Organizing for America

Fact Check on Clinton ad

April 29, 2008

SCRIPT: The economy's in trouble. When the housing crisis broke, Hillary Clinton called for action—a freeze on foreclosures. Barack Obama said no. Barack Obama said no to a freeze on foreclosures. Wall Street Journal, 1/11/08

OBAMA'S MORTGAGE PLAN RECEIVED PRAISE OVER CLINTON'S FORECLOSURE FREEZE, WHICH WAS CALLED "DISASTROUS" AND "A FAIRY TALE"

New York Times Editorial: "Obama Has Endorsed The Best Idea Currently On The Table To Prevent Foreclosure." The New York Times wrote in an editorial, "Mr. Obama has endorsed the best idea currently on the table to prevent foreclosure: amending the law so that troubled borrowers can have their mortgages modified in bankruptcy court. That would give lenders a big incentive to work with borrowers — reducing interest or lowering principal balances — before they opted for bankruptcy protection. Mrs. Clinton has not endorsed bankruptcy reform. She has called for $30 billion in federal funds to bolster state and local foreclosure-prevention efforts and has proposed a 90-day moratorium on foreclosures and a rate freeze on subprime adjustable mortgages. Those measures also could help, but as the crisis has developed, the problem has become less one of resetting interest rates and more one of borrowers owing more than their homes are worth. Bankruptcy reform is a better way to deal with that problem." [New York Times, 3/27/08]

New York Sun: Some Critics Say That Clinton's Plan "Could Actually Make Market Conditions Worse." Clinton's "plan to rescue homeowners with a $30 billion federal aid package on top of a 90-day ban on foreclosures and a five-year freeze on interest rates for subprime mortgages could actually make market conditions worse, critics say. Private companies may be less likely to lend if they know the government can come in and override the deal, some conservative scholars warn, or they may add costly premiums to account for the uncertainty." [NY Sun, 3/25/08]

Fortune Writer Jon Birger: Clinton's Mortgage Plan Freeze Is "The Dumbest Solution To The Current Mortgage Mess I've Heard From A Top Presidential Contender" And "Would Be Disastrous." "Hillary Clinton is no dummy. Even her detractors know that. And yet in last night's Democratic presidential debate in Nevada, Clinton floated what is perhaps the dumbest solution to the current mortgage mess I've heard from a top presidential contender. 'I have a plan - a moratorium on foreclosures for 90 days [and] freezing interest rates for five years, which I think we should do immediately,' Clinton announced at what was the last Democratic debate before the Nevada Caucus on Jan. 19. A 90-day moratorium on foreclosures would throw a lifeline to some deserving homeowners, though I suspect it would only delay the inevitable for most. That's not my beef. Where Clinton goes awry is her proposal to freeze mortgage rates for five years, which is essentially a much broader version of a deal President Bush recently hammered out with lenders to assist some subprime borrowers. If Clinton's only goal were to bail out homeowners facing steep rate resets on adjustable mortgages, her plan would work just fine. For everyone else though, such a freeze would be disastrous. ... Then there's the long-term impact such a bailout would have on behavior. While Clinton's plan would no doubt save some legitimate victims who were duped into taking out bad loans, she'd also be saving the flippers and speculators who knew the risks of low teaser rate mortgages but figured (wrongly) that they could always sell their house for a profit if the reset mortgage rate proved unaffordable. Bailing out these folks now would only encourage them to take even bigger risks down the line." [Jon Birger, Fortune, 1/16/08]

Thaler and Woodward: Clinton's Foreclosure Proposal Looks Too Good To Be True: "Promising The American People That You Can Fix Things By Just Lowering Their Interest Rates Is Dishonest, A Fairy Tale That Wont' Come True." "Senator Clinton's foreclosure proposal might appeal to homeowners with adjustable rate mortgages scheduled for a rate increase. But, as with most offers that look too good to be true, this one comes with many problems. The first is its enormous scope. The plan is essentially to repudiate, revoke, or compel the revision of millions of contracts. There are approximately eleven million mortgages in America with adjustable rates, with a total value of more than $2 trillion dollars--a lot of money, even by Washington standards. Even restricting the plan to the 3.4 million subprime ARM loans (roughly $700 billion) would require an intervention of massive scale. An even more serious problem with Hillary's proposal is the nature of the solution it proposes. When someone takes out a loan with a low, so-called 'teaser rate' that is scheduled to increase in a couple years, the investors who put up the money for that loan are counting on at least some of the borrowers to hold on to their mortgage long enough to start paying the higher rates. Without the promise of this increase, the initial rate would have had to be much higher. As economists like to say, there is no such thing as a free lunch...Senator Clinton's policy amounts to a command-and-control approach to economic policy in which the government announces prices and tells suppliers what to produce. Undertaking such an intervention can only raise interest rates on mortgages (and maybe other interest rates as well) as markets attempt to incorporate risk premiums to cope with possible future interventions. Promising the American people that you can fix things by just lowering their interest rates is dishonest, a fairy tale that won't come true." [Richard Thaler/Susan Woodward, TNR, 2/4/08]

SCRIPT: Now gas prices are skyrocketing and she's ready to act again. Hillary's plan: use the windfall profits of the oil companies to pay to suspend the gas tax this summer. Barack Obama says no... again. People are hurting. It's time for a president who's ready to take action now. Barack Obama says no to suspending the gas tax

CLINTON SAYS SHE WILL USE THE WINDFALL PROFITS TAX TO PAY FOR SUSPENDING THE GAS TAX

...But She's Already Spent That Money on "A Clean Energy Future." "Hillary believes it is time for oil companies to do their share in funding clean energy technologies. She will give oil companies a choice: invest more in clean energy technology or pay a portion out of their windfall profits into a Strategic Energy Fund. The Strategic Energy Fund will also eliminate oil company tax breaks and make sure that oil companies pay their fair share in royalties when drilling on public lands. This fund will jumpstart a clean energy future by injecting $50 billion over ten years into research, development and deployment of renewable energy, energy efficiency, clean coal technology, ethanol and other homegrown biofuels." [Clinton Plan for Energy Security, 4/6/08]

PUNDITS AND ECONOMISTS AGREE THAT GAS TAX HOLIDAY IS POLITICAL PANDERING

Oregonian Editorial: Clinton and McCain are Pandering on the Gas Tax, "We Agree With Obama on This Issue. He Calls it a Short-Term Fix." An Oregonian editorial wrote, "The two presidential contenders can't resist the chance to pander to voters and, as a bonus, paint Sen. Barack Obama as an elitist....This is an election-year sop, not a plan for the future....We agree with Obama on this issue. He calls it a short-term fix that benefits oil companies rather than consumers, and says it creates the illusion of leadership without actual change. But we also expect more from McCain, an independent thinker who rarely resorts to such political gimmicks. Most of all, voters deserve better. They deserve candidates who will concede that the federal gas tax hasn't budged for 15 years -- and that the nation's roads, bridges and railways are suffering as a result. They need candidates who will look beyond the nation's borders and address the falling dollar and the global demand for oil, two factors that are far more powerful than an 18-cent tax. In other words, voters need candidates who will acknowledge what's at stake after the next election -- and the next summer vacation. [Oregonian Editorial, 4/29/08]

Washington Post Fact Checker: Temporary Illinois Gas Tax Holiday Showed that Economic Benefit Was Minimal and the Majority of Consumers Didn't Feel They Were Paying Less. "The gas tax moratorium proved politically popular in Illinois, but economically questionable. The Illinois Economic and Fiscal Commission estimated that the state lost $175 million in revenues during the six-month period. A subsequent study by the National Bureau of Economic Research showed that gas prices fell by 3 percent, meaning that only three fifths of the savings from reduced taxes was passed on to consumers. "It turned out to have a pretty small effect," said Joseph Doyle, an assistant economics professor at the Massachusetts Institute of Technology. "Consumers were slightly better off, but the benefits were spread very thinly, and the government was a lot worse off." A poll by the Chicago Tribune showed that only 28 percent of motorists believed that they were actually paying less for gas as a result of the temporary suspension of the tax. Obama has changed his mind dramatically on the tax cut since voting for it back in 2000 in Illinois. On the campaign trail Monday in North Carolina, he described the proposal as a "short-term quick fix that we can say we did something even though we're not really doing anything." [Washington Post Fact Checker, 4/29/08]

Economists Agree: Most Savings from Gas Tax Holiday Are Passed on to Producers, Not Consumers. "James Hamilton, professor of Economics at the University of California-San Diego, said that most of the benefits from a temporary tax moratorium would likely go to producers rather than consumers. He said that states that suspend gas taxes are able to respond to rising demand more efficiently than the country as a whole, because gasoline supplies can be easily moved from one state to another. "Prices would certainly rise to the market-clearing level," said Hamilton. "I would expect the price [of gas] to go back to very close to where it was before [the tax cut], in which case consumers would not see any benefit." Another economist, Jeffrey Perloff, of UC-Berkeley, agreed that a federal tax moratorium would likely have less impact on consumer gas prices than a state moratorium. He said his models showed that a suspension of the 18.4-cent federal tax on gasoline would likely result in a temporary 9 to 12 cent reduction in the cost of a gallon of gas to the consumer, with the remainder of the reduction coming in wholesale prices." [Washington Post Fact Checker, 4/29/08]

Economist Gelbach: "The Price Paid by Consumers Would Change Relatively Little, If at All." Economist Jonah Gelbach wrote, "one point that has gone largely unreported in the regular media is that a brief gas tax holiday would likely do little to reduce prices for consumers simply because in the short run the supply of gasoline is relatively fixed (in econese, the short run supply curve is close to vertical). As a result, a cut in the gas tax of brief duration will simply cause the pre-tax price of gas to rise. This would mean that the price paid by consumers would change relatively little, if at all (tho James Hamilton's post, linked below, suggests the consumer price might fall by as much as half the gas tax, which I think would be about 9 cents). Instead, the price received by oil companies would simply rise, providing them with windfall profits." [Gelbach blog, 4/21/08]

OBAMA OPPOSES A FEDERAL GAS TAX HOLIDAY BECAUSE HE DEALT WITH ONE AS A STATE LEGISLATOR AND SAW THAT SAVINGS WERE NOT PASSED ON TO THE CONSUMER

Today: Obama Said A Gas Tax Holiday Is Not An Idea To Get You Through The Summer But Designed To Get Clinton And McCain Through An Election. "Now, the two Washington candidates in the race have been attacking me lately because I don't support their idea of a gas tax holiday. This is an idea that, when all is said and done, will save you – at most – half a tank of gas over the course of the entire summer. That's about $28. It's an idea that some economists think might actually raise gas prices. And without a plan to pay for it right away, it means that the money would come directly out of the fund we use to pay for construction projects, which could cost the state of North Carolina up to 7,000 jobs. This is the problem with Washington. We are facing a situation where oil prices could hit $200 a barrel. Oil companies like Shell and BP just reported record profits for the quarter. And we're arguing over a gimmick that would save you half a tank of gas over the course of the entire summer so that everyone in Washington can pat themselves on the back and say that they did something. Well let me tell you – this isn't an idea designed to get you through the summer, it's designed to get them through an election. The easiest thing in the world for a politician to do is to tell you exactly what you want to hear. But if we want to finally solve the challenges we're facing right now, we need to tell the American people what they need to hear. We need to tell the truth." [Time, 4/29/08]

Federal Government Levies A Tax Of 18.4 Cents Per Gallon Domestic Gasoline Sales. Excise taxes on highway fuels have been a dedicated source of funding for the Federal Highway Trust Fund since its creation in 1956. The Federal Government levies a tax of 18.4 cents per gallon on domestic gasoline sales and 24.4 cents per gallon on diesel fuel. The tax levels were last adjusted in 2003. Since 1932, when the first Federal excise tax on gasoline was imposed, it has been adjusted by Congress almost 20 times. Because the statutes do not specify that the Federal excise taxes on highway fuels will be adjusted for inflation, and because they have not been adjusted at regular intervals in the past, they are assumed to remain at current levels in nominal terms through 2030. This assumption can, however, result in seemingly inconsistent results [eia.doe.gov, accessed 4/23/08]

Obama Voted For A Gas Tax Holiday Which Required That Gas Retailers Had To Indicate That Retailers Post On The Pump That "The Price On This Pump Should Reflect The Elimination Of The Tax," Which Obama Specifically Called Attention To In The Press. Obama voted in favor of amending the Use Tax Act, the Service Use Tax Act, the Service Occupation Tax Act, and the Retailers' Occupation Tax Act. The bill provided that beginning October 1, 2000, the tax imposed by the Acts on the sale of motor fuel and gasohol shall be reduced to 1.25% from the rate of 6.25%. The bill provided for the reversion of the rate to 6.25% if a certain tax revenue growth is not attained. Within 14 days after the effective date of this amendatory Act of the 91st General Assembly, each retailer of motor fuel and gasohol shall cause the following notice to be posted in a prominently visible place on each retail dispensing device that is used to dispense motor fuel or gasohol in the State of Illinois: ‘As of July 1, 2000, the State of Illinois has eliminated the State's share of sales tax on motor fuel and gasohol through December 31, 2000. The price on this pump should reflect the elimination of the tax.' The notice shall be printed in bold print on a sign that is no smaller than 4 inches by 8 inches. The sign shall be clearly visible to customers. Any retailer who fails to post or maintain a required sign through December 31, 2000 is guilty of a petty offense for which the fine shall be $500 per day per each retail premises where a violation occurs. Chicago Defender reported, "Obama (D-13th) said the bill gives customers needed temporary relief from high gas prices. ‘Gas retailers must post on each pump a statement that indicates that the state tax has been suspended and that this temporary elimination of the tax should be reflected in the price per gallon of gas,' said Obama." [91st GA, SB 1310, 3/8/00, 3R P; 50-0-6 (BO: Y); PA 91-0872, 6/29/00; Chicago Defender, 7/1/2000]

Obama Voted Against Permanently Eliminating Illinois' Gas Tax, Saying That The Temporary Elimination Of The Tax Had "Not Been Passed Onto The Consumer." In 2000, Obama voted against a bill to make permanent the elimination of the State's portion of the tax on motor fuel and gasohol (now, the tax reverts to 6.25% on January 1, 2001). Obama said on the floor that there was an organization called "the Illinois Tax Accountability Project, that is in the process of trying to track the gap between wholesale prices and prices at the pump during the period since we took this – we removed this tax, and what they have found so far –and the study is not yet complete, but apparently it appears that any decline in prices at the pump have been perfectly matched by declines at the wholesale level...That would indicate, at least at this point, that the elimination of the tax has not been passed on to the consumer." [91st GA, SB 1867, 11/15/00, 3R P; 46-12-0; Session Sine Die, 1/9/01]

Ø 2001: The Hill Noted Illinois' Experiment With Gas Tax Repeal Had Failed In Article About Calls For Gas Tax Cut. "Even though Dick Morris overlooks the fact that a bipartisan Senate voted against cutting the federal gas tax three times in 2000 ("Gas tax is the real tax cut issue," May 23), here are 10 good reasons why cutting the gas tax remains a bad idea this year: 1. The federal gas tax, unchanged since 1993, has nothing to do with the increase in gasoline prices in 2001; 2. The federal government cannot guarantee that gas prices would drop at the pump with a tax suspension. Temporary state gasoline sales tax repeals in Illinois and Indiana last summer offered little relief for motorists. The average price of gasoline in both states continued to increase during the period the tax cuts were in place - about 20 cents per gallon; 3. If the savings were passed on to motorists, what happens when the suspension is lifted? Americans would experience, in one day, the largest spike in the price of gasoline - 18.4 cents per gallon - in U.S. history. Think of the outrage that would cause; 4. Suspending the federal gas tax places billions of dollars in future funding for state highway and mass transit programs at risk. Uncertainty about the federal government's financial commitment will disrupt state programs, jeopardizing several hundred thousand American jobs." [The Hill, 5/30/01]