artdiamondblog.com – Page 372 – Art Diamond's web log

Democratic 1997 Tax Break Fed Housing Bubble

Source of graph: online version of the NYT article quoted and cited below.

(p. A1) “Tonight, I propose a new tax cut for homeownership that says to every middle-income working family in this country, if you sell your home, you will not have to pay a capital gains tax on it ever — not ever.”
— President Bill Clinton, at the 1996 Democratic National Convention
Ryan J. Wampler had never made much money selling his own homes.
Starting in 1999, however, he began to do very well. Three times in eight years, Mr. Wampler — himself a home builder and developer — sold his home in the Phoenix area, always for a nice profit. With prices in Phoenix soaring, he made almost $700,000 on the three sales.
And thanks to a tax break proposed by President Bill Clinton and approved by Congress in 1997, he did not have to pay tax on most of that profit. It was a break that had not been available to generations of Americans before him. The benefits also did not apply to other investments, be they stocks, bonds or stakes in a small business. Those gains were all taxed at rates of up to 20 percent.
The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so. “When you give that big an incentive for people to buy and sell homes,” said Mr. Wampler, 44, a mild-mannered native of Phoenix who has two children, “they are going to buy and sell homes.”
By itself, the change in the tax law did not cause the housing bubble, economists say. Several other factors — a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall — probably played larger roles.
But many economists say that (p. A22) the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.
Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, has said the tax law change was responsible for “fueling the mother of all housing bubbles.”

For the full story, see:
VIKAS BAJAJ and DAVID LEONHARDT. “1997 Tax Break on Home Sales May Have Helped Inflate Bubble.” The New York Times (Fri., December 19, 2008): A1 & A22.
(Note: ellipses added.)
(Note: the online version of the article is dated December 18, and has the somewhat different title: “The Reckoning; Tax Break May Have Helped Cause Housing Bubble.”)

“Ryan J. Wampler made nearly $700,000 on three sales of his own homes in eight years.” Source of caption and photo: online version of the NYT article quoted and cited above.

Stimulus Bill Causes “Burden from Higher Taxes Down the Road”

In the op-ed piece quoted below, Nobel-prize winner Gary Becker, along with Kevin Murphy, express reservations about the recently-passed stimulus bill, although they apparently do not go quite as far as Harvard economist Robert Barro, who believes the multiplier may be close to zero (which would imply no stimulus from the stimulus bill).
Although Becker and Murphy believe that there will be some stimulus, they emphasize that the costs will be substantial:

(p. A17) The increased federal debt caused by this stimulus package has to be paid for eventually by higher taxes on households and businesses. Higher income and business taxes generally discourage effort and investments, and result in a larger social burden than the actual level of the tax revenue needed to finance the greater debt. The burden from higher taxes down the road has to be deducted both from any short-term stimulus provided by the spending program, and from its long-run effects on the economy.

For the full commentary, see:
GARY S. BECKER and KEVIN M. MURPHY. “There’s No Stimulus Free Lunch.” Wall Street Journal (Tues., February 10, 2009): A17.

Atmospheric Carbon Dioxide that is Probably Not Caused by Human Activity

“This artist’s concept shows a cloudy Jupiter-like planet that orbits very close to its fiery hot star.” Source of caption and image: online version of the NYT article quoted and cited below.

(p. A31) Astronomers testing techniques to search for extraterrestrial life have detected carbon dioxide in the atmosphere of a planet 63 light-years away.

This carbon dioxide, though, is certainly not coming from plants or automobiles. The planet, HD 189733b, is far too large (about the mass of the Jupiter) and too hot (1,700 degrees Fahrenheit) for any possibility of life.

For the full story, see:
KENNETH CHANG. “Carbon Dioxide (No S.U.V.’s) Detected on Distant Planet.” The New York Times (Thurs., December 11, 2008): A31.

Harvard Economist Barro Calls Stimulus Bill “Garbage”

(p. A17) Harvard economist Robert Barro being interviewed on the stimulus bill by the Atlantic:

Barro: This is probably the worst bill that has been put forward since the 1930s. I don’t know what to say. I mean it’s wasting a tremendous amount of money. It has some simplistic theory that I don’t think will work, so I don’t think the expenditure stuff is going to have the intended effect. I don’t think it will expand the economy. And the tax cutting isn’t really geared toward incentives. It’s not really geared to lowering tax rates; it’s more along the lines of throwing money at people. On both sides I think it’s garbage. So in terms of balance between the two it doesn’t really matter that much.

For the full excerpt of the Atlantic interview with Barro, see:
Robert Barro. “Notable & Quotable.” Wall Street Journal (Tues., February 10, 2009): A17.
(Note: italics in original.)

Christensen Book Re-Thinks Basic Assumptions About Health Care Innovation

Source of book image: http://images.barnesandnoble.com/images/34000000/34009038.jpg

Christensen’s new book hit the shelves in December 2008. His ideas on health care are promising, if the special interests don’t get in the way. (I have not yet read the new book, but have read earlier versions of his proposals on how disruptive innovations can improve health care.)

(p. R2) BUSINESS INSIGHT: Your coming book, “The Innovator’s Prescription,” takes a look at health care. How likely do you think it is we’ll see substantial innovation in the structure of the U.S. health-care system?
DR. CHRISTENSEN: Well, one great benefit of the current economic crisis is that it will create pressure to find a real solution to the health-care problem. Right now, emergencies exist at companies like General Motors, which has got to drive the cost of its health care down. Every city and town in America would be bankrupt if they kept their books the way private-sector companies keep their books — because of the obligation cities and towns have taken upon themselves to provide health care for their retirees.
And so we really are in an emergency where it’s likely that employers and health-care providers are open to completely rethinking some of the basic assumptions that made innovation seem impossible. What we’re hoping with this book is that we can just bring a way to frame the problem that can help people reach consensus around a course of action that otherwise, at another time, would have seemed quite counterintuitive.

For the full interview, see:
Martha E. Mangelsdorf, interviewer. “Executive Briefing; How Hard Times Can Drive Innovation.” Wall Street Journal (Mon., DECEMBER 15, 2008): R2.
(Note: ellipses added.)

Ending Capital-Gains Tax Would Encourage Funding for Entrepreneurial Ventures

(p. A15) In virtually all economics classes, including those taught by the many excellent economists on the Obama team, the idea of government spending as an engine for growth is not a popular topic. Yet despite their skepticism of Keynesianism in the classroom, when it comes to public policy, these economists happily endorse a large stimulus package that could bring our deficit to 10% of GDP. Why?
One explanation is that these economists think this recession is an extraordinary one.
. . .
But this particular recession is unique not in its dimensions, but in its sources. First, it is the result of a financial crisis that severely affected stock-market valuations. The bad equilibrium did not originate in the labor market, but in the credit market, where investors are reluctant to lend to risky firms. This reluctance is making it difficult for these firms to refinance their debt, forcing them to default on their credit, further validating investors’ fear. Thus, the problem is how to increase investors’ willingness to take risk. It’s unclear how the proposed stimulus package would help inspire investors to do so.
. . .
So how do we stimulate the economy without increasing the already large current-account deficit? It’s not easy, but here is an idea: Create the incentive for people to take more risk and move their savings from government bonds to risky assets. There is no better way to encourage this than a temporary elimination of the capital-gains tax for all the investments begun during 2009 and held for at least two years

For the full commentary, see:
ALBERTO ALESINA and LUIGI ZINGALES. “Let’s Stimulate Private Risk Taking.” Wall Street Journal (Weds., JANUARY 21, 2009): A15.
(Note: ellipses added.)

“Little Risk the Ice Sheet Will Collapse”

“To probe the underside of Greenland’s glaciers, NASA researcher Alberto Behar released 90 specially tagged rubber ducks into a fissure of the Jakobshavn Isbrae glacier in Greenland, tracking their progress along underground melt-water streams.” Source of caption: typed from print version of the WSJ article quoted and cited below. Source of photo: edited screen capture from the online version of the WSJ article quoted and cited below.

(p. A13) As researchers learn more about the mechanics of Greenland’s glaciers, they are becoming convinced that, by itself, the sub-surface water slide created by so much melting ice may be a short-lived seasonal effect, says University of Washington polar scientist Ian Joughin. The glaciers speed up in the summer but slow down in the fall. If that’s true, there may be little risk the ice sheet will collapse as some scientists recently feared — at least not for the foreseeable future.

For the full story, see:
ROBERT LEE HOTZ. “The Sober Science of Migrating Rubber Duckies; An Armada of Tub Toys Sets Sail in New Research Discipline, ‘Flotsam Science,’ and Helps Unravel Enduring Planetary Mysteries.” Wall Street Journal (Mon., November 14, 2008): A13.

Stimulus Bill is “Big, Messy, Largely Off-Point and Philosophically Chaotic”

(p. A11) The final bill was privately agreed by most and publicly conceded by many to be a big, messy, largely off-point and philosophically chaotic piece of legislation. The Congressional Budget Office says only 25% of the money will even go out in the first year. This newspaper, in its analysis, argues that only 12 cents of every dollar is for something that could plausibly be called stimulus.

What was needed? Not pork, not payoffs, not eccentric base-pleasing, group-greasing forays into birth control as stimulus, . . .
. . .
I think there is an illness called Goldmansachs Head. . . . When you have Goldmansachs Head, the party’s never over. You take private planes to ask for bailout money, you entertain customers at high-end spas while your writers prep your testimony, you take and give huge bonuses as the company tanks. When you take the kids camping, you bring a private chef. Goldmansachs Head is Bernie Madoff complaining he’s feeling cooped up in the penthouse. It is the delusion that the old days continue and the old ways prevail and you, Prince of the Abundance, can just keep rolling along. Here is how you know if someone has GSH: He has everything but a watch. He doesn’t know what time it is.
. . .
But you don’t have to be on Wall Street to have GSH. Congress has it too. That’s what the stimulus bill was about–not knowing what time it is, not knowing the old pork-barrel, group-greasing ways are over, done, embarrassing. When you create a bill like that, it doesn’t mean you’re a pro, it doesn’t mean you’re a tough, no-nonsense pol. It means you’re a slob.
That’s how the Democratic establishment in the House looks, not like people who are responding to a crisis, or even like people who are ignoring a crisis, but people who are using a crisis.

For the full commentary, see:
PEGGY NOONAN. “OPINION; DECLARATIONS; Look at the Time.” Wall Street Journal (Sat., JANUARY 30, 2009): A11.
(Note: ellipses added.)

New Business Model for Promoting Disruptive Innovation

“Clayton M. Christensen” Source of caption and photo: online version of the WSJ interview quoted and cited below.

(p. R2) BUSINESS INSIGHT: . . . There must be, . . . , cases where concerns about the market cause companies to abandon their plans for new products or really retrench. Or do you see that happening less these days as companies realize the importance of keeping up with changing markets?
DR. CHRISTENSEN: In the next two years, I think the answer will hinge quite a bit on the role that hedge funds play in driving stock prices. By now, 95% of all trades on the stock exchange are executed by hedge funds, mutual funds or pension funds that you could not call shareholders. They’re share owners, but they don’t even hold the shares long enough, on average, to vote the proxy. And long-term shareholders are always better for innovation than the short-term people are.
BUSINESS INSIGHT: So we might see innovation more from private companies?
DR. CHRISTENSEN: Absolutely right. And there’s another business model toward which more and more companies need to move. It’s a business model you see with Li & Fung in Hong Kong, Tata Sons in India, and Cox Enterprises in Atlanta. In this model, the holding company is privately held, and then certain of the subsidiary companies that have the right characteristics take their shares public on the market.
What that allows those companies to do is, when they have a disruptive innovation that they need to launch, they can just do it under the private umbrella of the holding company, and not have it reduce the near-term performance of the publicly held subsidiaries.

“A Splendid Birthday Present” for Charles Darwin

Source of the book image: http://images.barnesandnoble.com/images/34510000/34519930.jpg

(p. A13) . . ., on Feb. 12, biologists the world over will celebrate Charles Darwin’s 200th birthday. Throughout the year, at festivals galore marking his bicentennial, “On the Origin of Species,” a mere 150 years old, will be hailed as one of the greatest works in the history of the sciences.
. . .
Mr. Coyne begins with a succinct account of what is at stake. “Life on earth evolved gradually beginning with one primitive species — perhaps a self-replicating molecule — that lived more than 3.5 billion years ago; it then branched out over time, throwing off many and diverse species; and the mechanism for most (but not all) of evolutionary change is natural selection.”
Darwinism is thus a claim with several basic components, and the book is structured by carefully exhibiting the evidence for each. Making that structure explicit allows readers to recognize just where they are in the argument. As they follow Mr. Coyne’s parade of evidence — his discussions of the fossil record, of vestigial traits, of the ways in which living things constantly make novel use of the bits and pieces they have inherited, of the distribution of plants and animals — the components of Darwin’s thesis are sequentially supported. We have a list of things to be shown, they are shown and the truth of evolution is established.
. . .
Yet will any defense of Darwin, however painstaking and lucid, succeed in substantially modifying the public-opinion survey results? Mr. Coyne has seen the opposition first-hand, recounting his experience of talking to a group of businessmen about evolution and eliciting the reaction: “Very convincing — but I don’t believe it.” This sort of skepticism is often rooted in a sense that Darwinism somehow discredits morality — a perception that Mr. Coyne argues against, cogently, in a brief final chapter. But he does not seem to appreciate the depth of popular hostility toward Darwin.
. . .
Whether or not he succeeds in bringing Americans en masse to learn to love evolution, he has offered Darwin a splendid birthday present.

For the full review, see:
PHILIP KITCHER. “Bookshelf; Following the Evidence.” Wall Street Journal (Thurs., JANUARY 29, 2009): A13.
(Note: ellipses added.)

The reviewed book is:
Coyne, Jerry A. Why Evolution Is True. New York: Viking, 2009.

A classic paper on whether the speed of a scientist’s acceptance of evolution was related to the scientist’s age, is:
David L. Hull, Peter D. Tessner and Arthur M. Diamond. “Planck’s Principle: Do Younger Scientists Accept New Scientific Ideas with Greater Alacrity than Older Scientists?” Science 202 (November 17, 1978): 717-723.