The Meltdown Lowdown (No. 4)

Editors' Note: This piece has been corrected.

1. Clinton Makes Sleazy Gas-Tax Demagoguery Bipartisan.

When Sen. John McCain proposed suspending the 18.4 cents per gallon federal gas tax for the summer, I did what any honest economist would do -- I trashed him for sleazy demagoguery. Instead of saving consumers money, McCain's proposed tax cut would divert revenue the government uses for desperately needed repairs of roads and bridges into the pockets of the oil industry.

Cuts in gas taxes would not lower gas prices because the supply of gasoline is close to fixed -- the oil industry is already operating its refineries at near maximum capacity (or so they claim). As we teach our econ students, if the supply is fixed, then the price is determined on the demand side. This means that, if the industry produces about 400 million gallons of gas per day, the price will continually adjust to the point where all consumers put together purchase about 400 million gallons of gas per day. Therefore, if the gas tax is reduced or eliminated, as McCain has proposed, the price consumers pay will stay the same, but more money will go to the oil industry.

Sen. Clinton's pollsters apparently discovered the same thing as McCain's, because she is now advocating the same tax break for the oil industry disguised as a gift to consumers. Her willingness to emulate McCain might provide some basis for concern -- let us hope that she avoids telling stories about her years in a Vietnamese prisoner-of-war camp.

2. Housing Vacancy Rates Are Almost 50 Percent Above Record.

The Census Bureau reported on Monday that the vacancy rate on ownership units was 2.9 percent in the first quarter, yet another record. In prior housing downturns, the vacancy rate on ownership units had never exceeded 1.9 percent. We are clearly in uncharted territory in this crash. The rental-vacancy rate also rose, although at 10.1 percent it is still slightly below the record of 10.4 percent set in the first quarter of 2004.

The flip side of rising vacancy rates is declining ownership rates. The overall ownership rate stood at 67.9 percent in the first quarter, down 1.4 percentage points from its peak of 69.3 percent in the second quarter of 2004. The homeownership among black people fell, even more sharply, from 48.8 percent in the first quarter of 2005 to 47.1 percent today -- a net decline of 1.8 percent. This is the lowest rate of homeownership for black people since 1999, which is of course well before the surge in subprime lending that took place from 2004 through 2007.

I guess this is what Bush's "ownership society" looks like.

3. House Prices Continue to Plunge.

Home prices are falling faster than ever according to the Case-Shiller Home Price Indices. Prices in the Case-Shiller 20-city index, which covers major metropolitan areas, fell 23 percent over the last year. If prices continue to fall at the rate they've been falling over the last quarter they will have declined 24.9 percent by the end of the year (this is known as the annual rate of price decline for the quarter).

The price decline was even sharper in some of the formerly hot markets. Over the last twelve months, prices declined 31.5 percent in San Francisco, 34.6 percent in Los Angeles, and 36.8 percent in Las Vegas. Over the last quarter, prices in these cities have declined at annual rates of 36.5 percent, 36.3 percent, and 40.8 percent, respectively. Even less bubble-inflated markets are now seeing rapid price declines. Prices in New York City fell at an 11.4 percent annual rate over the last three months. In Boston they fell at a 15.9 percent rate and in Washington at a 26.8 percent rate.

The current rate of price decline will destroy almost $6 trillion in real housing wealth over the course of the year, an average of $85,000 per homeowner. That is very bad news for homeowners, but it could mean some bargains in the future for prospective homebuyers.

Overall, it probably is good news that the bubble is deflating quickly. It's sort of like having a tooth pulled: It hurts, but doing it slowly will only extend the pain.

4. "Bush Was Riding High on Claims of Solid Job Growth."

That is what The New York Times says, although it's not clear what that means to it. Job growth has actually been pretty bad through most of President Bush's time in office, so what does it mean that he was riding high on claims of solid job growth?

President Bush comes in dead last in job creation among recent presidents, even falling behind his dad's dismal record. So, is the Times pulling our leg when it says he was riding high? Is it making a reference to the use of illicit substances? Or is this just a really badly informed article?

5. McCain's Radical Half-Baked Insurance Scheme.

You've got to admire McCain's chutzpah. Most people would not propose dismantling something as crucial as the country's system of health-care insurance unless they had a well-developed and tested alternative to put in its place. But McCain would.

He wants to end employer-based insurance and replace it with individual-based insurance. While there are plenty of problems with our employer-based system, switching over to a system of purely individual insurance can create bigger problems. Worst among them is something called adverse selection, which, I promise, is not as complicated as it sounds.

Insurers don't make money by insuring sick people. They prefer to insure healthy people. Healthy people send you checks every month and never go to see a doctor. That's very profitable. On the other hand, people with serious illnesses send lots of bills to their insurance company. That's bad for business.

If you give insurance companies a choice, they will try as hard as they can to sign up healthy people. They certainly will not insure people they know are sick. Of course, those are the very folks who most need insurance. This is why both Clinton and Obama have proposed plans under which insurers would be required to insure everyone regardless of their health.

McCain doesn't want such intrusive measures. Instead, McCain says he will work with the private sector.

Now that takes real courage -- he's telling tens of millions of Americans with serious medical problems to vote for him so that he can dismantle the health-insurance system and then to trust him to put something workable in its place.

Maybe he should rename his campaign bus the Crazy Talk Express.

Correction: This article originally contained several incorrect figures. House prices in the 20-city Case-Shiller index fell 23 percent over the past 12 months, not 12.7 percent. The 12-month rate of price decline for San Francisco was 31.5 percent not 17.2 percent. The rate for Los Angeles was 34.6 percent not 19.4 percent. The rate for Las Vegas was 36.8 percent not 22.8 percent. The annual rate of house price decline in various cities in the first quarter of 2008. The rate for San Francisco was 36.5 percent, not 26.5 percent. The rate for Los Angeles was 36.3 percent not 26.3 percent.

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