Is your credit card unsafe?
Yesterday the Senate banking committee held hearings on the credit card industry's aggressive lending practices. The testimony of Harvard law prof Elizabeth Warren on the "tricks and traps" credit card companies use to goose up rates and pile on fees was particularly eye-opening. (Go here if you'd like to read the card issuers' side of the story.) Credit card debt is often framed as a matter of personal responsibility. Which it is. But it's not just that--credit card companies have learned how to make their rules so wildly complex that some cards are just plain unsafe for even the most responsible users, argues Warren. In calling for tighter regulations, she draws an analogy to other kinds of consumer products:
No one needs to be an engineer to buy a toaster. No one needs to be a crash test scientist to buy a car. And no one should need to be a lawyer to take on a credit card.
I know, I know: Lenders need to be compensated for extending to credit to people who might not always pay on time. But there's a straightforward way to do that. Just charge a risk-appropriate rate up-front, and use penalties to keep borrowers in line. But many issuers now seem to be using late fees and punitive rate hikes as an essential part of their growth strategy. How do I know this? Here's a line from Capital One's 2005 annual report to shareholders.
Additionally, the increase in other consumer loan products, such as home equity loans, puts pressure on growth throughout the credit card industry. These competitive pressures remain significant as a result of, among other things, increasing consolidation within the industry. The industry’s response to this competitive pressure has been to increase mail volumes to record levels, and in some parts of the market, most notably, with respect to the prime revolver customers, offer extremely low up front pricing that appears to make profitability heavily dependent on penalty repricing well beyond "go to" rates for a substantial percentage of customers. The Company is choosing to limit its marketing in those selected parts of the market because it believes the prevailing pricing practices will compromise both economic returns and customer loyalty over the long term.
To be clear, Capital One is describing some of its competition in the bolded text, not its own practices. But you have to figure that the folks at Capital One know their industry. And what they are describing is a rigged game.
Posted by Pat Regnier 11:10 AM 4 Comments comment | Add a Comment

So what was Jim Webb talking about last night?
And is the economy really as bad for the middle class as the Democrats say? Click here for more on Democrats and the economy, from yours truly, in this month's issue of Money. Better yet, go to the store and spend the $3.99. The art's nice and the tables make more sense. And you'd be giving an incremental boost to my job security--something we all could use more of these days.
Posted by Pat Regnier 6:22 PM 0 Comments comment | Add a Comment

Why Bush's health care idea is a tough sell
In tonight's State of the Union address, President Bush is expected to propose a universal tax deduction for the purchase of health insurance. The winners: Anybody who is paying for health insurance on their own. Or those who are close enough to being able to afford it that a tax break might help. The losers: Anybody with a really, really good employer-based plan. Right now, health insurance is tax-free when it's part of your benefits package. Under the Bush plan, you'd have to pay taxes on benefits above $15,000 for a family policy, or $7,500 for an individual. About 20% of those with insurance have coverage worth more than that.

I went to my company's HR website today to figure out if I'd be hit with a higher tax bill under the Bush plan. Among all the statements detailing my compensation and benefits, I couldn't find any mention of the value of my health plan.

Under the Bush proposal, I'd not only only know how much my health-care is worth, I'd also have a pretty big incentive to keep it under the cap. In other words, I'd be more likely to choose less-generous insurance. Maybe that would seriously slow down overall health care spending--although it's debatable--but it would certainly make health care less of a nightmare for employers. Over time, I expect few companies would offer coverage beyond the cap. (Bush's Health Savings Accounts also encourage employers to move towards lower-cost, higher deductible plans.) Companies would find it easier to project their health-care benefits costs into the future, which would make their shareholders very happy.

The politics of this are interesting. Democrats lately have held out hope that big employers might become their allies in the fight for universal health care. But if the Bush plan somehow got through, health care costs might eventually become less of a threat to balance sheets.

But this dog won't hunt. Whatever the merits of the idea--and I think there are some--I don't see how a politically weak President can come to Americans worried about their health insurance and say that the answer is to make good plans less good. Not unless the pay-off for those without coverage is really big. One thing the Clintons learned during their attempt at health-care reform is that people are highly loss-averse when it comes to health insurance. Those "Harry and Louise" were aimed squarely at people who already had decent insurance and were afraid that the government might take it away. The Clintons failed to make the benefits of their plan obvious enough that insured Americans would be willing to take a risk. Ditto for Bushcare, I predict.
Posted by Pat Regnier 11:37 AM 17 Comments comment | Add a Comment

Talking back: Why isn't the AMT more unpopular?
Sammy from New York writes in about the alternative minimum tax:
You can thank TurboTax for much of the lack of outcry about the AMT, just like you can thank withholding for the general lack of outcry about tax rates.

What people don't see they don't squawk about.
That's a smart point. Joseph Thorndike , the research director of the Tax History Museum (worst... field trip... ever...*), makes a similar argument in this contrarian commentary, "The Great Noncrisis of the AMT." Here's Thorndike:
Sophisticated software and professional tax preparation have rendered our federal revenue system in general -- and the AMT in particular -- just a bit too painless. TurboTax deals with the AMT almost in passing. Yes, the program tells the unlucky taxpayer, you have run afoul of this fiscal Frankenstein; but don't worry, we'll do the math. Tax preparers offer the same service to an ever-growing number of Americans. In 2002 more than 83 percent of Form 1040 filers paid someone else to do their taxes.
Thorndike also notes that for most people financial bite of the AMT is smaller than you might think—the high average numbers you often see quoted in the media are pushed up by wealthier taxpayers. "AMT taxpayers will pay more," Thorndike writes, "but relatively few will pay a lot more." Bottom line: The AMT could be with us a good while longer.

*I kid. Actually, the THM is a virtual, online-only museum, and it's really quite interesting.
Posted by Pat Regnier 9:33 AM 1 Comments comment | Add a Comment

Who's afraid of the housing crash?
If you've been trying in vain to unload your house in Boston for anywhere near your original asking price, you might not want to read this. In The Economists' Voice, Berkeley economics professor Aaron Edlin argues that the housing crash might be good for some people. (Free login required. Worth the effort.) "Bring it on!" he says.

Counterintuitively, it's not just renters who win when real estate values fall, Edlin argues. Tumbling home values can also benefit many current homeowners. Which ones? Those hoping to move to a high-priced city, or families who need to move up to get more space. When housing prices fall, the expensive stuff may very well fall more, in dollar terms. Here's the math:
Consider for example a family that owns
a $500,000 house in the Midwest who comes
to San Francisco and buys a $1,000,000 house
(probably something much smaller than the
family’s current home, by the way). The family
must cough up an extra $500,000.

Suppose that housing prices rise by 50% in
both locales. Now, the small San Francisco house
costs $1,500,000 and the Midwestern house
costs $750,000. It costs an extra $750,000 to
make the move after the general appreciation.
What happened is that the difference in price of
$500,000 grew by 50% to $750,000....

If prices now fall by 33% in both locales, the
prices will become $1,000,000 and $500,000
again. The difference in price will fall by 33% to
You can do a similar calculation for a family trying to bridge the difference between their $750,000 house and the bigger $1.5 million house next door. A 33% drop in local real estate prices would cut the gap to $500,000. Edlin offers the crucial caveat that the price drop could temporarily wipe out the family's equity, but adds that if they can manage the down payment on the big house, they'll ultimately have a lower monthly mortgage payment.

Update: This news story underscores a couple of points we've been talking about on this blog. First, that the boom in real estate has also had a cost--if you're young and in the market for a house, it's just another form of inflation. Second, that real estate prices are changing the definition of "middle class" in many areas.

In the New York metropolitan area, a $500,000 median-priced home required a $171,000 annual salary. The median-priced home in San Francisco, the most expensive U.S. market, was $759,000, requiring income of $260,000.... On the opposite end of the spectrum, Mansfield, Ohio, homes cost a median $85,000, requiring $29,118 in income.

Posted by Pat Regnier 5:43 PM 15 Comments comment | Add a Comment

Talking back: Consumer power, the AMT, and why I sometimes dream of Indianapolis
The comment feature on the blogging software I use is a little clunky, and so this site isn't yet as interactive as I hope it will become. (This old media fogey would love some advice on this from you experienced bloggers out there.) As a first step towards turning this into a real conversation, I'm going to put up a regular "Talking back" post to discuss some of the commentary on this site. So this is the first of many.

On corporate responsibility, Mark Cericola writes:
You can change corporate behavior by two methods - legislation and consumer demand. If consumers refuse to purchase this affects corporation's goal of maximizing profits. Unfortunately, in our society consumers normally will forego moral companies for lower prices. I cringe when I have to agree that legislation is the most effective manner to enact moral/ethical behavior.
I think Mark has this right. But the Democracy article shows that consumer's lack of conviction in the face of a great bargain is only part of the equation. We also lack reliable information. And the corporate responsibility movement often muddies the water, by creating voluntary codes of conduct that don't really help us differentiate the good from the not-so-good. Here's how the authors, :
Imagine a world with one voluntary code of conduct governing the operation of apparel factories. Let's call it the Golden Code of Conduct (GCC). This is a strong code that calls for the provision of a living wage, recognition of unions, and limits on working hours. Now suppose another set of companies who do not want to abide by the code, but still care about consumer perceptions, creates their own code, called the Super Code of Conduct (SCC). Their code lacks many of detailed provisions of the GCC, but it has some vague language about treating workers with respect. Companies must decide which code to adopt, and the SCC is clearly cheaper to institute. For high-minded companies that want to live by the more stringent code, the high costs could make them uncompetitive in supplying retailers. Meanwhile, the benefits are only significant if consumers can tell the difference between the two codes.
And, of course, consumers usually can't.

On the AMT, we've got a robust debate about what counts as middle class. For example, Troy Smith from Chicago writes:
I am not clear on what the point was of your comment about Montclair, NJ and Newton, MA? Are you implying that the AMT doesn't really impact the "true" middle class, only the upper part of it?
The median family income in 2004 was about $54,000. The AMT kicks in around $100,000. Whether you call a six figure family income middle class or upper middle class depends a lot on where you live. Many people who are affluent by the standards of the Chicago area, where I grew up, couldn't afford to buy a home in Montclair today. But if you drove around Montclair and didn't know what its charming old houses have been selling for lately, you'd probably call it a typical middle-class bedroom community, maybe a little nicer than most. Here's Dave from Yonkers, NY (which isn't nearly as pricey as Montclair):
I'm moving the family to an area that will give me almost a 2 hour one way door-to-door commute so I can live in a more 'affordable' community with good schools, but it will still cost me almost $500 month to park at the train station, take the commuter train to the city and then transfer to the subway. Then I get to pay income taxes to two states as well. After paying the mortgage / real estate taxes etc on my 'mansion,' buying diapers at Costco, and stashing a few bucks in college and retirement funds (no pensions for us!), that will probably leave me with enough cash on a monthly basis to get the oil changed in my luxurious 9 year old Honda.
I hear you, Dave. I live in Brooklyn, where a brownstone in a fairly high-crime neighborhood might fetch $1 million. Sadly, I don't own one of those. This summer, I visited my sister's family in Indianapolis and I was kind of shocked at how much higher a standard of living they enjoyed for their money. (At least if you don't count the fact that it took us half a day and 60 miles of driving to find Spanish-style chorizo for my wife's peerless chili recipe--not so much of a problem in the Borough of Kings!) It's important to keep these big regional differences in mind when we talk about who's rich, who's poor, and who's getting squeezed.

Posted by Pat Regnier 3:06 PM 3 Comments comment | Add a Comment

Does "corporate responsibility" make corporations more responsible?
It's Martin Luther King Day, so it seems particularly appropriate to talk about the role of social activism. Does it have a place in our investment portfolios?

A couple of interesting recent articles say "no." From the right comes Henry Manne, and from the left there's this from the journal Democracy.

Manne's take is fairly simple: Public corporations are for maximizing profits to shareholders. Period. The Democracy writers argue that whatever activists think corporations should be for, maximizing profits is certainly what they are always going to seek to do. So activists trying to get them to change their ways are just engaging in an expensive, probably fruitless battle. Better, they say, to focus on changing the laws corporations have to abide by.
Posted by Pat Regnier 7:10 PM 2 Comments comment | Add a Comment

Sadly, the AMT is no mistake's Jeanne Sahadi had a smart article today on the dreaded alternative minimum tax. The bottom line: Killing it is going to cost.

This bit got my attention:
In co-sponsoring a bill for repeal, Senator Charles Grassley (R-Iowa) said in a statement, "It's unfair to raise taxes to repeal something with serious unintended consequences like the AMT."
The standard rap on the AMT is that the tax was originally designed to snag just a handful of rich taxpayers, but that it wasn't indexed to inflation when it was written, which is why it is rapidly becoming a middle-class tax. (At least if your idea of middle class looks like Montclair, NJ, or Newton, Mass.) The implication: It's all just some crazy misunderstanding!

Nonsense. How many major tax bills have been passed since the AMT was instituted? I count about 26 or 18, depending on which version of the minimum tax you start with. Since at least the Clinton administration, the growing impact of the AMT has been well known in Washington. Every time a tax bill is written, somebody has to do the math and figure out how much revenue the government can expect to bring in and what the budget will look like under the new system. So when Congress is debating whether it should cut or raise the top marginal rate by x, they do that knowing they'll be collecting y from the AMT. The AMT isn't the result of a decades-old mistake. It's a conscious decision by Congress and the President about who will bear the burden of paying for government. A decision they make every time they pass a big tax bill.

Pretending that the AMT is just a thoughtless boo-boo serves two purposes, it seems to me. First, it deflects responsibility for a tax that is driving a growing number of people nuts. Second, it allows you to do what Grassley seems to be attempting, which is to characterize a significant tax cut--at a time when that seems hard to afford--as little more than a technical fix.
Posted by Pat Regnier 10:55 PM 39 Comments comment | Add a Comment

Are the rich getting richer? Do you care?
You read it all the time : The rich are getting richer in America... and they're doing it a whole lot faster than the rest of us. In other words, income inequality is growing.

A recent Wall Street Journal op-ed by the libertarian Cato Institute's Alan Reynolds claimed to debunk this prevailing wisdom. (A vastly more detailed--but also easier to follow--version of his argument was published on the Cato site the other day.) This set off a blogsphere brouhaha, as you can see here and here and here and here for just a sampling. And now economists Emmanuel Saez and Thomas Piketty, whose data Reynolds questioned, have responded to him. I've waited to post on this until I could decide who seemed to be right. Well, I've read all the relevant material pretty closely now, and here's my verdict: I... don't really know. Not for sure. Most of the argument turns on one cloudy factual question (the exact impact of tax reform on reported incomes) and one knotty theoretical question (whether to count "transfer payments," such as Social Security checks, as part of income.) Sometimes reporters need to admit it when a discussion is above their pay grade. Even when they are wearing their "blogger" hat.

But I can also report that Reynolds is an outlier--even many free-market conservatives regard increased inequality a given--and that serious economists have plausible responses to most of the questions he raises. Reynolds' Cato paper presents as uncontroversial and black-and-white several points that are in fact quite arguable. The hyperbolic blogger Donald Luskin calls Reynolds a modern Galileo; that just tells you that some people want very, very badly to believe this stuff.

My opinion is that the balance of evidence shows that inequality is something worth worrying about, even if the details are hard to pin down. Yes, inequality looks less bad if you count government transfer payments to the middle and lower classes. But doesn't that just mean government has been helpful in softening underlying inequality trends--in part by doing things conservatives like Reynolds surely object to?

Obviously, serious money is at stake in this debate. If you think inequality is a problem, and that it's growing, you'll probably want to scrap the Bush tax cuts.

But of course lots of conservatives don't think inequality is a problem, even if it is growing. Back in 2004, I spent some time with the radio talk show host Neal Boortz. He was on tour promoting his FairTax Book, an apologia for a radical tax reform bill sponsored by Georgia Republican John Linder. The FairTax would replace the progressive (i.e., rich pay relatively more) income tax with a national sales tax. While the FairTax has some progressive features, it's undeniably a great deal for the very rich. At the time, The FairTax Book was a bestseller and this idea actually seemed like it had an outside chance of getting a serious hearing. (Hurricane Katrina hit as I was putting the last touches on the story, and, well... things changed.) In our conversations, Boortz made it pretty clear he didn't give rodent's hindquarters about whether the rich paid less, as a proportion of their income, than the not-so-rich. "I learned a long time ago , I don't look in other people's pockets. I look in my own," he said.

Now, the very next quote in my notes is "Isn't this a sweet ride?" We were having this conversation in a small chartered plane flying over the Gulf Coast, on the way to the next stop in Boortz's book tour. (I'm not sure who paid for the plane, Boortz or his publisher, but the point is that regular folks don't get to do this.) Then again, I also met lots of people in Boortz's fan base on that trip--teachers, small businesspeople, retirees, all folks who presumably fly commercial--who said pretty much the same thing. Many liberals will probably write this off as a sort of false consciousness. That's a mistake. Economic jealousy really is undignified, as well as counterproductive. And I suspect people in the middle trying to get ahead are even more sensitive to this than are the already-well-off.

But that's a diversion. You don't need to be green with envy to think inequality is a problem. Big differences in standards of living can have real, concrete costs to the relative losers. As Cornell economist Robert Frank has argued, the rich help set the standard for the rest of us, and unless you are St. Francis of Assisi you will find this difficult to blithely ignore. Want your kid to get a competitive education? You'll probably want to move to a suburb with excellent schools--and those places don't have a vast stock modest, affordable two-bedroom Cape Cods these days. Instead, Frank argues, you may find yourself stretching to move into a McMansion. At some point, too much inequality may also make for bad or even corrupt politics. Harvard economist Edward Glaeser discusses this here.

The more obvious problem with growing inequality is that it makes it harder for people to feel as though they are getting ahead and sharing in prosperity. This is especially true in periods when the typical person really isn't seeing much wage growth--which has been the case for the much of the past five years, despite the recovery and the market rebound. The success of American capitalism has been driven in part by our optimism, which makes us willing to accept the risks I write about in this blog. What happens if that risk/reward calculation stops looking so good?
Posted by Pat Regnier 12:32 PM 37 Comments comment | Add a Comment

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.