Tag Archives: Consumers

Eliminate the Mortgage Interest Deduction Now

Shout Bits has argued that the Mortgage Interest Deduction is not so helpful to regular Americans, but with interest rates at historic lows, now is the time to eliminate this market distortion. Not only does the MID encourage buying unaffordable homes and promote market bubbles, the primary beneficiaries are wealthy individuals and large banks. Eliminating this deduction would actually help most ordinary homeowners.

For 2012, a couple filing jointly can claim an $11,900 standard deduction, even if they have no otherwise deductible expenses like mortgage interest. Therefore, the first $11,900 in mortgage interest paid by such a couple generates no tax savings for them. Today’s national average 30 year fixed mortgage coupon rate is 3.8%, which means that a mortgage smaller than $313k (11900/.038) generates no tax savings for a couple filing jointly. Now, a $300k mortgage is not unheard of, but it is clearly not for the struggling working class.

Since the first $313k of a mortgage balance is not deductible, the tax incentive is to borrow as much as possible. After all, Uncle Sam is kicking in about a third of the interest expense above $11,900. Further, the tax code discourages paying down mortgage balances, since as interest payments fall, so does that tax benefit. This perverse incentive leads to speculative bubbles which burst when incomes fall below the point where an income tax deduction is available. The MID certainly contributed to the real estate crash of 2008.

Worse still, a recent study by Andrew Hanson at Georgia State University concludes that the tax code’s reach into the mortgage market increases mortgage rates for modest homeowners. Mortgage lenders siphon off 9 to 17% of the government’s subsidy intended for homeowners (as much as $1.7bln per year) in the form of higher rates. Not only does the MID not benefit smaller borrowers at all, according to Prof. Hanson’s study, it costs them hundreds of dollars extra, even if they cannot take an interest deduction.

It is always wrong, corrupt, and perverting for the government to manipulate markets as it does with the MID, but now is the perfect storm of minimal benefits and maximum harm. Mortgage rates cannot fall much further due to structural cost limits, so the interest deduction benefit is nearly as small as it ever can be. Likewise, with tighter lending criteria, only the well-off can qualify for loans big enough to earn an interest deduction above $11,900.

With the Federal Government looking for ways to raise taxes, the very worst choice would be raise marginal rates. Instead, a flatter and broader based tax code is the answer that is more just and stable. Eliminating a deduction that only benefits the well-off, while harming modest borrowers and enriching big banks, is an obvious choice. The time is now.

The FCC Serves Another Blow To Consumers

While many consumers reasonably assume that government regulators protect and work for their interests, the reality of today’s regulatory regime is far more complicated and sometimes corrupt. All too often, the relationship between regulators and industry is too cozy, and government regulation becomes a crutch for political insiders and a barrier to competition. Sadly, the one party not at the regulatory banquet is the consumer. No better example is that of the recent FCC decision to repurpose its Universal Service Fund as an internet build out fund, the Connect America Fund.

The FCC has a long history of driving up consumer prices to benefit rich and connected companies. Older consumers may remember the days when long distance rates varied by time of day, with prices jumping fivefold Sunday evenings. AT&T would admonish its customers to call grandma early on Sunday before prices spiked. The fact is that long distance costs basically the same as local call to provide, as evidenced by every major mobile provider including long distance for free. The price difference was a construct created solely by the FCC. When Judge Greene broke up AT&T, its executives foolishly fought to keep the long distance business because the FCC had artificially made it the profit center. The slow decline of AT&T, ending with its acquisition by one of the companies it once considered ancillary trash, demonstrates that the market eventually bypasses regulatory interference. Market competition from cell phones and internet telephony eventually reduced AT&T’s value to nothing more than its brand name.

In 1996, Congress tasked the FCC with revamping a fund that mostly provided Puerto Rico with cheap phone service into a nationwide subsidy to equalize the cost of urban and rural phone service (phone service costs much more to provide in the country). The fund did not alter the exceptionally generous, even corrupt, subsidies to small rural companies; this new fund was for large companies that mostly served big cities. The supported areas were not really impoverished farm land, but most often rich suburban estates and tony vacation hamlets. The various Baby Bell companies like Bell South or SBC fought vigorously for what they thought would be billions in free money. The handful of people who still receive a bill from these companies can still see a charge for Universal Service Fund. While consumers certainly paid into the fund, nobody was particularly happy with its results. As cell phones and internet telephony began to dominate local phone service, it became clear that few wanted a land line, especially in the suburban and vacation cities this fund was designed to subsidize.

So an expensive government program that ultimately benefited rich suburban customers at the expense of relatively poor urban customers had run its course. The FCC had the broad authority to declare that basic service was universally available at reasonable rates without the fund and end the tax on the urban poor. Of course, the government never gives money back, so the FCC repurposed the fund to now provide high speed internet to the same wealthy suburban and vacation home customers. Again, remember that country farmers are covered by a separate fund that more than adequately provides them high speed internet.

High speed internet is a growth and profit center; it does not need a subsidy. Suburbanites already have basic DSL speed internet, just not quite fast enough to satisfy the FCC’s delicate sense of fairness. Of course you don’t hear the multi-billion dollar Baby Bells fussing over another subsidy, even if nobody needs it. Again, the relatively poor urban customers are subsidizing HD video quality internet for the relatively rich suburban dwellers and their vacation second homes. The only real beneficiaries are the internet providers who will get free money to build networks that consumers probably could afford anyway. Of course the FCC’s intervention in the free market will drive up overall costs, but the consumer was never at the table to begin with. Naturally, those that might want to later compete using technologies such as LTE wireless will have a hard time overcoming the politically connected companies that got free money to build out their networks. The FCC’s M.O. is to lock in technologies and entrench favored companies at the expense of the consumer.

Good for the poor? No. Good for the truly rural farmers? No. Good for Ted Turner’s Montana ranch and Aspen second homes? Yes. Good for Fortune 500 companies that are already profitable? Yes, very. The FCC is yet another example of a rogue regulatory agency that the US does not need. Consumers can do very well without this type of protection.

Steve Jobs – A Life In Failure

This week Apple co-founder Steve Jobs passed away after a lengthy battle with cancer. As a household name, people naturally mourned the man most had never met. Like his historical comparison, Thomas Edison, Jobs was a brash provocateur, did little of the hands-on inventing in his shop, enjoyed a non-conventional libation, and he oversaw monumental failures. Jobs’s sometimes nemesis, Bill Gates, has many of the same type-A traits, but Microsoft was essentially forbidden to fail, and that is the reason Apple is worth 25% more than Microsoft today.

Failure is the common thread among all great innovators. Edison’s monumental failure was his DC power grid. Westinghouse won the battle to electrify the nation with AC power – a vastly superior technology, yet Edison remains the greatest inventor of his time. Jobs’s failures were epic – the Lisa, Next Computer, the first portable Mac. Under different leadership, Apple also produced the Newton and other disasters. Unlike anything else, failure focuses the mind, redirects resources, and redoubles creative efforts. Most triumphs rise from the rubble of colossal failure. In Apple’s case, it teetered on the brink of insolvency at the end of 2000, only to become the most valuable publicly traded company today.

Microsoft also had its share of failures – Windows Me, Clippy, a host of failed applications. Microsoft’s early history was that of producing a poor first effort, but constantly improving until it dominated the market. The paths of Jobs and Gates diverged when the Government decided Microsoft was too successful. In 1998, a group of AGs and the DOJ responded by shackling Microsoft’s creativity; Microsoft essentially had to clear each new idea or product with government bureaucrats. Anything that might leverage Microsoft’s strengths in the market was forbidden. Microsoft had become akin to a public utility – profitable, but low growth and no innovation. Without the prospect of success, the risks of failure seem too great, and innovation at Microsoft tailed off.

To be sure, Microsoft employees continued to invent new technologies. Microsoft pioneered the tablet PC, touch screen smart phones, speech recognition built into Windows, and a wealth of patents. But Microsoft never bet the farm on any of these innovations, and they never dominated their markets. Most notably, Apple now dominates the tablet market that Microsoft launched a decade ago. Without the incentive and freedom to risk failure, Microsoft lost its way. Now that government oversight has been lifted, Microsoft is aggressively pursuing the markets it pioneered – smart phones and tablet PCs. The freedom to fail is the power to innovate and make the world better.

Shout Bits has argued against government interference in the creative process before, but the story of Steve Jobs is the promise of US exceptionalism, while the story of Microsoft is the decline of innovation when the government disallows failure. Jobs lead the true American life. He failed over and over; his life took as many turns as his short years allowed. He founded a Fortune 500 company, lost it, and eventually rebuilt it. Along the way, he revolutionized computers, movies, music, and telephony. Whenever Jobs took on an industry, those working for the established norm packed their bags.

On the other hand, while Microsoft started out disrupting industries with aggressive risk taking, later it was ensnared by government dictates on what was ‘fair.’ The careers of Jobs and Gates are a cautionary tale to anyone who might believe the government should allocate investments or somehow decide which ideas are to succeed. Even if Pres. Obama had picked a winner in Solyndra, the heavy hand of government would have foreclosed on someone else with an even better idea. Steve Jobs’s career was a celebration of the US’s unique capacity to tolerate the failures that eventually lead to the innovations that build the modern world.