The Looming Savings Gap

In my last blog post, “From the U.S. to Argentina in 20 Years,” I noted that interest on the national debt will amount to $829 billion a year by 2019, if we are to believe the Office of Management and Budget’s most recent 10-year budget forecast. That projection assumes, however, that 10-year Treasury bond yields increase to no more than 5.2% and stay stable for most of the decade. How realistic is that assumption, and what happens if the forecast is wrong?

To provide some perspective, let’s look at the history of Treasury bond yields. Using Federal Reserve Board data, I’ve charted the past 30 years.

As you can see, the current 10-year Treasury bond yield of 3.4% is about the lowest it has been for an entire generation. The Obama administration does allow for a slight uptick in long-term rates to a level consistent with the experience of the past decade. The question then is this: Is the last decade’s experience of low interest rates likely to persist in the future?

If we experience more of the same, Obama’s interest rate forecast is reasonable. If interest rates climb to levels seen in previous decades, the forecast is too optimistic, deficits will be worse, and the glide to insolvency will be steeper.

As far as interest rates go, I believe that we are living in the best of times. To quote Federal Reserve Board Chairman Ben Bernanke, when addressing the German Bundesbanke in 2007, the world is experiencing “a global savings glut.” He attributes that glut largely to a savings surge in large developing countries like India and China. (I have seen estimates from other sources that the Chinese save 40% of their income. As their economy has grown and incomes have soared, so have their savings.)

Far be it from me to tell Mr. Bernanke his business, but I would humbly hypothesize that this glut will dissipate in the mid-term future. Most of the advanced industrial economies in Europe, North America and the Asian Rim, as well as China, are growing old. Households save (or governments save for them) in order to provide for their retirement. When the working-age population is a large percentage of the whole, the savings rate is high. When large segments of the population reach retirement age and people begin drawing down their savings to support themselves, the savings rate declines.

Nowhere is this trend clearer than in Japan, long known for the frugality of its population. The Organisation for Economic Cooperation and Development (OECD) tracks the savings rate of member nations here (see “Saving, Household Saving Rate”). The data show that Japan, which attained a formidable household savings rate of 15.0% in 1990, has experienced a steady decline as its population has aged. (Japan has the oldest average population of any country in the world.) This year, Japan’s saving rate is a mere 3.5% — almost as pitiful as the U.S.’s rate. The savings decline has been equally marked in Korea, which also is aging rapidly.

The major European economies are maintaining high savings rates right now (with Finland a bizarre exception — it seems to be dis-saving). But, if my conjecture is right, as their working-age populations begin retiring in large numbers, their savings rates will decline. Most importantly, the same is true of China, which, with its one-child policy, may be aging the most rapidly of any society on the planet.

These trends will take 10 or more years to become manifest, but they are more or less inevitable. So, in the year 2019, just as U.S. budget deficits are growing by $1 trillion a year or so, the world will be transitioning from Bernanke’s global savings glut to Bacon’s global savings gap.

The Obama administration understands the implications of the domestic Age Wave for the purpose of forecasting U.S. spending on entitlements, but it has ignored the implication of the global Age Wave on savings and capital formation. I’m not singling out Obama here — almost everyone has overlooked it. But Obama is the one making the 10-year forecast. For the past 20-30 years, every major industrial and developing economy in the world has been injecting savings into the global pool of capital. Within 10 years, every major economy will start drawing down that savings to support an aging population. And that draw-down will accelerate with each passing year.

Bacon’s bottom line: It takes a collosal act of faith to believe that the interest rate picture 10 years out will resemble the interest rate environment of the past decade. It takes an ostrich mentality to believe Obama’s OMB forecast that 10-year Treasuries will remain stable at 5.2% for the next decade. If my analysis is correct, the U.S. interest rate burden will exceed the $829 billion a year in the official forecast by a wide margin. If yields return to the 8.0% level seen as recently as 1991, interest payments could well consume $1.3 trillion a year. At that stage, the debt burden will grow uncontrollably, taking on a life of its own.

The U.S. cannot long continue down that path before foreign lenders stop lending to us and the final fiscal crisis consumes us. How will Virginia be positioned to weather that final crisis? Will we follow the example of California in its slide into the abyss, or will we remain a rock of fiscal rectitude? Do either of our candidates for governor even recognize the magnitude of the challenge?

Share this article


(comments below)


(comments below)


55 responses to “The Looming Savings Gap”

  1. I'm sorry.. I have to call you on this:

    " If we experience more of the same, Obama's interest rate forecast is reasonable"

    this is NOT Obama's forecast.

    why do we keep ascribing the whole ball of wax to him, ESPECIALLY if we say that we are not into the blame game?

    " Far be it from me to tell Mr. Bernanke his business"

    but you are.. you are expressing doubt in our institutions that are dealing with this problem..

    I have doubts too.. but I'd be the first to admit that I simply do not have the "smarts" than Bernanke has…

    And remember this.. we had a whole bunch of folks who DID HAVE …a LOT OF CONFIDENCE in a guy named GREENSPAN – otherwise known as Mr. Deregulate….

    I think it's good – to question government, our institutions, the Congress and even the Presidency…

    I'm no apologist for any of these institutions ..

    If we want to talk about savings, consider this.

    Why do we LIMIT how much money that someone can put into a 401K if we need more savings?

    Wouldn't a small change in the tax code to allow folks to say.. double their 401K be worth considering?

    Some folks – for a few years – would even take second jobs if much of it could be put into a protected savings account?

    My point here – if we are going to have a collective hand-wringing society about all the things that are wrong … let's do get on to ways to fix it.

    I think …respectfully…

    that the bottom line is more than this:

    " The U.S. cannot long continue down that path before foreign lenders stop lending to us and the final fiscal crisis consumes us."

    This is why I say that the dialog is not about moving forward.

    we seem to be saying that we've done some things.. that are so bad.. that we are headed for doom and we really have no way to change it.

    since when did we start thinking this way?

    isn't this a self-full filling prophetic approach?

    1. Obama did not get us here, it took a long time to get here.

    2. it's going to take a long time to turn it

    3. we can either roll up our sleeves and get on with it or we can go howl at the moon.

  2. here's another "go forward" idea.

    Why did we fall off the "PayGO" wagon?

    If we got back to this idea – at the least – we would stop the annual increase in the deficit.

    then would/should/could we do something like PayGO PLUS where the goal is a 10% reduction in the annual budget… ???

    Why not create a BRAC-like Commission that recommends a 10% cut budget for each Cabinet level based on the gov performance measures found here:

    the Congress could vote the package up or down but could not change it ..neither the President either…

    and if it failed.. then the budget would be by continuing resolution of existing funding – which over time would essentially work like a cut.

    we'd cut the growth of government and cause a real prioritization process that focused on performance.

    How about we grid rid of mortgage interest deductions except for the owner-occupied home and we limit the amount that could be deducted to what median-priced housing is – and we means test it so that the interest deduction only goes to those who cannot afford their first house without that deduction?

    Let's get rid of itemized expenses altogether…

    everyone pays their fair share.

    ..i.e. a REAL "FAIR" tax and not the bogus one masquerading as a fair tax?

    times of crisis are times of opportunities…

    times where we must think about doing things that in better times we immediately dismiss..

    again.. we've got a ton of opportunities to reform what we all know a byzantine tax system.

    isn't now a good time to be getting rid of the obvious scams that pervade our system?

    let's hear some ideas.

  3. James A. Bacon Avatar
    James A. Bacon

    Yes, Larry, the OMB's 10-year forecast IS Obama's forecast, insofar as Obama is responsible for the words and actions of key players in his administration. He did not write the forecast, but it would not have been published without the explicit approval of his OMB budget meister Peter Orszag.

    But that's beside the point. I really don't care whose name is attached to the forecast. What is indisputable is that it's the official forecast of the current presidential administration of the United States.

    As to your other points, I do intend to discuss "what we should do about it" in future posts. But right now I am trying to establish a line of thinking that is not widely accepted on the basis of data that is not widely disseminated. If people don't agree that the U.S. is headed to fiscal armageddon if it stays on its current path, then they will find little value in the rest of what I have to say.

  4. I agree with you're diagnosis of the structural problems ahead – the savings glut indeed will not last forever, and we need to take this into account.

    But your chart is very, very misleading. Could you explain to readers why you only started charting interest rates in 1979? Were the high interest rates of the early eighties some sort of natural rate that we should come to expect – or were they a deliberate policy choice? The curious can google "Volcker" and find that out pretty quickly.

    We are going to be coming out of a deflationary depression. The last time we emerged from such a situation, it took decades for high interest rates to take hold. Like I said, I agree with you on the structural problems that we're going to be facing. It's definitely a serious situation, and it won't be easy street. But I wouldn't go too far with your doomsday scenario either.

  5. If it's OMB's forecast, then I would submit respectfully JB – focusing on the forecast and not who is the current President is a better way to …stop looking back… or worse.. say that we're looking forward but then take substle swipes at who one thought had a hand in the current situation.

    and here's what I don't understand – projections are tools – to tell us what is going to happen to us if we don't take action…

    they are not self-fulfilling prophecies or let's say that , that is not their purpose.

    these projections are supposed to be clarion calls for change.

    to motivate all of us to man the dikes … not to sit on the porch and say that we are doomed.

  6. Let me give a real world example of how we use and misuse projections.

    We say, that if nothing changes, Medicare will go bankrupt in some number of years.

    Notice that when we talk about private health care that we do not use the same method of projecting.

    What we do not say is that Private Healthcare -without any changes in premiums and coverage will.. go broke in 10 years.

    We don't say that.

    But then we say that Medicare IS bankrupt and essentially proves that govt is incompetent at dealing with this kind of an issue.

    Private health care – on the other hand – is perfectly free to double their premiums and toss out more folks – enlarging the pool of uninsured even more – that we have to pay for with tax dollars at the ERs.

    so we have a double standard where for the same kind of problem…

    if it's Medicare – it's bankrupt

    but if it's the private sector – it's not…

    I don't think we can every get to a better understanding of the challenges we face – and how to deal with them – if we are not willing to look at these things in a similar way.

    SO our path is pre-conceived to assume that the govt has failed and that turning these things over the private sector will improve the economy and get the govt out of stuff that it can only do expensively and incompetently.

    I'm looking for an apolitical, self-consistent philosophy and criteria that we use to equally and objectively judge govt agencies.

    When I hear that we are "incompetent" at Medicare but we are " the best dang Military in the World bar none" and it's the SAME EXACT Govt.. I get the vapors.

    and if you think the govt is incompetent at health care – let me point you to TRICARE which is healthcare for the military AND their dependents – all 8+ million of them… and it is just as expensive as Medicare…

    should we turn over TRICARE to the private sector since it too is subsidized and going bankrupt and let the private sector deny coverage to military dependents for "pre existing" conditions?

    How come we can do TRICARE but we can't do MEDICARE?

    is it "okay" to run a bankrupt operation for the military but not for civilians?

    give me a reason that applies to both operations..

    Moving forward requires us to, at the least, recognize our own personal biases … double standards and blind eyes with regard to government.

    there is no disagreeement from me about the debt problem… it is very serious and we need to deal with it..

    but we need to deal with it.. on a non-partisan basis…

  7. Gooze Views Avatar
    Gooze Views

    I agree that something is fishy here.
    (1) You pick 1979 which was a horrible time for the U.S. economy with stagflation and all. It took Paul Volcker's tough, strict monetary medicine to fix it.
    (2) When you have high inflation OF COURSE yields are going to be higher. More risk involved. Credit is so much more expensive.
    (3) Inflation hawks Volcker and then GReenspan kept inflation low, artifically low and too much so for decades.
    (4) This manufactured feeling of good vibes from low inflation — plus a lack of government regulation — brought us weird stuff like drivatives and subprime. All the proper banks eventually jumped into the pool of subprime they had once shunned because it made them so damned much money.
    (5) During the Bush years, the SEC allowed much higher debt-equity ratios in loans, which contributed to last year's bust.
    (6) Panicked by the crisis last fall, Bernanke and Hank "bazooka in his pocket" Paulson pushed for ever lower inflation rates to ease the crisis and credit.

    So what was the point you were trying to make? That inflation is now low and deficits are high? Got anything else?

    Peter Galuszka

  8. James A. Bacon Avatar
    James A. Bacon

    Daniel, it's a fair question to ask why I went back 30 years with the chart. I did so in order to show the range of interest rates within relatively recent history. If I'd have gone farther back, interest rates would have been lower. The sky-high rates of the late 1970s were a consequence of the "stagflation" economic policies of that era.

    Many people think the Fed's current policies are highly inflationary. If they're right, it's not unreasonable to think that we could have a repeat of 70s-era interest rates. I'm not predicting that interest rates will spike, I'm simply saying we need to understand the full range of potential outcomes.

    I would disagree with you about one point. It may have taken many years for inflationary expectations to reflect themselves in interest rates. But markets will be far more sensitive next time around. We are far more dependent than before on foreign investment. Foreigners will be as hyper-sensitive to, and unforgiving, of the inflation risk in the U.S. as they are in Argentina, Brazil or any other country. As the history of the past 10, 15 years has shown, what Tom Friedman calls the "electronic herd" will yank out its money in a heart beat.

  9. James A. Bacon Avatar
    James A. Bacon

    Peter, read my response to Daniel above. … As for the future of interest rates, what are your thoughts? Do you think 10-year treasuries will be yielding 5.2% 10 years from now?

  10. Reid Greenmun Avatar
    Reid Greenmun

    Yes, high inflation is coming. You can't keep printing money and running up massive debt and expect otherwise.

    Given the expectation of high inflation, why save anything?

    Any money you "save" will be devalued due to run away inflation.

    The wiser move is to invest in assets that will appreciate due to inflation.

    "Saving" is a sucker's game at this time.

    In my view, aside from the foolish policy changes that lowered the percentage of leverage that investors were once required to pay for stocks or to borrow money on an investment, the real problem has been a addiction to DEBT.

    Some here ask about "pay as you go".

    Yet, often this blog advocates massive taxpayer funded new "settlement patterns" based on taxpayer funded mass transit – projects that require selling bonds to fund and running up more and more government DEBT.

    Light rail doesn't pay for itself – so we can't have it both ways – pay as you go and light rail funded by bond DEBT and subsidized pay redistribution of taxpayer's wealth.

  11. I don't know what to expect with interest rates – I don't know whether 5.2% is reasonable or not. But nothing suggests that inflation is a problem right now, and the people that consider current Fed policy inflationary are basing that on a very crude idea of the quantity theory of money. The Taylor rule suggests that Bernanke's policy now is more contractionary than Greenspan's was in the early 2000's, not less. Furthermore, the inauguration of the practice of paying interest on reserves held at the Fed is going to give the Fed strong tools to fight any future inflation – much more powerful than they had in the 1970s.

  12. James A. Bacon Avatar
    James A. Bacon

    Here's how I'm interpreting the vibes I'm getting from people who don't agree with the tenor of this post… Bacon's post may not actually say anything critical of Obama's economic policies, but his argument can be construed as 8*indirectly* critical of Obama's policies. If his argument can be construed as anti Obama, the argument must be subtly biased. If the argument is biased, it is discredited. Voila, we don't have to actually engage any of the facts or ideas expressed therein.

    Nice rhetorical jiu jitsu, guys.

    Let's go through this one more time: The looming fiscal cataclysm is a failure of a *philosophy of governance* shared by both the elephant clan and the donkey clan. Both President Bush (R) and President Obama have presided (and/or will preside) over extraordinary increases in the national debt. I am not making this a partisan issue. If I happen to mention Barack Obama in my posts it's because, well, gee, he HAPPENS TO BE THE FRIGGIN' PRESIDENT RIGHT NOW.

    Someone else will be president in 4/8 years from now. If he's a Republican, he'll probably be captive to all the Republican special interests that have made it impossible to enact meaningful fiscal reform.

    I believed in the "Contract for America" and had hope for the Gingrich Revolution back in the 1990s. I'm honest enough to admit that the Republicans were thoroughly corrupted by power. I had no such illusions about our current "hope and change" president who, it is increasingly evident, is totally in hock to the traditional Democratic constituencies. The special interests rule Washington now, they will rule after Obama is gone, and they will continue fighting over the spoils until the system collapses.

    Only a searing crisis that brings the federal government to its fiscal knees will give the politicians in Washington the will to enact fundamental fiscal reform. Unfortunately, that fundamental reform will involve massive cuts to treasured entitlements and a disruptive retreat of the American military commitment around the world, and attendant surrender of large chunks of the globe to the barbarians.

    I can only hope that the Commonwealth of Virginia remains an island of fiscal solvency when the cataclysm comes. Someone has to make sure that at least some of the legitimate functions of government continue to be maintained.

  13. you also have some folks saying right now that the mistake in the stimulus was that it was not enough and that is why we are having a jobless recovery.

    You know.. virtually all of willingly will assume 30 years worth of debt…

    we do that to get something now instead of "saving up" for it.

    That's what the govt did.. it spent money in advance in hopes that it would stimulate economic activity that would unlock the markets and encourage investment in jobs-producing industries.

    Now.. some are saying that we either did not do enough or what we have done has not found it's way into the economy quickly enough.

    Certainly the clunker program moved quick and the folks who say that those who bought cars will not be buying them in the future are correct…

    they bought "ahead" .. it kicked loose loan money… and it saved some jobs at the dealers and in the manufacturing segment – more Toyota than GM but American plants…

    Some of this boils down to a feeling, a suspicion that the Govt ought not to be messing with fiscal and monetary policy to start with… and that it's more black art than rocket science or brain surgery.

    I must say …the last few years of Greenspan convinced me just how wrong one of those geniuses can be.

    I mean when he comes out AFTER the meltdown and sez "Guess what.. I was wrong" .. I was blown away…

    so I take Bernanke and company with a bigger grain of salt but at the end of the day – I'm not so sure I understand monetary and fiscal policy enough to question the judgement of folks like Bernanke…

    however.. that does not seem to cause similar trepidation in others who remain convinced that what Bernanke advised was nothing short of driving this country into an economic ditch…

    I think.. the wheels were off of the car when Bernanke got the steering wheel..myself.

  14. Gooze Views Avatar
    Gooze Views

    Once again I question your use of Argentina or Brazil or other countries in comparison to the U.S.
    They have all had hyperinflation. So has Israel. So has Russia.We're talking rates of 2,000 percent per annum.
    Why? The chief culprit is that the central banks in those countries flipped the "on" button on the printing presses for paper currency to meet some immediate economic crisis. You flooded the places with cruzadas or rubles or whatever. This is a different ball game than what yoiu are focussing on — deficits and debt.
    Also, unless I am badly misreading you, you seem to be trying to make a correlation between government paper yields and the "soundness" and respect borrowers have for that government's solvency. I am trying to point out that inflation and interest rates have a much bigger impact on yields.
    If you look on your chart, the last 10 years or so U.S. government paper had relatively modest yields. But that didn't stop the Chinese from buying up as much as they could. So what's the point here?
    You might want to read more broadly into macroeconomics and monetary policy before you start drawing these conclusions, especially if your intent is to use these blogs as the basis for a book.
    Peter Galuszka

  15. well.. now I'm going to change direction here and defend Mr. Bacon.

    I don't think he has his thumb on the scale here… I think he is truly sharing a perspective that he does have – and he's not alone.

    I think this is part of why we all look at the same thing and come away with different ideas of what it means..

    and on balance.. I'd like to hear MORE from Mr. Bacon and not have him feel like he's being asked to be quiet…

    so thanks for sharing your perspective.. and please do share more.

  16. I thought some might enjoy this:

    How Did Economists Get It So Wrong? By PAUL KRUGMAN

  17. Anonymous Avatar

    "Why did we fall off the "PayGO" wagon?"

    Because it is unsustainable. Teh goverment cannot do that any more than (most of us) can pay cash for a home or car.

    For some things, borrowing is not on ly not a bad iea, it is a good one.


  18. Anonymous Avatar

    "…PayGO PLUS where the goal is a 10% reduction in the annual budget… ???"

    Freakin CRAZY idea.

    The economy and the populatio goingto expand. Thee is NO ENSIBLE way to decreas thbudet i te face of increasing work to be done.


  19. Anonymous Avatar

    "Yes, high inflation is coming. You can't keep printing money and running up massive debt and expect otherwise."

    Then you should borrow up to the hilt – pay back durable goods with cheap dollars later.


  20. Anonymous Avatar

    "…inflation and interest rates have a much bigger impact on yields."

    Exactly, and a lot of other things, too. The price of oil has gone up, in dollars, but if you comapare it to the price of gold, it has gone up very little.

    Inflation means squat, in the end. What matters is productivity. If you are productive or you invest in productive companies, you will do well, even if currency is reduced to wampum.

    Anybody could "print" wampum, but it was sufficiently tedious to make that unlikely: it was easier to trade a pelt for wampum if you needed it — providing you were a productive hunter.


  21. I think Ray you misunderstand PAYGO or perhaps I do but Virginia has a Constitutional Requirement to balance it's budget.

    Most States, in fact, have such a requirement.

    In the end – whether you are an individual, a company or a govt, you cannot spend more than you are bringing in.

    It does not mean you cannot borrow but it does mean that the payback is deducted from your source of funds.

    Failure to accept this reality is what happened in the housing bubble when people took loans that they knew they could not repay – and were counting on new sources of funds or asset apprectiation to stave off disaster.

    When we as a county as doing our finances that way – they call it a DEFICIT because like a big sore thumb.. there is no known way to pay it back and it just sits there… and we pay interest on it and that interest eats into what we have left to pay for other needs.

    I think an honest question, a legitimate subject of debate, is how large a deficit is acceptable, what is too much, and why.

    Clearly.. in a home budget and a govt budget, there is a point where the interests payments are such a percentage of your income flow that if you have some bad luck or unexpected expenses – it can drive you into bankruptcy…

    how close to that line do you want to tread?

  22. dumb question #57

    Why does the govt LIMIT the amount of money that you defer taxes on?

    If the govt wants a higher savings rate – why not have a tax code that rewards saving instead of a code that rewards creative scams where people take advantage of deductions that ostensibly benefit the government – like interest deduction or the gazillion other myriad ways that are provided to essentially exploit the tax code?

    I found this an interesting perspective:

    " Subsidizing bigger government
    Tax preferences have an adverse impact by shielding taxpayers from the real cost of certain activities, and there are two reasons for the damage. First, preferences encourage individuals to “demand” more of the sheltered activity, thus diverting resources from more productive uses. The home mortgage interest deduction, for instance, is widely believed to harm the economy by encouraging people to shift money from business investment to residential housing. Second, preferences enable providers to “capture” part of the tax preference by increasing prices. Most experts believe, for example, that education tax credits lead to higher costs as colleges adjust their tuition prices to get a share of the money."

    I wonder if anyone has calculated the total amount of tax deductions compared to our national deficit?

    Our tax code not condones, it encourages, scams and inflationary activities.

  23. Anonymous Avatar

    "The home mortgage interest deduction, for instance, is widely believed to harm the economy by encouraging people to shift money from business investment to residential housing."

    Horse manure. Widely believed by whom? Where is the data? How many own homes vs how many own businesses? If yo don;t won a business, would you rather invest in someone ELSE's business, where you have almost no control, or invest in your own home?

    Teh point is to encourage GOOD investments, whether they are business or residential. And that is the point of most subsidies: they are designed to correct a known market failure.



  24. Anonymous Avatar

    "Light rail doesn't pay for itself – so we can't have it both ways "

    Way to go Reid: The emperor has no clothes.

    One mans incentive is anothers subsidy. We all hate debt unless it funds something that favors ME.

    My argument here, from day one, has been that wee need to drop ALL the political posturing and develop a way (that BOTH parties can agree on) to MEASURE the results of the priorities we choose.

    The Republican party beleives we can increas the overall economy by cutting taxes. Fine. Lets agree on a way to MEASURE that hypothesis.

    If we cut taxes and the economy shrinks, then we are all losers, and the hypothesis fails. But suppose the economy does grow, but it grows disproportionately, such that the top 4% have even MORE of the wealth and the capital?

    Then you have created a public policy which has CREATED winners and losers, which cannot be a valid public policy. So, assuming th Republican policy works, then how much should the winners be willing to compensate the losers?

    The Republican position is not at all, since everyone had an equal opportunity to "gain" from the reduced tax policy.

    So next we need a way to measure whther or not that is true. I don't have any idea how to do that: I have talked my way into a thought experiment which provides no clear answer.

    I'm open to suggestions on this one.

    But, my observation of the "opportunites" poor people get is that they don't amount to much. It takes enormous personal perserverance to multiply by zero and gain very much.

    Sure, some people do it. But the fact that it is marginaly possible doesn't make the system fair.

    So, lets assume we cut taxes by 20% and that increaes the economy by 40%, of which 96% goes to the top 4%. And lets assume that the Republican Laffer curve is correct so the net result of all this is positve revenue to the government of 5%.

    How do we decide, objectively, if this is good public policy?

    We better have an answer, otherwise the Republicans will say, Holy cow, we cut taxes and the government got even more money (Never mind this wasour argument in the first place). Governmnent is too big and too intrusive: we need to cut taxes…..

    Obviously, this cannot go on forever.

    So, how do you decide objectively what is the "righ" level of taxation?



  25. Anonymous Avatar

    "Failure to accept this reality is what happened in the housing bubble when people took loans that they knew they could not repay …"

    Nonsense. We have been around and around on this and it is clear that the cause of the housing bubble was NOT people taking loans that they "Knew" they could not afford.

    There are far to many other factors to attempt to blame this on some kind of selfish personal volition or greed.

    People made the same kind of decisions people before them have made.

    I was in over my head on my first home, but I was lucky: I didn't make that loan right before the housing bubble broke.

    I was in over my head, but I had confidence in my ability to swim. Had I failes it would NOT have been because I took a loan that I "Knew" I could not handle.

    To blame the entire housing bubble on people who are no different than I was is gross oversimplification, compounded with a political predilection to reduce EVERYTHING to personal choice.

    And waht is bizarre is that we think we can reduce EVERYTHING ot personal choice and knowledge because it is far to complicated for GOVERNMENT to comprehend and manage.


  26. Anonymous Avatar

    "how close to that line do you want to tread?"

    If you are young, expect your income to grow and you have time to recover from a disaster, then you get one answer.

    But if you are old, tired and stagnant, you get a different answer. Unless you have a lot of life insurance, in which case, what the heck.

    You think the US is Old, Tired, and Stagnant?


  27. Anonymous Avatar

    "I think Ray you misunderstand PAYGO or perhaps I do but Virginia has a Constitutional Requirement to balance it's budget."

    That does NOT mean you have to pay for everything as you go. You can ahve a balanced budget that includes plans to pay for increased debt.

    My understanding of PAYGO means that for every spending increase you have to identify an offsetting decrease.

    That has nothing to do with balancingthe budget and everything to do with stagnation. If you had an unbalanced budget to begin with, paygo would perpetuate but not solve the problem.

    It is a dumb idea from the get go. It is a poster child for intellectually challenged conservatives.


  28. re: " My argument here, from day one, has been that wee need to drop ALL the political posturing and develop a way (that BOTH parties can agree on) to MEASURE the results of the priorities we choose."

    this is known as POLITICS Ray and when you can figure out how to get rid of it…only then can you come back with ideas on how to agree.

    otherwise.. we're blathering

  29. mortgage interest deduction and incentivizing what is "good" for the country.

    incentivizing a moral hazard is not good for the country.

    and that's what we did.

    We said in essence that we'd pay your interest costs if you wanted to speculate in the housing market…

    and you know what.. people did exactly that and you know what? it was a PONZI scheme that any half-wit could have seen except that most everyone involved in it was actively pursuing as much of a share of the scam that they could.

    We paid people to risk money by speculating on the value of something.

    That's something that has risk and, in fact, enormous risk and it's something that some folks do – who have the money to risk but what we did – we encouraged people to make risky investments by subsidizing and insuring the risk.

    and guess what? Mortgages are now being offered for 20% down and documented income and assets!

    What a concept!

    but we have not corrected the fundamental problem – we're still insuring risk and creating a moral hazard by doing so.

    You cap the moral hazard by capping the per person benefit and that's what needs to be done.

    One interest deduction on one home that you live in and only the median value in that region.

    Once we do this.. the moral hazard with interest deductions will be capped. It won't go away but it will be kept to it's original goal of helping people become owners of their primary residences.

  30. " My understanding of PAYGO means that for every spending increase you have to identify an offsetting decrease."


    You have to show how you are going to pay for it – and that's very different than what you're saying.

    For instance, you can cut some other program deemed not effective or you can charge a fee such that the service is sef-funded – like FDIC.

    You don't understand PAYGO Ray
    much less what deficit spending is apparently.

  31. Capping Interest Deductions.

    Ray.. have you ever noticed on your taxes that how much you can deduct for medical expenses is effectively capped according to your income?

    Notice also.. that you can only shield a certain percentage of your income from taxes?

    If we can do this for health care and pensions – then why not for mortgages?

    If we did this – we'd limit the moral hazard – and we'd free up money for PAYGO… and/or for things that "might" benefit us…you know… like health care for those who can't get insurance…

    See….we make these choices..

    we choose to reward those who are essentially using the interest deduction as a subsidized investment strategy and at the same time we penalize people who need health care.

    If we were not such hypocrites, on this why would we not let those who can only get very expensive insurance – write it off?

    I'm sure the insurance companies could find a price for plans for folks for "pre-existing" conditions.

    Why not let those folks write off ALL of their insurance premiums?

    see.. we do have choices.. and we do make those choices.. and they create moral hazards and punish those who don't have their own interest group working for their favorite deductions.

  32. The deduction for interest payments on home mortgages is capped at a mortgage value of $1.1M. Any interest you pay to borrow beyond the $1.1M is not deductible.

    Jim Bacon's use of a 30 year chart to show interest rates is quite justified. The only argument might have been going back to 1969 instead of 1979. The 1970s represented the decade where the American economic approach fell apart. From dropping the gold standard to the oil embargo to rapidly escalating social benefits to offshored manufacturing the 1970s changed the US forever. America's current economic situation was foretold in the 1970s.

  33. 1.1 million cap.

    is that per house or per taxpayer?

    Can the same taxpayer have 2 million dollar homes and have the interest deduction on both as well as subsidized flood insurance on the one at the beach?

    while at the same time.. the guy who earns 50K and has 200K in medical expenses cannot write them off and must file for bankruptcy?

    this is the problem.

    we make choices on our tax and entitlement policies that are, in theory, a justifiable benefit.

    so we're fine with taxpayers helping the guy with the million dollar home pay his interest expenses – but not a penny for that guy whose kid needed a 100K operation.

    and so we say that people do not save enough?

    Now.. if you're going to give that guy with a million dollar home a bunch of govt money for buying that home.. tell me again why he should "save"?

    I think before the housing meltdown, we had folks who were making money on buying and selling homes on the basic premise that no matter how high your interest rate that it was a "non-factor" as long as you could keep selling houses at higher prices than you paid for them.

    I submit that if you limited interest deductions to one house – the principle residence and not 1 million but instead the median regional price that the business of buying and selling houses would then be like any other business.. a choice of what kind of business you'd be best suited to operate.

    If it was running 7-11s, then you chose that. If you were good at buying/selling homes, you'd do that.

    but we had folks who would have been better off running 7-11's that buying/selling homes and it was the govt that encouraged them to choose the home business.

    so what I don't understand is that many folks believe that Fannie/Freddie were complicit in the business of CDOs but those same folks do not believe that the interest deduction policies had anything to do with it.

    My view is that none of it would have happened if the government was not, in effect, subsidizing the buying and selling of homes… and encouraging the moral hazard of approving mortgages without documented income and assets.

    one house deduction per principle owner – and we solve this problem and at the same time the guy who might have bought that house with his discretionary income would be thinking about where else to put it .. including "saving" it.

  34. James A. Bacon Avatar
    James A. Bacon

    Larry, We agree for once. Why *do* we subsidize the guy buying the million-dollar house, and not the working stiff buying his own medical insurance? Are there any underlying principles of justice or fairness involved, or does the disparity in tax benefits simply reflect the disparity of power in Washington, D.C., of various vested interests?

    I totally agree that we should limit tax deductions on mortgages. There is no justification for subsidizing second homes, or for subsidizing conspicuous consumption in the form of $1 million+ first houses. If we absolutely must have mortgage deducations, then the amount should be set just high enough to help first-time homeowners — maybe $200,000.

    To be totally consistent with my principles, however, I would argue for no mortgage deduction at all. People need to pay the full cost of their locational decisions.

  35. Anonymous Avatar

    How about indexing mortgage deductions to the cost of housing? Maybe in East Bugtussle, the deduction is $50K. There needs to be some recognition of higher housing costs in some parts of the country.

    How about eliminating or, at least, restricting the tax exempt status for the big foundations? Compare the Ford Foundation or the Gates Foundation to the family with a million house in NoVA or Long Island or San Francisco, and all of a sudden the relative wealth and fairness looks quite different — at least to me.

    One of my biggest and consistent gripes about progressive politics is that they never get the really wealthy or the really powerful.


  36. Anonymous Avatar

    " My understanding of PAYGO means that for every spending increase you have to identify an offsetting decrease."


    You have to show how you are going to pay for it – and that's very different than what you're saying.

    For instance, you can cut some other program deemed not effective or you can charge a fee such that the service is sef-funded – like FDIC."


    OK,I stand corrected, now my My understanding of PAYGO means that for every spending increase you have to identify an offsetting decrease, or else raise taxes.


  37. Anonymous Avatar

    "One of my biggest and consistent gripes about progressive politics is that they never get the really wealthy or the really powerful."


    Well, isn"t that because they are not progressive enough?


  38. Anonymous Avatar

    "you can only shield a certain percentage of your income from taxes?"

    "Mortgage interest deduction is capped at 1.1 million"


    You guys are a barrel of laughs, trying to find SOME way to stick to your ortgage deduction guns, ins spite of anything.

    You all claim to be free market guys but only as long as you ca control the market with incentives of your choosing.

    My only argument is that there is no reason to favor one kind of investment more than others, unless you have a developing (like solar or wind) market or one that is clearly underserved.

    For example, why shouldn't one be able to deduct two mortgages? It's a clever wayto attack the mortgage deductio but in flies in the face of reason.

    I know plenty of people who are migrant workers: Florida in Winter and Martha's Vineyard, New Hampshire, or Maine in summer.

    Why shouldn't they have two homes – and deduct them both?

    As yu have pointed out, we already have limits — so let this turkey go: it isn't "the cause" of the housing meltdown.


  39. Anonymous Avatar

    "There needs to be some recognition of higher housing costs in some parts of the country."

    Good point, but we already do that by setting the limit high. Ifyou live in bugtussle you won't spend that much anyway, so you don't ned the index.


    Are you saying, let's lower the deducton for those who won't use it anyway and keep it for those that need it?

    What's the point?


  40. re: free-market principles and swallowing toads.

    Philosophically, I agree with Jim Bacon about mortgage interest deductions.

    Remember when you used to be able to deduct auto interest?

    Why did that completely go away instead of being means tested?

    So my TOAD… my compromise is that I don't like the idea of home mortgage deductions at all but I'll AGREE to a COMPROMISE .. on the PREMISE that we help the folks that need it if it also helps the economy


    one deduction for one home and only if you qualify and even then on a proportional income basis …


    then for all those folks that have some "extra" money – let there be a level playing filed as to whether they want to invest in a local 7-11 or put there money in the bank or let the Wall Street guys have it in return for "dividends".

    but let's do away with this stuff which is little more than legalized scams that basically breed interest groups… who lobby for more and more… like addicts on crack….

    out out damn scoundrels!

  41. " The third lesson is that American housing policy has been monumentally foolish.

    We have used public resources to encourage ordinary Americans to bet all they could on highly risky housing markets. Fannie Mae and Freddie Mac, the home mortgage interest deduction, even the willingness to bail out financial firms that had lost too much on mortgages, can all be seen as policies that encourage ordinary people to risk it all on real estate.

    I had once thought that these policies were misguided, but not terrible. We now know that encouraging buyers and lenders to bet on housing can impose vast costs on the country."

    to see the first two lessons we learned:

    looks like Gross had it right to start with… gee.. where do I go to get my economist credentials?

  42. Anonymous Avatar

    "Why did that completely go away instead of being means tested?"

    Because it is not a true investment? Auto's almost always depreciate whle homes generally appreciate?

    Auto expenses for business are still deductible, but this has not given rise to the situation (yet) where the only way you can have a car is to lease it.

    So the auto situation is not comparable to the home situation.

    You guys are just curmugeons: you cannot stand the idea that someone else might get a good deal. It is exactly like the hummingbirds at my feeders: fighting over something that is free.

    You don't think it is free because you see anyone ELSE's deduction as increasing your taxes.

    But we have already seen that the mortgage deduction has limits, your ability to avoid income taxes has limits, we have already see that there are legitimate reasosns to need two homes (and two dedcution) and we have already seen that means testing for buying home is pretty much meaningless. And we already know there is little ifference between owning a second home for investment/rental than from investing in a realty trust- except a personal investmetn is more transparent: you know what you are buying and who is managing it.

    This isn't hurting anyone, except in their imagination. That other hummingbird is stealin "my" nectar, even though I haven't any use for it and it is free besides. it is pure unadulterated selfishness. We ahve already seen that average homes vary by location, so ewe can't set a reasonable dollar limit,on interest deductions.

    What you really want (apparently) is a market limit that prevents people from buying more than they can afford, or from getting a tax break if they CAN afford it. So much for being free market advocates, wo are not in favor of social engineering. And it would not have prevented the meltdown, anyway.

    Who is going to decide how much house you can afford? The government? The faceless government bureaucracy? the same one that started this meass by saying everyone whould have a home?

    Is this the same big bad government that we cannot trust to tell us how much health care we can afford? Are you suggesting that we ration houses and healthcare the same way: by means testing?

    By all means. Let's set up a government run plan that monitors your expenses and income in such a way that you can never fail. You will be 100% safe from financial failure, even if it means you live on the street.


    We could have a flat tax with no deductions and a consumption/sales tax, and you would support that because you think you would be better off: you have your home and no deduction is needed and your consumption patterns are small.

    And sure enough with a flat tax our tax RATE would be lower. For about a week, after whichs someone will lobby to get it changed in their favor.

    But the same amount of money (or more) needs to be raised and the new tax rate will turn out to be about the same as our effective taxrate (after deductions) is.

    The only people this is going to help is those that don;t spend or invest in anything, and therefore don't contribute to the economy.

    Just because that guy other gets a deduction does not mean that I pay more taxes. It sounds logical, but it just doesn't follow.

    If you want something to happen, then you need to be willing to pay to make it happen. It is all too easy to set up negative incentives (take that guys deduction) for other people in order to get what you want for free.

    Only it can't work. Preventing the other guy from having something doesn't mean that you get more. And you waste a lot of energy in the process. It is childish and counterproductive.

    With all the flitting about my hummers do, chasing each other off,they could be halfway to Mexico by now.


  43. oh.. did I mention this part:

    "Luckily, no one will ever again think that Fannie and Freddie are independent entities that impose no costs on American taxpayers.

    Yet I think that we have not yet fully faced the fact that our tax code encourages people to finance their homes with as much debt as possible, and that our financial regulations abet irresponsible lending.

    Now that we have backed away from the abyss, we can consider making much-needed reforms, like reducing the upper cap on the home mortgage interest deduction, that could depress housing prices in the short run, but make future housing bubbles and crashes less likely."


    you dang right.

    Too many people doing too many stupid and greedy things have just about done this country in…

    right now.. as the article said – there would be virtually NO new mortgages if it was not for the Government being the mortgage provider of last resort.

    That's how damaged we are.

    The housing market would be in TOTAL collapse right now if it were not for the government.
    Ray – given the events of the last few years, would you call a house an "investment"?

    Wasn't that what caused this – treating a home a liquid investment?

    You ask who will decide how much house folks can afford?

    Well Ray. right now if you went to the private sector market.. they are asking for 40-60% down payment and a credit score near 800.

    the ONLY mortgage you can get right now for 20% is through the govt.

    If what has happened has not affected your thinking on this.. you're a lost cause ..guy…

    Those hummingbirds…. you're not watching them while imbibing yourself are you?


  44. Anonymous Avatar

    Our tax code encourages people to finance ANYTHING with as much debt as possible, and that our financial regulations abet irresponsible lending. It could be a tractor, printing press—- or a house.

    Everybody gets treated equally, and they can invest in anything as thy see fit, whatever will give them the most return.

    If the banks are stupid enough to lend too much money, how is that the fault of the mortgage deduction?


    The tax deduction is NOT taxes that would otherwise be paid: it i a deduction that everyone gets. It is money that was never intended to be collected.

    By advocating the removal of the mortgage deduction you are advocating a tax increase. Naturally, that increase doesn't affect you, because your home is paid for by now.

    In the spirit of Paygo, you got some other tax you would like to DECREASE?

  45. Anonymous Avatar

    Well Ray. right now if you went to the private sector market.. they are asking for 40-60% down payment and a credit score near 800.

    the ONLY mortgage you can get right now for 20% is through the govt.


    My mortgage company just sent me an offer to refinance at a lower rate. I do have considerable equity, but still, my new rate would be like free money.

    Mortgage loans can't be that hard to get, and can't stay that way.

    Otherwise we will never get out of the housing mess.

    I'm no curmudgeon. I hope lots of people just like me get homes under conditons similar to what I had. I struggled fo a while, held two jobs an ate lot of spaghetti. Drove a clunker I rebuilt several times.

    It was th best thing thatever happened to me, but based on what you think the world should look like, I wouldn't qualify today, let alone back then.

    Sorry, I don't see the point in wishing ill on other people after "I got mine".



  46. Anonymous Avatar

    Ray – given the events of the last few years, would you call a house an "investment"?

    Absolutely, and it is a better investment today than it was a year ago. This is all financial collapse brought on by excessive SECONDARY and TERTIARY levererage. Int he process they also managed to muddle the ownership (property rights) to the loans to the extent that no one owned anything and no one was responsible for anything. It was a classic case of tragedy of the commons.

    It had (next to) nothing to do with mortgage interest deduction or the intrinsic value of the homes. A place that cost $200K to build two years ago and sold for $500k would still cost $200K to build today, but it might sell for only $300k. Maybe $250k.

    Either way it is a better bargain and a better investment today.


  47. and if you owed the mortgage 300K or a house than will bring only 200K and you have to sell it?



    That's a BAD Investment…

    and it was encouraged by the government by subsidizing the mortgage and giving preferential tax treatment over other types of "investments".

    When the government buys mortgages that have no documented assets or income and they let you write off the interest no matter how high that interest is…

    then any dummy can see that as long as houses sell for higher prices that you could use these incentives as a money machine – an ATM…

    and the government provided the dollars to run that ATM…

    but it was, in effect, a PONZI scheme where it was preordained that at some point there would be excess homes to the demand.

    that's what happens when you subsidize/incentivize something.

    that's why we have a bunch of folks right now building ethanol refineries when it clearly does not make economic sense …

    same deal with farm subsidies.

    We pay people to produce and then we turn around and buy it and distribute it to schools and foreign countries for a hell of a lot more cost that if we just bought it on the open market and supplied it that way.

    When you get right down to it.. the government is providing what amounts to legalized scams… as you say "allowed by code"… and what it amounts to is tax transfers… to special interests…

    it's rotten to the core and has made our political system rotten to the core …with the money that special interests pa to keep their preferential tax treatment.

    it has perverted our economy and make it work in ways that are not at all a true market economy.

  48. Anonymous Avatar



    That's a BAD Investment…"

    I rest my case, a bad investment is still an investment, as opposed to an expenditure for current goods, like toothpaste.

    As I pointed out, you can make money in a down market, and somebody always does. All that stuff gets sold to SOMEBODY.

    Plus the guy who SOLD the house for mor than it is worth now, did pretty well. Darn Speculators.


  49. Anonymous Avatar

    ",,,same deal with farm subsidies.

    We pay people to produce and then we turn around and buy it and distribute it to schools and foreign countries for a hell of a lot more cost that if we just bought it on the open market and supplied it that way."

    Nice idea. How do you square it with the facts?

    In the 1930's and up until the late 1950's we spent a third of our income on food.

    Since the era of farm subsidies has taken hold, we spend far less than that.

    In fact, this is part ofthe reason our "poverty line" calculation is screwed up.

    It was established when food was a third of a family budget. So the bureaucrats just take a common grocery bill and multiply that by three to determine the poverty level — even though that ratio no longer holds.


  50. Anonymous Avatar

    "…it has perverted our economy and make it work in ways that are not at all a true market economy."

    We all like to believe that, but a true market economy has perversions of its own.

    We can relieve (some of) that by protecting proerty rights better, so that they can be traded fairly.

    It is one reasonwe have government, and subsidies.


  51. government subsidies and preferential tax treatment are "property rights"?

    more blather from the eco-blogs?

  52. Reid Greenmun Avatar
    Reid Greenmun

    Me? I am a Libertarian. I support the Fair Tax.

    I agree that the mortgage deductions are simply another way to use the tax code to modify personal behavior instead of simply raising the minimum tax reveneu required to perform the minimum required government services.

    Taxes have been BADLY abused for far too long.

  53. Anonymous Avatar

    " to perform the minimum required government services."

    I'm a libertarian, too, but this is where I falloff the wagon.

    Provided we can sho that a government activity provides a net public benefit, why should we limit government to some minimum that prevents this?

    I'm as sceptical as anyone else concerning what government can do effectively, but private action has major failings, too.

    What we need is better metrics. These are best provided by the market. Which means we need more kinds of property, more proeprty rights, and more protection of property rights.

    If you have a liquor license or tobacco allotment, you can sell them. How is that different from any other subsidy?


  54. " I'm a libertarian, too, but this is where I falloff the wagon."

    ha ha ha.. Ray.. do you know what what libertarians think of subsidies?

    "Provided we can sho that a government activity provides a net public benefit, why should we limit government to some minimum that prevents this?"

    because the alleged 'benefit' is in the eye of the beholder usually the one who will benefit.

    "What we need is better metrics."

    you want others to provide the metrics that prove your assertions?

    "If you have a liquor license or tobacco allotment, you can sell them. How is that different from any other subsidy?"

    where did you get the allotment from and who had the right to determine that there should be an allotment to start with?

  55. re: the Fair Tax

    I've read several sources including Wiki and I'm not opposed to it – if modified.

    First, it MUST generate the same revenues at the start so the actual rate needs to float until things stabilize.

    Second – Social Security and Medicare funding.. I should say forced savings plans for retirement need to remain unless we propose to throw old people out onto the streets because they failed to save for retirement (this is where Libertarians have to decide if they are going to deal with realities or remain ideologues)

    3. Massive Fraud will result if you only do the tax at the final retail stage.

    Everybody and their dog will be buying cars at wholesale to "resell" at retail.

    Every single sale would have to have paperwork proving it was not a taxable sale and someone to monitor and follow up …

    Most examples of high consumption taxes also have black and gray markets in profusion.

    4. – Finally.. such a tax would need to be incrementally implemented.. gradually and allow for mid-course corrections… as opposed to the Saturday night massacre method.

    Many of the folks who advocate for the FAIR tax do not seem very flexible at all .. it has to be a certain way or else it's not the FAIR tax.

    I'm always suspicious of proposals like this.

Leave a Reply