When I was young, my father taught me a very simple story:
A man walks by a big room and sees that it’s chest high in manure. “Quick,” he says “someone get me a shovel. There must be one helluva horse in here somewhere!”
Now the message was always clear: don’t be afraid of hard work and look upon every situation with an optimistic eye. Lately though, reading the paper has been a lot like running into that room; only I’ve begun to realize there’s no horse in there. Just a whole lot of shovelin’.
The latest pile can be found in a column by Dean Calbreath, a well-respected staff writer for the Business section of our local paper: The San Diego Union Tribune. You can read the full story here: Government Spending is Tool to Revive the Economy, although the title itself is about as subtle as a sledge hammer to the head. (I wonder if he was being ironic with the word “tool”?) In the column itself, Mr. Calbreath expects politicians debating the “stimulus package” will take heart in a new study by UCSD economist Valerie Ramey which concluded that for every $1 the government spends, it generates $1.40 in economic growth. Uh… yes, you read that right. The government is generating 40% growth on its spending programs. Wow! We really can spend our way out of a problem. I mean Mister, at 40% growth we’ll be out of this recession in a quarter or two if the government will just get it through their thick heads to spend enough. (When I read utter nonsense like this I am reminded, as I so often am, of the wit and wisdom of Homer Simpson. Upon realizing he and a few other characters were literally trapped at the bottom of a hole they themselves had dug, Homer hit upon an elegant solution: “We’ll dig our way out!” As the screen fades we can here Chief Wiggum say, “No, dig up, stupid…”)
“Raising spending stimulates the economy,” Ramey said. “On average, government spending raises gross domestic product and raises employment, although it sometimes leads to a small decrease in consumer spending, as consumers find themselves in competition with the government.” You think?! So let me get this straight: the “magic” money that the government has (we’ll come back to that in a second), stimulates the economy but stops small businesses and individuals from investing in themselves. Well, what’s a little shift in the welfare state if it means an increase in the GDP! Hey, I’ve got an idea; let’s triple the amount of money the government spends, move the majority of our citizens onto welfare and really bounce the GDP up to record heights.
I suppose it should come as no surprise that later in the article, Mr Calbreath describes an “economy laid low by the mortgage crisis.” The mortgage crisis? Is this economic shorthand? Was there not enough space in this 1100 word column to mention immoral investment banks, criminal ratings agencies, the CRA (ground zero of the housing problem), government regulators asleep at the wheel or rampant, undisclosed use of exotic creations like Default Swaps & CDOs? The mortgage crisis? Mr. Calbreath, your readers deserve more respect than that.
The UCSD study is not the only peg on which Mr. Calbreath hangs his hat:
A massive hole in demand is emerging as consumers, businesses and state and local governments are forced to cut back,” said Nigel Gault, chief US economist at IHT Global Insight, an economic analysis firm in Massachusetts. “The federal government is the only entity that can fill that gap, either by spending itself or by providing the financing for spending in the rest of the economy.
… either by spending itself… Ah yes, we come back to the financial gain we reap when the government reaches deep down into its pockets and spends some of its hard-earned money to stimulate the economy. What’s that you say? The government doesn’t have a job? The government doesn’t earn money, hard or otherwise? The government doesn’t even have pockets? Well, I guess you’re right. But WE have pockets. When these pinhead economists tell you that government spending is going to accomplish something, remember what they mean: the government’s going to confiscate money from you (or in the alternative print it and confiscate it from your unborn children) and spend it on things you very likely wouldn’t have. This is a zero sum game. When the government raises the GDP or employment by spending money – YOUR MONEY – you are, by default, unable to spend it yourself. So we have to ask ourselves: “Did anything really happen?”
To answer that question, I propose a quick thought experiment. Imagine yourself on your way to the grocery store with your allotted budget for groceries and I stop you on the street and take that money. Let’s say I repeat this up and down the streets. Now let’s say I take all that money and I go to the grocery store (although to be accurate we would have to make it a grocery store far away and poorly run, a store which I – in my infinite wisdom and obvious superiority to all those from whom I took grocery money – have deemed worthy of the business) and I spend all that money. Now tell me, did that store enjoy a boost in its gross profits? Certainly it did, no question. Now tell me this: did grocery stores as a whole enjoy a boost to their gross profits? No. All those stores that all those people would have shopped at suffered a loss; worse yet, it wasn’t even a dollar for dollar trade. Remember, I took all of your money and spent it at an inefficient, poorly run store. Not only was there no real gain in over-all grocery store gross profits, there was a net loss! (Unless you’re an economist, in which case you might discover a 40% return on the spending I did.)
Eventually, way down at paragraph 27 (of 28), we see a little piece of logic leak out. Ms. Ramey, our UCSD economist, states,
In the long run, for instance, we should take a look at reducing the payroll tax – which, after all, taxes people for something you want them to do: work. Economic theory tells us that if we reduce that tax, we can stimulate the number of jobs created.
Well that just makes too much sense. If we lower payroll taxes we can stimulate the number of jobs created. Ms. Ramey, why aren’t we following that piece of logical advice? Because, she explains, people might just save the extra money they make. Or pay off debt with it. It would not have “an immediate effect on the economy.” Not like, say… infrastructure spending would. Uh huh. I think I get it now. Taking my money and spending it inefficiently increases the economic viability of our economy. Building bridges and freeways two or three years from now, that will have an immediate affect on the recession in our economy. But reducing my payroll taxes, which I would feel as increased purchasing power within one pay period, that will not help the economy.
Here’s your shovel back. There’s no horse in here. Just a whole lot of BS.
Chuchundra says:
It’s obvious that you have no idea what you’re talking about.
Please explain what the CRA is and how it was “ground zero” for the mortgage crisis. Show your work. There is no partial credit.
February 4, 2009 — 9:35 am
Sean Purcell says:
Chuchundra,
I went back and linked CRA for you and anyone else that has difficulty with Google. The debate over their involvement in the mortgage crisis is a long one. You’ll have to do your own homework before you join the conversation.
February 4, 2009 — 10:47 am
JB in SD says:
Sean
It’s obvious you don’t know what you’re talking about. You didn’t contradict yourself, at all. I didn’t catch any double speak either. Learn how to write…. 🙂
Nice post as always
February 4, 2009 — 11:57 am
Jeff Brown says:
Sean — This ‘debate’ over what will or will not stimulate the economy is much akin to debating gravity’s ultimate affect on a skydiver. Since time is of the essence, some advance the theory the parachute will cause more delay than is acceptable. Those who actually do understand the concept of gravity observe the ‘debate’ knowing it won’t change anything in the end.
The problem? The epiphany will hit those eschewing parachutes roughly 5-10 seconds before the ground does.
What you point out in this post is nothing if not painfully obvious. You just did it better than I’ve seen it done almost everywhere else. Certainly better than I have. I will take the opportunity to revisit my post on Two Villages.
Guard your fish closely.
I’ve already made my peace with the reality of what is happening on Capitol HIll. Let’s allow them their way, much as we did in the mid-late 1970’s. You’d think with all the empirical evidence available from all those jumpers’ unintentional Rorschach test patterns left on the ground for us to see would forever remind us gravity always has its way.
Alas, history shows us these lessons must be learned again and again. I’ve chosen to remain on the sidelines like an Olympic judge with scorecards in hand.
Oh my!! He really stuck that landing. That’s a ’10’ for sure!
Let the games begin.
February 4, 2009 — 12:11 pm
David Shafer says:
Sean, don’t agree entirely with you, but I have hedged my bets by protecting my wealth from future taxes as best as I can. Because no matter if you are entirely correct or not taxes will need to go up in the future to pay for all that spending, social security, and the war which when it is all accounted for is probably 2-3 times as expensive as the tarp and stimulus packages!
February 4, 2009 — 12:54 pm
Michael Cook says:
Sean,
Interesting article and perspective. I fall in the disagreement camp on many items (of course). We have already discussed the CRA. See the following:
http://www.ritholtz.com/blog/2008/12/fdic-chairman-sheila-bair-on-cra-not-guilty/
http://www.ritholtz.com/blog/2008/10/the-cra-its-a-racial-thing/
http://www.ritholtz.com/blog/?domains=http%3A%2F%2Fwww.ritholtz.com%2F&sitesearch=http%3A%2F%2Fwww.ritholtz.com%2F&cx=015905226837203657063%3Ax1cwdcykvvw&ie=UTF-8&oe=UTF-8&cof=FORID%3A11&s=Search&q=community+reinvestment+act#974
Sorry for the hyper links, still not sure how to make them more concise in the comments, but I think the Big Picture has done a great job aggregating very credible sources on this issue. My homework is done on this, now I hope you can do yours.
While that was a less important issue, the more important issue is government spending as a tool to jump start the economy. I look at it more like jump starting a dead car battery, more so than your grocery store analogy. Obviously, like any other tool, if it is over used there will be significant negative consequences, but when used properly there is no question that it can shorten recessions and provide a much needed boost to the infrastructure and the economy.
Tax cuts are great, but when there is no revenue being generated whats the point? When small businesses cant get loans and people stop spending because of fear of job loss, help me understand how cutting my taxes will make them feel better. Furthermore, when states, which cannot run deficits like our Federal government are billions of dollars in the hole, help me understand how they can cut taxes???
As a New York State resident, I am not looking forward to paying more for everything with a smaller salary, but there is no alternative. California is even worse off. I would love to see you tell Arnie to cut taxes right now, the state cant even afford to give out refunds. In the current economic state, I would really like to see you make a case for how tax cuts would 1) be possible and 2) move the economy to a better place.
Feel free to argue about what the money gets spent on and how many jobs it will create, but this is one of the few times where I think government spending is appropriate. Once consumers feel comfortable enough to start shopping, employers feel comfortable enough to start hiring and reinvesting, then I will agree with your tax cuts theory. Economics is never a one size fits all. Tax cuts dont work for every situation. I know Jeff does not agree, but there are a lot of tools that can be used to keep the economy running smoothly. Perhaps these tools were misused to get us where we are, but in my opinion tax cuts are not the tools to move us forward. Perhaps once the car gets going, then we can move in that direction.
February 4, 2009 — 2:50 pm
Sean Purcell says:
Hot damn, some juicy comments. I’m running out the door but will definitely comment tonight (although I might wait till it’s really late and Michael Cook is groggy).
February 4, 2009 — 3:29 pm
Brian Brady says:
I’m glad you wrote this. I was attempting to refute the Calbreath story over on SDBackyard.com and got derailed by real work.
In the words of our state leader, “Ah’ll be bach”
February 4, 2009 — 3:51 pm
Jeff Brown says:
Hey Michael — I have a tax cut for ya. How ’bout getting trillion$ off the sidelines by eliminating the cap gains tax?
Wonder how many jobs that might create? Wonder how fast that money would turbo charge the economy?
February 4, 2009 — 4:02 pm
James Boyer says:
I am of the opinion, that though government spending generally does not return $1 for every $1 spent, there is a role for government spending in a situation such as we are in now. They can spend it now, in an attempt to stimulate us out of this economic mess, or they can spend it later managing bread lines and soup kitchens. Even the Republicans, well those who have pulled their heads out of their ideology, seem to be on-board with this sort of logic
February 4, 2009 — 5:05 pm
Sean Purcell says:
Josh – I’m working on it brother 🙂
February 4, 2009 — 7:59 pm
Geno Petro says:
Sean,
Believe me; this country doesn’t need people like myself working on any highway, much less a whole bridge. This country needs me (and my wife, of course) spending my aggregate discretionary income on consumable stuff again—that is, of course, if and when lenders ever decide to open their coffers to the good Jumbo borrowers to purchase without 30% Down and at a decent APR….so I can, therefore, start moving enough property again to even have some discretion.
knowwhatimsayin?
G.
February 4, 2009 — 8:00 pm
Sean Purcell says:
Jeff
I know I’m preaching to the choir with you and I know I can count on you to take any point and make it sharper
I love that. But here’s my question for you: is it so far gone that standing on the sideline is all that’s left? Maybe I haven’t gained your wisdom yet, but I have a hard time watching. There’s some part of me that feels like the situation can still be fixed… or maybe there’s a part of me that fears if it’s not fixed we will never recover. Is that the wisdom you’ve gained? No matter how bad it looks, eventually the ship will right itself?
I don’t know Jeff. I am awfully worried about the “tipping point” that I see us crossing.
February 4, 2009 — 8:11 pm
Sean Purcell says:
David,
I always respect your opinion. What parts do you disagree with? Also, I see you’re protecting yourself against future tax increases (and knowing you, you’re advising your clients too), but what are you doing about inflation. I’m seeing hyper-inflation around the bend. Are you hedged against that? Do you disagree or see less severity? I’m curious.
February 4, 2009 — 8:16 pm
Jeff Brown says:
Sean — We’ve been warned about economic mushroom clouds since before mushroom clouds existed. Let’s only go back to Carter. He was gonna spend our way out of the mid-70’s recession. Did he take a page from JFK’s songbook in the early 60’s and cut taxes? Nope. He invoked all the normal socialist ‘solutions’, then when they so predictably failed, he had the colossal arrogance to blame the American people for a bad attitude.
Just as ‘change’ and ‘hope’ won’t affect gravity, socialist economics will always be, and always have been a guaranteed FAIL. Some guy came along after Carter and told Americans we weren’t the problem, socialist ideas were. Then he went over Capitol Hill’s collective(ism) 🙂 heads and got gov’t off our backs. If he’d had a Republican Congress the spending back then would’ve been far lower than it was. Remember, Congress via our Constitution, holds the purse strings in our system.
Though I’ll be forever grateful to those like yourself if indeed you succeed in derailing this express train racing left. I prefer to allow the folks who’ve been duly elected to have their way without delay. The sooner the better. As usual, they’ll fall on their own petard. Frankly, I’m confused already. If the stimulus is so wonderful, and so sure to work, why wouldn’t Dems pass it now, forever cutting Reps off from claiming credit for it’s massive success? But I indulge myself. 🙂
We’re witnessing Carter on steroids. If you wanna know the next couple years’ chronology, simply review the mid-late 70’s. Then review how we shed the anchors and set the economy at full sail in the 80’s.
February 4, 2009 — 8:44 pm
Sean Purcell says:
Michael,
Always great to hear from you. As I said in my first comment, the CRA’s part in this is still being debated and we will have to agree to disagree. As you said, it is a very minor part of what I wrote.
One place we do disagree is the analogy. I don’t see the battery charger idea as representative because it is not a closed system. More accurate would be to suggest that you are going to recharge a battery using a charger that borrows energy… from the battery. There’s a pretty good chance you’re just going to kill it altogether.
I’m not suggesting that government spending has no effect on the economy or even that the affect can’t be positive. But what’s needed is thoughtfulness and a scalpel. What we’re getting is blind haste and a trillion dollars of largess. I want to say this is like using a semi-trailer to kill a fly, but that is a vast understatement. This is a nuclear explosion to kill a fly. Our self-centered, economically ignorant, myopic congressmen and women are granting themselves a trillion dollar charge card with barely enough time for the ink to dry.
Recessions are tough and depressions are devastating, but they are transient. Wildly irresponsible spending may not be. If nothing else you have to admit that the law of unintended consequences has you more than a little worried.
As for tax cuts, I agree that the states are limited. This is more painful for those of us in California and New York where the tax rates are already absurdly high. As an aside, how is it that the states with the highest taxes are in the most financial trouble? You cannot raise taxes to solve problems and you cannot spend your way out of problems. The government should operate no differently than you and I. If something untoward happens to one of us (we’ll call it a personal recession) we pull back, cut our budgets and do what it takes to ride it out. We don’t steal money to continue our life style and promise to pay it back later.
State taxes: not my answer. It’s about small business. It’s always about small business. (Well… sometimes it’s about politics. California used to be a powerful state; hell it was a powerful nation. Now it is financially and morally bankrupt. It is also a one-party state. Coincidence?) I believe it when I read that there are roughly 24 million small businesses in America and 17,000 large companies. Where would you focus your energy if you wanted to add jobs (which must be our primary objective in pulling out of a recession)? Would you like to see 17,000 companies add 2 jobs? 3 jobs? How about 5 new jobs EACH. That’s 85,000 new jobs. Or, we could cut taxes, fees and regulations that harm small business in hopes that just 10% of them grow enough to hire ONE new employee. Presto: 2.4 million new jobs. Small business is the heart and soul of this nation and should be our sacred vision right now.
Once consumers feel comfortable enough to start shopping, employers feel comfortable enough to start hiring and reinvesting, then I will agree with your tax cuts theory. I respect you a great deal Michael, but you have this backwards. Consumers don’t feel comfortable AND THEN employers start hiring and reinvesting. Employers start hiring and reinvesting, which gives consumers a sense of security going out further than one quarter. That’s when they begin spending again. You can’t cause businesses to hire and invest by spending billions of dollars on infrastructure and you sure as hell can’t do it spending billions of dollars on “causes.” It would appear that you can’t even do it giving them money directly (I point you to Bush and Paulsons’ complete waste of $350 billion doing exactly that.) Get small business going again, then we can look at sustained growth through supply-side spending.
February 4, 2009 — 8:57 pm
Sean Purcell says:
Brian,
I would love to read what you have to say about Calbreath’s piece.
February 4, 2009 — 9:04 pm
Sean Purcell says:
James,
Do you really believe we are headed for bread lines? I look outside and I don’t see it. Tough economy yes. Bad economy yes. Painful unemployment yes. But soup kitchens and bread lines? No. As for the republicans, at least they didn’t vote for that House monstrosity. Give them time though. They’ll eventually sign off on a boondoggle. Hyper-inflation will make us all look back fondly on this recession.
February 4, 2009 — 9:08 pm
Sean Purcell says:
Geno,
I don’t know brother. A little time out on a freeway work detail might just buy you enough time for the heat to blow over on that listing you’ve been discussing. I lived a block from Grand and Ashland. I spent some time talking to a couple of guys out that way and you’re right: watch out for the cousin… 🙂
February 4, 2009 — 9:16 pm
Michael Cook says:
Jeff,
Capital gains tax?! I dont often use the word absurd, but when the stock market is down 60% in a year and real estate values down significantly, how many people do you think are saying, “Damn, if only that 15%capital gains tax wasnt eating up my profits…” Try again…
Sean,
We are actually in agreement on a lot of the points you made up top. Consumer confidence and employment is a chicken and egg thing, which I didnt intend to state in any particular order. I actually think they rise together, but that is another small point.
The larger points which we agree on are the crazy way the money is being spent and the ungodly large size of the money being spent. Obviously, the major problem with government spending is that they do it so poorly and in such large quantities. TARP I and TARP II will be bad, no question. But I dont think we should throw the baby out with the bath water.
I also believe my battery analogy holds well here because the money we are spending will be recouped as the velocity of money speeds up. Example: I dont have a job, so I stop spending money at the local diner, they go out of business and 3 other people now dont have jobs. This cycle repeats. Normally, this would ebb and flow, but it appears we are near a tipping point where fundamentals are very bad and unemployment is getting very high.
At times like these, the government needs to inject something into the system to get people back employed and running smoothly again. Like you, I believe small businesses are the most important aspect of this as they make up by far the largest employment in the country. However, we differ on the way to keep them solvent. I believe we are at a point where giving them tax breaks will not help. They are barely breaking even and probably not paying much in the way of taxes as it is. Furthermore, doing nothing in my opinion will also not result in the customary rebound because of the negative economic spiral we currently see.
To me the only other option is government spending. As I said in the previous comment, you can feel free to argue that it is too much and is not going to the right places because I would agree. Getting banks to lend again would be another way to help small businesses, but that would also require government spending.
Sorry Geno, but I dont agree that we need to start helping people get into expensive houses. If you cant put 20% down, you probably dont need a jumbo loan. Prices need to rebalance in real estate and as people see their “nest egg” drop in value like a rock, it will only make them less likely to spend money (I know from personal experience…) causing even more problems.
Finally, I am a little less worried about hyper-inflation in the near term. If you look at the amount of money being lost in real estate and the stock market and you add the $1 trillion in government spending you still have a net loss of dollars in the economy. In my opinion the only thing we have to fear from inflation is over stimulating the economy as it begins to turn around and we are not there yet.
February 5, 2009 — 9:20 am
David Shafer says:
Sean, I knew you were going to ask the question about inflation!!! The answer is not a short one, so put on your reading glasses 🙂
First, I need to lay out why I don’t believe you and Jeff when you say, this is what happened before, so it will happen again. Science has taught us some important things over the last 40 years, and one of the important developments is chaos theory or dynamic system theory. What those ideas has demonstrated is that small, seemingly innoculous items can have dramatic effects on the entire system (the so called butterfly effect). This has been demonstrated in a variety of disciplines including behavioral finance and economics. Black swan events, fat tail, random walk are all outgrowths of chaos theory. What this tells us is that events don’t repeat themselves in the same way as happened before. Wouldn’t the world be great if they did!!! Sean, you and I and Jeff would be sitting somewhere as billionaires if they did, because it would be fairly easy to input into a computer program enough data that it could predict future movements of commondities, stocks, real estate, etc. and we are all smart enough to have done it! 🙂
Now let’s talk about inflation. Your thesis is that when monetary policy dramatically increases money supply (just trying to simplify it for brevity sake) the results will be inflationary. Indeed there is some evidence that happend in the past. But, the world is a different place now. Inflation is by definition an increase in pricing of goods, services, and labor in relation to currency. So let’s look at some key components. Labor for example. We now have a world labor market where everyone is either directly competing or indirectly competing with the world on labor costs. Our labor value is in the top 5% of the world. However, there is a huge gulf between the top 5% and the bottom 95%. That gulf has been getting smaller, but is still very large. Can we expect labor to become more expensive when there exists a huge pool of vastly less expensive labor?
Let’s look at commondities. The price of grain has just gone up substantially. Can we expect it to make a huge jump again? Who is going to pay for this increase? No the most likely outcome is a slow increase in the ability of third world folks to pay an increasing amount for grain. Unless of course one of those pesky black swan events occur! Oil, which fueled the inflation of the 1970s. Back then it was the middle east and us as oil producers. So OPEC could control the market. Now we have in addition to those two, Congo, Russia, North Sea, Venezuela, Mexico and of course shale oil and deep sea oil in the gulf, the artic, Alaska, etc. Technology and increased pricing makes OPEC less able to dictate oil prices.
You could go on and on, but the bottom line is to have hyper-inflation you need rapidly increasing incomes along with rapidly increasing costs of material and rapidly increasing commodity prices. In a world that is flat, I don’t see that happening here (talk to me about China and India though).
However, as noted in the first paragraph, a small event, could produce your hyper-inflation or it could cause the opposite, we just don’t know. What we do know is that it won’t happen just like it did before!
As to the stimulus plan, it is political theatre IMHO. Already we are seeing little ray’s of sunshine about the economy poking through the clouds. I don’t like huge deficits, but I blame most of the deficit on the war which is in its 8th?? year now. Guns or Butter folks and we have chosen guns. Am I hedged against inflation, yes, just by being an active investor I am hedged. I know that is counter-intuitive to the buy gold folks. The people who get really hurt in inflationary times are those on fixed incomes, meaning our burgeoning retirees who are already dependent upon the government!
February 5, 2009 — 9:29 am
Jeff Brown says:
Hey Michael — Absurd would be couching your reply in terms assuming Wall St. is the center of all that matters Heaven and earth. How ’bout the trillion$ in real estate gains that won’t see the light of day because of not only capital gains, much of it more than 15%, not to mention recapture at nearly 25%.
Where do you think much of that capital might go, if it was unleashed sans taxes? Talk about absurd. Leave your own zip code for an hour and think outside the Wall St. box. 🙂
February 5, 2009 — 10:44 am
Thomas Hall says:
I frankly struggle with the concept that somehow we’re moving into a socialistic state when we’ve been living with horribly bloated, ineffective entitlement programs for greater than 6 decades.
I listened to a fascinating discussion on NPR regarding the evolution of money – essentially discussing how we evolved from bartering to sophisticated financial instruments that few if any have the capability to discuss in laymen terms.
The end of the discussion concluded with America’s misconception that we are not a welfare state. The Harvard professor duly outlined how our government squanders billions on health care – a factor of more than 2 than other industrialized nations and we don’t even cover everyone – in fact our void is almost 50 million, alittle more than half the population of Germany alone. The issue isn’t the quality of the care – the issue is the cost.
Funny thing is – these entitlement programs have survived through liberal and neo-con administrations.
Fact is – our government is inefficient. At the most basic level, what are America’s moral imperatives? Let’s drop the ideology out of the discussion and do the right things.
February 5, 2009 — 11:47 am
Michael Cook says:
Jeff,
Recapture and capital gains are different taxes, one based on depreciation and the other based on actual gain. I am sure you know this, but that was for the readers benefit.
I fail to see how changing either of these tax rates would be helpful. If I own a property that has now declined 20-40% in value, I probably dont have to worry about paying capital gains and I may not have to worry about depreciation recapture either if the decline is steep enough.
Additionally, these two items are not a factor in whether or not I sell in a down market. Only losing 15% vs. perhaps 17.5% is not going to be incentive enough to make me sell a property, when it is going to be more costly to obtain financing to purchase a new property. It is really hard to get investment loans now and they are really expensive and require significant downpayments, though I am sure you can site otherwise, in most parts of the country.
“Where do you think much of that capital might go, if it was unleashed sans taxes? Talk about absurd. Leave your own zip code for an hour and think outside the Wall St. box.”
Personally, I think that capital is mostly already gone. It evaporated when housing prices declined 20%+ over the last year. This applies to most zipcodes I know.
Lastly, we need to look at who is really driving the economy. There are far more people working 9 to 5 and /or owning small businesses than people invested in real estate. There are also far more people invested in the stock market than invested in real estate investment properties (401k advantage or disadvantage as the case may be).
Despite all that, its the same story when looking at real estate vs. the stock market. Both have seen significant value erosion and would benefit very little from a capital gains tax reduction today. Maybe when things get up and running again, but today that would do nothing.
I stand by my absurd and raise you an “incredulous.”
February 5, 2009 — 12:00 pm
Jeff Brown says:
Michael — You are wrong on so many levels I don’t know where or how to begin. Suffice to say, you’re obviously unaware of all the real estate out there either free & clear, or with very low LTV’s. They’re legion.
Get beyond the headlines for a minute. You dismiss the recapture, but trust me, it’s real as a heart attack for those standing on the sidelines. This is a no-brainer, and anyone reading this who owns property I’ve described is cheering for my two year cap gains/recapture holiday.
And for the record, a big DUH when it comes to those in an upside down position not wanting or caring about this kind of tax cut. 🙂 Even a caveman like me knows tax cuts to those not subject to taxes is dumber than a bonfire at a gas station. I’m not nearly smart enough to figure out how to give tax cuts to those not currently paying taxes. 🙂
February 5, 2009 — 12:25 pm
Laura Evans says:
Once again I am adding my 2 cents in a domain where entrance costs a plug nickel (minimum) – perhaps leaving you all short-changed. But…
I read Sean’s latest post and the following comments as I always do, with a healthy mixture of pleasure and awe. Then, I emailed Sean privately and said,
—I see the wisdom in Jeff Brown’s post:
“I prefer to allow the folks who’ve been duly elected to have their way without delay. The sooner the better. As usual, they’ll fall on their own petard.”
Sometimes it is better to jump in, fail and recover as quickly as possible instead of dragging out the failure/recovery period.
Or, lose a battle to win the war. HA-OOH!!—
I proceeded to go to lunch and thought, “Oh no! That’s too simple.” Sean is a member of IWA (Irish With Attitude) and he must continue to Fight the Power.
I still believe Jeff is right, but we NEED to continue to hear voices like Sean’s so once the inevitable happens, instead of complacency, we were busy planning our insurrection.
February 5, 2009 — 1:55 pm
Sean Purcell says:
Michael,
You’re right, we do agree on many things. the crazy way the money is being spent and the ungodly large size of the money being spent is certainly at the top of the list. My question to you then is: why are you standing over there with the people doing the crazy spending of an ungodly amount of money?
If you see someone’s been bitten by a poisonous snake and in their haste to stay alive has decided to sever a major arterey in hopes of stopping the poison, you don’t encourage them! You yell stop! You grab the knife. You very loudly and quickly say “I know you have poison in your vein right now, but stopping the poison by bleeding yourself to death is not the answer!” (Too dramatic? 🙂 )
Let’s go back to your new and improved battery analogy. You’ve lost your job and because you no longer eat out, you are directly contributing to the loss of three more jobs at the local diner. So far, I’m with you 100%. Unemployment is a problem. OK, now explain to me how spending taxpayers money (the diner employee’s money) on sex education, rehabbing the National Mall, funding the Endowment for the Arts, contraceptives and climate research is going to help you, the three amigos at the diner or the entrepreneur running the diner itself?
I do agree with you that we are near a tipping point, but it’s not about unemployment. Unemployment is high; it hurts… sort of like a recession is supposed to feel. But it’s nothing close to a depression. When you look out your window do you see people selling pencils? No. The tipping point is of a citizenry moving from self-reliance to government entitlement. That is the trully scary point we are tipping over right now and this “stimulus” package only serves to give everyone a great big push. (Similar to that kid at the pool each summer who’d tell the little one’s he’s going to teach them to swim, then pushing them in and laughing – only difference is: the big spenders on Capital Hill aren’t laughing… and there’s no life guards on duty.)
Getting the banks to lend again is a terrific idea and we’re back on the same page again. If the House and Senate want to spend a couple weeks crafting an expiration laden bill that encourages lending I’m all for that kind of spending. Before they can even begin to discuss ways of making that idea work, they have to get their hands out of business. Lenders don’t lend and borrowers don’t borrow and investors don’t invest when it looks like the government might step in at any moment and change the rules. (E.g. Want to buy stock? Careful, the government might make your preferred stock worthless by injecting tax payer funds and taking the prime equity position. Want to merge a company, sell off a company, create a company? How do you recruit and hire the best guys when the government is threatening to cap how you reward them? Want to start lending mortgage money again? How do you account for the risk of a judge rewriting the mortgage agreement in a BK proceeding? The list is almost endless.) So, get lenders to lend even if you have to spend some tax payers money? Right on. Try to manage business in much the same way you want to manage my spending? Good luck…
Finally, you say you’re not overly worried about inflation in the near term because the money lost is still greater than the flood of freshly printed money the government is churning out. How exactly is it lost? At least with properties this is a non-starter. The people who bought homes in the last 3 years passed tremendous wealth onto the sellers. The people who bought years ago (and didn’t take out an equity line) didn’t lose something they never had. So the money either wasn’t lost, or it went to the sellers who got out when the gettin’ was good. Either way, we didn’t lose that much real money (certainly not enough to offset the government spending like a drunken sailor… with three days to live… in a brothel).
Michael, if we agree on nothing else let’s agree on this: the government is about to spend a Titanic size boat-load of your money, my money and our children’s money on a problem it understands at a considerably lower level than the average small business owner in America.
February 5, 2009 — 2:41 pm
Sean Purcell says:
Jeff,
You are dead-on. The last estimate I heard was that something over 50% of all American homeowners have more than 50% equity and over 1/3 own their homes outright!
Hey, I’m not smart enough for that tax cuts to those not currently paying taxes thing either. Do you think – if we put our heads together – we could come up with a tax rebate for those who didn’t pay taxes? We could even give it a catchy name like… welfare.
February 5, 2009 — 2:47 pm
Sean Purcell says:
Laura,
I disavow any knowledge of any such group as the IWA. (Have you been looking in at the secret meetings?)
Truth to Power, baby. Sinn Fein.
February 5, 2009 — 2:53 pm
Tom Vanderwell says:
Wow, been out and just catching up. This is an awesome conversation. You guys rock!
Tom
February 7, 2009 — 7:39 am
George Williams says:
Always intrigued by those who insist that the government is an efficient allocator and deployer (i.e. spender) of our resources. It is not.
The U.S. Constitution makes no allowances for what Congress and the President are doing with regard to the current ‘bailout’; the government was not setup to compete with the private sector – and certainly not to seize those assets through something along the lines of the TARP.
Fact is, the U.S. government manufactures nothing: it is a bottom line financial liability, whose functions should be what the Federalist Papers envisioned: preserve and protect the Union. Nothing more, nothing less.
February 7, 2009 — 1:20 pm
Robert Kerr says:
…concluded that for every $1 the government spends, it generates $1.40 in economic growth. Uh… yes, you read that right.
It’s the magical perpetual wealth machine: put $1 in, get $1.40 out.
It’s silly, isn’t it? But isn’t is also fundamentally the same as the magical math that agents and appraisers have been peddling for the least decade?
I don’t know how many times I’ve heard: if you spend $20K on a new kitchen / windows / basement /you-name-it, you will get back even more at the sale.
And the pitch is usually followed up with: “ps, call my brother-in-law and he’ll do the work for ya.” You would not believe how many people fall for that.
February 8, 2009 — 9:38 pm