Looking for growth – Will housing provide it? 

Recent data show that the housing market, while still a lower than historical norm at 2.2% of the economy, is on the mend.  Historically (from 1980-2007), the housing industry’s share of gross domestic product (a measurement of all goods and services produced in a year) averaged 4.5%.[1]  During the housing bubble leading up to 2007, housing accounted for up to 6% for several years.  It has taken almost 5 years to absorb the excess inventory accumulated during the boom years and home prices are finally rising.   Chart 1 shows that economists surveyed were too conservative in their estimates.

Housing starts, building permits and new home sales have been higher than expected as shown in the table.  Note the difference between “survey” and “actual”.  Source:  Bloomberg

Positive Implications of a resurgent housing sector – jobs, spending, and consumer spending! 

It is reasonable to expect that housing will revert to its average contribution to the economy and has finally started on that path.  How much is an additional 2.3% of our $15 trillion economy?  The Bipartisan Policy Center estimates that the missing 2.3% is roughly equal to $350 billion.  Moreover, the additional jobs that could be created to meet estimated housing needs is almost 3 million jobs.

All this bodes well for a stressed US economy that is seeing decreasing demand for exports due to a slowdown overseas.  Housing could make up for some of the lost revenue. Assuming the housing recovery is sustainable, the ripple through the economy should help stimulate demand for other goods.  And consumers will spend!

Chart 2 shows the upward trend for new home sales.  Source:  National Association of Home Builders

Simpson Bowles – Part 2 – How it affects you

Last week I discussed the goals of Simpson Bowles and the comprehensiveness of the proposal.  While the appointed bipartisan commission ultimately rejected its own plan in December 2010, this road map for cutting the long-term debt and deficits continues to resonate in political debates.

Most notably, the proposal calls for shared sacrifice by taxpayers and government employees.  And what makes the plan unique – compared to subsequent plans – is that it addresses both the revenue (taxes) and spending (outlay) sides of government in every sphere.  Even entitlement costs, which are growing at more than twice the rate of the economy, are reigned in to solve long-term funding gaps.   

My goal here with The Huffman Broadsheet is to give you, dear reader, useful information as you contemplate your verdict within this political maelstrom.  The politicians can haggle over spurious details during debates and avoid the full and total analysis involving painful choices that we, as a responsible citizens and taxpayers cannot ignore.

What are the Main Components of the Simpson Bowles Plan?

There are six main parts to “the Moment of Truth” plan. (Click on the title for full document)  Highlights are listed by category.

1)   Discretionary spending cuts

The commission notes that forecasting and controlling discretionary spending was how the government balanced its books in the 1990s.  Members suggest there be enforceable spending caps, realistic disaster budgeting, and that total government employees be reduced through attrition.

2)  Tax reform (click here for quick summary)  

• For individuals: the commission suggests lowering rates and broadening the base of payers through the elimination or curtailment of many deductions. Mortgage interest deduction and charitable donations are two examples.
• Reduce the deficit by ensuring that revenues reach 21% of gross domestic product by 2022.
• Simplify the tax code.

• For companies:  Establish a single corporate rate and lower it to between 23% and 29%.
• Align US tax system with international trading partners by moving to a territorial system whereby income earned overseas is not subject to domestic taxes.

3)   Health Policies

• Reform or repeal those parts of Medicare that are subject to fraud or are inadequately budgeted for such as long-term care insurance.
• Pay for the Medicare “doc fix”, a sustainable growth-rate formula aimed to control Medicare spending, which now equals more than $200 billion.
• Reduce Medicare fraud.
• Address Medicaid funding and state implementation.
• Adequately budget for health care programs.

4)   Other Mandatory Policies

• Protect the disadvantaged.
• End wasteful spending.
• Review and reform federal workforce retirement programs.
• Reduce agricultural programs.
• Give post office greater management autonomy. 

5)   Social Security

• Make retirement benefit formula more progressive.
• Reduce poverty by providing an enhanced minimum benefit for low-wage workers.
• Gradually increase retirement ages based on increases in life expectancy.
• Gradually increase the taxable maximum to cover 90% of wages by 2050.
• Adopt an improved inflation measure to calculate Cost of Living Adjustment.

6)   Process Reform

• Establish a debt stabilization process to enforce deficit reduction targets.
• Design effective automatic triggers for extended unemployment benefits.

Fast-forward 2 years later: Facing the Fiscal Cliff and how it affects you – or “What, me worry?”[1]

Almost two years have passed since the Simpson Bowles plan was rejected.  The economy now faces a potential recession if numerous short-term provisions are allowed to expire.  For individuals, the tax code remains needlessly complex and outdated.  (Refer to charts 1 and 2 to see how you may be affected.[2])

The good news is that:  tax receipts are rebounding and the government operating deficits are shrinking. (See the Congressional Budget Office  October report.)

The bad news it that:  the US cannot continue to “kick the can down the road” forever.

Chart #1:  Federal tax rates for individuals would increase roughly 5% if all provisions in the fiscal cliff are allowed to expire.  Source: Tax policy center

The first presidential debate covered tax policy and the economy. Since the candidates brought up Simpson Bowles several times, I picked up my copy to review. If you would like to read the entire 65-page proposal, titled “The Moment of Truth” click on the title.

Otherwise, I’ll summarize the main points here – since you will be hearing a lot about it in the coming weeks.

First, what is it?

The report was published December 2010 by the National Commission on Fiscal Responsibility and Reform. This 18-member bipartisan commission, appointed by President Obama, devised a blueprint to reduce the national deficit by $4 trillion by 2020, reduce the deficit and put the nation on a better, more sustainable footing. While the “Mission and Goals” continue to be laudable almost two years later and almost unanimously agreed upon, the implementation of these objectives is the sticking point.

Where there is universal agreement…

The goals of the plan are wide ranging, comprehensive and ambitious. The “guiding principles and values” underlie the difficult choices and compromises made by the group. Here are the core principles:

1. A commitment to make America better off tomorrow than it is today.

2. Don’t disrupt the fragile economic recovery.

3. Cut and invest to promote economic growth and keep America competitive. This means cutting waste in government but at the same time investing in education, infrastructure, and establishing policies to augment economic growth and keep the US globally competitive.

4. Protect the truly disadvantaged.

5. Cut spending “we cannot afford – no exceptions” in the federal government, the tax code, entitlement spending.

6. Demand productivity and effectiveness from Washington.

7. Reform and simplify the tax code (by lowering rates and broadening the base of taxpayers).

8. Don’t make promises that we can’t keep.

9. The problem is real, and the solution will be painful requiring shared sacrifice (interest payments on the debt may reach $1 trillion annually by 2020).

10. Keep America sound over the long run.

The sticking points: Shared sacrifice — or something for everyone to hate.

The last fifty pages of the plan detail how the commission would implement these values. And they really spread the pain around, so much so that by the time Obama was presented with the final plan, not enough commission members were supportive to take the plan to Congress. The plan died, only to be resurrected repeatedly as other legislators have tried to develop a plan with less pain. Voters are also unenthusiastic given the potential limitations on beloved deductions such as the mortgage interest rate deduction or proposed increase in retirement age. (For more history, see my previous blog “Tough Choices“).

Over the next few weeks, look to The Huffman Broadsheet for discussions about specific components of Simpson Bowles that look like they’ll survive.