Wednesday, April 18, 2012

Willard "Mitt" Romney: A Pig in a Poke, Redux

The issues from outside the box
by Jim Johnson

Willard Romney, the likely Republican nominee for the Presidency, has sought to position himself as the one candidate, through his understanding of the economy, with the wherewithal to pull our nation out of the recession. While offering no evidence of his self aggrandizing claims, he similarly declares that President Obama lacks the real-life experience in the real world of business to understand job creation. But Willard demonstrates to those who understand economic principle that he should have spent more classroom hours learning how an economy functions than in his business administration classes—learning only how to make money for himself. Economics is a purely academic study that has as little to do with business administration as business administration—and decades of real world experience in the business sector—has to do with shaping economic policy, and every indication is that his policy will prove to be a disastrous failure .

Those who are as yet unfamiliar with what a pig in a poke Willard has demonstrated his economic plans to be should familiarize themselves with that before they buy into it, but need only know the latest revelations about his agenda to know just how little he knows about economic principle—and the real world ramifications of his policy—and just what he meant when he said he was not concerned about the poor. He has now let it slip that he wants to eliminate the Department of Housing and Urban Development (HUD). But more tellingly, it demonstrates how little he understands about the economics of the real world, and how devastating an impact his agenda would have on the economic recovery and especially on the middle class.

The housing industry has long been recognized as the key to the creation of wealth, and to the recovery. The role HUD plays through the Federal Housing Administration (FHA) has been instrumental in pulling the US economy up since the FHA was founded in 1934, and played a key role in the growth in home ownership that fueled the post WW II housing boom and economic expansion of the 1950s and 1960s. The introduction of the FHA low down payment, thirty year mortgage loan has made home ownership possible for over 34 million home owners, and fostered financial security in a way that no other investment available to the middle class could offer.

The majority of retirees who enjoy financial security today owe that security to the equity they have taken out of their home, or which they still retain in the homes they have bought and sold. The principal reason for this unique fact is that the financing available, and especially the low down payment loans available through the FHA, are a leveraged investment. Since current FHA loan limits vary based on area median home price, and fall within the range of $271,050 and $625,500, HUD's benefits accrue in a big way to anyone earning up to $200,000.

Since buying a home usually entails a lower monthly payment than rent, you can realistically discount as relevant any monthly mortgage payment as a cost of an investment in a home. Everyone has to live somewhere. The value to the home owner lies in the fact that the appreciation in value for a $3,500 investment in a $100,000 home will accrue not against the principal (the down payment), but against the value of the property. Before the crash, it was not unusual for appreciation rates to be at least 2 percent to 3 percent per year. Thus, a homeowner's $3,500 initial investment would have earned $2,000 to $3,000 in a year. Without even considering the lower cost of living that ownership may have provided over renting, and the home mortgage interest deduction at tax time (which Willard also wants to eliminate), this is an incredible investment opportunity!

Not only does ongoing Republican hegemony threaten this benefit from HUD to the middle class, but the societal costs of what it threatens for the poor are all but unimaginable. HUD also sets standards for, and through the FHA, financing for private investors and public housing, in addition to housing vouchers, without which millions of low income families could not afford rent. In addition to potentially thrusting the number of homeless people to stratospherically high numbers, the ramifications for people at every income level are little short of devastating.

Investors in multifamily apartments that cooperate with HUD's voucher program would either need to put most of its tenants out on the street—and endure the significant costs of evictions in addition to foregone revenue from the rentals—or simply endure their losses or reduced revenues to keep the development open. This later makes no business sense, and the potential for the ensuing glut of rentals would tend to lower rents to an unprofitable level no matter what they did. A more likely scenario would be that they would be abandoned to foreclosure as real estate investment trust after trust went into bankruptcy.

The net effect would reduce the economy of the United States to something more closely resembling the still struggling economies of our South American neighbors. Economies do not operate within the make-money parameters of business and business finance, but rise and fall based on governmental policy that fosters economic development. This is a basic truth as alien to Willard Romney and the rest of the reactionary Republican cabal as love is to a stone. While they are fond of saying that you cannot spend your way to prosperity, there is evidence that you can—and no evidence that you can cut your way to prosperity outside the limited considerations of an individual business enterprise. Truly, buying into anything they offer as a solution to our nations economic recovery that will take us into economic prosperity is like buying a pig in a poke.

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