 vote of each house of Congress and ratification by ¾ of the states. This means that it could be stopped by just 13 state legislatures.
  • How would a BBA be enforced? By having the Supreme Court step in and require specific actions to raise taxes or cut spending? This seems problematic.
  • There would have to be a provision for override in the case of emergency (war or other catastrophe). A 2/3 vote by each house of Congress would be a logical way to handle a situation like this. But such a system could easily be abused.

The goal is to significantly shrink the debt as a percentage of GDP over time as the economy grows.  This does not require a balanced budget but only that annual deficits be lower on average than annual growth of the economy.  Representative Paul Ryan’s “Roadmap” plan, for example, would shrink the debt by 30% over a 20 year period without a single annual balanced budget. The important thing is to shrink the debt as a percentage of the economy, and to get going on this as soon as possible.  If it requires a somewhat rigid amendment to get this done, then that’s what we need to do!

Status Quo on the Budget Is Not Good Enough II. Look at the Big Picture!

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In my last post, “Status Quo on the Budget Is Not Good Enough,” I discussed a report from the outgoing chair of the Senate Budget Committee, Patty Murray (D-WA), and explained how it epitomizes the lack of progress made on the massive debt problem which has developed since the Great Recession of 2008 -2009.
CaptureThe basic problem is that Senator Murray’s analysis simply does not recognize the seriousness of our debt problem as shown in the above chart.  Right now our public debt (on which we pay interest) is “sitting” at 74% of GDP for a year or two, before it continues its rapid increase.  This projection assumes an historically “normal” growth rate of 3% and no new recessions, neither of which assumption is assured.  It also assumes that the sequester budget cuts and new top tax rate of 39.6% stay in effect.  In other words it is a best case scenario based on current policy.
Breaking it down, the debt will continue to increase because annual deficits will continue to exceed the rate of growth of the economy.  The main driver of these increasing deficits is the cost of the health care entitlements of Medicare and Medicaid.  Medicare costs will increase rapidly because of the aging of the American people.  Medicaid costs will increase rapidly because: 1) more low-income people are being covered by the ACA and 2) since the recession there are more low-income people to be covered.  I certainly support expanded healthcare coverage but we have to figure out how to pay for it!
How do we contain the increasing costs of Medicare and Medicaid?  We do it by controlling the overall rapid growth (at twice the rate of inflation) of healthcare costs in general, i.e. for private healthcare. How do we do this?  See a couple of my recent posts either here or here.
Senator Murray, along with many other progressives, argues that we need more deficit spending in order to stimulate the economy and create new jobs.  More jobs are badly needed but more deficit spending is the wrong way to get them.  Then how?  With tax reform among other things.
Based on the outcome of the 2014 elections, I am optimistic that something along the lines of what I have just described will be tried by the next Congress.  We’ll soon find out!

Status Quo on the Budget Is Not Good Enough

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I have now been writing this blog for just over two years.  I usually write three posts per week and this one is #280.  My top sources for background information are the New York Times and the Wall Street Journal.  My own local newspaper, the Omaha World Herald, carries the Washington Post economics journalist, Robert Samuelson, whom I greatly respect.
A column of his discusses a recent report from the Senate Budget Committee prepared by its outgoing chair, Patty Murray (D-WA), entitled “The updated fiscal outlook and its implications for the budget debate next year.”  To me this report clearly shows why there has been so little progress made in straightening out the budget over the past few years.
CaptureCapture1Here are some highlights of the report:

  • “Both our current fiscal situation and the outlook going forward have significantly improved, meaning we need a budget approach more focused on jobs and growth, not just on cuts.”
  • “Deficits have fallen dramatically over the last five years, and projected debt and deficits have also declined.”
  • “Revenue losses due to the recession and slow recovery were significant enough to counteract nearly half of the improvement in projected deficits, which highlights the need for new revenue from the wealthiest Americans and biggest corporations as part of any future deficit reduction effort.”
  • “It is clear that we need a federal budget approach more focused on jobs and growth, not on cuts for the sake of cutting. That leaves Republican leaders with a critical choice.”

In my opinion there are two basic problems with Senator Murray’s analysis:

  • Deficits have indeed fallen dramatically from their very high level in 2009, but not far enough! Deficits are projected to rise back to 3.9% in just ten years, as shown in the first chart. This means that debt will keep growing indefinitely, as shown in the second chart. This is unacceptable!
  • We do badly need to focus on jobs and growth but more deficit spending is not the way to do it. Although immigration reform and expanded trade would help, fundamental tax reform, individual and corporate, is what is really needed to grow the economy.

Hopefully a new Congress will be able to move in this direction next year!

Nebraska Does Not Need Charter Schools

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A story in the World Herald on December 19, “OPS board preparing for charter school bills,” reports that several members of the OPS School Board expect charter school legislation to be introduced into the Nebraska Legislature next year, and want to be in a position to influence it.   According to proponents, charter schools provide more choice for families who are dissatisfied with their own neighborhood school.
In debating this issue, it is important to keep in mind that the Learning Community already provides expanded educational choice in the metro Omaha area.  In 2013-2014, 6,535 students, of whom 42% were eligible for Free and Reduced Lunch support, participated in the LC’s Open Enrollment program which allows great latitude in transferring into a different school district as long as space is available.  FRL eligible students are provided free transportation for these transfers, at a cost of $5.4 million last year.
CaptureThe above charts from the 2012-2013 LC Annual Report demonstrate very clearly the academic benefit provided by the Open Enrollment program.  For example, the 237 FRL students who transferred into low FRL elementary schools scored as high in reading proficiency as the resident students.  The 248 FRL students who transferred into high FRL elementary schools scored much higher in reading proficiency than the resident students.  Similar results are true for mathematics although the proficiency numbers are lower.
The LC staff believes (see the 2013-2014 Annual Report) that the number of FRL students participating in open enrollment is too small to have an appreciable difference on closing the profound socio-economic achievement gap which exists in the Learning Community.  However, the Open Enrollment program is still valuable as a safety valve for families who are looking for a different school environment.
Consider all of the educational choice which already exists for OPS students: many magnet programs, the Wilson Focus School in south Omaha, the Seventy-Five North partnership proposed for Howard Kennedy Elementary School, and the new privately funded Nelson Mandela Elementary School opening in Fall 2015.
On top of all this is the LC’s Open Enrollment program for any low-income student to transfer to a different school district with free transportation provided.
Nebraska does not need Charter Schools for the very simple reason that huge educational choice already exists where it is most needed, namely within the high poverty Omaha Public School District.