"Tax Cuts Are Not The Answer"

In his latest missive on the No Nonsense Economics pseudo-blog, economist Chris Thornberg provides a very detailed analysis on why tax cuts in the U.S. are not the panacea that some politicians would have you believe.

From his post:

First I need to make one thing perfectly clear: I am not a fan of paying taxes. I recognize that government involvement in the economy is necessary for the promotion of the public welfare. But the waste in terms of efficiency not to mention the funding of pork barrel projects for privileged special interests is at best frustrating and at worst criminal.

I mention this because I realize I will hear a howl of protest from the right when I point out something quite obvious—that cuts in public spending and tax cuts for individuals at any level of income are not going to cure what currently ails the U.S. economy. Such a statement is close to blasphemy in some circles, but unfortunately neither the data nor the logic support the point of view...

In particular the Bush tax cuts, which lowered overall tax rates substantially, did not lead to a new acceleration in job growth. Instead jobs stayed on their same slow downward trend. Looking back farther, a sharp increase in taxes at the end of the 1960s did not substantially lower job growth either. And most damning of all is that taxes, for the past 2 years, have been pegged to their lowest level for well over 50 years—and it hasn’t helped pull the U.S. out of its current slump...

On tax cuts, both parties are wrong. All the tax cuts put into place by both Bush and Obama are doing as much to stimulate the Chinese economy (if not more) as our own by simply keeping the trade gap unsustainably high. And it surely hasn’t helped those ‘job creators’ create more positions given that job growth over the last decade has been tepid at best. Ultimately the cuts are only enabling Americans to continue to overspend—a bad habit that started during the housing boom that dominated the economy over the past decade.

Its time to recognize the failure of these policies as a cure for the U.S. economic doldrums. Instead they are simply building up a painful amount of Federal debt that will eventually need to be reckoned with. As for spending, this money would have been much better used as direct funding for infrastructure projects, and perhaps tax credits for small business investments and hiring. This would be spending that directly affects U.S. production...

Click here to read the post in its entirety.

Collateral damage from unfinished new home projects

When I was recently asked by the blog L.A. Land to defend the temporary change in the tax law to allow builders to recapture taxes paid in the boom years to help them weather the bust, I did so partly to gauge the sentiments of the blog's readers. The results? A big PR headache for builders, as the mail ran 40:1 against any type of bailout.

But one of the reasons I defended the 'bailout' was because when a builder goes bust, it's not just the executives and employees who are punished -- it's also the vast army of subs and suppliers, not to mention homebuyers who were buying into what they thought would be a new -- and finished -- community. While the anti-bailout folks would casually dismiss this as Rumsfeldian 'collateral damage,' I think it's a bit more complicated than people either realize or want to know. From an MSNBC story:

As America’s housing market has foundered, homeowners who bought into newly rising projects at just the wrong time have found themselves marooned in stalled, abandoned or largely unoccupied developments with little place to turn, placing a strain on them and municipalities forced to pick up the pieces.

Experts say it’s one of the least examined aspects of the housing downturn, and one that has struck many parts of the country, from areas like Las Vegas, which experienced rampant speculation and overbuilding, to cities where construction was more restrained such as the Jersey Shore and Philadelphia...

One third of over 200 cities surveyed have seen an increase in abandoned or vacant properties in their communities as well as other forms of blight, according to a report released last month by the National League of Cities in Washington.

Nearly 60 percent said lenders have not offered to help cities deal with the fallout from foreclosures and other problems in housing.

“In more cases, cities are picking up the slack by maintaining the homes, mowing the lawns and making sure that neighborhoods with abandoned housing are safe,” said Christiana McFarland, research manager at the league’s Center for Policy and Research. “It’s a strain on resources.”

More than 25,000 vacant and abandoned properties cost eight Ohio cities at least $63 million, as local governments deal with job losses and the foreclosure crisis, according to a February report commissioned by ReBuild Ohio, a coalition of local government, nonprofit and civic groups...

Like abandoned and foreclosed homes, unfinished houses and projects are not merely community nuisances. They also contribute to the glut of inventory dragging down the market...

When fewer than half of the units in a project have been sold, the developer usually retains control of the homeowners association, diminishing the clout of residents if they wish to get things done.