Use Gas Tax to Solve Social Security Concerns

I'll leave health care until tomorrow but the other concerns of our nation can be dealth with a single policy proposal that I call a houseboat with wheels because it can do more than one thing. Here are the objectives:

1. Increase fuel efficiency of cars in order to reduce our economy's dependence on fossil fuels and to reduce carbon emmissions.
2. Overfund social security so that we don't need to raise income taxes significantly in the future when we will have far fewer workers for each beneficiary.
3. Invest in US infrastructure, such as electrical transmission, renewable energy generation, mass transit, high speed rail.

All these things can be done with one new thing. We have a rare political consensus now that we need dramatic change in the way the US economy has been moving. Here's what we should do:

1. Impose a tax on gasoline consumption. The federal excise is low now, about 20 cents a gallon. I would like to see it increased gradually over the course of the next 15 years. Say 10 cents in 2010, 20 cents in 2011, etc. through 2024. This would give the auto industry some time to create more fuel efficient cars. The policy would be good for them because it would encourage people to replace their old inefficient cars.
2. Take the proceeds of the tax and put them into the social security trust fund.
3. Do not buy US treasury bonds with the proceeds. The point of the trust fund is to fund the certain increase in social security costs over a longer time period, by starting now. Using the fund to buy US treasuries just delays the tax consequences, undermining it's raison d'etre.
4. Instead buy municipal bonds with the proceeds. Direct muni purchases to new, clean, sustainable infrastructure projects, such as renewable energy, electric transmission, trains.
5. Structure the muni securities to pay debt service when we need it for social security, 2030 - 2050.

Why Patton and Fast Times

Some of you may be wondering why I chose to review two such different movies, Patton and Fast Times at Ridgemont High last month. Maybe I should explain. The point is, these pictures mark the beginning and the end of the best era of American film-making. Stick to movies that came out between these two.

Patton upped the ante on psychological insight. After Patton (1970) came The Conversation, Five Easy Pieces, Dirty Harry, Taxi Driver, Dog Day Afternoon, Two Lane Blacktop, Dirty Mary Crazy Larry, movies with crazy heroes, sick individuals with real beating hearts. Compare their heroes with Mr. Tibbs in In the Heat of the Night (1968). In the Heat of the Night is a great movie, with a great score and the always entertaining Rod Steiger, but Sidney Poitier's hero is totally inhuman once you get to know him. Likewise Steve McQueen's Thomas Crown (1968) is a super cool zero. Gregory Peck in To Kill a Mockingbird (1962) is another good example. Heroic, but too pure, too simple. There's no aha! this is real life! You have to go back to the 1950s, say to Marlon Brando's Terry Malloy to find to find a high level of complexity in a central character. But On the Waterfront was a rarity. Even genre movies in the 1970s had substance and psychological complexity.

At the end of the decade came Fast Times. Like a 1970s movie, it's serious about journalistic integrity and serious about taking on the tough issues. There's an abortion. All the characters have depressing part-time jobs at the mall or in convenience stores, other than the one who scalps concert tickets. But it's also funny. The history teacher says Aloha all the time. And it's sexy: Phoebe Cates reveals her chest to great effect, especially on poor Judge Reinhold. Hollywood learned the wrong lessons from the seminal Fast Times. The teen movie industry that blossomed in its wake told touching stories of early romance, but rarely would a viewer recognize what he saw. The independent Dazed and Confused came the closest. But in general, the movie makers copied the Fast Times surface: show sexy kids in sunny climates triumphing over their own foolishness and some mild adversity. Hey I loved those movies as much as the next guy, but they were not sufficiently challenging. The imitations delivered pleasures but didn't leave an impression and don't hold up. War Games was fun, but Matthew Broderick, like Tom Cruise, is a piece of cardboard. He's a smile in a pair of chinos. Compare them with sweaty Mike Damone in Fast Times. Things just got saccharine.

I recommend Smile, written by Jerry Belson, and directed by Michael Ritchie. A beauty pageant in the California hinterlands. A sophisticated ensemble story about the politics of how to play in rigged games in a small town. It came out in 1975, five years after Patton and seven years before Fast Times.

Smile

Bob's and Eric's Ideas for the Economy

My friends Eric Weaver and Bob Palmer wrote some good opinion pieces on the current economic troubles in the US. Eric argues that stimulus dollars flowing to banks should include money for commmunity development banks, not just because their work is important, but because they've been fulfilling their mission while the rest of the financial services sector has been buttering its belly. Bob lays out a plan for mortgage relief. Nice job, guys.

http://progressillinois.com/2009/1/16/palmer-six-steps-foreclosure-crisis

http://www.sfbayguardian.com/entry.php?entry_id=7926&catid=4&volume_id=398&issue_id=416&volume_num=43&issue_num=18

I'm not normally an iconoclast or crank, but I can't understand why the land purchase program I have described in this blog is not being taken up. Here's an op-ed I submitted to the NY Times:

I keep reading that a rebound in the housing industry will be a balm for bank and household balance sheets and a potential key to ending the US economic crisis. This formulation glosses over the fact that housing is two competing industries, both sick. Curing both, however, may not be what's best for the economy. The housing industry includes the sales of new and of existing homes. In fact, the credit crisis and the foreclosure crisis both stem from the decline in the price of existing homes. The decline in the new home construction industry hurts homebuilders and their employees, but that pain does not radiate out to the financial system or American homeowners generally. In fact, there are a lot of benefits from a decline in new home construction.

The contraction in credit markets has led to sharp reductions in investment and consumption and a broad fiscal stimulus is now necessary to sustain businesses and households through the worst of the slow-down. But a targeted plan identifying existing homes as the root of the problem, and protecting or restoring their value might have saved us from this monumental effort. At this point, a targeted initiative increasing the value of existing homes might be one of the most efficient investments of stimulus dollars, and would accomplish a variety of other worthy aims. To achieve this aim, the government should provide dollars to states for the purpose of buying undeveloped land to be set aside for conservation. Removing potential home lots from the marketplace would immediately add to the value of the existing lots, adding to homeowners' wealth and increasing the value of the home mortgages on bank balance sheets.

Homebuilding is an important industry in the United States. Americans prefer newer homes and economic vitality depends on the existence of affordable, appealing places to live located close to desirable jobs. New homes, though, can come from already developed property as well as from forest or farmland. Industrial and commercial property can be converted into lofts and apartments. Old houses can be torn down and rebuilt, remodeled, added to, or just renovated. The fact is, though, the large homebuilding corporations sell new homes on a very large scale. Their business model depends almost entirely on new home construction. The proposal here is to push back on that business model, increase the ratio of reconstruction to new construction, and give existing homeowners some much-needed market power.

New home construction has been too easy for a long time. In addition to the familiar story of the financial encouragement, the regulatory environment has also been helpful in that home-building permits are awarded at the local level. The metropolitan areas we live and work in are ungoverned. Changing land use and traffic patterns have a regional impact, but permitting is handled locally, and the narrow aim of increasing the local property tax base is usually a significant factor. The resulting sprawl strains city and inner-ring suburban economies and tax bases, and leads to longer commutes, more traffic, and more air pollution, while legacy mass transit systems are made less and less relevant.

Buying undeveloped land is a simple solution to a complex problem. Many states and localities have "land banks" in place. Their traditional role is to take temporary possession of blighted properties and eventually resell them to owners who put them to good use. With sufficient funding they, or other land conservation groups, could fight blight before it happens, rather than after a decade or two of disuse and decline. If a homebuilder sells, say, 2,000 acres of land outside a metropolitan area for $30,000,000 and undeveloped land is made more expensive by the program, the builder would dial down new home construction on undeveloped land in favor of investing in existing homes or other properties and transforming them into more desirable properties. The program could make reinvestment along these lines a condition of the sale. This would be a great benefit for the owners of existing homes, who have seen years of price declines and with inventories at very high levels, face difficulties selling their homes at all.

For 10 months in 2008, the inventory level of existing homes for sale in the United States, was more than 4 million, representing more than eleven months of sales, according to the National Association of Realtors. The annual rate of housing starts (new homes) in December 2008, twelve months into the recession and three months into the credit crisis was 550,000, according to the Census Bureau. That's 45% below the rate of housing starts one year ago, but it's still adding to the available inventory. In December of 2008, the inventory of existing homes for sale finally dropped below 4 million, dropping in fact by 490,000 even though only 360,000 homes were sold. The difference must be a result of would-be sellers giving up. That's not surprising as sales prices in December were 19% below the 2007 level.

One could argue that the time to guard against oversupply of housing has come and gone. New construction has slowed down tremendously, and the four million people who want to sell their homes have little to fear from the half a million new homes currently being made. But the question is, how do we turn the problem around? The key may this: home prices reflect expected appreciation in addition to current supply and demand. The home-making machine is humming quietly today, but the volume will certainly get louder if home prices start to stabilize. Home-builders have substantial amounts of land inventoried, have debt service payments to make, and have an incentive to make and sell houses as soon as and as long as the sales price is greater than the cost of construction. Given this possibility, why buy now? A nationally funded land purchase program would give us a tool to steer, to some extent, new home-buying dollars toward much needed home price appreciation and redevelopment of languishing existing property, rather than toward unneeded additional home construction.

Patton and Fast Times

I watched Patton a couple weeks ago. The DVD began with Francis Ford Coppolla on a couch. I had to fast-forward through it, pushing the button, since under the DVD's menu system, the interview was part of the movie itself, not a separate feature. As a result your dense correspondent was made aware, by force, that Francis Ford Coppolla wrote the screenplay. Patton is the triumphal story of a brilliant commander and seems to fit snugly in the camp of movies about great heroes in good wars. But it's also a Coppolla movie and foretells the darker depiction of war in Apocalypse Now. What connects them is insanity. The movie Patton is an absolute nut. He reads Rommel's book on tank battle tactics before going to bed. Looking over a great valley, he hears the explosions from the Carthaginians' brave stand against the Roman legions. Omar Bradley tells him, "I do this because I was trained to do it. You do it because you love it." The movie is full of great lines. During a tank battle, Patton shouts, "Rommel you magnificent bastard. I read your book!" The 1970s were the golden age of great movies about not-great people, and Patton, from 1970, marks the transition, bridging the tough, heroic World War 2 movies like Bridge on the River Kwai with the dark 1970s take seen in Apocalapyse Now or The Deerhunter.

I left Fast Times at Ridgemont High off of my five favorites list earlier this year. I don't know how this happened. I think memory loss and confusion may be side effects of Lunesta. Fast Times was on cable TV a couple weeks ago and it never gets old. The brilliance of Cameron Crowe is his subtle, documentarian's interest in getting the quiet stuff just right. In reference to an old teacher, one teenager says to another, "You had Deegan?" Mike Damone's lines, such as "this is great iced tea!" and "I come here for the strudel," are not funny lines, but they are absolutely right for the character, who is very sharply drawn, as are many others. I've come across others over the years who know every line in the movie. It's a concatenation of episodes and it's remembered for the funny ones and the sexual ones, but what really sets it apart is the artistic freedom given to the writers and actors to create vivid, subtle, realistic characters. An added bonus: Jeff Spicoli has two mostly mute pals. Look closely and they are Eric Stoltz and Anthony Edwards!



Fast Times at Ridgemont High (Widescreen Special Edition)

buy land?

This really seems like a golden opportunity to do something about sprawl. Land is cheap. Sprawl causes increased driving and pollution, undermines the fiscal health of towns and cities, and undermines the property value of existing homes. Buying exurban land would address all these very important issues, and address falling home prices at the same time.

The only possible argument in opposition is that increasing land prices would hurt the new home construction industry. But homebuilders are not buying land in this environment. They would much prefer to sell it. If any homebuilders holding land are recapitalized with money instead, and undeveloped land was being bought at above market rates by land banks backed by the federal government, the homebuilders would turn their attention to existing homes, to buy and improve. A fine, non-polluting activity, and one that would help out the owners of those existing homes, a large group of people who have been getting socked with declining equity for about 4 years. I don't think the banks would mind seeing a rise in home prices either.

Proceed with Bailout and have Toll Brothers rebuild North Philadelphia

I'm very disappointed that the bailout failed. What I think many Americans don't understand is that we have nothing approaching a free market in the United States. We have a regulated, mixed economy in which government agencies provide many services, enfranchise businesses to provide many services, regulate businesses in an enormous variety of ways, and step in and save businesses when deemed necessary. Obviously, the size of this bail-out shows that huge mismanagement has occurred. Placing blame for it will be a fun parlor game for many years. But the credit crisis can be solved with this bold dramatic step. If the government also takes steps to improve the real estate market, they would not have to deploy the full face amount of the bailout and the investments they do make might well be pretty good ones. But the success of the legislation will itself have significant ameliorative effects on the credit market.

To improve the real estate market they should read my entry of January 26, 2008. I'd like to see the government buy some land and shrink new home development in overbuilt places like Las Vegas and Phoenix. That would be hugely helpful to existing homeowners and their creditors. Even if they bought the land someone like Toll Brothers has on inventory. I'd like to see them put Toll Brothers to work re-building North Philadelphia.

Glass Steagall is not the Issue. Economic Fundamentals are the real story.

There's a lot of talk now about how John McCain is particularly ill-equipped to lead the country out of the current financial melt-down because he and Phil Gramm were proponents of deregulation and deregulation, including Gramm's dismantling of the Glass Steagall act that separated commercial from investment banking, is what got us into this mess. There are two main problems with this argument. First, Wall Street has been highly regulated in the last decade. Eliot Spitzer's prosecutions, Sarbanes Oxley, regulation FD, have left the business neck-deep in red tape. For example, communications between different functions of the firms are tightly constricted, and employees need permission to make personal investments or accept positions on corporate boards. Second, Glass Steagall might have made things worse. Bear could not have jumped into the arms of JPM had Glass Steagall been in place, nor could Merrill have merged with Bank of America. Past mergers may have been responsible for averting other potential crises as well. Could Citi's or UBS's investment banking arms have weathered the storm without their banking parents?

So regulation and oversight sound good (and appear to have worked in the case of commercial banks), but their application doesn't necessarily protect us, as illustrated by the recent crisis.

The problem this time around was really pretty similar to what happened in the dot-com bubble. Investors had a great appetite for a particular category of investment, in this case structured finance including mortgage-backed securities, and so Wall Street provided a great amount of it. The bizarre twist in this case was that a lot of what turned out to be rubbish was not equities, bets on promising technology, but AAA-rated debt. That made this bubble more toxic than the last one. Another realization that didn't really come up in the dot-com era: broker-dealers hold a lot of inventory and can suffer significant losses as a result.

The problems occurred in the unregulated "structured finance" realm rather than in the regulated world of corporate finance. One response would be to demand the kind of transparency and disclosure of structured entities that is demanded of public corporations. After all, if billions of dollars are being invested in them, the cost of disclosure might be worth the benefit. This might help, and we should probably do what we can, but it's safe to say it won't solve the problem. When investor appetites are in play, securities will flow and when the good stuff is gone, the junky stuff will be conjured up. The problems were flawed science, hopeful investing, and old-fashioned spin-meistering. These things can't be stopped.

So what ought to be done? First, a litle more diagnosis.

The root of the problem is the distribution of income. Wealth was quickly accumulating in the newly global investor class and it wound up spilling into these instruments that looked conservative, but in fact relied on a healthy American middle class. This group didn't exist anymore.

The US response to anemic economic growth was to keep interest rates really low. Growth was anemic because the American consumer saw no growth in earnings. Low interest rates permitted borrowing and grew asset prices in real estate, as well as sustaining politically presentable levels of consumption growth. Beggars can't be choosers, and this debt-based economic growth was all the US could muster.

Can anything be done about the skewed distribution of income which is essentially a technological phenomenon? Well, the appropriate public policy response is to recognize that economic growth as well as the basic health of a society depends on broad-based prosperity. If the dollars are flowing to corporations and the wealthy, tax them and make the middle class better off with free popular services that benefit everyone such as education, health care, infrastructure.

Historically, societies marked prosperous times by building great, lasting things, like universities, city boulevards, museums, skyscrapers. The prosperity of the 1990s and the more narrow prosperity of the mid-2000s didn't yield much public manifestation. I think that's the root of the problem here. The wealth wasn't shared. And as Obama says, the poverty trickled up.