« Cap and Trade as Futures Market | Main | The Myth of the Rational Amazon Book Reviewer »
Argument by omission
Sebastian Mallaby writes:
The political pressure to act reflects concern for homeowners. But as the blogger Tyler Cowen has written, there are better ways to target assistance to the deserving poor than by rescuing subprime borrowers. Given that they hold some responsibility for borrowing too much, subprime borrowers are not society's most unambiguously deserving group. And many of them are not poor, either.
Equally, the pressure to act comes partly from concern that the subprime mess is scaring investors away from whole classes of debt, with indirect effects on the economy. But if investor confidence is the problem, government meddling can backfire. The leading Democratic presidential candidates have proposed, variously, a moratorium on mortgage foreclosures, a freeze in loan rates and other measures to help homeowners at the expense of investors. This is hardly the best way to rebuild market confidence.
This is correct, although of course you would expect me to agree with myself. Mallaby does conclude that the government should do something, by the way.
Now read Paul Krugman's column on the same topic, from the same day. On a sentence-by-sentence basis, Krugman's claims hold up (though he probably exaggerates the extent of fraud in order to demonize the lenders). On policy, he argues that the bankruptcy courts should give borrowers a better deal. I, too, favor a looser bankruptcy law, but is this the right context for such a change? The two claims cited by Mallaby are never dealt with:
1. Subprime borrowers are not the most deserving poor, and many are not poor at all
2. Right now is not a good time to penalize credit-constrained banks or rewrite contracts against their interests
Maybe Krugman disagrees with these points, but we never learn why. The duty of the popular economist is to encourage audiences to move beyond simple good-bad stories and think in terms of opportunity costs and unintended consequences. As a writer, Krugman is one of the best clarifiers of all economists, of all time, ever. He has trained himself to specialize in clarification, but on some issues the truth is in fact murky and this psychological tendency to clarify leads him astray.
Clive Crook has a good column on the Paulson plan. Arnold Kling has very good commentary. Felix Salmon has a good analysis of Krugman the blogger vs. Krugman the columnist.
Posted by Tyler Cowen on December 10, 2007 at 12:35 PM in Economics | Permalink
Comments
Tyler's statement, "As a writer, Krugman is one of the best clarifiers of all economists, of all time, ever." is false. Have you been reading his columns in the NY Times? The statement would have been true in the mid-1990s with Krugman's excellent columns on Slate and with his book, Pop Internationalism, which I still recommend. Imagine the take-apart he could so on his fellow columnist Tom Friedman, if he so chose. But he gave up clarifying economics some time ago.
Posted by: David R. Henderson at Dec 10, 2007 1:48:15 PM
This is very generous to Krugman. He, and Reich for that matter, clarify supportive arguments very well while glossing or obscuring the perverse incentives in their preferred regulatory solutions.
Posted by: JasonL at Dec 10, 2007 1:48:24 PM
I find it interesting that Krugman mentions people like "working families" and "distressed and defrauded borrowers" but never mentions the "deserving poor." Are Krugman and Tyler (and Mallaby) even talking about the same people? How did the poor even enter the discussion?
Posted by: Peter at Dec 10, 2007 2:24:04 PM
Here follows my message to Mr. Crook:
Sir:
First, I have been delighted to find you at FT, after missing you from the big "E."
Now, some carping: You wrote:
"Totting up the explicit and implicit cost of these programmes, the mind reels. The tax deduction alone is nearly $80bn a year. It is a little late for a market-based approach."
Who or what entity bears that "cost" you reference? A "deduction" (presumably from calculation of taxable income) lowers the "cost" of taxes to the taxpayer. If he does not get the deduction he pays more in taxes.
So, can we presume you infer that the "cost" falls on the allocators of government revenues? What is the nature of that "cost" to them? What effect does it have on their actions? Is that a real "cost," in economic terms or only political.
In the light of your past writings, I hope you have not shifted to the view that "deductions" (which allow taxpayers to keep more of their own money) are "subsidies."
Regard,
R. Richard Schweitzer
Atlanta, GA. USA
s24rrs@aol.com
Posted by: R. Richard Schweitzer at Dec 10, 2007 2:25:31 PM
Uh, deductions are subsidies. If you wanted to let taxpayers keep more of their own money, you'd lower tax rates over all. Deductions mean that for a given revenue target you take less in taxes from one group of people, meaning more in taxes from the rest. That's just the way the math works. If you don't want to make up the revenue in other taxes, you can either substantially raise the deficit, passing the cost on to future generations and crowding out private investment, or cut spending. The second is presumably your preferred option, and I would tend to agree - it may even be good in itself. But that depends on your view of a separate issue. If the spending in question helps taxpayers in general, ie infrastructure, you would again be imposing more cost (to make up for fewer benefits) on the population at large to subsidize a selected group.
Posted by: Daniel Merritt at Dec 10, 2007 2:45:49 PM
Mr. Schweitzer,
The entity bearing the cost of the deduction is every single non-home owning individual in the country. Since the cost of capital of buying a home is artificially lowered by the deductibility of interest, home values are artificially higher than they would be absent the deduction. Thus the deduction is a wealth transfer from non-homeowners to homeowners.
I am for all lower taxes, but not in the most distortionary of ways. The mortgage interest deduction is the most distortionary aspect of our highly distortionary tax code. I would be for its elimination, but to suddenly do so would cause a drop in asset value that would be crushing. The best solution it seems to me is to faze out the deduction over the course of a generation, say 35 years, by reducing the deductibility a couple percentage points a year, till it's ultimately 0.
Posted by: joe at Dec 10, 2007 2:56:02 PM
I would also note the following omissions from the debate:
1) Any reason why promptly and vigorously enforcing existing law dealing
with conduct at the time of mortgage creation would not sufficiently address
the problem.
2) Any explanation why, if existing laws are inadequate, they are not
being repealed when more laws are added.
3) Any idea how many borrowers and brokers might have been defrauding
the ultimate lenders and how the proposals treat them.
4) Recognition of the amount of subprime mortgage that is purely
speculative.
5) Any consideration of the unintended consequences of allowing
borrowers to write down mortgage amounts for future home equity lending
or high loan to value lending, and the second order consequences from
that on, say, for homeowners who can no longer use home equity loans to
refi credit card debt at lower rates.
6) Any program for capturing, whether for a lender or the government,
some or all of the appreciation in equity value after a mortgage has been
written down.
7) Recognition (this from capitalgainsandgames.com) "that homeowners either with no mortgage, a prime fixed rate mortgage, a prime adjustable rate mortgage total, or a VA/FHA mortgage total are more than 91% of all homeowners. Those with subprime adjustable rate mortgages equal less than 5% of all borrowers. In other words, the program announced by the Bush administration last will do nothing for the overwhelming number of homeowners, and they aren’t happy about the other 4.4 percent getting a break."
BTW, agree with "joe" re the need to phase out the interest deduction over time.
Posted by: mt57 at Dec 10, 2007 3:11:47 PM
"The duty of the popular economist is to encourage audiences to move beyond simple good-bad stories and think in terms of opportunity costs and unintended consequences."
Krugman has written many times why he has chosen a polemic/manichean approach over the last few years; I'm sure you have read his thoughts on this subject. Why not refute them directly if you disagree?
More generally, *why* is that the duty of the popular economist? Shouldn't the first duty be something along the lines of using your specialized skills to inform the public debate? Why is a *generic* "unintended" consequence more important than the specific intended consequences Krugman sees (accurately or not) in the Paulson plan. The point of public policy isn't maintaining one's respect in the eyes of one's peers with impeccable analysis and bons mots; it's serving one's fellow citizens by trying to improve our collective choices.
You sometimes write as if engaging with the political process is necessarily fatal to intellectual integrity. This does not provide much of a model for citizenship ...
Posted by: Sam Penrose at Dec 10, 2007 3:19:48 PM
My pet peeve is that Government is into every thing these days. It is into many things that I think that it should not be into but it does a very bad job of prosecuting fraud which seems to me a basic help the poor function that it should be into. So now that it is too late, those who want a strong state cry fraud.
Well lets prosecute the fraud and maybe help the poor but let us not help those who are not victims of fraud and not poor.
I will say one thing about fraud over welfare, it is at least educating. Victims of fraud are usually wiser comming out of it than they where going in.
Posted by: Floccina at Dec 10, 2007 5:13:30 PM
Krugman's strident political agenda colors his economic recommendations. He has reinvented himself as more of a pundit nowadays than an impartial "clarifier".
Posted by: anonymous at Dec 11, 2007 2:44:51 AM
It is true that the people who got screwed on their sub-prime mortgages are not the most deserving poor. If I thought that the bailout money they might get would be sent to starving people in Africa, I'd probably support that instead. But that's not on the menu.
And more fundamentally, the question of how "deserving" they are is not relevant. These people were more-or-less robbed. If someone broke into my house, and I called the cops, the appropriate response (on both instrumental grounds and justice grounds) would not be for them to refuse to come help me on the grounds that even the post-robbery me is in pretty good shape all told.
Posted by: David J. Balan at Dec 11, 2007 12:05:52 PM
The main suggestion of both the Democratic Party in Congress and Krugman is to permit Chapter 13 debtors to cram down their mortgages to the fair value of the property and a market rate of interest. This solution is available in Chapter 11 to corporations adn the rich. It isn't available to Chapter 13 debtors, a difference with no explanation other than the political power of banks, and the weakness of the poor in Congress.
The post raises two points:
1. Subprime borrowers are not the most deserving poor, and many are not poor at allAs to 1, bankruptcy deals with the portion of the poor who have a decent chance of paying the best price for the house. The cramdown is essentially a sale at the best price, not at a foreclosure price, and the lender is a forced financer, but at least there is some negotiation. The bankruptcy proposal doesn't fix the fraud problem, but let's be realistic: the cost of fixing the fraud cases is way too high.2. Right now is not a good time to penalize credit-constrained banks or rewrite contracts against their interests.
As to 2, If you think revision of contracts is hard on banks, try foreclosure in market with too few bidders.
Posted by: masaccio at Dec 11, 2007 11:16:39 PM
I think that rewriting a contract against the bank's interest is arguably an unconstitutional deprivation of their property interest without due process of law. The banks should challenge anything of the sort in court vigorously.
Bankruptcy laws should be relaxed for borrowers simply because that is the purpose of the bankruptcy laws: a fresh start.
Some states make recovery of the loaned amount - foreclosed value of house unrecoverable. I am sure the idiots at MS and others didn't account for this in their models. But maybe they did. If this law is one the books at the time of contract, then it seems arguable that there is no debt in existence (incorporation of terms).
Rewrting laws and making them retroactive to the loans in existence is different. This is deprivation of property without due process of law. The neat thing is that states are not subject to suit by citizens. Presumably this means those investment banks. Ooops... that darn 11th amendment.
So, I would suggest that states get busy rewriting their laws to make the homeowners from having to assume the debt post foreclosure. This may stand up to challenge.
Posted by: urgle at Dec 20, 2007 6:09:48 AM
hi,I University majoring in the legal profession.After graduation,I 徵信 the work of the strong interest.Has worked in several徵信社.Has a wealth of experience. Now I immigrants France,Hope to continue to engage in the work of徵信 credit.
now, is to wake up every day to drink 咖啡, shopping. I hope that early awareness of Boles.
thanks,thank very much.
Posted by: Tonny at Mar 18, 2008 4:04:36 AM
Posted by: Alii at Apr 3, 2008 11:01:59 PM
aion gold
aion money
cheap aion gold
cheap aion money
buy aion gold
Mabinogi online gold
Mabinogi gold
buy Mabinogi gold
cheap Mabinogi gold
Mabinogi money
2moons dil
2moons gold
buy 2moons dil
2moons dil
cheap 2moons dil
flyff gold
flyff penya
flyff money
buy flyff penya
cheap flyff penya
cheap flyff gold
Dofus kamas
buy Dofus kamas
cheap kamas
Dofus kama
Dofus gold
Dofus money
Knight online gold
Knight Gold
Knight Noah
Knight online Noah
Posted by: aion at Jul 14, 2009 11:29:48 PM
