Friday, March 27, 2009

Bailing Out The CIB

Jen Wagner wants to know what Greg Ballard thinks of the CIB bailout options:

Food and beverage taxes: Bumping up Marion County's 2 percent food and beverage tax by 1 percentage point would bring in $18 million a year. This is one of the best options because it raises the most money. But opposition from taxpayer groups would be high. Odds: Still alive.

Hotel taxes: An increase of 1 percent in Marion County's 9 percent hotel/motel tax would drum up $4 million a year. The hotel industry is opposed to any increase, saying it would make it more difficult for Indianapolis to compete against other cities for convention business. Odds: On the table.

Raising admission taxes: Increasing Marion County's 6 percent admissions tax by 1 percentage point would bring in $1.5 million a year. Mayor Greg Ballard likes this idea, though the Indiana Pacers are especially loath to do this because it would make it harder for the team, already struggling with thin turnout, to draw crowds. Odds: Possible.

Concessions from the teams: The Indianapolis Colts now get a share of revenues generated during non-Colts events at Lucas Oil Stadium. Giving that up would mean $3.5 million for the Capital Improvement Board a year. The Pacers hope the CIB will assume $15 million a year in operating costs at Conseco Fieldhouse. As a compromise, the CIB might assume a portion of that amount. Odds: Uncertain.

Expanding taxing districts: Adding new hotels and other stadium-related businesses to a sales tax increment financing district in Downtown would generate $10 million a year. Odds: Possible.

Alcohol tax: Indiana's spirits, wine and beer taxes are on the low end, but lawmakers are more interested in solutions that affect Marion County alone, not the whole state. The taxes raise about $42 million a year, which is split between the state and local governments. Odds: Unlikely.

That's a good question, and certainly one I can't answer. But I can certainly offer an opinion as to how the bailing out should be done. The CIB deficit is at $43M, and they've already agreed to $6M in cuts, leaving $37M to make up.

First things first. I'm sorry, but the Colts and Pacers have to make concessions here. The public's sympathy for bailouts is small enough, and I see no good argument why the economic bad times should only be shouldered by the government. So let's take the $3.5M the Colts get from non-Colts events (which is ridiculous anyway, but that's another story). Now the Pacers actually want the CIB to take on additional costs, which strikes me as unrealistic on their part. We'll come back to that, but for now the $3.5M seems like a no-brainer. Deficit down to $33.5M.

Marion County Taxes: From a purely selfish standpoint, this is the one I'd like the least because I eat out, whereas I don't stay in hotels. But that's a lot of revenue to pass up, and eating out is a luxury, so lets do that and pick up another $18M for a deficit of $15.5M. But hey, let's do all the others too. The special tax district for $10M, the hotel tax for $4M, and the ticket tax for $1.5M. That comes to... $15.5M.

So if we adopt all the local tax increases and take none of the costs the Pacers are trying to push off on us (but also not ask them for concessions like with the more successful Colts) we can close the gap. Seems a bit overly burdensome to Marion County in my opinion. The final option of using state alcohol tax money is rejected almost out of hand because provincial representative in the rest of the state don't want to spend the money on Marion County. But wait! Marion County is this state's tax base. It's almost certain that the rural counties that would be most opposed to this plan are net tax recipients, taking money from Marion and the doughnut counties. The fact is the state's economic success is intertwined, and hurting Marion County hurts everyone. Now I do believe that Marion and the doughnut counties most certainly benefit more than the rest of the state on this issue, but not exclusively. So I think what I'd like to see is for the deficit to be paid out by some combination of concessions from the sports teams, local taxes applied to Marion and the surrounding counties, and some state funding. Food, beverage, and hotel taxes are probably the best source for the local tax revenue, and the burden on any one county is less when we're extracting revenue from all of them. I think the alcohol taxes are also probably a good source of the state contribution as well. As Wagner says, our alcohol taxes are already low, so there's room to increase them without creating a black market. Alcohol is also a luxury good with negative public health externalities, also making it a decent candidate for some additional taxation.

Now this plan is probably completely unfeasible politically. Instead I'm afraid what's going to happen here is that Marion County will get hammered. I hope I'm wrong.

Thursday, March 26, 2009

Credit Default Swaps vs Poor People Getting Houses : FIGHT!

A friend on the Facebooks recently got into a political internet slap fight (I always think of this XKCD) that ended up with a bit that essentially blamed the economic crisis on "Bill Clinton and his subprime mortgages". Never mind that a) what they are probably referring to is the government push to get more of those less well off able to buy houses b) that was actually done under Jimmy Carter, I believe and c) the whole "Democrats helped poor people get houses and that caused the crisis!" is very un-classy and a drop in the bucket compared to the Credit Default Swap Mess.

So I decided to but in a little on her comment about that thread.
Two great videos that help explain what credit default swaps are and how they nuked the economy.

CDSs are important because they were completely unregulated, meaning banks bought very heavily into them. Essentially many "too big to fail" financial institutions made a bet that the housing market would just keep going up forever. An unrealistic expectation. When housing prices finally started to fall, the whole house of cards came crashing down.

The Credit Default Swap market was worth $62 trillion recently (down from it's peak certainly given the way things have crashed). It was worth $900 billion in 2000 with Phil Gramm (R-SC) deregulated the CDS market.

The median home price in the united states in 2005 was $213,900. If you want to compare that to the size of the CDS market, that would mean the current CDS market would avearge out over 289,855,072 2005-median-value homes. According to the 2003 census bureau housing survey there were 105,842,000 households (which includes apartments)

Given there are some date differences in my data and some very rough math, still the CDS market outweighs even the value and number of homes in the united states. The government helping a few more poor people get houses is a drop in the bucket compared to the failure of CDSs and the "too big to fail" banks' involvement in that mess.

There's possibly a math mistake in there, or an oversimplification. It was done in a rush on a Facebook comment thread. The main point stands though that "poor people getting houses they can't afford" is a drop in the bucket compared to the size of the Credit Default Swap mess. It was bad deregulation in 2000 and a failure to patch that hole for this long that led us to the mess we are in. And for that, yes, you can blame greedy corporations and our representatives in Congress that did nothing to undo the mistake of not regulating those CDSs.

Neglected Blog Is Neglected

So this idea has failed, but I'm going to try to rescue it with a shot post with quick and dirty math about Credit Default Swaps that was fun to put together but potentially has some horrific math error I haven't seen that will render the entire post bad. So.. stay tuned!