Trading Places - The demographic inversion of the American city.

In the past three decades, Chicago has undergone changes that are routinely described as gentrification, but are in fact more complicated and more profound than the process that term suggests. A better description would be "demographic inversion." Chicago is gradually coming to resemble a traditional European city--Vienna or Paris in the nineteenth century, or, for that matter, Paris today. The poor and the newcomers are living on the outskirts. The people who live near the center--some of them black or Hispanic but most of them white--are those who can afford to do so.

Developments like this rarely occur in one city at a time, and indeed demographic inversion is taking place, albeit more slowly than in Chicago, in metropolitan areas throughout the country. The national press has paid very little attention to it. While we have been focusing on Baghdad and Kabul, our own cities have been changing right in front of us.

Local governments are having their budgets stretched to the limit these days.  Fuel costs are a large part of it - fuel for trash pickup, police, school buses, etc.  

Road maintenance is one area where we are already starting to see cutbacks.  The cost of asphalt has increased along with other petroleum based products, but road repairs also require lots of diesel fuel for trucks and heavy equipment.  Where this is all headed, I don't know except that it is likely that road conditions will deteriorate in coming years.

The laizzes-faire capitalism that we have chosen to embrace instead has problems that many people overlook.

For one, we import 70% of our oil right now, and that coupled with the high cost of oil mean that we have huge trade deficits.  One can make the argument that this is a contributing factor to the plunge in the value of the dollar.

Importing so much oil has national security implications as well, mainly because we are importing some amount of our oil from the Middle East.  For example, if we were 100% self-sufficient in oil, would we have bothered to invade Iraq?  I doubt it.

All of the experts tell us that we can't drill our way out of this problem either.  Oil production in the US peaked in 1970.

All of the estimates I have seen show that ANWR and OCS are just little blips on these curves.

like "delusional or on drugs," and you will be banned per our posting guidelines:

* Users who unnecessarily bash or attack, including ad hominem attacks, any users on the site are subject to immediate banning.  Our actions will be dictated by the specific circumstances.

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an accusation of being on drugs is an attack?

Uh-oh.

on this subject.  If you have evidence to the contrary, please feel free to present it.  What will not be tolerated here is calling everyone you disagree with a "leftist," "obtuse," etc., and also as you completely misrepresent the positions we articulate here (who EVER said "government could do no wrong?"  to the contrary, I could provide a list of a hundred areas where it HAS done wrong, particularly under Republican misrule).  

International Center for Technology Assessment, which says:

The report divides the external costs of gasoline usage into five primary areas: (1) Tax Subsidization of the Oil Industry; (2) Government Program Subsidies; (3) Protection Costs Involved in Oil Shipment and Motor Vehicle Services; (4) Environmental, Health, and Social Costs of Gasoline Usage; and (5) Other Important Externalities of Motor Vehicle Use. Together, these external costs total $558.7 billion to $1.69 trillion per year, which, when added to the retail price of gasoline, results in a per gallon price of $5.60 to $15.14.

TAX SUBSIDIES
The federal government provides the oil industry with numerous tax breaks designed to ensure that domestic companies can compete with international producers and that gasoline remains cheap for American consumers. Federal tax breaks that directly benefit oil companies include: the Percentage Depletion Allowance (a subsidy of $784 million to $1 billion per year), the Nonconventional Fuel Production
Credit ($769 to $900 million), immediate expensing of exploration and development costs ($200 to $255 million), the Enhanced Oil Recovery Credit ($26.3 to 100 million), foreign tax credits ($1.11 to $3.4 billion), foreign income deferrals ($183 to $318 million), and accelerated depreciation allowances ($1.0 to $4.5 billion).

Tax subsidies do not end at the federal level. The fact that most state income taxes are based on oil firms? deflated federal tax bill results in undertaxation of $125 to $323 million per year. Many states also impose fuel taxes that are lower than regular sales taxes, amounting to a subsidy of $4.8 billion per year to gasoline retailers and users. New rules under the Taxpayer Relief Act of 1997 are likely to provide the petroleum industry with additional tax subsidies of $2.07 billion per year. In total, annual tax breaks that support gasoline production and use amount to $9.1 to $17.8 billion.

PROGRAM SUBSIDIES
Government support of US petroleum producers does not end with tax breaks. Program subsidies that support the extraction, production, and use of petroleum and petroleum fuel products total $38 to $114.6 billion each year. The largest chunk of this total is federal, state, and local governments? $36 to $112 billion worth of spending on the transportation infrastructure, such as the construction, maintenance, and repair of roads and bridges. Other program subsidies include funding of research and development ($200 to $220 million), export financing subsidies ($308.5 to $311.9 million), support from the Army Corps of Engineers ($253.2 to $270 million), the Department of Interior?s Oil Resources Management Programs ($97 to $227 million), and government expenditures on regulatory oversight, pollution cleanup, and liability costs ($1.1 to $1.6 billion).

PROTECTION SUBSIDIES
Beyond program subsidies, governments, and thus taxpayers, subsidize a large portion of the protection services required by petroleum producers and users. Foremost among these is the cost of military protection for oil-rich regions of the world. US Defense Department spending allocated to safeguard the worlds? petroleum resources total some $55 to $96.3 billion per year. The Strategic Petroleum Reserve, a federal government entity designed to supplement
regular oil supplies in the event of disruptions due to military conflict or natural disaster, costs taxpayers an additional $5.7 billion per year. The Coast Guard and the Department of Transportation?s Maritime Administration provide other protection services totaling $566.3 million per year. Of course, local and state governments also provide protection services for oil industry companies and gasoline users. These externalized police, fire, and emergency response expenditures add up to $27.2 to $38.2 billion annually.

In the end, the ICTA estimates the "real price of gasoline" at $5.60/gallon (low estimate) to $15.14/gallon (high estimate), incorporating all "externalities."

like energy efficiency, renewable energy, breaking our oil addiction and protecting the environment. Crazy stuff, I know! :)

There is so much immaturity in this post, I don't where to begin. For example, you write:

The fact is the rich of NoVA can spend anything and everything they want on gas, regardless of the price.

You may want to talk to some of my rich friends up there in NOVA. Apart from the super rich -- yeah, $4/gallon gas is not affecting Warren Buffett's lifestyle -- this is simply not true.

But when it comes to policy, economics and history, you are just wrong.

You state:

Carter's policies ruined the American economy, raising inflation to a whopping 22%.

I could find no data supporting your contention that inflation reached 22% for any year during Carter's presidency. Can you provide a cite?

That's not to say that inflation was low -- it was not.

Also, inflation data needs to be placed into its historical context. Consider that inflation typically rises following the end of a war, so before making a statement blaming the inflation on Carter policies, that ought to be considered. (Note on this chart how inflation jumped following WWI, WWII and Vietnam). In other words, if Carter's policies are to blame, then one needs to explain why inflation began its inexorable rise prior to Carter's presidency.

There was plenty going on in the early 1970s -- Munich, Watergate, the emergence of OPEC -- that to pin any economic circumstance on "policies" is simplistic, if not pointless, as best. What policies did you have in mind, and how did they cause the inflation you claim was caused.

Or what are the "obtuse strategies" you claim Carter promoted that Obama and Feder are advocating today? Conservation? I'll ask your question -- are you serious?

I am always amused by the lurking trolls who finally post a comment, and think the blinding truth of their discredited conservative ideology that low taxes are a laudable goal in their own right, and all government is bad, independent of the policies attached to them, is just going to stun us dumb ol' Progressives into whacking ourselves on the far heads, if not donning sackcloth, and moaning "Why, why, why? How could we have been so wrong about all this?"

RightFromTheMiddle, I am sorry that your disenchantment with Democratic governing philosophy drove you to the GOP, but I respect your choice and hope it all works out for you. I urge you to return to that fold, and leave us poor souls here to wallow in our uninformed ignorance.

I think the point has been made that this particular diary is not a glowing review of government.  So, that said...

You recognize that we have two issues that need to be addressed: energy and climate change, right?  Of course, if you don't think that these are problems, please explain your thoughts behind that.  In the case that you do, what is your alternative solution?  Or what are Republicans offering in this space that is more attractive as a solution?

There are certainly a lot of different paths we can take on these two issues.  Some present more difficult barriers to overcome to reach a desired solution.  But regardless of what the ultimate package is that we put together, we need to work on it together and reach a consensus.

First, housing prices collapsing in PW and Loudon have more to do with the bursting of the housing bubble than with the cold, amoral hand of the market correcting urban planning according to high energy prices.

Second, how we live is an individual and collective choice.  We didn't get to this point by government action or inaction alone.  I don't think that Eisenhower considered or could even have predicted the consequences of the interstate system.  It's a lot to put this all at government's door.  There are a whole lot of willing participants in this entire system.  And we should not minimize or ignore their(our) role in this.

I don't think we need to end sprawl to solve this problem.  With more information, I now have faith in Eric's argument that technology will solve both the energy and the climate crises.  I was down before because if it required a change in behavior, I thought we were doomed.  But now I see that is not necessary (at least not a huge change).

The home mortgage deduction, a subsidy to the housing industry, is what created the wasteland of acres of bulldozed forest with un-sellable tract mansions.  This was fueled by tax deductions and cheap, non-unionized labor and a buying mania that makes the dot com bubble look like rational exuberance.  We find ourselves on a rapidly deflating bubble that's causing a recession and a credit crunch. Even the latest bailout for the big banks from Barney Frank and George Bush includes a starter home deduction.  

Lowell's right, the government does subsidize sprawl, but not just in transportation policy.  The home mortgage deduction is the price subsidy that has finally blown up in our faces.  Time to phase it out.

We don't need bigger, remote houses; we need better, closer communities.

There is no doubt that the mortgage deduction is a policy that favors home  ownership (and there is legitimate disagreement whether this is inherently a good thing, something I believe to be the case, BTW), but current housing value problems result from a number of factors related to the availability of credit in which this deduction plays a relatively minor role, IMHO.

You're right, the capital gains exclusion contributed much to the bubble, too.  Mea culpa. Singling out the mortgage deduction only is highly simplistic. The Home Equity Line of Credit, also, has allowed consumers to have other tax payers subsidize their spending.

Bottom line is we've over-subsidized sprawl and over invested in housing.  There's no need to encourage such wasteful spending with unwise tax policies.

basically has the government favoring wealthier people - mainly in suburbia - who can afford a home over poorer people - mainly in the cities - who rent.  That's certainly not progressive, and I don't see how it's particularly good public policy either.  Does it encourage sprawl?  I'd strongly argue YES, given that it favors the suburban homeowner model over the urban apartment/rental model.  Why is the government in the business of favoring either? At the minimum, why isn't the mortgage interest deduction capped at $1 million, $2 million or whatever, so that someone can't deduct the interest from their $50 million mansion while poor people get nothing at all?

but the average home price is much lower than that.

What about deductions for home equity lines of credit, are they capped too?

The limit is the lessor of $100k or the difference between Fair Market Value and your first mortgage.

Of course, these limits apply only to debt after 1987.  But you are still subject to the overall limitation on itemized deductions.  And there are phase-outs depending on your income.  And you have the interplay of AMT too.  It's complex because we have a complex code, which is why it pays so well to be an accountant in tax season.

but I feel like this is as good a time as any to bring it up: just because something is popular does NOT mean it's good public policy.  For instance, the mortgage interest deduction is popular, but what are its costs and unintended consequences?  For instance, see here.

I think it is always dicey to raise any government policy is a vacuum.

Sure, one can look at many policies and trace undesirable consequences from them.

I am a believer in home ownership because I think it does help create stable communities in which people are financially vested.

Do the applicable tax policies favor the wealthier who are able to afford homes? Obviously. But this is an effect, not a cause.

I would only contend that over time the benefit so far outweighs the cost that to even have a discussion of whether this is a good policy is a classic case of losing the forest for the trees.

In any event, here is a short article that takes a look at this stuff.

http://www.dollarsandsense.org...

The Presidential Advisory Panel on Federal Tax Reform noted the following:

The benefits of current tax incentives for housing are not shared equally among all taxpayers. Under current law, the tax benefits for housing, which are larger than the entire budget of the Department of Housing and Urban Development, mostly go to the minority of taxpayers who itemize deductions. These taxpayers typically are drawn from higher-income groups. Over 70 percent of tax filers did not receive any benefit from the home mortgage interest deduction in 2002. According to the Joint Committee on Taxation, more than 55 percent of the estimated tax expenditure for home mortgage interest deductions went to the 12 percent of taxpayers who had cash income of $100,000 or more in 2004.

 

It is weighted heavily to the upper end of the income scale.  That doesn't promote diversity in the people who own homes.  They also noted that countries like Australia allow no equivalent deduction yet they have a home-ownership rate of 70% (higher than ours).  This credit has been around since 1913 so this very well could have been the intent of politicians at the time.  

On top of that, the $1 million limit applies to both the first and second home.  So, wealthy filers get to claim the deduction on both their primary residence as well as vacation properties.  Most people don't have the luxury of owning two homes.  This can account for some of the  bubble in housing, but how much, who knows?

I have agreed that the deduction favors the wealthy. That was not the subject of the question.

the question was whether the government has a legitimate policy objective in promoting home ownership. I think it does. The government does this in all sorts of ways, the tax deduction being one among many tools.

Some of them favor wealthier people, others do not.

For example, the government helps to provide low cost credit for homeowners through Fannie and Freddie. Notwithstanding these companies' current problems, the fact is that they have helped millions of people own their own homes, build wealth and have better lives. For the most part, the benefits of these companies accrue to the middle class homeowner.

Other programs do hep low-income people realize the goal of home ownership, and don't help middle or upper income people at all.

Again, however, the issue was whether home ownership, as opposed to renting, I suppose, ought to be a goal of governmental policy at all. I think it ought to be. But even at that, I want to be careful is discussing what I see as the role of government. Home ownership ought not to be goal of government in and of itself. I think government policies ought to promote the welfare of everyone to the greatest extent possible while allowing for the greatest amount of personal liberty in pursuing one's personal goals. One way to do this is to enact policies that create stable communities capable of supporting good schools and safe environments for all people. Own ownership is a proven means toward accomplishing that. It is not the only one.

That's exactly what government should be doing.  I guess I'm far less comfortable with government deciding that one class of people - married, homeowners, whatever - is more desirable and then rewarding them in the tax code or with differential "rights" of various kinds.  That's really tricky stuff.

But I don't think the argument for homeownership is that homeowners are more deserving of government support than others.

I think the argument has to be that promoting as much home ownership as possible does promote the general welfare by helping create stronger communities for everyone. If you rent a home in a neighborhood with a high rate of home ownership, you benefit from home ownership, in theory, in the form of access to better schools, lower crime, etc.

Same with married people. To the extent that married people, or any people with a long-term commitment to a stable relationship, married or not, are generally good for society, then I think it is a reasonable policy for government to help create conditions conducive to this.

This isn't to denigrate anyone that doesn't fit in these groups. All people -- married, single, homeowner, renter, doctor, lawyer and Indian, er, Native American chief -- benefit from, and glom off, society in different ways.

But if all you are doing with a policy is saying, I want to favor home owners, or married people, or whatever, without other policies pursuing the larger goals that have the general welfare in mind, then the result is Conservatism as practiced by modern Republicans, and we know that doesn't work.

is whether this social/economic engineering built into the tax code actually achieves the stated or implied goal.  We build on this junk into the tax code, and then we rarely follow-up on whether it worked or what the unintended consequences are.  

My perfect individual tax code would be just stopping on line 22 of Form 1040 (Total Income).  On the lines after: apply the tax rates, subtract tax already withheld, and end with tax refund/due.  No deductions, no exemptions, just a clean easy form to fill out with simple instructions for reporting your income.  You could then lower the tax bracket rates to make up for the elimination of all that junk.  And then you wouldn't need H&R Block, TurboTax, or accountants generally to file your taxes.  And reduced complexity would free up so many resources tied up by the current tax code.  It would be as simple as sales tax, yet progressive in effect (i.e., perfection).

The lobbyists alone who would find themselves out of work would rocket the unemployment rate over 10 per cent. :)

=)  It would be creative destruction, sort of like Shiva as Nataraja.

the specific merits of the Mortgage Interest Deduction and whether it was good public policy.  That was, at least, the subject of this small tangent within the main post.  As far as I know, there is no evidence that the deduction has led to higher home ownership rates.  As the panel was pointing out, there is no correlation between this deduction and home ownership rates when compared to other countries.  What the deduction does do is distort investment decisions made by the portion of our society that controls the greatest amount of wealth.  It encourages them to tie up capital in real estate instead of other investments.  Is that good for the economy?

And if the goal is also to promote the welfare of everyone to the greatest extent possible, this deduction really fails there.  It goes to so few people who don't even need the subsidy to begin with in order to purchase a home.  And as so underlined by the panel, it is more than the entire budget for HUD.  Nice, right?

I didn't think we were talking about government's programs generally that promote home ownership.  But even so, this is not one of them.  And to Lowell's main post, you can have high home ownership rates and not have sprawl.  The UK has equivalent ownership rates to us and they have high density overall.

but not with your conclusions.

To cite one example, yes, the home mortgage tax deduction distorts investment decisions. So does every tax deduction and tax imposition. The question is whether that distortion is a good one or a bad one.

You say:

It encourages them to tie up capital in real estate instead of other investments.  Is that good for the economy?

My answer is, "Yes." Oh, it may not be the most efficient short-term use of capital, but when one considers the long-term benefits, even over generations, from more stable neighborhoods, better schools, better health, stable families, wealth creation, and on and on, I think it is hard to argue that home ownership is not a net positive for society in many, many ways.

As to whether the home ownership deduction helps promote that, or whether it is simply a sop to the rich, is a fair and debatable point. And as for whether it causes sprawl (while at the same time not effectively promoting home ownership) is a little baffling to me, but I'm no economist.

When I was referring to them, I was referring the 12% of filers who accrue the majority of the benefit of this deduction.  We know for a fact that wealth is concentrated among a minority in this country.  So, this isn't affecting the investment decisions of middle America, because middle America doesn't possess that much wealth to invest.  I was referring to the people who have a good deal of wealth to begin with (the people who benefit from this deduction) where it's a decision more about investment and tax avoidance than anything else.  It would be better not to favor real estate as an investment for this pool of capital, but rather tax all investment choices equally and free investors to make the best decision and not a tax manipulated one.

To your point about this being debatable, as noted in most years, the overwhelming majority of filers do not receive any benefit from this deduction.  And even among those who pay interest on mortgages, only 54% receive this tax benefit.  What argument could be made that this deduction helps in any way achieve high home ownership rates?  What argument can be made that this helps promote the positive benefits that home ownership promotes for society in general?

It's just a hand out to upper income filers.  It is protected by the National Association of Realtors because it increases the price of homes that these upper income individuals buy.  It is protected by banks because they get higher fees and interest off larger loans.  Basically, if you can take the deduction, you can afford a mortgage payment 43% higher if your marginal rate is 30%.  Is that coming into play for close to half of filers who can't even claim the deduction?    

The mortgage deduction does play an important role.  It increases home prices by increasing the amount buyers can pay for mortgages.  The primary beneficiaries of this deduction are the top quintile of income tax filers (and raising home prices doesn't necessarily encourage home ownership).  The National Association of Realtors estimates dropping the deduction would cut 15% off the price of homes (that's significant).  And I have heard as high as 30% of a home's price is attributable to the favorable tax treatment (I think that was from that book Freakonomics).

That's not to say that the deduction caused this mess.  The biggest that thing that has encourage home ownership is Alan Greenspan.  Did you forget that he is the root of all evil?  =) I kid, because I love.  =)  But seriously, historically low interests rates that fueled the roaring 90s allowed so many people who would not have been able to buy a house, buy a house.  Then you have a slew of financial sector deregulation that encouraged that too.  The explosion of asset-backed securities opened Pandora's box.  It took risk away from originators so why bother with basic income verification when somebody else will be picking up the tab if the homeowner doesn't pay.  And then you have the Credit Agencies who once again failed to do their job, but does anyone crack down on Moody's and S&P?  They let Enron slip through the cracks and they knew about that off balance sheet debt too.  And then they rated all these ABS as investment grade debt, and surely they must have known what was going on.  It's wonder why anyone even trusts Moody's or S&P as ratings services anymore, yet these failures seem to increase their stature even more.  It's bizarro world.  Tangent, sorry.

Trying to make the problem even worse -- borrowing from mass transit projects to pay for highways.

Best thing ever. The combination of subways and light rail in NYC has that place ticking 24/7. Sure, there are downsides but crime is going to happen regardless.

I tell you, DC needs to get its act together and extend the rail out more. If you provide more stops in the city and around it, more people can make use of it and that would kill the traffic problem. If you put more money in funding the light rail out down to even Virginia Beach then you'll grow the amount of business overnight. Trains take as much time as driving and subways beat walking. It's a no-brainer.