Friday, August 12, 2011

Casey B: Principle v Policy


RE: Casey B. Mulligan's The Misunderstood Mortgage Interest Deduction:

At first glance, the home-mortgage interest deduction would seem to cause homeowners to borrow excessively for home ownership, and thereby deplete government treasuries. But that ignores the fact that one person’s mortgage interest payment produces interest income for another person or a business. The lender may well owe taxes on the interest income.

Mm.

1. Let's not say "excessively". It assumes too much.

At first glance, the home-mortgage interest deduction would seem to cause homeowners to increase their borrowing for home ownership, and thereby deplete government treasuries.

2. Let's not say "deplete". It exaggerates by connotation.

At first glance, the home-mortgage interest deduction would seem to cause homeowners to increase their borrowing for home ownership, and thereby reduce government revenue.

But?

But that ignores the fact that one person’s mortgage interest payment produces interest income for another person or a business. The lender may well owe taxes on the interest income.

Ah, the tax burden is transferred from borrower to lender. What a tidy thought!

Of course, if the interest expense wasn't deductible, the borrower would pay income tax on that sum, and in turn the lender would pay income tax on that sum. But who's counting? Who cares about such details?? Casey B's thought is just so tidy.

More home-mortgage borrowing means more home-mortgage lending, and the latter means more interest income that can be taxed.
More borrowing doesn't mean more lending. More borrowing *is* more lending. Borrowing is the same act as lending. It's just seen from the other side, the side of the other participant in the transaction. But an act of borrowing and an act of lending are the same act. All transactions are double-sided. C'mon, Casey!
So yes, more borrowing (and/or more lending) means more interest income and more interest cost. Casey B uses this concept to defend and preserve the mortgage-interest deduction. I use the same concept to show that it leads to increased reliance on credit.

Makes me sound like the guy who wants to eliminate the home-mortgage interest deduction. That is not what I want; we went over this already.

Here, I am pointing out that the home-mortgage interest deduction is one example of the myriad policies that encourage excessive reliance on credit.

Eventually, yes, I think we would want to get rid of the interest deduction. We would want to get rid of *all* interest deductions, even those for businesses. Even those for financial businesses. But today is not the day to eliminate the home-mortgage interest deduction. Not when we're still suffering the effects of the crisis.

It is important to know that excessive reliance on credit is the problem. But we have so very many pro-credit policies, we could start anywhere to dismantle them. We do not start with housing.

Anyway we should start, not with dismantling, but with filling a hole. Start with policies that help people reduce their existing debt: Tax incentives to accelerate the repayment of debt.

We don't have anything like that, now.

6 comments:

Jazzbumpa said...

Art -

Your formatting confuses me sometimes. Why is some of your commentary in the largest font and some in the smallest? It's hard to tell who is saying what.

I don't think we need a lot of incentives to reduce debt these days. People are doing it out of necessity. Businesses are not borrowing.

http://www.asymptosis.com/yeah-right-supply-of-credit-to-businesses-is-a-big-problem.html

Banks are not eager to lend. In a brutal, aggregate demand shortfall kind of way, it's self correcting.

Too bad it will take a decade and likely cause a depression.

Alas,
JzB

The Arthurian said...

"Banks are not eager to lend. In a brutal, aggregate demand shortfall kind of way, it's self correcting."

That is exactly right.

"Too bad it will take a decade and likely cause a depression."

Yes, and incentives that HELP people reduce debt would help. For example you could get a tax credit for reducing your debt. Basically, the government pays for your debt reduction.

That would speed up the process.

//
the normal is the normal.
the indented italics is a quote.
the double-indented, smaller text is my aside, or a tangential remark I am making.

gee, I thought my content was so good that the formatting would explain itself...

Jazzbumpa said...

Your content is wonderful.

//
As an aside: How do you conceptually differentiate between a normal comment and an aside?

The double indent-small font protocol is not obvious to the uninitiated. Why not label asides as asides? It will help me, at least.

//

I'm off the idea of tax incentives. In a low tax environment they have little oomph. A large segment of the population pays no income tax at all. These are the ones who need the most help, and for them a tax break is meaningless.

For someone with AGI of $69K, the marginal rate is 15%. Paying down an extra thousand in debt in a year will cost $83.33 pr mo. As an incentive, they get $150 back the following April. Do you really think a cash-strapped family will respond to that kind of incentive?

I sure don't.
JzB

WV: boaryst - a Russian pig

jim said...

Yes, and incentives that HELP people reduce debt would help. For example you could get a tax credit for reducing your debt.

____________________________

In an aggregate sense this is what is already happening today.

For instance, the government gave every worker a 2% pay raise in January (fica tax). It is continually pointed out in the media that people just use this and the other tax credits to pay off debt. Why do they think that is bad?

What seems to elude most people is that the deficit that the federal gov is running is a transfer of the private debts to the government. Which is actually in aggregate a good thing because the government pays so much less in interest.

Think about it. The money going into treasuries is really that portion of income that the private sector is not spending (or investing in more risky places). That is, the private sector is determined not to borrow and to save and thus they are spending less than their income. This private sector surplus is generally not being put under their mattresses or in mason jars in the backyard so it finds its way into the securities that the treasury issues. Thus the govt is assuming the debt. Given that banks and other lenders are receivibng repayments and savings but not finding lenders, where else would the money go?


They can only do so much per year so its going to be a while before the $24 trillion debt that the private sector created from 1998-2008 is liquidated enough that the private sector can go back to functioning normally

The Arthurian said...

Jim --
"In an aggregate sense this is what is already happening today."

Yes, but not consciously, and not on purpose. The pittance tax cuts give people a bit more money to use as they will. Agreed, there is great desire to reduce debt today. But policy gives no direction in this regard. Rather, existing policy continues to create advantages for the expansion of credit use.

"It is continually pointed out in the media that people just use this and the other tax credits to pay off debt. Why do they think that is bad?"

They think it is bad because they have not yet realized what Richard Koo and others realize, that we must complete the deleveraging before we can resume credit expansion. Thanks for the Koo link, by the way.

"What seems to elude most people is that the deficit that the federal gov is running is a transfer of the private debts to the government. Which is actually in aggregate a good thing..."

I agree it would be a good thing. But it eludes me also that it is happening. At least it is not happening with the gusto we require. In comments at The Slack Wire, JW Mason has helped me understand this.

"This private sector surplus is generally not being put under their mattresses or in mason jars in the backyard so it finds its way into the securities that the treasury issues. Thus the govt is assuming the debt."

But again, it depends on chance rather than policy. It depends on debtors who have trouble making their payments, to make their payments. This makes it a very long, drawn-out process.

"They can only do so much per year..."

As you are aware, we no longer live in a gold-standard world. We can print money. If we have good reason, we should print money. To me, policy-driven debt reduction is the good reason. Print money and use it to pay off private-sector debt. To the extent that debt was created by fractional-reserve banking, repayment of debt destroys the debt and destroys the newly printed money at the same time. So, printing that money isn't even inflationary. We can eliminate a lot of debt in a short period of time, if we make it economic policy to do so.

What happens by this plan is that credit-in-use becomes again credit-available, which can be lent out, which can cause inflation. But that is a different matter, and it does not become relevant until we again see economic growth. And the threat of this inflation can be minimized by creating tax incentives to accelerate the repayment of debt, and by eliminating tax incentives that encourage reliance on credit and accumulation of debt.

jim said...

Hi Art,
I don't think there are many policy makers who agree with your position. I think most of Washington, bankers, Wall street and Main street businesses all believe credit expansion in the private sector is a desirable thing. They would like to see policy that encourages more household debt not less.

What policy makers are uncertain about is whether the current federal deficits are enabling the private sectors desire to save or whether the private sector would want to save without the deficit.

That is the $20 trillion question because if households become more determined to save as a result of lowering the deficit, the economy will contract and the effort will backfire. The end result would be more negative growth and even larger deficits. OTOH, if households would be cajoled into returning to borrow and spend mode via govt austerity then the economy would grow on the backs of the household debt rather than the federal debt.


But as far as I can see households are having none of it and thus household adverse reactions to debt are driving policy.

-jim