The Real Truth About Mortgage Deductions

Note: Somehow this got stuck as a draft since February - not very timely, but I'm not that prolific so...

Felix Salmon doesn’t think that the mortgage deduction really matters all that much.

The standard deduction in 2009 for a married couple filing jointly is $11,400. That means you get to subtract $11,400 from your income even if you don't pay any mortgage interest at all. Now suppose that married couple bought a home for $200,000, put 20% down, and got a 6% mortgage. Then their annual interest payments are 6% of $180,000, or $10,800. They own your own home, but they get no benefit from the tax deduction: they're still better off taking the standard deduction.

Here is the reply that I left at Asymmetrical Information:

Felix is totally and completely wrong on the mortgage interest deduction.

Mortgages are front-loaded so that for the first 1/3 of the term you are paying mostly interest. so all of those recent buyers are paying 80-90% of their payments just in interest.

Plus you add in deductions for property taxes, etc and you get a significant deduction on your taxes.

Long time owners don't see as much value, but inflation, etc mean that they make it up by keeping larger portions of their paychecks anyway.

Its easy to win an argument when you make up the facts to support your story.

Technorati Tags: housing taxes economics politics

Cosmologists Should Study the Stars, Not Economics

I am taking a class on cosmology and am forced to read a pretty poorly written book – The View From the Center of the Universe: Discovering Our Extraordinary Place in the Cosmos

From the very beginning the authors have been setting up an argument that something was missing in the human consciousness and that a new cosmology would lead us to some enlightenment.

I’ve been kinda dreading when they were going to get to their point – what the new cosmology would look like.  I haven’t quite gotten their yet, but it is crystal clear what form it is going to take as they have just compared gravity to wealth.

Gravity slowly magnifies subtle differences in the expanding universe.  Denser regions expand more slowly, and less dense regions more rapidly, than average.  Gravity always makes the rich regions of the universe comparatively richer and the poor regions poorer, and thus gravity is the Ultimate Scrooge Principle.
…
Wealth left to its own devices in some ways works like gravity: the rich tend to get richer and more powerful. 

Sigh.  How often must this misguided view be debunked?  It is demonstrably false, one of the foundations of economics – and arguably one of the few things that nearly all economists would agree on is this simple fact.  Trade makes everyone better off.  Or stated another way: the creation of wealth makes everyone wealthier.

I challenge anyone to find a case where the poor get poorer when wealth is left to its own devices – it takes government to reverse the progress of humanity (and they do it well).  Take government out of the picture, and only a little, and you get the massive creation of wealth such as we have seen in South Korea, Taiwan, Ireland and Eastern Europe.  Even more recently you have the incredible improvement in the lives of Indians and Chinese.

At the very least I wish that people that don’t actually know anything about economics would at least keep quiet on the subject.  The spreading of trite anti-progress metaphors simple makes it easy for the ignorant to spread their ignorance.

Technorati Tags: rant,economics,school

Change You Can Believe In

On Monday we have this:

On Thursday [Obama] plans to send at least a summary of his first budget request to Capitol Hill. The bottom line, said an administration official Saturday, is to halve the federal deficit to $533 billion by the time his first term ends in 2013.

On Wednesday we have this:

The Democratic-controlled House pushed through a $410 billion measure Wednesday that boosted domestic programs, bristled with earmarks

Which version of the truth are we supposed to believe?  The words or the deeds?

Technorati Tags: politics,Obama,Congress

Obama to Cut the Deficit

You can believe it because he says so.

On Thursday he plans to send at least a summary of his first budget request to Capitol Hill. The bottom line, said an administration official Saturday, is to halve the federal deficit to $533 billion by the time his first term ends in 2013.
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the deficit will be shrunk by scaling back Iraq war spending, ending the temporary tax breaks enacted by the Bush administration for those making $250,000 or more a year, and streamlining government.

Can someone explain how increasing taxes on 2% of the population (call it $200 billion in revenues) and reducing Iraq spending by $55 billion (if costs are reduced by half).

Let’s leave out whether raising taxes on the most productive members of the economy is a good idea during a recession and let’s leave out whether raise taxes actually raises revenues.  That’s really only about $250 billion of deficit reductions per year.  Far less than the over $500 billion necessary to half the deficit.

Now let’s take into account that Obama is wanting to extend Medicare to cover people over 55.

Billions of new funding for government departments and projects.

Billions in interest for the so-called stimulus package.

And those are just the knowns!  How much more money will be sunk into the black hole that is the auto industry?  Will the government continue to throw good money after bad banks?

Can someone explain to me how you end up with a balanced budget in 2013 when the deficit is going to grow in 2009 & 2010 just based on the binge that has taken place in the first month in office?!

My guess is that he doesn’t want to balance the budget – this is just political cover for raising taxes during a recession.

But maybe I’m just skeptical of politicians, because lord knows there isn’t any justification for that.

Technorati Tags: politics,budget,economics

What’s Wrong With Economics

One of the things that has struck me most about the debates on the ‘crisis’ is that most of it are narratives about what happened – most of which just confirm prior biases.

Even the debates about the so-called stimulus bill are bias confirming stories about how it will ‘fix’ things or do nothing.  For all of the talk about how economics is a science there is little or no real science involved.

Science is, or is supposed to be, about the formation of theories that have predictive power.  We have plenty of theories, but most of them look backward, where are the testable hypothesis?

What I would like to see is economists making testable predications.  The economy as a whole is too chaotic and complex to use the power of economics to predict the state of the economy for the next year – or even the next month!

However, there are cases where the real science of economics can provide testable theories.  Use them!  Publicize them!

Start collecting aggregate scores of the different ‘schools’ of economics.  Are Neo-Keynesians better at predicting the effect of legislatures or the Monetarists or the Austrians? 

Physics hasn’t gained ground in the understanding the cosmos by attempting to explain it all at once, it broke it into testable pieces.  Economics has made attempts at explaining pieces but put that knowledge to practice.

Make predictions.  Be wrong.  Add to the collective understanding of the human species and quit the bias confirming narratives.   Most of all, put some science back into the discussion.

Technorati Tags: science,economics

The Fairness of Review Season

William Briggs relates an acquaintance's story about the annual review process.   From the tone of the post it doesn’t sound like he thinks it’s fair.

My friend is a top employee, a fact which nobody questions, and so my friend gave four personal goals a 5 and one goal a solid 4. The form was then handed in.

It wasn’t long before a human “resources” resource got on the phone to question the ratings. “Did you know,” the resource questioned, “that your group is only allocated three ‘outstandings’? So you cannot put four of them for your self.”

It certainly doesn't seem "fair" but it is the only way that I can think of to make the ratings scarce so that they are only truly given to those that deserve them.

Without this artificial scarcity you allow really crappy managers -- that only want to please their employees--  to give out 'outstanding' reviews like candy.  Meanwhile, more honest managers try to give them fairly (and those with rigorous standards give them out sparingly) so there are huge disparity amongst different teams.   With employees that work for lazy managers getting rewarded and employees that work for demanding managers getting punished.

This isn't to say that the system is perfect, but at least the inequity in rating is somewhat limited within a certain scale.

I have worked for managers that don't establish clear goals or objectives and rated everyone highly.  I have also worked for managers with very high expectations and doled out "outstandings" like they were pure gold. I would much rather work for the later.

Technorati Tags: work,economics

Cosmic Origins, Computer Models & Life. Or How to Get a Headache

The history of the Universe goes something like this.  At least according to the guys that study the stuff and it least as far as I understand it.

In the beginning there was an infinitesimal speck with infinite mass and it exploded in the “Big Bang.”  The resulting energy cooled ending up with protons and neutrons.

That matter cooled some more collapsing the matter into Hydrogen and Helium. The gravity of the particles collapsed the light gasses into masses so dense that they burst into stars.

The stars, as they burned, created oxygen, carbon and other elements.  Eventually the stars ran out of fuel, exploding and expelling the newly created elements into space.

These stellar remnants eventually coalesce and create new stars.  These stars manufacture more oxygen, carbon, etc.  They explode, expelling their elements into space. These remnants eventually coalesce…

This process continues and continues for billions of years creating new stars with richer mixes of elements which explode until there are enough of the heavier elements that they collapse, not into stars, but asteroids and planets.

On one such planet the elements of carbon, oxygen, nitrogen, etc chain together in such a way that amino acids are created and then proteins.  Eventually, these complex molecules result in single cell organisms.  Darwin then takes over and you get humans and the various flora and fauna of the planet earth.

Physicists have fairly complex computer models that basically confirm that this story is plausible. Plug in an infinitely dense point and what we know about physics and you get something evolves approximately like what I have described above.

So, those computer models that simulate the creation of matter, the birth and resulting death of stars and galaxies.  Computer models that churn vast amounts of data simulating billions and billions of years over the course of weeks and months.  Could those computer models actually be simulating the formation of life?

Does that life actually gain sentience? Could we actually be in a similar computer model?  I know that life as a computer program isn’t really new (though I never saw The Matrix) I’m not sure that it has ever been thought about quite this way.  Is what I am thinking about possible?

Obviously, if it took a Supreme Being to create that trigger than resulted in the proteins that make up life it certainly isn’t possible.  But if you assume that the spark that created life was purely random could we actually be creating the conditions for life every time we run through a Big Band simulation?

I think I have a headache – anyone have an Aleve?

Technorati Tags: science,physics,big thoughts