Saturday, September 15, 2012

Hot Pockets or Pick Pockets

This item was originally written on Monday, December 26, 2011 ... the day after Christmas, on Facebook.

Christmas is over and I hope everyone had a very merry time with family and friends, with gifts and cards, with food and drink, and just a chance to escape to focus on what is really important in life.

Just before Christmas, and accompanied with “high drama,” Congress finally passed an extension to the payroll tax cut. I think that was good news and a relief to those who are suffering most in our struggling economy. The bill that was finally, quickly passed and signed by the President included a two month extension for the 2% Social Security tax cut, an extension of funding for unemployment benefits, and a continuation of the abeyance of a very large cut in Medicare doctor payments.

All three will a positive effect on the American people. As I’ve written before, the payroll tax cut will put more money in the pockets of all working Americans. The extension of unemployment benefits will help those who have been out of work for half a year, a whole year, even longer (although details depend on the individual states).

Finally, delaying the 27% cut in Medicare reimbursement is good news for doctors, but it is also good news for Medicare patients. If the payment for Medicare treatment becomes too low, then doctors will stop seeing Medicare patients. That has already happened on a small scale, but each cut in reimbursement will mean more doctors will refuse Medicare patients. While it is a blessing that inflation has not been a large concern these last five years, put yourself in the shoes of a doctor with a practice and employees that have to be paid for, and you are told your fees are cut 27%. What would you do? At some point, you would simply state “I can’t afford to provide this care any longer.” Then the poorest in our nation, those on Medicare and Medicaid, will have fewer choices for doctors.

So all three actions will benefit most those who are struggling. Sadly the extension is only for two months, and we can now expect Act II of the debate in Congress about solving these problems and stimulating the economy. I think I’m going to go down to the butcher shop and watch them making sausage.

My informal polling indicates most people are in support of this bill. As I wrote previously, there are two sides to the payroll tax debate, and – frankly – I’m on both sides. I agree this was legislation needed to help those in most need of help and it should boost our economy by something near 1% from the increased spending. That is good.

On the other hand, I don’t want to see a loss of funding to the Social Security Trust Fund. In addition, I’m very concerned about our run-away deficit and our national debt. I agree that increased government spending is necessary during times of economic downturn. This is a lesson Woodrow Wilson missed, and his errors intensified the great depression.

But, eventually, our financial house must be brought in order. As a nation (or as individuals), we can’t continue indefinitely spending more than we earn. Borrowing for good reasons is good. For example, most people would never be able to own a home if they didn’t borrow the purchase price. Other large items such as automobiles and trucks are also typically bought on credit rather than cash.

But borrowing to make ends meet is not a long-term economic strategy that can be followed by nations or families. The bills must be paid. If for no other reason, at least the US has to stop borrowing when the payment (that’s interest) on the national debt becomes too large a percentage of the budget. That basically means that our children and grandchildren will have to pay for our spending today.

One only needs to read the newspapers and hear about the debt crisis in Europe or the “austerity measures” being adopted by some European debtor nations. Austerity measures is a fancy economic word for “we will be eating Ramen Noodles for dinner tonight, and tomorrow night, and the night after …”

There are many reasons that our government budget is so out of balance. On one hand there is continually increasing spending. One component of that spending is a defense budget that includes several wars and supporting one of the largest militaries in the world. Second is the so-called entitlement spending. That’s Medicare and Social Security and pensions for former government employees. After those two big budget items there is little left to spend on anything else. On the other hand are tax cuts enjoyed by all segments of the population. Those decreases in tax rates are now over a decade old and were extended last year after a noisy debate, mostly having to do with the “rich paying their fair share.”

The cynic in me thinks everyone wants higher taxes – on the other guy. But, for me, taxes are just too damn high! Don’t raise taxes during a recession – don’t you know any economic theory? I’m tired of paying for all of those that don’t pay. Do you want to cripple small business, the real job creator in our country? – I’ve heard and thought it all. The practical guy in me knows that the only solution is going to be a combination of reductions in spending and increases in government income. Just watch out for that devil that lives in the details.

In an attempt to control spending Congress, will often require a source of funding to offset any new spending. That is good policy and forces some level of prioritization of needs. After all, we can’t afford everything.

So, what is the source of funding of the current payroll tax reduction extension and the related legislation? Well, you’ll have to scan the newspapers and television news very carefully to find the answer to that question. The headlines are full of dramatic statements such as “Obama Wins Showdown with Congress” or something else designed to attract readers and viewers by treating these important issues like a sports competition. Sadly there is little information to actually inform readers and viewers … AND voters.

I did find a useful article in the LA Times that described the source of funding of this legislation. It is a fee on loans issued by Fannie Mae and Freddie Mac, the government affiliated home mortgage giants, that will offset the loss of income and extra spending.

Based on prevailing rates for a 30-year fixed-rate loan, a homeowner borrowing $200,000 would pay about $4,000 more if the loan were sold to Fannie or Freddie. That would raise the mortgage payment about $11 a month for the life of the loan.

I learned that, even though the tax cut extends for only two months, a fee on loan amounts would be levied for a DECADE. That’s right! To pay for two months, this fee will last for ten years. Plus, this means another source of funding for any further extension of relief will have to be found. This well is being pumped dry!!

(A special tax on those earning over $1 million has often been suggested to pay for the cuts and benefits, but defeated by the Republican opposition. That fact will probably play big in Act II of the debate and also in Act III – the election campaign.)

Oh, and that fee arrangement also makes it difficult for Congress to work on efforts to shut down Fannie and Freddie, which federal regulators seized three years ago with a taxpayer bailout now estimated to total about $150 billion.

Then there is the problem that the collapse of the housing market triggered the Great Recession and led to a wave of foreclosures as housing prices plummeted nationally. The market has been struggling to recover amid weak economic growth and high unemployment.

The new mortgage fee to fund the temporary extension of the payroll tax cut could dampen the still-sluggish real estate market and complicate efforts to overhaul the nation's wounded housing finance system. The new fee may even make a new loan unaffordable to the very people that this legislation is intended to help.

It is true that the Obama administration and some analysts have called for Fannie Mae and Freddie Mac to raise their fees to make it easier for private companies to compete with them. Because the government owns Fannie and Freddie, investors view the mortgage-backed securities they create as safer investments than those offered by private firms. Raising their rates to compensate for this natural advantage may be this is a wise decision increasing private mortgage providers.

I think a fee increase would be fine — if the money were used to offset losses at Fannie and Freddie. But diverting the money to other government uses is a bad idea.

We certainly have raised the level of robbing Peter to pay Paul to a new level, as government reaches into the left pocket to put money in the right pocket. I am used to this game of smoke and mirrors from our elected representatives. I just wish the “free press” would be more out front informing the public of just where the money is coming from.

Sadly, I think a lot of people just want to hear that the check is in the mail. They are not too worried where the money is coming from. “Kids, I’ve got bad news for you. The next envelope in the mail isn’t going to be a check, but a bill … a very big bill. Well, good luck with that!”

No comments:

Post a Comment