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Posted at 9:15 AM ET, 12/13/2010

Friday question answered

By Jennifer Rubin

Again, I want to thank all who commented on Friday's open thread on who is the big winner and who is the big loser in the Bush tax cuts deal. Kudos for the high level of discourse. There were a number of interesting and provocative answers, but sold2u touched on several key issues on the subject of who wins and who loses on the tax agreement and what Speaker Nancy Pelosi will do:

The biggest winner is the unemployed. At least they get a little peace of mind over the holidays. If the extension actually helps encourage new hiring, even better. The unemployed are due a little luck.

The losers - liberal academic economists like Krugman and Reich. Obama has signed off on the tax cuts and sold it as a stimulus plan. The political Left has abandoned the Keynsian "increase spending / increase taxes" worldview. Both Krugman and Reich will continue to argue their viewpoints to the faithful reading HuffPo and the NYT, as opposed to the real decision makers in Washington. Their prescriptions came close to being actual policy; now they are just another academic exercise...

Nancy [Pelosi] will try and get a bone regarding increasing the estate level taxation. However she knows that the deal can only get worse if she kicks it to the next Congress. The Left already has been working the narrative that they really got the better of the deal. This will give her the cover to go along with it.

The unemployed should rejoice, although I'm not certain whether the reader is referring to the extension of unemployment benefits or the Bush tax cuts. As others, including Larry Summers, have argued, extension of unemployment benefits tends to prolong, not shorten, the span of unemployment. As for the Bush tax cuts, there is a political reason for each side to extend it only two years, but the economics on a two-year deal are shaky. Democrats still think tax "fairness" is a winner and they want to keep it alive for the 2012 election; Republicans think it's a loser so they also want to fight about it again in two years. But does it make sense from a business perspective? Probably not. To get the biggest bang for the buck, a permanent extension, providing certainty for employers as to their future costs, would be ideal. But, alas, this is a compromise, so the unemployed should be glad that their chances of finding work are marginally improved.

I agree with the reader that the soak-the-rich liberal dogma and their propensity to divorce tax policy from economic performance were seriously undermined by Obama's embrace of the Bush tax cuts. But the president is also a loser, though he did not need to be. A cranky press conference, an unfavorable side-by-side comparison to Bill Clinton and the avalanche of liberal criticism have left him bruised and politically vulnerable. If you want to triangulate you have to do with good cheer and confidence, not with a kick in the shins to both sides. Obama's petulance is getting the better of him.

As for Pelosi, I suspect she won't even get a crumb. The Senate is due to vote on cloture this afternoon. If there are 60 votes (I'l bet the number will be at least 65), that is the only bill, that's going to make it through the House. If the bills are different, we'll need a conference committee and another round of votes. All before Christmas? Fuggetaboutit. The Senate bill be the final deal, and Pelosi will get her first taste of what the 112th Congress will be like (i.e. unpleasant for liberals).

By Jennifer Rubin  | December 13, 2010; 9:15 AM ET
Categories:  President Obama, Taxes  
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I think you vastly overstate the potential for the upcoming Congress. What is most likely to happen is absolutely nothing. Whatever wild ides the House has, the Senate won't even vote on. Of course there will be the usual symbolic measure like votes against abortion funding, and to cut foreign aid, but by and large nothing of substance.

If you want readers' big surprises for 2011, the marginalization of the Tea Party is number one. Those who were elected will be taken into the Republican fold and seduced, while those on the outisde will find they no longer have a voice except in carping at their own party.

Dark-horse prediction, a floating of DeMint, or Coburn for president balloon. The closer we get to 2012, the less influence that Palin will have as people realize that she most likely won't run, and if she runs won't be allowed to win by the Republican establishment. Look for fiscal conservatives to root around for a better alternative resulting in the other two taking a serious look.

Posted by: 54465446 | December 13, 2010 10:06 AM | Report abuse

Would somebody please explain how a TEMPORARY tax policy (of only two years!) can be of any help for the prostrate housing market (to say nothing of all of its ramifications OR other much bigger business decisions)?

Posted by: nvjma | December 13, 2010 10:43 AM | Report abuse


It won't. It will hurt the housing market because the certainty of an increased deficit has already sent the 10 year Treasury about 75 basis points higher which means the 30 year fixed mortgage rate is the highest it has been in months and will continue to rise.

Do you have any hard questions?

Posted by: 54465446 | December 13, 2010 10:51 AM | Report abuse

Would somebody please explain how a TEMPORARY tax policy (of only two years!) can be of any help for the prostrate housing market (to say nothing of all of its ramifications OR other much bigger business decisions)?

The housing market will bottom when it bottoms, and the government cannot do a thing about it.

FWIW, up until the late 90s, the ratio of median house price to median income was steady as a rock at 3.0. Maybe a couple of 2.9s or 3.1s, but more or less stable. When the US stock market bubble went critical, the US residential real estate bubble began to inflate, and pretty much blew up a decade later.

Latest numbers from the NAR (Q3), the median house price in the US was $177,900. Median Income (2009) was $49,777. MHP/MI is 177,900 / 49,777 = 3.57.

Another way to look at it is the "normal" price for housing is 47,777 * 3 or about $147,331. Which means housing is still overvalued by 16%. Of course, equilibrium can be attained without prices falling, but if prices stay stagnant, it will take about 7.5 years of income growth at the rate of the last 10 years, which is about 2%.

One thing about markets is that they invariably overcorrect. Which means housing probably won't re-enter bull market territory until prices become dirt cheap. And 16% over the historical average is not "dirt cheap."

Trying to support the housing market is a fool's errand. The Japanese tried to do it in the 1990s and it was a disaster - creating all sorts of unintended consequences, an undercapitalized banking system, and years of misallocation of capital. And in the end, housing prices (and the Japanese stock market - another government support fiasco) eventually found their market clearing levels.

Posted by: sold2u | December 13, 2010 11:59 AM | Report abuse

only thing that will help the prostrate housing market is job growth that fuels confidence.

Every RE market is local. "housing is still overvalued by 16%" is totally meaningless - a sweeping generalization.

Posted by: K2K2 | December 13, 2010 12:27 PM | Report abuse

"Every RE market is local. "housing is still overvalued by 16%" is totally meaningless - a sweeping generalization."

First of all, I used median numbers. Which pretty much means by definition some localities won't fit the pattern.

Second, you absolutely can make generalizations about markets at a macro level. Guys like Soros made a living at it. Can the S&P 500 be overvalued even though some stocks are "cheap" and others are "expensive?" Of course. You can find great buys in a bear market as well as great shorts in a bull market. But you can't ignore the overall market and where valuations stand vs other asset classes.

Same with housing. Some localities (Greenwich, CT, NYC, the Bay Area) may hold up (or fall less) than the vast majority of the country. But, if you are going long real estate at these levels, you are definitely fighting the tape.

I stand by my statement - the US residential real estate market is probably 16% overvalued, and will probably overcorrect on the downside.

Posted by: sold2u | December 13, 2010 12:43 PM | Report abuse


I buy your argument generally, but there are a lot of "black swan" items still affecting housing prices. Plus, as you may have heard last week, the government is looking for ways to stimulate the investor side of the RE market, so who knows what plan will be forthcoming.

Posted by: 54465446 | December 13, 2010 1:35 PM | Report abuse

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