Obamanomics vs Reaganomics

         Originally Published in NV and CA Examiner on October 1, 2010

      The decade was the 80's. The household word was supply side economics. Supply side economics is actually a classical theorist which became the foundation of Reaganomics. The fact is, Reaganomics merely concentrated on incentives. The key point at that time was the cuts in income taxes, particularly in the marginal tax rates. The policy became effective since it spurred the economy with an enhanced supply (particularly for the people to exert more work efforts thereby promoting productivity) and consequently inspired the demand (with increased investment in plants and equipment and put muscle in research and developmental efforts).

     Reagan boldly cut the average marginal income tax rate from a high 29.4% in 1981 to 21.8% in 1988. Over a seven year period, from 1982-1989, the gross domestic product grew by 4.3% at an average growth rate of about 0.6% per year.

    George W Bush followed suit the inspiration provided by Reagonomics by cutting then the marginal tax rates from 24.7% in 2000 to 21.1% in 2003. The economy, particularly the GDP, grew at a respectable rate of 2.7% per year over a 4 year period from 2001- 2005.  (Stats provided by Robert Barro of the Harvard School of Economics).

     In contrast, the core of Obamanomics seems to be founded along Keynesian origins, since policies being implemented are those that are demand driven.  The underlying objective is just the same with Reaganomics, i.e., incentives.

     Case in point, the cash for clunkers. This program promoted the destruction of functional old cars and accelerated the demand or purchase of new cars. Unfortunately, this scenario drove up the prices of used cars and did not really work out well. The automobile sales increase went on a boom and later bust pattern.

     Another program is the First Time Homebuyer credit which was enhanced with the Long Time Resident Credit. Were the incentives felt on a continuing basis? Yes, we witnessed temporary increase in home sales. But as I have argued in a previous article, the FTHBC was probably a failure rather than a sustainable “incentives” program inspite of. The buyers were already mind set to buy their first homes and at best the program only hastened the timing of their purchases.

     Lastly, let’s look at the labor market, which is currently saddled by a national average of 10% unemployment rate and 15% in some areas, as in Las Vegas NV.  This too, became an area where the demand “incentives” was instituted.

     We are witnesses to the current program that unemployment insurance eligibility had been extended to 99 weeks, with the end in view that it could have the “incentives” effect. Labor Department statistics show that 57% of all people receiving unemployment benefits are already on the extended program. Experts argue that in a weak economy, extending unemployment benefits in fact “encourage” prolonged unemployment notwithstanding the fact that workers only get about 40% of their previous earning potential.

     So what’s the bottom line? Well, Reaganomics is anchored in the classical economist theory, which encourages incentives that had lasting positive effects. It initially enhances productivity, and then builds up the “supply” in the economy. In the process, the enhanced supply inspires the demand in the economy. Obamanomics, on the other hand is taking the Keynesian position, which is oriented on the demand side. The programs that are being implemented lean towards pushing demand or “stimulus” in the economy.  The common denominator however is just the same-incentives.

     To date, the salient programs in the Obama administration are probably not that effective. The current economic advisers of this era can learn from lessons in the past and should emphasize favorable and long-lasting economic incentives. As Mr. Barro put it, “we can start by considering the extension of the tax cuts that were implemented in 2001-03 as well as reduction in the period of  eligibility for unemployment insurance. “

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Pacquiao vs. Margarito..The Wisdom Behind It

Originally Published in the Nevada Examiner on September 24, 2010

On the June 16, 1983 undercard of Duran-Moore, middleweight journeyman Luis Resto defeated top prospect Billy Collins Jr. in a 10-round assault-- literally. At the conclusion of the fight, Collins' corner discovered that Resto's gloves had been doctored and at least one ounce of padding removed from each. Collins was left with significant injuries and permanent eye damage that changed the course of his life. Meanwhile, Resto and his trainer, Panama Lewis, were charged with assault and banned from the sport of boxing for life.


Over the years, Resto had maintained that Lewis tampered with the gloves without the fighter's knowledge, but he finally admitted 25 years later that not only did he know that the gloves were doctored but he knew that his hands were wrapped in tape that had been dipped in plaster of paris.

That is where we join Antonio Margarito. The Tijuana Tornado is living down his own illegal hand wrap incident while also trying to re-assign the blame to his trainer. Unlike Resto, Margarito's illegal hand wraps were discovered in the dressing room and never made it to ring. So he was never arrested by the law, but the California State Athletic Commission continues to incarcerate his career and the Nevada Commission agrees, for now.

Some might argue with Nevada's wisdom. After all, if they had rubberstamped Margarito (as Texas has) then the year's largest fight would be coming to Las Vegas and its almost 15% unemployment rate, not to mention its rabid Filipino fans. However, anyone who has seen a picture of Billy Collins Jr., with his cheek broken and his eyes swollen shut, knows that approving Margarito's license was about much more than economic impact.

What happened to Collins was attempted murder, and no commission should be able to stomach the idea of licensing a fighter that was willing to do that to someone. Las Vegas has always embraced boxing and its gladiatorial metaphor, but if they're going to license Margarito, then they might as well license feeding Christians to lions at Caesar's Palace.

Margarito maintains, as does Bob Arum, that the fighter was unaware of what was in his hand wraps, but the majority of us remain skeptical. As Manny put it, "Of course, I believe he knew." And why wouldn't a fighter notice a foreign object in his wrap or feel it when he punched? Maybe Margarito will tell us more about it in 25 years.

For now, both parties agree that Team Pacquiao will be watching Margarito's hand wrapping very closely. But why stop there? Check the gloves, the trunks, the mouthpiece, his water bottle, and his hair gel. You don't catch a guy robbing a bank, and then wait for him to rob the same bank when he gets out of jail. If you think Margarito is a cheater, then you should anticipate all of the new and interesting ways of cheating that he could have researched while he was suspended.

That will be the job of Freddie Roach, Buboy or whichever Pacquiao representative is asked to bring a microscope to Margarito's hand wraps. It's a job that someone should have done for Billy Collins Jr. And at the end of the day, while some people believe Antonio Margarito and some people have forgiven Antonio Margarito, the image of Team Pacquiao watching as the trainer wraps the Mexican fighter's hands will remind us all that none of us really trusts Antonio Margarito.

Is the First Time HomeBuyer Credit a Failure?

Originally Published in Nevada Examiner on September 17, 2010

The July sales of existing homes fell by a devastating 30%. What could be more frustrating is the fact that there seems to be no light at the end of the tunnel. For the past many months players in the real estate market are just curious to know if we already hit rock bottom. Many feel that we have not and a lot of us just keep on scratching our heads where the market is actually heading. Experts predict that the next six months could be worse before they get better. They say that values of homes will still decline by double digit in some areas in the U.S. especially those hardly hit, tops Vegas, within the next 6 months to a year. No. No….Johnny, it’s not the end of the world!


Many observers noted that this phenomenon might be traceable to the imminent expiration of the $8,000 First Time Homebuyer Credit, (FTHBC). Guys and gals, it’s gonna be gone by Sept 30! The question we are putting forward here is, “was there a real additional demand created with the advent of the FTHBC or was this another failed policy by the Obama administration? “

The fact is, many critics are taking the position, and I may have to agree with them, that the FTHBC was just another political gimmick that may have only influenced or hastened the timing of home purchases and simply put, provided free money to many people who were already mind-set to buy their houses anyway. Sad to say, the FTHBC did nothing to change the fundamentals (guys, remember your Economics 101) of demand and supply in the housing market. While others may argue, “yeah it did,’ “particularly the supply side since new homes were aggressively built during this period.” Yeah, you may have a point too. But what I am saying here is, there was no increase in the demand since I am arguing here that only the timing was influenced. The “artificial” increase in demand was unsustainable to really make a difference in the market forces- because if it did then the market should feel upswings in the price of homes. But it did not.

If one will objectively analyze the empirical data, the FTHBC was probably an armament to postpone the day of reckoning in the real estate market while simultaneously creating an illusion that the economy is on its way to recovery. Whether as a solo policy or in concert with other Federal programs, nothing much was achieved as we continue to witness home prices decline-- hitting more than 30-50% of their peak values. The game of refinancing is over! We now realize that housing isn’t just going to be another driver to improve consumer spending.

We also note that the Loan Modification programs, as being announced in the radio, is also a failure! They say that more than 50% of those who did loan modification are kicked out of the program no more than 6 months after modification. They’re back on the red and swiftly become delinquent again with their mortgage payments.

However, the lobbyists which include Realtors, Mortgage Bankers, and Home Builders continue to propagate the concept that rising home prices is an indicator of a robust economy. They are encouraging the government to do everything in its power do stand by this school of thought. Corollary to this blinded paradigm, and in keeping with this scenario, the government is trying its best to keep homeowners in their houses they just couldn’t afford! People just want too much house for too little money!

Sound economics would suggest that the above concept of rising house prices could only be a symptom or a manifestation but cannot be a cause of an aggressive or robust economy. Whether you are a Classical, Keynesian, post-Keynesian, Reaganite or whatever school of thought you belong to, you will agree that productivity in the economy is the true measure of economic growth. If we translate this to the needs of today’s economy, that would mean we need jobs, more jobs and more, more jobs!

In fact, from my readings, I recollect that in order for us to fulfill the growth rates set by government of 3.3% in 2010, we need to create 1.5 million jobs. For 2011, government has set a target of 3.7% which should translate to 3.1 million jobs. Lastly, the target growth rate of 3.8% in 2012 would call for the creation of 2.6 million jobs.

Mr. President, we desperately need jobs. Reports say that there are some areas, in the country, particularly Las Vegas NV, which are saddled with more than 14% unemployment rate. Some urgent measures have to be taken- probably not just bailouts-- before it’s too late…

Why the hype..when there's no fight?

Originally Published in Nevada Examiner September 10, 2010
                                
In a recent U-stream video, Floyd Mayweather Jr. scoffs at accusations that he is ducking Manny Pacquiao. The 5'8" welterweight insists he will "stomp the midget" (aka the 5'6" Pacquiao) and cook him with some “rice with a little bit of barbecued dog" afterwards. The inflammatory comments are first-class fight hype, the sort of talk you would expect from Muhammad Ali in the days when he canvassed the streets of the Philippines claiming he was going to 'kill the gorilla in Manila.'

The only problem is that Floyd and Manny aren't fighting. Make no mistake, the fight that Mayweather seems to be promoting is the fight that everyone wants to see, the fight that everyone would rather see as Pacquiao prepares to face Antonio Margarito and Pretty Boy Floyd continues his most recent, and perhaps IRS-motivated, sabbatical from boxing. But for the second straight year, one of the fighters has walked away from the money (perhaps mountains of it) only to say, 'maybe next year.'

Truthfully, neither man has a lot of 'next year' in him. Mayweather is now 33 and Pacquiao will soon be 32, a far cry from the 25 year-old Sugar Ray Leonard ducking a 23 year-old Thomas Hearns, perhaps the last time that ducking was truly 'good' for a boxing promotion. No, this delay is decidedly bad for any potential Pacquiao-Mayweather clash, and frankly, it's bad for the already financially flagging boxing industry. It's as if the NFC and AFC champions declined to take the field for the Super Bowl but agreed to face each other after the players had all retired. How can anyone take the sport seriously?

And how is a public already sentenced to another year of replacement main events supposed to receive an incendiary hype video for a fight that, at the earliest, would occur next March? Of course, that assumes that Mayweather isn't actually ducking Pacquiao, and there are many legitimate reasons he should.

For one, Pacquiao's punches come from non-traditional and constantly shifting angles. The power puncher, who was once able to put his left fist through guards and knock opponents backwards in the 130 pound weight class, has found a much more artful way to dispense of his opponents at 135 and above; he simply uses his hand speed and movement to put clean punches right on their chins.

As impenetrable as Mayweather's defense is, he does occasionally leave himself open, and he relies on his reflexes and speed to recover. However, both seemed to fail him as he took a heavy overhand from a 38 year-old Shane Mosley in May. Mayweather may be slowing down more than he realizes, and considering Pacquiao throws three punches to Mosley's one, Floyd could end up looking like King Kong fighting a fleet of airplanes. It just takes one lucky pilot to find the chin.

That's not to say that, as time goes by, Manny becomes a clear favorite, far from it. Pacquiao's most celebrated successes at the higher weight classes have come against fighters who are willing to trade punches with him. Mayweather is not that kind of opponent. He's a faster, bigger, smarter and more patient version of Juan Manuel Marquez.

And Manny will slow, just as Floyd has, if not from age, then from the road wear of facing larger and larger opponents. And if an older, slower Pacquiao faces an older, slower Mayweather, it may become obvious how badly Manny needs his speed to penetrate Floyd's defense, and how little speed matters to Floyd's ability to outwait and out-time Pacquiao.

The fight may happen next year. The fight may not happen at all. But what is most clear as Floyd Mayweather simultaneously blasts and ducks Pacquiao on the Internet, is that the fight will not happen in either man's prime. Pacquiao will not defeat the "real" Mayweather, and Mayweather will not defeat the "real" Pacquiao. Two men trying to sell themselves slightly after their expiration date will enter the ring, and the only clear winner will be Father Time. Last I checked, he was undefeated.

A Sick Housing Finance System

Originally published in the Nevada Examiner on September 3, 2010

A lot of us who are now or who had been involved in Housing Finance wonder what the stars hold for the immediate future and the years to come. The underwriting process that we are witnessing now, are indeed very strict to the point that some borrowers just find the stringent rules to be absurd if not downright ridiculous. Well, isn’t this just right? We all deserve it! The fact of the matter is that, if we historically trace the roots of today’s mortgage problems and the collapse of the real estate market, a lot has to do with the breakdown of sensible underwriting procedures.

Prior to the 1990’s, we had common sense underwriting principles that require down payments, good credit and the due diligence of the lenders or mortgage agents to strictly verify if the borrowers and future homeowners have the ability to handle their mortgage debt. In 1992, the U.S. Congress passed the Federal Enterprise Safety and Soundness Act. The law basically imposed affordable housing mandates on Fannie Mae and Freddie Mac. Hey, this was the start of former President Bill Clinton’s era!

At the start of 1993, regulators have started to abandon the conventional tried and tested underwriting principles. They started to substitute liberalized lending standards which led to the influx of the no-down payment or minimal down payments and other weak, if not “sick” loans. By the year 2006, more than 30% of all home buyers put no money down.

Prior to the real estate meltdown, we saw the negative amortization loans soared sky-high which were sugar-coated with the very popular pseudonym “Option ARMS.” We were all in awe to see mortgage loans that started with a low 1% interest rate. These types of loans were so misunderstood by so many that eventually led to the catastrophic consequences to the common homeowner. Sheila Bair, chair of the FDIC noted that, “the financial crisis was triggered by a reckless departure from tried and true common sense loan underwriting practices.”

Given that we practically faced or continually face a sick and dysfunctional housing finance system, what do we do now, bright boys?

According to Edward Pinto, a stalwart in the Housing Finance system, the following should be done:
(1) We should require larger down payments and stricter underwriting standards
(2) Reliance on the private sector and capital
(3) Removal of affordable housing mandates

Pinto wrote, “If there is to be an affordable housing policy, it should not be implemented by hidden subsidies and loose lending standards, but instead made transparent and funded on budget by the government.”

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Art C. Javier, Enrolled Agent, a Tax Professional for more than 18 years in Las Vegas, is Federally Licensed to Represent Taxpayers Before the IRS. He was the Publisher and Editor-in-Chief of the former Las Vegas Examiner. A former Professor of Economics at the University of the Philippines and De La Salle University Manila, Art was also a Professorial Lecturer in Economics and Management at the Sokoto State University, Nigeria and CEU Graduate School of Business MBA Program, Manila.