Commentary: Taking Us in the Wrong Direction

Budget-DeficitAmong my biggest pet peeves in politics are those politicians who argue that we need to run government like a business.  I understand the sentiment and the desire to be fiscally prudent, but at the same time, government is not a business.

The goal of a business is to maximize profit for the business.  However, the goal of government is multifold, including the enforcement of laws, distribution of benefits and resources, and of course, administration.

You just cannot run a government like a business, because it functions very differently, and most honest politicians who have worked, particularly in the executive branch, will tell you that.

By the same token, my new and growing pet peeve is the analogy between government budgets and the household budget.

Both sides like to reach for this.  For instance, President Obama in February said, “Families across this country understand what it takes to manage a budget.”  He added, “Well, it’s time Washington acted as responsibly as our families do.”

As one observer noted, “While this comparison appeals to a general belief that we should ‘live within our means,’ it’s also misleading.”

It is the wrong analogy, in part, because just as government is not a business, it is also not a household.

Unlike households, policymakers need to take into account how their decisions will impact the nation’s economy as a whole.

One observer argued that a better analogy would be to compare government budget deficits to prescription medication.  As medicine during a time of sickness can help the body’s natural immunities fight off and overcome infection, so too can deficits, if properly utilized, be used to aid a sick economy and help the natural market forces by providing a boost.

It is baffling, from any perspective other than a political one, that the focus would be on reducing the deficit during a time when the economy is not producing jobs or growing at a reasonable rate.

This is not an argument against closing the deficit, it is an argument against contracting government spending at the very time the economy needs a boost.

As the observer again notes, “The U.S. economy slumped largely because of a reduction in spending by households and businesses. For households, this was a reasonable response to declining property values, job losses and insecurity. Likewise, it made sense for firms to cut back on investment as their customers spent less. If the federal government were to act this way, though, it would reinforce the decline in economic activity, not alleviate it.”

In order to stabilize the economy, we need to rely on the federal government to provide the counterbalance to those swings in both consumer and business behavior by doing the opposite – spending money on infrastructure projects and increasing disposable household income through some sort of targeted tax cut.

Instead, we are doing the opposite, by taking several trillion out of the economy toward some nebulous deficit reduction package.  History ought to teach us this is the wrong approach.

Indeed, the only time in recent years we closed the budget deficit and even ran a slight surplus was achieved mainly by a surge in the economy during the 1990s when revenues soared.  Did we reduce spending?  No.  We slowed the rate of increase and allowed the economy to catch up.

That is not going to happen right now.  We would have to cut so much spending from the economy, to close the gap in a meaningful way, that we would actually simply stall the economy even more.

Indeed the observer notes, “Immediate large spending cuts or tax increases to close the budget gap would be a severe blow to an already weak recovery.”

Unfortunately, politics has taken us in the wrong direction here.  But why should that surprise us?

—David M. Greenwald reporting

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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49 thoughts on “Commentary: Taking Us in the Wrong Direction”

  1. Neutral

    Go ahead and cite your “one observer”. As long as you’re going to lift the quotes verbatim, you might as well give credit where due, in this case Bill Craighead of the LA Times:

    [i]Decisions about the federal budget are fundamentally different from those of individual households, because policymakers need to account for how their choices affect the economy as a whole. It is more appropriate to liken government budget deficits to prescription medicine. Just as medication can be helpful to a sick patient, deficits can aid a failing economy.[i]

    [i]Read more: [url]http://www.mcclatchydc.com/2011/08/25/121943/the-wrong-budget-analogy.html#ixzz1W3E962tc[/url][/i]

  2. David M. Greenwald

    You just defeated the entire purpose for which I withheld the name because people always get bogged down on the personalities and discrediting them and never discuss the ideas. I was trying to avoid that, but I can always count on my readers to defeat the efforts. Thanks.

  3. E Roberts Musser

    I would argue over-regulation (that is largely ineffective) is killing jobs, such as Obamacare and the Frank-Dodd Act. Businesses are holding onto a lot of their revenue bc they don’t know how much they are going to have to shell out when these regulations take effect. These super regulations are causing jitters in the business world.

    [quote]It is the wrong analogy, in part, because just as government is not a business, it is also not a household.[/quote]

    Actually, I think the household analogy is apt. We, as a nation, keep spending money we don’t have, running up debt like there is no tomorrow. If a household did that, it would run into a brick wall very quickly. The fact of the matter is that the federal gov’t needs to stop expanding services, needs to do the job it is supposed to do better, and make do with the sizable tax revenue it is already garnering.

    A prime example of this mismanagement is the SEC (Securities and Exchange Commission – regulates banks and stock market). The SEC is supposed to regulate the banks. Yet it has come out that the SEC is playing footsy with the very industry it is supposed to regulate. As an example, the SEC began investigating Duetsche Bank for insider trading and fraud. A few months later the SEC lawyer that was supposed to be doing the investigating landed a cushy job at Duetsche Bank. The SEC closed its investigation. And voila, no insider trading or fraud!

    We are paying millions upon millions of dollars for regulatory agencies that don’t regulate. Another prime example is the agency that is supposed to regulate the oil industry and drilling for oil. The Gulf oil spill is an example of this agency’s abysmal failure. This agency’s regulators were on the job watching porn, while they should have been watching BP. Has there been any fallout against the agency’s employees who were asleep at the switch? No, nary a fine or firing over the incident.

    Taxpayers are paying billions for regulatory agencies that are not working. Then Obama comes in and insists on creating new regulatory agencies, instead of making sure the existing ones work correctly. You can have all the regulations you want, but if they are not enforced, they are not worth the paper they are written on.

    [quote]This is not an argument against closing the deficit, it is an argument against contracting government spending at the very time the economy needs a boost.[/quote]

    Are you calling for another round of stimulus spending? The first round doesn’t seem to have worked very well, so what makes you think another round wouldn’t just find its way into the wrong pockets (upper mgt in banks) as the first one did? In many cases, millions upon millions for economic stimulus only created a handful of jobs, e.g. 14, while jobs contracted in the private sector, so there was actually a net loss of jobs.

  4. Don Shor

    I think the household analogy is too simplistic. I agree with the basic premise that government is not a business and that it really can’t be run like one. But a more appropriate analogy would be to a very large corporation. Large corporations carry significant amounts of debt, leverage their assets, often hold large liquid reserves, and usually have lines of credit to manage their ongoing cash flow. In my own industry, some of the largest nurseries have been caught short as banks have cut those credit lines abruptly, causing bankruptcies and, in some cases, liquidations. So if you want to stretch the analogy: during the debt limit debate the most conservative legislators were calling for an abrupt cancellation of the government’s line of credit. The government has liquid reserves, and has ample credit. But it can’t function day to day without the line of credit without serious dislocation.

    But you can stretch the analogy too far. I mean, most corporations don’t go to war and put it on their credit card. And most can’t print money when they run out.

  5. Rifkin

    I agree with you, David, and Don, that the “run the government like it’s a businss” meme is off-base.

    However, from my economics background, I strongly disagree with your Paul Krugman-esque neo-Keynesian prescription for the economy:

    [i]”In order to stabilize the economy, we need to rely on the federal government to provide the counterbalance to those swings in both consumer and business behavior by doing the opposite – spending money on infrastructure projects and increasing disposable household income through some sort of targeted tax cut.”[/i]

    You and Krugman and the small minority of liberal (not libertarian) economists who believe deep deficit fiscal stimulus works are terribly wrong. All the Obama economists who claimed his plan would work were proven wrong. I told them BEFORE he passed his plan it would not work.

    [i]”Instead, we are doing the opposite, by taking several trillion out of the economy toward some nebulous deficit reduction package.”[/i]

    You have this wrong, too. The agreement that Obama signed onto with the debt ceiling package reduces the increase in the debt. It does not “take several trillion out of the ecnomy.”

    [i]”History ought to teach us this is the wrong approach.”[/i]

    If history is your guide to stimulating the economy, look at the GW Bush administration. Bush ran huge deficits up to the time Obama took office. Did they stimulate the economy? Obama then took those up several notches, and again the economy was not stimulated.

    Lefties cry that it would have been worse without the Obama stimulus. Bull. No evidence for that.

    It all comes down to a false reading of what is wrong with the economy. The lefties like Krugman focus on aggregate demand. They need to focus on housing inventory. We have an even bigger glut than we had in 2009, and it is growing worse. That problem has created our credit crunch. And that credit crunch is stealing the lifeblood of the economy, money.

    If we would just focus on the inventory problem–read my colum from February 2009 to see how to fix it–we could get this economy going strong, again.

  6. Alphonso

    [b]Are you calling for another round of stimulus spending? [/b]

    We do need to stimulate the housing market – it continues its death spiral and its going to take the economy with it. There are too many underwater loans and the trend of walking away from homes/mortgages is growing. The economy is based on consumption and consumption is based on wealth. If the biggest asset most people own is declining in value consumption and the economy can only go in one direction – down. As people walk away from their loans the foreclosure sale prices distort the comp valuations downward and the wealth of all homeowners continue to sag. One problem is our tax laws tend to encourage people to walk away from loans because you can not write off the loss from a residential home sale. So we need ot beef up the benefits of buying homes (more tax credits) while also increasing the benefits (allowing loss deductions) to selling homes in underwater markets.

    Clearly, the housing market losses have offset the benefits of both the stimulus packages and the tax reduction efforts.

  7. Frankly

    Don: [i]”But a more appropriate analogy would be to a very large corporation.”[/i]

    I agree with this analogy, but with a big caveat.

    [i]”I mean, most corporations don’t go to war and put it on their credit card”[/i]

    Sure they do. They go to competitive war and leverage debt to invest in activities to maintain or grow market share. When they run out of cash flow to cover their existing debt service and can no longer borrow, they are insolvent and file bankruptcy. Businesses can also print money per se by selling equity shares. Like the government, they tend to dilute the value of those shares by creating a greater supply of available shares.

    The caveat, and it is a big different, is that the US government can cannibalize private production (which private wealth is a byproduct of and contributory to) to sustain itself. That is why we see government spending as a percentage of GDP continuing an upward trajectory… because the people running government have a mindset that there is and endless supply of funding sources. This would be like IBM extracting fees from other companies to help it pay its bills, but then, since it kept spending more than it took in, it would need to extract ever increasing fees. At some point the fees paid by the other companies would make them insolvent and bankrupt too.

  8. Rifkin

    [i]” So we need ot beef up the benefits of buying homes (more tax credits) while also increasing the benefits (allowing loss deductions) to selling homes in underwater markets.”[/i]

    I mostly agree with this. However, the key thing to understand in the housing market is that the problem, due in large part to excess building, excess lending and excess borrowing, is one of undercapitalization.

    That is, there are too many “homeowners” who have no capital, no net worth.

    We need to get cash investors to buy them out and to buy up all the foreclosed homes owned by banks. Once that happens, liquidity will return to the economy and we can grow again.

    As I wrote 2 years ago, this is how to get investors to clean up these inventories: “… eliminate all capital gains taxes for investors who purchase a foreclosed property in the next three years and award a federal tax credit to them equal to the amount they pay in property taxes for five years. If someone then buys a foreclosed house for $150,000 and sells it 5 years later for $450,000, the $300,000 capital gain would be tax free. For the time the investor owned the house, Washington would effectively pay his property tax.”

  9. Frankly

    In honor of American ingenuity, free market capitalism, and the pursuit of profit. Note that it was only 27 years ago that this was amazing.

    [url]http://www.youtube.com/watch?v=2B-XwPjn9YY&feature=player_embedded[/url]

  10. Rifkin

    [i]”Note that it was only 27 years ago that this was amazing.”[/i]

    Most amazing, in hindsight, is that 13 months after the Mac was introduced, Apple fired Steve Jobs.

  11. Don Shor

    [i]they are insolvent and file bankruptcy.[/i]
    Interestingly, in this situation most can simply shed debts and start over. In our industry this has become SOP for the larger growers who sell to box stores nearly at cost. What is amazing is that their vendors continue selling to them. It has caught up with a few of them now, notably Hines Nurseries (formerly the largest wholesale grower in the world).
    If bankruptcy actually meant liquidation in most cases, many firms would probably manage themselves better.

    Lots of interesting ideas about how to stimulate the housing market. So how do you suggest helping the 40%+ of Americans who rent? How about the 8 million+ who spend more than 50% of their income for rent?

    I don’t call for a round of stimulus spending for the purpose of increasing growth. I don’t know enough about macro-economics to know whether the first round helped prevent worse economic conditions, as Krugman and others seem to argue, nor do I think anyone can say with certainty whether any fiscal policies would help at this point. I am concerned, though, about what I am hearing from the leading candidates for president, who seem to advocate:
    drastic cuts in federal spending;
    not just no further stimulus, but no further extension of unemployment benefits or other spending to preserve the social safety net;
    privatization and cuts to entitlement programs;
    no loosening of monetary policy.
    I think that drastically cutting federal spending could have adverse effects by increasing public-sector unemployment. I sense that some people think public sector jobs are less valid somehow than private sector jobs. But in our own region, significant cuts in public sector jobs or pay will ripple through the economy, affecting private businesses such as retailers and contractors.
    I think that one role of the government during an economic downturn is to assist people who are displaced and suffering economic hardships. Waiting for the private sector to provide that is likely to take a very long time. So keeping people in school, continuing unemployment benefits, expanding access to health care — all help reduce the impact of the prolonged recession.

  12. Frankly

    [i]”Most amazing, in hindsight, is that 13 months after the Mac was introduced, Apple fired Steve Jobs.”[/i]

    True, but you have to wonder if that might have contributed to his later success. People can get stuck in a professional and creative rut. Many creative entreprenuer types can only grow a business so far and then the shift of energy to operational challenges starts to exceed their talents and capacity. Jobs probably learned stuff he needed to come back to Apple and be successful.

    Another consideration is the organic nature of business leadership need. A lot of success or failure has to do with timing and wired skillset. Successful CEOs are generally right for the time. At other times they can be complete failures just because the leadership need does not match their wiring.

    I will be interesting to see where Apple goes now.

    I wish the heck I had purchased Apple stock in the early 2000’s when my Apple-fanatic cousin (who was working for Apple at the time) told me I should dump my Microsoft and Intel shares and do so. I thought art and technology did not make good economic bedfellow… man was I wrong!

  13. Frankly

    [i]”It’s funny to now see the same liberals who criticized Bush’s spending trying to justify the out of control Obama spending.”[/i]

    Good point Rusty.

    I often wondered about the left skewering Bush for spending on the Medicare prescription drug benefit. I think the fact that they did identified them as more ideologues than principled. That is a difference I see… the right would more likely give credit to any president taking actions that matched their principles. For example, a Democrat president demanding a strong military. However, the left has demonstrated they will eat their young to gain or retain power.

    Bush and Schwarzenegger should have been both favorites of the left: Bush for fiscal policy and Arnold for social policy. The lack of rational support of policy rather than personality or ideology is why I blame the left for the Tea Party. Moderate Republicans get skewered by the left no different than they skewer hardcore conservatives. Since hardcore conservatives already skewer moderate Republicans (see Romney)… the left forces this ideological divide.

  14. Alphonso

    I knew the Chief of Technology at HP when Jobs and Woz proposed their PC ideas to HP. The PC was rejected by HP at that time because it was too large and cumbersome – HP focused on the hand held calculators instead. Apple went for power while HP focused on less power but handy size. The interesting thing is that Apple has made most of its money by downsizing power products into items more closely resembling the original HP calculators, at least in size.

    Another thing to ponder is that even Apple needed a bail out along the way. Without a cash infusion and technology guarantees from Microsoft the company would have dried up and died. Of course now Apple has more than $75 billion of cash and investments.

  15. Dr. Wu

    [quote]If history is your guide to stimulating the economy, look at the GW Bush administration. Bush ran huge deficits up to the time Obama took office. Did they stimulate the economy? Obama then took those up several notches, and again the economy was not stimulated. [/quote]

    Its always hard to prove a counterfactual but I think a strong case can be made that the Bush spending (but even more so the MEWS –mortgage equity withdrawals) as well as Greenspan’s uber low interest rate policies forestalled what would have been a fairly severe but still normal recession after the dot-com bust earlier in this century.

    Similarly the stimulus program of Bush-Obama (yeah late Bush not that different except on healthcare) kept us from a depression–though things are still bad. Unfortunately the stimulus was not well thought out–more infrastructure and payroll tax cuts would have been more stimulative at lower cost. At this point any more stimulus is a political non-starter so no sense in debating Keynes vs Hayek yet again.

    Ben Bernanke will have to pull something out of his hat–his speech tomorrow will be widely watched but his next move is probably later in the year.

  16. Dr. Wu

    Just to clarify–I think Bush/Greenspan should have allowed the US to go through a recession circa 2001-3. But I don’t agree that the Bush stimulus didn’t have an impact (just not a good one).

  17. Frankly

    Yesterday, the Assembly Budget Committee approved both Senate Bill 14 and Senate Bill 15.

    Theh full assembly should vote on them in the next few days. The expectation is that they will pass.

    SB 14 would ensure our tax dollars are well spent by linking state budget decisions to actual program performance and delivery of results. SB 15 would ensure lawmakers look to the future when they make today’s budget decisions by requiring multi-year fiscal forecasts and economic impact analysis be part of the process and available to the public. Both bills make government more accountable to voters.

    Assuming they pass, will Brown sign or veto these bills?

  18. rusty49

    “I often wondered about the left skewering Bush for spending on the Medicare prescription drug benefit. I think the fact that they did identified them as more ideologues than principled.”

    Jeff, the liberals will sell this country out in a heartbeat if they think it will keep them in power.

  19. rusty49

    Here are a few examples:

    for instance…putting as many as possible on Government handouts in order to buy their votes

    making the path for illegals to be a citizen easier in order to pander their votes

  20. Rifkin

    [i]”making the path for illegals to be a citizen easier in order to pander their votes”[/i]

    A personal anecdote on illegal aliens:

    My maternal grandfather was born in a shtetl (a small Jewish village*) outside of Warsaw, Poland, which at the time was a part of the larger Russian empire, ruled by the Czar.

    When my grandfather was about 17 years old, he was captured on the streets of Warsaw and was immediately “drafted” into the Russian army. He spoke no Russian. He was sent to Chechnya for brief training and then he was sent to Siberia to fight a war against imperial Japan. Freezing to death in Harbin (now part of China, but then part of Russia), he fled to Shanghai and over the next roughly 12 years travelled the world, mostly working as a tailor on merchant marine ships.

    He ended up in San Francisco, an illegal alien. There were thousands of other poor, immigrant young men in San Francisco in those days who were also illegal aliens. No one much cared, as long as they stayed out of trouble.

    But trouble came to my grandpa in 1917 when the U.S. entered WW1, the Great War. He and other immigrants in big cities were rounded up and given a choice: join the US Army and go over to Europe and fight and get your citizenship if you make it back alive; or get exiled back to the country you came from.

    Going back to Poland was not a good option for him. He had lost touch with his family. He loved San Francisco. He wanted to become a U.S. citizen. So he joined the Army (where he got his new name, Benjamin Davis) and he served until the War’s end, when he got sent home to California a new citizen.

    Epilogue: In 1920 there was a terrible recession in the United States. Ben was then married and the father of one daughter, my Aunt Rose. He needed work. Hearing there were jobs in Los Angeles, he took the train down to southern California and found a job in the garment district, which was then almost entirely made up of Eastern European Jews. A few weeks after he had arrived, a woman about 5 years younger than he was approached him and asked him in Yiddish if he was “Benyumin Iunowloce” (his Polish name)? He told the woman, who had recongized his voice, that he was. She told him she was his niece, and that she and many of his brothers and sisters and nieces and nephews and most importantly his mother and father all lived in Los Angeles. In fact, he was living just 2 blocks from his parents, whom he had not seen or communicated with in the 17 years since he went AWOL from the Russian army.

    *Shtetls: I am a bit unclear on what my grandfather’s village was like. He told me when I was a kid that it was like a farm. They had cows and crops and orchards and so on. However, my mom’s cousin, who was among those from Poland who had moved to L.A. in 1920, said that where my grandfather grew up it was much more urban than Ben described. My cousin (once removed) said most of the people made their living in the garment trade. My own great-grandfather was a sort of manufacturer. He would travel to Germany to buy old clothes and overstock fabrics; and then take them back to the shtetl where his large brood of kids would cut them up and sew them into new clothes. That is how my grandfather, who ultimately became a clothing designer/fabricator in San Francisco, learned to be a tailor.

  21. Don Shor

    [i]Here are a few examples:
    for instance…putting as many as possible on Government handouts in order to buy their votes [/i]

    I see no reason to believe that liberals support strong social welfare programs in order to create voters or “buy votes.” Support for social welfare programs does not make someone unpatriotic.

    [i]making the path for illegals to be a citizen easier in order to pander their votes [/i]

    Support for easing immigration does not make someone unpatriotic. You are attacking the political positions of those you disagree with by questioning their character, motives, and patriotism. You just disagree with liberals. It doesn’t mean they are more or less American or patriotic than you are, simply because they hold different views.

  22. 91 Octane

    Vanguard: “if properly utilized, be used to aid a sick economy and help the natural market forces by providing a boost.”

    false analogy. when you run up the tab, that means you have to pay off more later, so for the short term improvement, you cause long term damage, just like a credit card. So to talk about deficit spending like it is medicine just like asprin is, is laughable at best.

    Vanguard: “This is not an argument against closing the deficit, it is an argument against contracting government spending at the very time the economy needs a boost.”

    the problem is we “boosted the economy” as you would put it, more than once now, and that did not create the jobs or employment that was promised. we only got deeper in the red, only now, we are out of jobs and employment, and our credit rating is worse. Comprende?

  23. Frankly

    Don, How about lefties screaming about the Bush administration’s program to subsidize the cost of prescription drugs for the elderly… compared to their screaming over the GOP proposing Medicare reform because it would harm the elderly?

    I agree with Rusty too… the latest order by Obama to change the deportation rules to release 300,000 undocumented detainees was just another “politics over principles” move… to make the Latinos happy so they will vote for him in 2012.

  24. rusty49

    “if the answer to a recession was simply to pump stimulus money, every nation and his brother would be well off by now with full employment.”

    91 Octane, you’ve got it. If spending more and deeper debt was the answer then why is Europe forcing Greece into an austerity program?

  25. jimt

    Want to chip in my 2 cents since this is one of the few times I agree with DMG’s main premise!
    Government is not like a big business or a big corporation, in that these entities are run strictly for profit. Government is not (theoretically) run for profit; though with the ongoing incorporation of the federal government by big finance/business in the USA; you might say the government is run for the profit of those few who pull the strings on it. As government becomes increasingly micromanaged by big finance/business interests; does this make the citizens into employees? In other words, the government does not work for us; we work for USA, Inc. The end point of this process is the same as communism; where government and big business are one and the same entity; and inevitably succumbs to the irresistable temptation of being run for the immense profit of those few who steer/direct the system; only it occurs via the fascistic route rather than the grass roots revolutionary route (in my view Obama was set up to put a populist face on the continuing consolidation of government control by big finance/big business).

    Maybe what people really mean when they talk about running government like a business is to incorporate certain specific business standards of efficiency into some government operations. That I could support.

  26. Rifkin

    [i]”with the ongoing incorporation of the federal government by big finance/business in the USA; you might say the government is run for the profit of those few who pull the strings on it.”[/i]

    I would put this somewhat differently. Our lawmakers generally serve the interests of those who finance their campaigns for office. If a member of Congress–or the president, for that matter–takes his money from big corporations, he will serve the interests of those big corporations.

    In some respects, all big businesses depend on certain government decisions to avoid being run out of business or to maintain the status quo or to make themselves profitable. It’s for that reason that most large companies join trade associations which fund campaigns and lobby elected officials, or the businesses are large enough or desperate enough to fund campaigns themselves and hire their own lobbyists.

    But if you look at who is funding campaigns, big U.S. businesses are not the largest funders. The real big funders of campaigns in states like California are the labor groups, which make 100% of their income based on government decisions. Lawyers who make their money suing businesses are the next largest group of funders of campaigns.

    On the national level, rich family farmers and farm corporations and food processors spend a ton of money on campaigns and lobbying. But even more important than the farmers are the contractors who make all of their money selling their wares and services to government. These contractors are partly free enterprise and partly government enterprise. An example is Boeing, which makes commercial and military aircraft. There are also many other government contractors who exclusively operate by winning government contracts. These companies make sure they have members of Congress and the president on their side.

    The last big group of big funders are the highly regulated industries, like big oil, big pharma, big coal and so on. These groups fund in order to get the regulations to work for them.

    If you don’t want organized labor, lawyers, farm lobbies, trade groups and so on dominating our politics, you should favor publicly financed campaigns. In my view, if we had public dollars financing candidates for office, we would have a much smaller, much less intrusive government. And our democracy would be far less corrupt.

  27. Rifkin

    According to followthemoney.org ([url]http://www.followthemoney.org/database/top10000.phtml[/url]), these are the largest campaign financers:

    1 — NATIONAL EDUCATION ASSOCIATION — $56,349,269
    2 — PECHANGA BAND INDIANS — $43,960,451
    3 — PENN NATIONAL GAMING — $40,522,447
    4 — MORONGO BAND OF MISSION INDIANS — $39,053,909
    5 — SERVICE EMPLOYEES INT’L UNION — $35,699,957
    6 — NATIONAL ASSOC OF REALTORS — $28,591,134
    7 — LAKES ENTERTAINMENT — $25,694,898
    8 — TRIBES FOR FAIR PLAY — $24,754,413
    9 — ActBlue — $23,183,948
    10 — AGUA CALIENTE BAND OF INDIANS — $22,079,201
    11 — AFSCME — $20,966,656
    12 — COMMUNITY FIN’L SERVICES ASSOC — $20,162,020
    13 — CLEAN ENERGY FUELS CORP — $18,851,800
    14 — PG&E CORP — $16,549,500
    15 — EDISON INTERNATIONAL — $15,133,561
    16 — INT’L BRO’HOOD OF ELEC WRKRS — $14,852,129
    17 — ARIZ COMM. FIN. SERVCS ASSOC — $14,675,023
    18 — AT&T — $14,510,025
    19 — LABORERS INT’L U OF N. AMERICA — $14,336,186
    20 — PALA BAND OF MISSION INDIANS — $13,180,519

  28. Frankly

    [i]”Maybe what people really mean when they talk about running government like a business is to incorporate certain specific business standards of efficiency into some government operations.”[/i]

    jimt, that is what we mean. We certainly don’t want government to profit from services it provides. However, you can create cost-benefit (value) models from any enterprise. Costs are definitive and tangible. Benefits might be too… or they might be partially derived and intangible. However, once established, here is where the business sense comes in… constantly seek and implement changes that result in the greatest benefit at the lowest possible cost. In other words, always seek the greatest value for our tax dollars.

    If government would do this, government would leave more services to the private markets and individuals, because government struggles with inefficiencies resulting from the lack of incentives to create greater value.

  29. JustSaying

    Rich, in what category aren you placing the tribal/gambling donors? Looks like big business to me. They rank high nationally, but almost all the cash was spent in California. On what? Why are our politicians soliciting this particular cash.

    The most irritating thing about this is that it diverts money that could be funding useful things. How about just a portion to finance a tribal college in California, so our Native Americans don’t have to go halfway across the country to get a quality NA education. Instead, it’s sent to Sacramento to insure something (probably nefarious).

    P.S.: Thanks for sharing the great story about your grandfather. What an exciting, exceptional fellow. I expect the current crop of illegals will have similar stories of hard work, devotion to family, contributions to and pride in their new country….

  30. 91 Octane

    Vanguard: “In order to stabilize the economy, we need to rely on the federal government to provide the counterbalance to those swings in both consumer and business behavior by doing the opposite – spending money on infrastructure projects and increasing disposable household income through some sort of targeted tax cut.

    Instead, we are doing the opposite, by taking several trillion out of the economy toward some nebulous deficit reduction package. History ought to teach us this is the wrong approach.”

    but we tried your approach already, and didn’t get anything for it. We pumped stimulus money into the economy more than once now, and have little to show for it.

  31. E Roberts Musser

    [quote]One problem is our tax laws tend to encourage people to walk away from loans because you can not write off the loss from a residential home sale. [/quote]

    No, actually you cannot necessarily write off the loss on a short sale, to the surprise of many a homeowner who tried to walk away debt free. If the homeowner’s house is underwater (loan is worth more than the value of the house), and the homeowner sells the house at a loss, the homeowner is still responsible for any loss the mortgagor takes on the short sale. Only if the bank agrees to let the homeowner off the hook is the homeowner not liable for that loss. And banks have been extremely reluctant to allow homeowners off the hook. I have had several cases where this has happened, much to the chagrin of the homeowner.

    What is really despicable about all this is that the banks often talked homeowners into taking out loans they could ill afford to purchase a house. Then when things came crashing down from the speculative housing bubble, these same banks took gov’t bailout money to get themselves out of hot water, but had no such compassion for the very people they duped. Had a case of someone who lost a home they lived in for 30 years, bc the bank gave them very misleading paperwork that listed the yearly interest rate as monthly (so it looked like the ARM was only 1 1/2% per year rather than per month), and talked them into converting uncollateralized debt that could have been written off in a simple bankruptcy into collateralized debt with their home as forfeit.

    To Rich Rifkin: Thanks for the wonderful story about your grandfather…

  32. E Roberts Musser

    [quote]One problem is our tax laws tend to encourage people to walk away from loans because you can not write off the loss from a residential home sale.[/quote]

    Oops, read this incorrectly. I thought what you meant is that homeowners could walk away without debt obligation if the home is underwater. However, I read your comment more closely and realized you’re talking about writing off the loss on one’s own income taxes?

  33. Alphonso

    “No, actually you cannot necessarily write off the loss on a short sale, to the surprise of many a homeowner who tried to walk away debt free.”

    ERM – you are agreeing with me. The tax laws do not allow the homeowner to write off that loss and that contributes to the tendancy to walk away and just let the bank foreclose. We would have a more orderly RE market if underwater sellers were encouraged more to sell the homes. I know at least a half dozen young people who are in the process of the walk away/ foreclose. They all put very little down (3%) and they need to sell for reasons like job move, separation and even need a bigger house. They can stop making payments, knowing it may take up to a year for foreclosure and simply move one. Of course they lose the down payment and any improvements they made but they avoid having to shoulder huge losses beyone the 3% down – the bank eats it.
    Of course foreclosure has a negative impact on credit but so many people are doing it the negative impact only lasts about three years. Meanwhile the high volume of foreclosure sales drive market comp prices way down and causes more market disruption.

  34. Frankly

    Elaine: That is correct about the borrower being on the hook for the short sale short… unless they negotiate an offer in compromise with the lender.

    Note though, that for every genuine victim of too aggressive lending practices, there are probably three times the number of borrowers lacking morals and perfectly happy to screw the bank and the government if they can. This is a big reason why banks don’t accept offers in compromise. Their special assets people are dealing with a majority of borrowers lacking any sense of moral or ethical obligation.

    I have had several borrowers just stop paying on their small business property loan because they were mad that their commercial real estate values had fallen. They demanded that they get “some of that Obama money” to help them. They allowed their property to be foreclosed on… closed their business and laid off their employees. Interesting too… most of these problem borrowers were first or second generation immigrants of specific ethnic origins. It was clear to me in my dealing with them that their business moral compass was influenced by their imported ethnic culture.

    Related to this, and something else I find fascinating… there are more of these cases in Southern California than Northern California. It may be a jump, but I see the greater ethnic diversity of Southern California contributing to a lack of sense of community or national pride that leads to more of this selfish and immoral behavior from borrowers. They simply don’t care who gets screwed in the transaction as long as they think they can get away with it. And note that B of A is having to lay off thousands of employees because of the mortgage losses they sustained from the Countrywide portfolio. Borrowers that walk away hurt others.

    Looking back, the issue with homeowners that got duped into buying more house than they could afford… the simple fact that they lacked the knowledge to make an informed decision on this should have been evidence that they were not qualified borrowers. I purchased my first house when I was 24 and knew enough then to steer clear of adjustable-rate mortgages to allow me to buy up to a more expensive home than I could afford. I also was just smart enough to not leverage my growing home equity to buy new cars and take lavish vacations. My ability to control myself had to do with me achieving some level of personal economic maturity. Many borrowers lacked this and should not have been considered qualified home buyers. Thank your government for starting the feed frenzy on the practice of giving mortgages to economically immature, unqualified borrowers.

  35. Alphonso

    [b]Many borrowers lacked this and should not have been considered qualified home buyers. Thank your government for starting the feed frenzy on the practice of giving mortgages to economically immature, unqualified borrowers.[/b]

    But that is not always the case. All of the young people I know who are walking away from their homes have combined incomes of around $250K – so they are fully qualified. They need to move and they have made an economic decision to avoid shouldering the loss. The real problem is a lousy market.

  36. Frankly

    Alphonso, That makes sense. These folks probably purchased in the hot market with 80 or maybe 90 LTV, and now they are upside down because the market crashed. They have to move for economic or other reasons. In this case I think most banks would accept a short sale. I agree that it does not make sense in these situations the short gets added to the borrowers income at tax time.

    However, my point still stands that there are a great number of borrowers out there lacking morals and who will walk away. The tax hit from a short sale is one disincentive. If it is removed, there will be more walking away.

  37. Frankly

    Note in these circumstances, many people I know hold on to their propery as a rental. It depends on a number of factors, but selling in a down market is not the only stratgey for some borrowers that would otherwise take a big haircut.

  38. Alphonso

    [b]However, my point still stands that there are a great number of borrowers out there lacking morals and who will walk away.[/b]

    It’s great to speak of morals, but then you and I have never faced the current situation. My home is worth 4X what I paid for it and I imagine you are in the same boat. However. let’s say you bought a condo on Santana Row in SJ for $350K an now it is worth $250K and you originally paid 3% down (roughy $10K). You changed jobs to one in SF but the bank will not agree to a short sale because you could commute. You have a mortgage loan of around $335K. You could sell it for $250K and take on the loss on sale obligation $250 sales price less commision 8K – less the mortgage $335K – so the leftover obligation would be$93K and it would not be secured (if you had to borrow the money) so the interest rate would be around 10%. Another choice might be to sublease the unit but that is only cover about half of the monthly obligation. The final choice is to simply walk away and let the bank foreclose. If you walk away you lose $10K but if you sell it you lose the $10K plus another $93K. Morally you should sell the house and eat the loss, but that is not what is happening. There is nothing being done (like tax help) to encourage sellers to do the “right” thing.

  39. Frankly

    Alphonso: I don’t understand the “walk away and lose $10k” point. When you walk away you are still obligated to pay the debt. The lender can seek a deficiency judgment. Also, it does not matter if the unpaid debt is from an accepted short sale, or from a foreclosure auction. In both cases the IRS considers the forgiven debt as ordinary capital gains. Also, your credit rating gets destroyed.

    The best alternative is to rent out the place. In most areas homeowners should be able to rent for close to what their mortgage is unless they have a funky loan. If they have a funky loan, the lender might consider a loan conversion to help reduce the monthly payments. For example, say you had a 15-year adjustable… maybe the bank would consider restructuring to a 30-year fixed to lower the payments.

    One more thing… if this couple made $250 per year and only put down $10k, they fit in the group of “unqualified” borrower in my view. If they had put down 20% like has been the standard down payments for residential mortgages, they would be able to sell the place closer to the amount of their outstanding debt. For example, you say the original purchase price was $350k. Then 20% is $70k. So if they had put down 20% they would have a $280k mortgage. $38k should be easy for a $250k couple to handle… note too that they would be able to write off some of this loss on their annual tax return.

    Can’t blame the bank or IRS for the 3% down. One way to look at this is that they got the benefit of use for so many months/years will also enjoying the use of cash they would have otherwise had to sink into a down payment. Now they are paying the price for the benefit since it had associated risks that have been realized.

  40. JustSaying

    How can people in $260,000 house with a $320,000 mortgage @ 6-1/2% interest–having already lost their down-payment equity and half of their employment and after spending two years trying to get the bank to renegotiate the loan under some federal program–be accused of lacking morals if they finally punt?

    With bank making business decisions to keep underwater homeowners locked into existing high-rate mortgages instead using the cheap federal money they’ve accepted to relieve the pressure, who’s “immoral”?

    What’s the homeowner’s best, similar business decision, then, if a short sale won’t relieve them of “underwater” portion and adds realty fees? Does a foreclosure wipe away the difference either? How many decades before these young people get back on their feet with this dilemma (on top of student loans)?”

    I think I like Rich’s solution to get these surplus houses off the market.

  41. Frankly

    You all do know about the Mortgage Forgiveness Debt Relief Act of 2007, correct? This provides tax relief for principle home mortgages with debt forgiven in 2007 through 2012. The Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence.

    The amount of debt forgiven must be reported on Form 982 and this form must be attached to the taxpayer’s tax return.

    This makes a short sale a much better option since it will not result in a destroyed credit rating.

  42. Alphonso

    [b]Alphonso: I don’t understand the “walk away and lose $10k” point. When you walk away you are still obligated to pay the debt. The lender can seek a deficiency judgment. Also, it does not matter if the unpaid debt is from an accepted short sale, or from a foreclosure auction. In both cases the IRS considers the forgiven debt as ordinary capital gains. Also, your credit rating gets destroyed. [/b]

    In the cases I have heard about the banks are not seeking deficiency judgements and they are not even sending the 1099 c statements so there is no forgiven debt “income”. You are right about the credit rating – but again there are so many people doing this (going into foreclosure) the negative rating has an impact for only about three years.

    I know very little about form 982 but I know the qualifications are complicated – so be careful with that one.

    [b]note too that they would be able to write off some of this loss on their annual tax return.
    [/b]

    That is an incorrect statement – I thought it was the way you described until about 4 weeks ago when I did some research . You can not write off the loss of value of a residence on your tax return.

  43. Frankly

    You are right, I was wrong on the loss write off… I was thinking about rental properties. In that case you can deduct the loss in value from basis minus depreciation. You cannot write off the loss from the depreciation of primary home or property not rented. That is because you can write off the mortgage interest.

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