Dumbest Act of Congress - Contestant #1 - 1997 Capital Gains - housing

In 1991 Republicans began introducing bills to make major changes in the Capital Gains tax.   They argued it would stimulate the economy.  In 1994 changes in the Capital Gains tax became part of their "contract with America".  In 1997, after years of battling they pushed the notion through Congress.


Before 1997 if you sold your house you could take all the proceeds and buy another house and not be subject to any Capital gains tax.  Then once in your life, after you were age 55, you could sell your house and buy a smaller, cheaper house and keep a specified amount of the extra money you made on the sale without paying any capital gains taxes.


The old scheme was economically brilliant.  It allowed flexibility to workers to change jobs, even if it meant moving across the country, so helped maintain a mobile work force.  And the one time exception after age 55 allowed people to use their homes as a nest egg, downsizing as they got older and pulling out a tax free nest egg for retirement.  


Congress threw out this law that had worked wonderfully for decades, and provided all sales of houses would be subject to Capital Gains taxes, but provided an exemption so a big part of the proceeds would always be tax free.  The door was opened to the speculators.     


House prices immediately started rising and for the next 9 years speculation on houses was rampant.  Numerous TV shows became very popular teaching people how to buy a house, fix it up a bit, then "flip" it for big profits.  House prices blew up to extraordinary levels.  Banks could make so much money trading, or packaging mortgages they lost touch with reality and rubber stamped purchases by people without the income or resources to pay for the house.  The bubble burst 10 years after the 1997 law and took down the rest of the economy with it.


Congress dumped a law that had served for decades to encourage stability, provide homeowners with the ability to be mobile, and have a nest egg when they retire and replaced it with a law that turned the housing market into a speculators casino.  

Musing on the battle of the 20th Century - Adam Smith v. Karl Marx

The twentieth century has lately been characterized as a battle between the free market capitalists who cite Adam Smith as their philosophical guru, and the socialist/communist devotee's who cite Karl Marx as their philosophical source.

The problem with both schools of thought is that neither is always the right approach or the wrong approach, both views represent tools in the toolbox of human nature, and both have their strengths and weaknesses.

In 1990 the capitalist's declared victory when the Soviet Union collapsed.  They believed the collectivist views of Marx were shown to be false by the economic weakness of communist regimes that caused many to implode and others to limp along while they gradually adopted a more free market approach.  They saw a future of permanent prosperity driven solely by the self interest of individuals striving to improve their lot, and in Britain and the United States, the flag bearers for western capitalism, collectivist notions that regulated the untrammeled freedom of the capitalist's to pursue their objectives were rejected. 

Twenty years later that triumphalism is gone.  The United States and Great Britain, the two most dedicated western capitalists nations, and the rest of the western world that followed their lead on the road toward more unfettered Capitalism, limp along with huge debts after a pretty predictable selfish and delusional boom led to a massive financial crash.  They now look with some fear at collectivist states like Vietnam or China who are grafting free market capitalism onto their collectivist state and experiencing the boom associated with the unfettered early stages of free market capitalism.

So now China is experiencing a bit of the triumphalism.  But Russia in the 1950's through 1970's was perceived to be a rising power, much as China is now.  Sooner or later China's form of grafted free market capitalism will stumble and their government will either have to crush all freedoms, or relinquish their ultimate control to democracy. 

In truth the great clash of the 20th century was always simply the newest incarnation of the struggle that has existed throughout human history between selfish interests and collectivist instincts.  Some of us are inclined by personality and/or upbringing to be more selfish, building our lives with little thought to its impact on others.  Others among us are by personality and/or upbringing prone to lean toward team building, to joint cooperative effort, to seeking paths that work for everyone.   

Capitalists sometimes speak of capitalism and democracy as one is the same.  Democracy is not a capitalist notion, it is a mechanism to allow all people to live the life they are comfortable with.  The Arab spring is not seeking to turn the middle east into a capitalist state, it is simply reacting to decades of selfish and ruthless people being allowed to dictate law to their own personal benefit. 

Perhaps the Arab spring is a harbinger of a 21st century where the self-interested finally lose control all over the world, and the self interested and the collectivists negotiate an accommodation that allows all people to follow their instincts and live the life they are comfortable with without doing so at the expense of others.