PRESIDENT BUSH SAYS: We must make the 2001 and 2003 tax cuts permanent.

“Unless Congress acts, most of the tax relief we have delivered over the past seven years will be taken away…make the tax relief permanent.”

DMI SAYS: “No matter what the economic situation, President Bush insists that tax cuts for the highest income households are the answer. However, these extremely costly tax cuts have done little to strengthen the economy so far, and a permanent tax windfall for the wealthy would fail the middle class by dramatically worsening deficits while providing little economic stimulus.”

• Making President Bush’s tax cuts permanent would not promote economic growth or alleviate the current financial strain felt by middle-class Americans.  According to the nonpartisan Congressional Budget Office, an economic stimulus package should be timely in order to address a looming crisis, should provide financial incentives to the households and businesses that are most likely to spend, and should be short-term so that budget deficits don’t balloon.  The tax cuts are in no way timely: they will already remain in effect through 2010, so there is no direct taxpayer effect until 2011.  The cuts have precisely the wrong target: they primarily hit a narrow and wealthy slice of the population that is particularly unlikely to spend the money quickly..  Finally, the tax cuts make permanent an economic strategy that has consistently increased the budget deficit, an unsustainable situation that puts the financial future of the middle class at risk.

• President Bush’s tax cuts let the nation’s wealthiest individuals off the hook, leaving middle-class Americans increasingly responsible for the cost of needed public services.  Millionaires receive tax cuts in the hundreds of thousand of dollars, but the aspiring middle class and the middle class receive little.  While the top 20% of earners received two-thirds of the benefit from the President’s tax cuts in 2007, the middle 20% of earners received only 11% and the lowest 20% less than 1%. 

• President Bush’s tax cuts did little to help the nation recover from the last recession. In fact, they coincided with an economic recovery that was weaker than those in the past.  Previous recoveries stimulated larger increases in employment, wages and salaries, GDP, consumption, investment, and net worth that were beneficial to the middle class; the recovery President Bush oversaw stimulated only larger increases in corporate profits.  An analysis of economic cycles by the Economic Policy Institute demonstrates that the 1990s recovery that included tax hikes produced a 10.2% increase in employment, while the recovery period coinciding with the President’s tax cuts yielded an increase of only 4.1%.  Previous recoveries that did not include tax cuts – and that even included tax increases – were much better for the American middle class.

• President Bush claims that immediate extension of his tax cuts would alleviate economic uncertainty by ensuring a consistent tax rate beyond 2010.  Yet, middle-class Americans are struggling to make ends meet now and largely do not make spending decisions about everyday necessities based on what the income tax rate will be three years down the road.  Middle-class Americans will not benefit from the certainty of future tax cuts that overwhelmingly benefit the wealthy who can afford to make current financial decisions based on the expectation of higher or lower taxes.

• President Bush also claims that extension of his tax cuts will prevent tax increases on small businesses that generate new jobs.  The truth is, only 1.5% of small businesses would be subject to increases in the top two tax rates when the President’s tax cuts expire.  Additionally, the Congressional Budget Office found that there is little evidence that making President Bush’s tax cuts permanent now would result in small business investment activity that would produce significant short-term economic stimulus.

• While some have argued that the tax cuts need to be made permanent because not doing so would in effect be a tax hike, we think that type of circular reasoning is ultimately vacuous. You do not make permanent a mistake.

Relevant Statistics:

• Amount received in 2006 from tax cuts enacted between 2001 and 2006 by the  average household in the top .3% with incomes above $1 million dollars: $118,000.

• Amount received in 2006 from tax cuts enacted between 2001 and 2006 by the middle 20% of earners: $740.

• Percentage of the 2001 and 2003 tax cuts that will go to the top 20% of earners and to the bottom 20% of earners if the tax cuts are extended through 2017, respectively: 74 and 0.

• Cost of making President Bush’s tax cuts permanent over the next decade (assuming extension of relief for the Alternative Minimum Tax): $3.5 trillion.

• Approximate increase in the budget deficit between 2001 and 2006 that resulted from President Bush’s 2001 and 2003 tax cuts: $1.2 trillion.

• Ratio of this number to the total increase in the budget deficit: 1/2.

• Cumulative increase in employment during the first six years of the economic recoveries in the 1990s (with tax increases) and the 2000s (with the Bush tax cuts), respectively: 10.2% and 4.1%.

• Percentage of small businesses that would be subject to increases in the two top tax rates if President Bush’s tax cuts expire: 1.5

PRESIDENT BUSH SAYS: Pass trade agreements with Colombia, Panama and South Korea and renew trade promotion authority.

“On trade, we must trust American workers to compete with anyone in the world and empower them by opening up new markets overseas… I ask you to approve agreements with Colombia, Panama and South Korea.”

DMI SAYS: “More NAFTA-style trade deals may be at the top of Corporate America’s agenda, but they aren’t a priority for the nation’s middle class. Most Americans already see their wages and benefits constrained by the intense global competition that exists today. At the same time, middle-class consumers are threatened by dangerous products imported from abroad with little oversight. We need a fundamentally different model of trade, in which the benefits don’t just flow to a small elite, but help to grow the middle-class in the U.S. and throughout the world.” 

• Increased international trade can contribute to economic growth, but the way trade rules are formulated in NAFTA-style agreements like the proposed deals with Colombia, Panama, and South Korea means that the benefits of trade are distributed unevenly, ultimately undermining the middle class and aspiring middle class in both the U.S. and the nations it trades with.

• A central problem is that these trade agreements empower businesses and investment capital to cross international borders more easily, providing a decisive advantage over working people who are not so internationally mobile and whose rights are not equally well protected in all of the nations covered by the agreement. This imbalance of power creates incentives to move U.S. jobs overseas and puts downward pressure on the wages of American workers as they are placed in more direct competition with poorly-paid, disempowered workers in the developing countries we trade with.

• Workers who actually lose their jobs are the hardest hit by unfair trade. Economists estimate that while about one million new U.S. jobs were created as a result of NAFTA, another two million have been lost due to the deal. Additional trade agreements could be expected to multiply these job cuts.

• With today’s improved communications technology, it is no longer just manufacturing work that is vulnerable to being sent overseas. Any work that can be done remotely, from accounting, to analyzing x-rays, to computer programming, can be performed more cheaply outside the U.S. Many of these are jobs that require advanced training and higher education – a college degree is no longer sufficient to protect American workers from the job instability and wage cuts that result from increased international competition.

• Poorly regulated international trade also hurts middle-class consumers. While the prices of imported consumer goods may be low, the middle-class pays when they are exposed to contaminated seafood from abroad, children’s toys coated in potentially deadly lead paint, and a host of other poorly-regulated imported foods and consumer products. U.S. oversight of imported goods has not yet caught up to the existing volume of international trade.

• There is also reason for concern about the specific countries these pending trade deals have been negotiated with. Colombia is renowned for keeping its wages low through violence – more union organizers have been murdered in Colombia than anywhere else in the world. Panama, meanwhile, is an international haven for tax evasion and money laundering. The proposed trade deal would make it easier for U.S. companies to dodge their tax obligations by setting up Panamanian subsidies.  

• It’s worth noting that none of these trade agreements are really “free”: they include thousands of arcane rules protecting the profits of multinational corporations, the interests of investors, and the patents of drug companies, for example. Rather than passing these agreements, Congress should insist that they be renegotiated to benefit middle-class workers and consumers, as well as the environment and the desperate working people in the nations we trade with.

• It is particularly ironic that Bush touts his support for trade adjustment assistance when he threatened to veto a bill that would have expanded the program. While assisting workers displaced by trade is no substitute for building an economy based on fair trade, it would have been a helpful reform.

• Truly fair trade agreements should include provisions that: protect internationally recognized labor rights and environmental standards with the same enforcement mechanisms as investor rights; protect against currency manipulation; do not restrict federal, state or local governments’ procurement choices, including the ability to favor local producers; do not grant special dispute-settlement privileges to foreign investors; and safeguard governments’ ability to establish consumer, environmental and workplace regulations.

• Beyond the agreements themselves, domestic policy reforms are needed to help the U.S. compete more fairly and effectively in the global arena. Policies like universal health care, strengthened labor rights and enforcement, stronger import inspection standards, and closing tax loopholes that prevent off-shoring help middle-class Americans to thrive in a globalized world.

Relevant Statistics:

• Net loss to the typical middle-class American household, with two earners making the nation’s median wage, due to trade in 2006: $2,000.

• Estimated net number of U.S. jobs displaced due to NAFTA during its first decade in effect: 1,015,291.

• Percentage of all U.S.-owned manufacturing production currently located overseas: 50%.

• Percentage of today’s American jobs that could potentially be sent overseas, according to the Economic Policy Institute: 18% to 22%.

• Minimum number of workers with a four-year college degree or more whose jobs could be sent overseas: 8 million.

• Increase in the U.S. trade deficit since November 2006 a year earlier:  $4.7 billion.

• Wages of the average manufacturing worker displaced by trade in their original job and their new job, respectively: $40,154 and $32,123.

• Minimum number of hazardous children’s toys manufactured in China recalled by Mattel Corp. in August 2007: 9,500,000.

PRESIDENT BUSH SAYS: Through HOPE NOW mortgage lenders and servicers have agreed to freeze interest rates for up to five years at their introductory rate. The HOPE NOW alliance has also agreed to move eligible borrowers into an FHASecure loan or help them refinance an existing loan into a new private mortgage. In addition, the Administration has proposed allowing cites and States to issue tax-exempt mortgages to refinance existing loans. These are effective ways to deliver financial relief to borrowers with adjustable rate subprime mortgages. 

“My Administration brought together the HOPE NOW alliance, which is helping many struggling homeowners avoid foreclosure.”

DMI SAYS: “The President has rightly focused on the need to refinance and modify abusive subprime mortgages.  Millions of homeowners with subprime adjustable rate mortgages have already experienced or will soon experience payment shock when their interest rates rise dramatically. Significant loan modification – changing the terms or the amount of the loan to make it affordable – is the only viable option for many homeowners. Unfortunately, the President’s plan to fix subprime rates excludes the vast majority of subprime borrowers and thus will not be available to perhaps millions of mortgage borrowers whose rates have already reset, or will reset in the future.  Any federal effort to address the subprime and foreclosure crisis must also include structural reform of the mortgage industry so that middle class homeowners are not targeted by discriminatory and predatory lending practices in the future. 

• The HOPE NOW rate fixing plan arbitrarily excludes borrowers whose introductory rates expire before January 1st 2008.  Hundreds of thousands of borrowers who received adjustable rate mortgages in 2005 and before will not be eligible. More than $50 billion dollars worth of subprime loans reset at higher rates in the final quarter of 2007 alone.  Pushing back the qualifying expiration date for introductory rates would enable the plan to include many more borrowers who were targeted by the recent generation of predatory subprime loans.

• The plan will not cover many different forms of abusive subprime loans such as “Option” ARMS, “No Doc”/”Low Doc” loans and “piggyback” mortgages that will also confront borrowers with exploding payment resets over the coming years. These products should be targeted in any plan to fix subprime rates.

• President Bush should have expanded and improved on the recommendation made by Sheila Bair, chairman of the FDIC, who in October 2007 proposed a plan that would have permanently frozen rates on all 2/8 and 3/27 subprime loans in cases where the borrower has been making timely payments. But, even at lower interest rates, a new loan at the full payoff amount will still be too large and unaffordable to many homeowners. In other instances, either because the home was over appraised or has simply gone down in value, refinancing is not an option for many homeowners because the amount they owe is larger than the actual value of the home.

• This plan is purely voluntary; it is up to mortgage servicers and investors to decide if they want to participate and modify subprime loans.  Given the fact that most servicers are prone to pursue foreclosure rather than modify loans, the federal government must provide strong incentives for servicers to modify unaffordable subprime loans. So far, the Administration has shown no interest in doing this.

• Borrowers must be current on their mortgage to qualify for the plan. A fairer plan would recognize that borrowers have often fallen behind because of predatory practices.

• The President should support the Homeownership and Preservation Act of 2007 which would: create a federal standard for lenders to ensure that mortgages are affordable and suit the needs of the borrower; prevent brokers from steering borrowers to more expensive loans; avoid the overriding of state laws while giving state governments more power to enforce laws; and hold mortgage holder liable for illegal practices.

Relevant Statistics:

• Approximate percentage of all subprime borrowers who currently are delinquent on their payments: 22.

• Percentage of subprime borrowers who will be helped by the President’s plan to freeze mortgage rates, according to the Center for Responsible Lending: 7.

• Number of homeowners with teaser rates that are scheduled to jump 30% or more over the next two years: 2,000,000.

• Percentage of these homeowners who could lose their homes according to federal officials: 25.

• Percentage of subprime loans that had reset through July 2007 that had been modified to help borrowers make payments, according to a survey conducted by Moody’s Investor Service: 1.

PRESIDENT BUSH SAYS: Congress should modernize the Federal Housing Administration and reform Freddie Mac and Fannie Mae.

“Tonight I ask you to pass legislation to reform Fannie Mae and Freddie Mac [and] modernize the Federal Housing Administration.”

DMI SAYS: These are common-sense steps that will genuinely help many middle-class families keep their homes.

• The Federal Housing Administration provides mortgage insurance that protects lenders against loss, thus encouraging more lenders to extend credit to people who might otherwise find it difficult to secure a mortgage.  Currently there are limits on the size of mortgages that can be insured by FHA and these limits have not kept pace with rising real estate prices. Bringing these limits in line with the current housing market is key to creating viable refinance options for middle-class Americans who have been targeted by predatory loan practices and are trapped in unaffordable adjustable rate mortgages and other abusive loan products.

• Given how high home prices have risen in recent years, especially in regions like New York and California, resetting the FHA insurance limit of $729,750 is necessary.

• When lenders have the ability to sell mortgages on the secondary market they have the means to readily refinance mortgages and help ordinary homeowners escape unaffordable loans.  Freddie Mac and Fannie Mae can help expand the secondary market.  However, current limits on the size of mortgages that meet Freddie Mac and Fannie Mae standards potentially preclude hundreds of thousands of refinanced mortgages from being sold on the secondary market. FHA modernization must be accompanied by Freddie Mac and Fannie Mae modernization which will expand the conforming loan limit and enable Freddie Mac and Fannie to buy mortgages up to $730,000.

Relevant Statistics:

• Percentage by which sales of single-family homes fell in 2007: 13, the largest amount in 25 years.

• Percentage by which construction on new homes fell in December 2007: 14, the slowest building pace in more than 16 years.

• Before 2007, length of time since annual home prices fell: 40 years.

• Medium home price in California: $597,640.

 Go to the next section: Budget

DMI on the 2008 State of the Union