Tag Archives: Consumers

Eliminate the Mortgage Interest Deduction Now

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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

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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

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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.

Obama Didn’t Lie II

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Two weeks ago Shout Bits discussed the perverse consequences of Obamacare – the elimination of health care options for individuals. Because of Obamacare’s many mandates, no private insurer can profitably offer new individual policies, so carriers are leaving the marketplace en masse. Further evidence that Obamacare will destroy private insurance and force individuals into a single payer system was delivered by Humana this week in a Letter outlining how Obamacare will limit choices for individual policy holders.

A highlight of the letter is the new concept of ‘grandfathered’ plans. Essentially, Humana acknowledges that new policies will be much more expensive due to the obscene mandates under Obamacare. Good news, though, because anyone covered before March 23, 2010 won’t have to pay the Obamacare penalties. Bad news, though, you can never change insurers or insurance coverage plans for the rest of your life. Of course young people seeking individual coverage will not have any options other than the government single payer plan.

Also, policies for young individuals can only be bought during a certain window each year. Anyone wanting individual coverage anytime other than October: tough. No further evidence is required – Obamacare is a rocket sled ride to single payer socialized medicine. The full and immediate repeal of Obamacare is the most critical mission for the survival of the US.

Apology For Toyota?

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In what is little surprise to anyone who is not a tort lawyer or megalomaniac Senator, government researchers determined that runaway Toyotas were caused by driver errors. While Toyota was quick to say that the matter is not yet settled, Shout Bits is now prepared to state that when an accelerator is pushed to the floor and the brakes are not applied at all, an accident may ensue. That’s right, when the US Government did an independent study of crashed Toyotas, they found that in every instance the gas pedal was to the floor and brake was unapplied. Naturally, all the Senators and trial lawyers who lined up to bash Toyota have apologized and admitted that Toyota actually sells high quality US made cars. Not yet, anyway.

From hearings on satanic rock music to steroids in baseball, Senators have never shied away from sensationalizing irrelevancies to distract from their many failings. The Senate does not have hearings on their own graft, pork, or special interest handouts. No, the Senate has hearings on whether teenagers should attempt to break aviation records, or whether cigarettes are unhealthy, or why Toyota is to blame for auto accidents.

Nobody can blame Congress for wanting to deflect attention from its massive, nation destroying failures, and its red herrings are usually harmless. After all, harping on lead paint on toys only ruined a handful of small business owners’ lives. In the case of Toyota, however, tens of thousands of jobs are at stake. Toyota has invested billions of dollars in US manufacturing along with decades of innovation that have driven up the quality of all cars worldwide. Congress’s whipping boy was a model of capitalism, prosperity, and the power of a free market to make everyone’s life better. Better still, Toyota never took bailouts from Washington (only union shops qualified for such aid).

Toyota played the game well, unlike BP, by prostrating itself before the uninformed bombastic jackasses who have never done anything to make cars safer. Mr. Inaba, Toyota CEO, nearly wept tears of blood as he admitted failings that his engineers most certainly told him were false. Inaba surely recalled the bogus acceleration charges levied against Audi ten years ago. Rather than defend his product, Inaba knew he had to submit to Orwellian prosecution in order to put the sensation behind him. Never mind that sudden acceleration complaints are only filed when the news is hyping them, not regularly as a real problem would suggest. Never mind that a cash strapped California driver clearly faked his high speed Toyota incident a few months earlier. Never mind that the accelerator systems allegedly at fault were used by many auto manufacturers. Never mind that Congress runs GM, Toyota’s main competitor. In fact Inaba deserves a prize for his containment and focus on preserving Toyota, rather than the objective truth that nearly all accidents are caused by driver error.

Now that the government study has fully exonerated Toyota, where are the apologies? Perhaps Rep. Barton can give it another go. Toyota has wisely remained cautious, likely fearful that claiming victory would incite a backlash. Of course it is no surprise that the old time media’s interest in restoring Toyota’s reputation is tepid. Car crashes caused by driver error are dog-bites-man boredom right down the middle. Likewise for the Senators that preened as Inaba kowtowed. Building up industry, supporting capitalism, or acknowledging that most companies want to do right by their customers is not the Washington way. So, as usual, the prattling classes take more interest in salacious falsehoods than they do in humdrum truth. Toyota: there is nowhere to go to get your reputation back, but thanks for playing the Washington game so well.

Taxation 101

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Shall there be an amendment to the Colorado Revised Statutes concerning limits on government charges, and, in connection therewith, reducing vehicle ownership taxes over four years to nominal amounts; ending taxes on vehicle rentals and leases; phasing in over four years a $10,000 vehicle sale price tax exemption; setting total yearly registration, license, and title charges at $10 per vehicle; repealing other specific vehicle charges; lowering the state income tax rate to 4.5% and phasing in a further reduction in the rate to 3.5%; ending state and local taxes and charges, except 911 charges, on telecommunication service customer accounts; and stating that, with certain specified exceptions, any added charges on vehicles and telecommunication service customer accounts shall be tax increases? – Colorado Proposition 101

This November, voters in Colorado will decide whether to reign in Gov. Ritter’s illegal tax increases, thanks to Proposition 101. Prop. 101 is a broad measure that will reverse the recent increases in vehicle fees, lower overall taxation for all Coloradans, restore Colorado’s TABOR provision that requires voter approval for all tax increases, and eliminate a number of nagging fees found on phone bills.

Naturally, statist groups and the local media recoiled at the proposal. It would bankrupt the State (Government that is). It would require the elimination of vast arrays of services, the standard doom and gloom from those who always want more government. No state has failed because of too little government or taxation. The collapse of California, New York, and New Jersey prove that too much government and taxation is the path to ruin. Since voters can always re-raise taxes later, Shout Bits heartily endorses Prop 101.

Still, voters might wonder why Qwest, the local old fashioned phone company, is opposed to the elimination of state telecom taxes and fees. Would Qwest not welcome reducing its customers’ monthly bills? Wouldn’t that free customers to buy more of Qwest’s services? Perhaps this is part of the reason Qwest soon will cease to exist, but Prop. 101 exposes the sleazy co-dependency between big business and big government.

Qwest is regulated by an abusive wing of the Colorado Department of Regulatory Agencies, the PUC. As with many of Qwest’s territories, the Colorado PUC has grown fat by shaking down its subjects, forcing them to provide money losing services in the name of social justice. In particular Prop 101 would repeal a tax that funds the PUC’s requirement that Qwest provide old fashioned phone service to the poor and those who live in the country. In a free market, the price of phone service in the country would be much higher than in the city because there are fewer country folk to share the cost of running wires everywhere. Qwest is concerned that its investment in these high cost phone lines would go to waste if it ceased to get so called Universal Service money from taxation. Better still, Qwest’s competitors pay into the Universal Service Fund. Expect a campaign against Prop. 101 showing people burning to death because Prop. 101 took away the phone that could have called 911.

The problem with this argument is that Universal Service, and the tax everyone must pay to fund it, does nearly nothing to benefit today’s consumers. Universal Service funds cheap phone services to the poor, but nowadays poor people overwhelmingly prefer cell phones for their flexibility and convenience. Poor people already get free cell phones and service for up to a year to help them reestablish themselves. On the other end, Universal Service primarily helps rich country customers. The real farmland countryside is not served by Bell companies like Qwest; the real countryside is served by an army of tiny family owned rural carriers that get huge subsidies from the Feds. Qwest’s version of the countryside is more like Vail or Ted Turner’s ranch. These people are middle to upper class and are perfectly capable of paying their own way without a government handout.

So, why not eliminate a program that gives the poor what they don’t want or need and subsidizes wealthy vacationers? The answer lies in the timeless tango of regulation – codependency. The state PUC is filled with bureaucrats who relish their power, while big companies like Qwest have kowtowed to their PUC masters for so long they can no longer make a valid business decision without government support. A simple proposal to defund this corruption by eliminating a wasteful and regressive tax would bring the cubical walls of this stem winding parasite crashing down. Both big government and big corporations defend the status quo because it supports them at the expense of hapless and often unaware consumers. As always, government is taking from the many to give to the few – in this instance the undeserving few.

Voters should be skeptical of the self-serving cries to keep the status quo of big government, illegal taxes, and cronyism. Vote for Prop. 101 if you live in Colorado. After four years of illegal tax increases and wasteful expansion of government into areas like union mandates and green energy, it is time to give the Government a dose of the reality with which everyone else is already well familiar.

No Miles for You

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This week the US Senate voted to outlaw earning frequent flyer miles from credit card transactions.  Of course Sen. Durbin, the amendment’s sponsor, would not put it that way.  Durbin rather said that by capping the fees charged to retailers, small businesses would benefit.  Sadly, Durbin is wrong on both counts; his proposed law would outlaw frequent flyer miles and harm small business.

Credit card companies like Visa and American Express charge both interest on consumer debt and transaction fees to merchants who accept their cards.  The fees vary, but can be as high as 2.5% of the purchase price for the more expensive American Express.  Durbin wants to help consumers by authorizing regulators to cap transaction fees at something like 0.7%.  As with all the consumer regulation coming out of Washington, capping fees sounds nice until the price of regulation comes due.

Credit card companies use the fees to pay for operating expenses like billing and customer service, but in order to compete for customers they also rebate some of those fees back to cardholders.  Sometimes the rebate comes in the form of frequent flyer miles, and sometimes plain cash.  American Express offers a Fidelity Investments affinity card that gives back 2% of most purchases.  Obviously if transaction fees are capped at 0.7%, such cards can no longer exist.  Durbin compared the costs of operating a credit card company to the fees it currently charges, but he ignored the marketing cost of consumer rebates.

Durbin’s amendment would force credit cards to quit innovating perks to attract the best consumers.  In Durbin’s world, all credit cards would be the same, since they would be regulated into offering exactly the same services to all.  Currently, consumers can choose from hundreds of options that best suit their needs, but that kind of choice is always the first victim of government regulation.

Even worse, Durbin’s amendment would reduce the quality of customer service for cardholders.  Since the cost of agressively investigating and reversing disputed charges does not appear to be in Durbin’s cost formula, credit cards will likely provide less consumer services.  Durbin’s amendment would turn credit cards in to regulated commodities with limited value to consumers.  Expect far fewer people to use credit cards when they offer limited service and no perks.

This brings up Durbin’s second misrepresentation – that his amendment would help small business.  Contrary to Durbin’s understanding, credit cards help small business.  Prior to the dominance of Visa and American Express, only large corporations issued credit cards for their customers.  Major department stores and gas stations issued their own cards.  There is nothing in the Durbin amendment to discourage large companies from offering credit card perks on their own cards.  Companies like Visa allow small businesses to better serve their customers and thereby compete with larger companies.  Without the ubiquity of Visa, consumers will be incented to shop at large retailers with their own credit cards and customer perks.  As is most common with Washington, this bill will actually harm small businesses and enrich the big ones.

Which company might benefit the most form the Durbin amendment?  PayPal stands to gain because it charges fees for processing credit card transactions.  PayPal would continue to charge unregulated fees for moving money, but would pay out far less to the credit cards it accepts.  Not to get Glen Becky here, but Ebay, PayPal’s parent company, did give Durbin $1000 the last time he was up for election.

So, a far left Senator from Illinois puts through a surprise amendment that stifles consumer choice, harms small retailers in favor of big businesses, and handsomely rewards one of his corporate donors.  Hardly news, to be sure, but it is one more reason to turn out at the polls this November.