Oct 17, 2008

Income Inequality: How To Lie With Statistics

I know it doesn't come as a surprise to anyone, but a new article by Alan Reynolds, Cato Senior Fellow, shows just how simple it is to "prove" income inequality has been growing in recent years. (You can read the full article here) Obama routinely uses this canard to dupe his worshipers, er, I mean followers. As Barry is reputed to have an above average IQ (130), one would doubt that he, too, has been taken in. Maybe he is too busy trying to dig up the paperwork a Federal Judge in Pennsylvania has ordered him to produce which proves he applied to have his American Citizenship restored? I know that would distract me if I had spent years seeking a position which has citizenship as a legal prerequisite.
Anyway, back to 'income inequality'.
Every collectivist progressive loves to tout how 'due to the Bush Tax Cuts, the top 1 percent got filthier rich and the poor just got poorer.' They often cite studies from this or that progressive organization such as the Brookings Institute or the Pew Charitable Trust. As Dr Reynold's article is rather short, there is no need to recreate it here, but suffices to say that it is a simple as choosing what year the comparison begins or ends with. Another simple method is to use before tax numbers to justify increasing taxes. Finally, what components of a group's income are included as income for the various brackets compared is used. The differences can be dramatic.
What Reynolds demonstrates is that the only real way to compare is via actual tax rates, per group over the same time-frame using the same data-set--in other words, comparing apples to apples. Here is a concise breakdown using a single Congressional Budget Office set of data (Dr Reynolds does not actually put this in a table, so I did) This table actually included one of the two years (1979 and 2002) that are routinely used to demonstrate income equality:

Percent Income Paid as Taxes by Bracket
Year/Bracket Top 1% Middle 20% Bottom 20%
1979 21.8 7.5 --
1989 19.9 -- (-1.6)
2000 -- 5.0 (-4.6)
2005 19.4 3.0 (-6.5)

That is right, folks. Those minus signs are payments to the bottom 20% through things like the Earned Income Tax Credit and other giveaways. Of other people's money. If you were constrained by money in choosing your child's college, for example, now you know where that money went. And yes, everyone has received a tax break. But by far those in the bottom quintile have 'benefited' much more (1.4, vs 4.5 vs at least 4.9).
Although I probably shouldn't stray too far from the point, one perspective that I can't get away from is: In light of the above, just how is Obama planning to give a 'tax cut' to 95% of working Americans?

Sep 22, 2008

Mortgage Meltdown Notes

This is a collection of links and references documenting the current mortgage crisis.

Background & General Coverage

Good general coverage is by the Competitive Enterprise Institutes OpenMarket.org.
A very good explanation about how the whole subprime process--with enough detail to actually explain it. 'Betting on Financial Armageddon' This also gives us another entry in the 'Blame Line' below.
Criticism of the Paulson Fannie & Freddie bailout at A "Failed Business Model"

The Fix 

Wall Street Journal-Here was a good plan to fix the long term Frannie and Freddie nightmare 'End the Mortgage Duopoly'
A simple and elegant fix which addresses the real culprit, the mark-to-market accounting rules: 'Here’s A Plan to Avoid a New RTC'

The Blame Line

Campaign Contributions by Fannie & Freddie as reported by 'open secrets' 'Update: Fannie Mae and Freddie Mac Invest in Lawmakers'
Congress members invested in Fannie & Freddie 'Fannie Mae, Freddie Mac Takeover Costs Congressmen Who Were Invested'

Goldman Sachs chairman and chief executive Lloyd Blankfein said one of the problems was that many financial institutions and investors "outsourced" their risk management."Rather than undertake their own analysis, they relied on the rating agencies to do the essential work of risk analysis for them. This was true at the inception and over the period of the investment, during which time they did not heed other indicators of financial deterioration," he told the panel. 1/13/2010 Congressional Testimony. Top US bankers admit missteps in financial crisis

"Up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. Three down."
SEC regulation has actually created a Cartel in the Credit Rating agencies, which has established significant barriers to entry--just another way government regulation is responsible for this crisis. Part of Basel II according to Randy (Basel II)

The three cartel agencies; Fitch, S&P and Moody's that have done the CDO ratings "Amid the chaos of the escalating subprime mortgage crisis, the three major credit-rating agencies - Fitch, Moody's and Standard & Poor's - have been voices of calm. They've downgraded only a sliver of the debt backed by such mortgages, and they say they expect the mess to stay safely confined to the subprime sector."
"Investors criticized S&P, Fitch Ratings and Moody's Investors Service, saying their ratings on bonds backed by U.S. mortgages to people with limited credit didn't reflect the lax lending standards that caused their backward-looking default rates to be inapplicable to risk level of the loans being made."
One thing that contributed to the credit crisis was the sucking up of massive amounts of liquidity by international central banks to borrow huge amounts for stimulus plans. (sjb)
Nobel laureate Joseph Stiglitz, economics professor at Columbia University in New York observed: “I view the ratings agencies as one of the key culprits. They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.”

HUD, Fannie & Freddie and the CRA:
Investors Business Daily traces some of the links between HUD, Fannie & Freddie and the Community Redevelopment Act in 'The Real Culprits In This Meltdown'
Great article by the liberal rag--The Village Voice--regarding the Federal Government's policy involvement in the current liquidity crisis. 'Andrew Cuomo and Fannie and Freddie' Aug 2008
A chronological list of HUD secretaries is here.
GAAP Accounting Rules

Wall Street Journal on the impact of new (last November) government mandated accounting rules. 'Maybe the Banks Are Just Counting Wrong'

Just my own opinion:
(2/15/2010) Remember how mortgages used to be when you were growing up? You got your loan from a local bank or Savings & Loan (this was one of the reasons S&L's were created--banks too restrictive on loans to regular people) and they usually kept it in house and serviced it. That also means that the bank representative who sold you the mortgage has his/her reputation on the line. Likewise, the bank would suffer the consequences if you defaulted.
All that ended with Fannie. Later Freddie--which had been around since the 30's--updated its business plan to get in on the action. Now mortgage brokers and mortgage banks would make the loan, but then sell it to Fannie or Freddie (F&F). The originator would never see that loan--or be liable for the risks, if any--again. All of this was a part of a wonderful government plan to expand homeownership. Talk about unintended consequences!

Mar 16, 2008

The Road Less Traveled: H.R. 3343

Politicians and the media have molded the national conversation on health care into a discussion about a choice between our current free-market system and a government funded, universal health care system. As prices continue to spiral out of control, it seems everyone is calling for the government to 'do something'. The approach most favored by the media is to label out of control health care costs as a 'market failure'. They quote statistics indicating that health care costs are increasing year after year at rates far beyond the annual inflation rate, and call it proof of a classic failure of the free-market. The fundamental 'ruthlessness' of the free-market is likewise to blame for the millions of Americans without access to medical care. Only more government controls will get prices under control and provide coverage for all Americans.
We are never told that the government already controls health care spending in the US. In fact, government provided health care (Medicare, Medicaid, SCHIP. etc) and regulation determines approximately 80% of all health care prices in the US. In reality, then, the spiraling costs are not a free-market failure; they are a government failure. All truly unregulated, free-market health care cost trends are exactly opposite the current cost trends of government regulated medical services. According to a 2006 survey of studies by the National Center for Policy Analysis the costs of medical services not regulated or covered by government or insurance, have either fallen or not increased as much as either prices in general or covered medical services. Cosmetic surgery fared the worst of the services studied and LASIK surgery the best:
From 1992 to 2005, a price index of common cosmetic surgery procedures rose only 22 percent while the average increase for medical services was 77 percent; overall, prices for all goods increased 39 percent.
The cost per eye of conventional vision correction laser surgery (LASIK) averaged about $2,100 between 1999 and 2005. By 2005 the price had fallen to just over $1,600.
As these cases show, the plain fact is that the evidence we have for the operation of a free-market in medical services shows that it works. Our daily experience of sustained and substantial rising prices indicates that our current government-managed medical care does not work. Yet all the health care proposals of the major Presidential candidates ignore this fact, and at best they promise us more of the same. Only one candidate--Congressman Ron Paul--seems to have a solution; and it is already a bill in Congress. Dr. Paul's 'Comprehensive Health Care Reform Act' (H.R. 3343) according to DownsizeDC would:
  • Give you a 100% refund from your taxes of every dollar you spend on medical care, including insurance premiums.
  • Make it easier for your employer to deposit the money it now gives to the health insurance companies into a Health Saving Account that would belong to you
  • This money would come to you tax free--you could use it to fund your health care and your insurance premiums This means your health insurance would belong to you, not your employer
  • You would have the money to pay small medical expenses with your Health Savings Account, which would allow you to reduce your insurance premiums by buying a Major Medical Plan, instead of a Cadillac Plan
  • You would also earn interest on the money in your Health Savings Account, tax free--you would get this interest instead of the insurance companies getting it (collecting interest on premiums is how the insurance companies make their money--these profits could be yours instead)
  • Plus, you would become your doctor's customer, instead of the government or your insurance company being your doctor's customer
  • This would place the consumer in charge, creating competition that would lower prices and improve quality

Simple and straightforward, the bill applies proven, free-market principles. It would bring down prices using competition, applied technology and increases in efficiency. As prices come down, more and more Americans would have access to affordable health care. Free market competition forces increasing availability. The history of decreasing prices over time in long distance calls, the automobile, and HDTV should make this point crystal clear.
The real national conversation needs to be about how best to de-regulate medical care, and what can be done to speed the transition to a system that works, not who will march the fastest down the road toward government mismanaged Universal Health Care.
(This article was published by The Conservative Voice on March 16, 2008.)