Tuesday, June 24, 2008

A comment I [tried to make] over at Economist's view which is ironic given the post that will be above.

Krugman argues that increasing home ownership should not be a goal of public policy

Brad DeLong plays devils real estate agent's advocate

You can make a political-economy argument that local communities work best on a political level when a majority of the voters have a big equity financial stake in the health of the community via homeownership (as opposed to renting), and an economic-myopia argument that encouraging homeownership is one of the few tools we have to push personal savings up toward what they should be. But you have to make those arguments: you can't just assume that widespread homeownership is a very good thing.

Winslow R. comments up thread (don't even ask how the thread got to the topic)

I'm in favor of opening up the whole government grant making process to real competition. How about a $300 million prize for an economic model that matches reality?

I comment on Winslow R and don't buy Brad's second argument. In passing, the first is ancient and important and basically valid although one way that homeowners invest in the quality of the community is by keeping undesirables out and well NIMBY. A country of small communities which care only about their self interest, is not always better than one of rootless cosmopolite renters.

Winslow you are way too stingy. Given the amount of effort that would be needed to make an economic model which matches reality $ 300 million is chump change. Think like curing cancer or maybe flying to Mars. We are waaaay more than $300 million of effort from a realistic economic model. And that is assuming that it is even possible. Now if you offer me $ 300 billion, I might try but if you are only offering $ 300 million I'll stick to fun models which might clarify thought but don't fit reality.

Brad DeLong suggesting opening a debate on possible positive externalities of home ownership. The argument that homeownership causes increased savings which is good because people are myopic really depends on how easy easy financing is. In most countries, the minimum down payments on houses allowed by banks are a significant fraction of the price of the house (50% minimum is not unheard of). In those countries, promotion of home ownership would be promotion of saving.

However, if there are no money down loans available, then encouraging home ownership might shift consumption to consumption of housing services (if people buy bigger houses) and shift national accounts from consumption of durable goods to housing investment, but it could easily reduce the amount of money available for investment in productive capital.

Negative amortization loans and home equity loans have made it possible for people in the US to consume more than they could have consumed if they rented.

It is true that owners make consumption savings decisions facing the HELOC interest rate not the T-bill interest rate (higher rate as they are borrowing not investing). The evidence tends to suggest that interest rates have no noticeable effect on consumption savings decisions in the real world (shocking yes but that's the evidence). Now this is consistent with a substantial effect (for one thing it is basically impossible to isolate the substitution effect (the one that matters for the discussion) from the income effect. However, the effect can't be a game changer . Yes, if true, this would mean that not only supply side economics but also a lot of perfectly respected fresh water economics is hokey. So what else is new.

My honest guess is that the housing interest deduction causes less investment in productive capital than a similarly sized cut in income tax. Eliminating the mortgage interest deduction without any other changes would imply a huge increase in investment in plant and equipment (ignoring the huge recession from a sudden drop in consumption including consumption of housing services).


Mark Thoma said...

For some reason, this comment didn't appear.


Anonymous said...

any changes coming ?