Biden’s Messed-Up Housing Gambit

Perverse housing subsidies from two corrupt government-created entities, Fannie Mae and Freddie Mac, played a huge role in causing the 2008 financial meltdown.

Yes, bad monetary policy from the Federal Reserve provided the fuel, but Fannie Mae and Freddie Mac ensured that munch of the excess liquidity would flow into the housing sector.

The ideal response would have been to get rid of Fannie Mae and Freddie Mac, but politicians very rarely do the right thing.

So we got bailouts (Bush’s awful TARP scheme), which was bad enough, but every subsequent president has tried to make a bad situation worse.

Obama tried to expand intervention in the housing sector. Then Trump tried to expand intervention in the housing sector. And now Biden is trying to do the same thing.

The Wall Street Journal opined on a crazy proposal from Biden’s team a few days ago. Here are some excerpts.

Income redistribution is an abiding value of the Biden Administration, and now it wants to spread that to mortgage lending. A new rule will raise mortgage fees for borrowers with good credit to subsidize higher-risk borrowers. Under the rule, which goes into effect May 1, home buyers with a good credit score over 680 will pay about $40 more each month on a $400,000 loan, and upward depending on the size of the loan. Those who make down payments of 20% on their homes will pay the highest fees. Those payments will then be used to subsidize higher-risk borrowers through lower fees. This is the socialization of risk, and it flies against every rational economic model, while encouraging housing market dysfunction and putting taxpayers at risk for higher default rates. …selling people houses they can’t afford has never been a good idea. See the subprime loan collapse of 2008. …the Federal Housing Administration…want[s] to punish those who have maintained good credit while rewarding those who haven’t.

The editors of National Review are similarly disgusted by the Biden Administration’s scheme.

Here are parts of their editorial.

The federal government props up the housing market in too many ways to count. The U.S. is unique among rich countries in having the national government insure mortgages, guarantee mortgage securities, and finance mortgages with government-sponsored enterprises. …When government isn’t getting the results it wanted with all of its previous involvement, it tries a little more intervention to “fix” its previous interventions. To help out homebuyers with poor credit scores, the Federal Housing Finance Agency has decided that homebuyers with good credit scores will pay a little more for their mortgages. …FHFA director Sandra Thompson said the new rules…would “increase pricing support for purchase borrowers limited by income or by wealth.” But income and wealth are and should be limiting factors in lending. It’s not good for borrowers to take on loans that may prove beyond their means to pay back. …this policy reduces the incentive to be responsible…and…has the added twist of penalizing people with high credit scores. …That’s one way to get more poor decisions and fewer good ones.

For all intents and purposes, the Biden Administration wants more redistribution.

That’s not a good idea.

But it’s an especially dumb idea when the additional redistribution is spiced with moral hazard.

P.S. Some of my left-wing friends say the 2008 crisis was caused by “Wall Street greed.” I respond by asking them whether there was greed on Wall Street in the 1980s and 1990s, or at other times. They usually have to admit that greed is always present, so I then tell them greed only becomes a big problem when mixed with upside-down government policies.

P.P.S. We should get rid of Fannie Mae and Freddie Mac and every other version of government intervention in the housing sector. Including the entire Department of Housing and Urban Development.

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Rent Control Lunacy

There are some issues – such as class-warfare tax rates and the minimum wage – where intelligent people on the left will privately admit being wrong (or at least they will admit adverse consequences).

Another example is rent control.

Indeed, it’s so obvious that imposing price controls on housing will create shortages that some folks on the left even admit publicly that it’s a bad idea.

Yet leftist politicians are drawn to the policy for the simple reason that renters outnumber landlords.

Simply stated, they’re willing to impose considerable damage so long as they can grab a few extra votes.

Let’s look at some evidence about the folly of rent control, and we’ll start with a hot-off-the-presses column by Ryan Mills for National Review.

Democratic leaders in Minnesota’s capital city are scrambling for solutions after developers put several large projects on hold across St. Paul in the wake of last week’s election, when residents approved what may be the strictest rent-control policy in the country. …left-wing activists on the eastern bank of the Mississippi River succeeded in their effort to cap rent increases at 3 percent annually, including on new construction, a step most communities that have imposed rent-control policies have specifically avoided out of concern that it would discourage future investments. The St. Paul initiative passed last week with 53 percent support. …Large developers who spoke to the Minneapolis Star Tribune and the St. Paul Pioneer Press told reporters that they’re pausing their projects across the city, and they are “re-evaluating what – if any – future business we’ll be doing in St. Paul.” Lenders are pulling out of new projects, they say, worried about the impact of the new policy. …dozens of buildings…have had 2022 rehabilitation projects stopped.

Wow. Sounds like St. Paul wants to supplant Minneapolis as the worst-governed city in the state.

Speaking of poorly governed cities, Christian Britschgi of Reason wrote early last year about what’s happening with rent control in New York City.

When the New York legislature passed major changes to the state’s rent regulations in June 2019, critics warned the new law would reduce investment in, and renovations of, rental properties in New York City. …those predictions are bearing out. …sales of apartment buildings in the Big Apple fell by 36 percent in 2019, and…the money spent on those sales fell by 40 percent. The prices investors were paying for rent-stabilized units—where allowable rent increases are set by the government and usually capped at around 1 or 2 percent per year—fell by 7 percent. …69 percent of building owners have cut their spending on apartment upgrades by more than 75 percent since the passage of the state’s rent regulations. Another 11 percent of the landlords in the survey decreased investments in their properties by more than 50 percent.

Some European cities also have adopted price controls on housing.

In a column for the Foundation for Economic Education, Jon Miltimore explains the damage this approach has caused in Stockholm.

Stockholm is just one of many Swedish cities struggling with a housing shortage. It’s not just that prices are too high; wait times for flats are also stunningly long. In Stockholm, for example, the average waiting time for a typical property is about nine years…, but wait-time in Stockholm’s most attractive neighbourhoods can run double that. …For younger Swedes in particular, the housing situation is a real problem—and it stems from Sweden’s decades-long embrace of rent control policies, which stretch back to World War II. …the results of Sweden’s rent control policies were quite predictable. The reality is price controls and other government regulations can’t fix housing problems.

The mess in Stockholm has even attracted attention from the BBC, as illustrated by the excerpt in this tweet.

Oh wow Sweden somehow made rent control work!

LOL JK it's the same disaster it's always been: https://t.co/MSyTFIkoTX pic.twitter.com/pCRpSJvnK1

— Scott Lincicome (@scottlincicome) August 29, 2021

Jon Miltimore also wrote about disastrous impact of rent control in Berlin.

In February 2020, Berlin introduced the so-called Mietendeckel—a cap on rent—to keep Berlin from becoming the next London or New York, cities where pricey rents have driven out many lower- and middle-class residents. The rent caps didn’t apply to everyone, however. They applied to properties built prior to 2014, freezing rent at June 18, 2019 levels. …Well, a year later, and the results of Berlin’s experiment are in. …Housing supply has shrunk and many landlords have reportedly exited the market, making the shortage much worse. …The lesson? Rent control has effects on housing supply, and those effects are not good.

And it you want more bad news from Germany, Berlin voters just approved a scheme to confiscate some apartments.

Here’s the story from the EU Observer.

Berliners voted in favour of expropriating apartments owned by big real-estate companies, with 56 percent of voters in the German capital saying ‘yes’ in the non-binding referendum at this weekend, the Financial Times reported on Monday. Now Berlin’s new municipal government has to decide how to proceed, since the expropriation of housing units could be legally challenged as against the German constitution.

I don’t know the outcome (if any) of the court challenge, but I do know that rent control is horrible policy.

And other economists agree.

P.S. Price controls are also bad news for pharmaceutical products and emergency supplies.

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Michael Bloomberg, Housing Finance, Race, and the 2008 Crisis

I have Republican friends who don’t trust Michael Bloomberg because he switched parties and Democratic friends who don’t trust him for the same reason. I tell all of them that it’s more important to focus on his policy agenda rather than his partisan identification.

Though that’s not a happy topic, at least from a libertarian perspective. For instance, I recently criticized his very bad tax plan.

And when he was mayor, I dinged him for his regressive views on the 2nd Amendment and his nanny-state approach to lifestyle choices.

Today, let’s consider his view on housing finance, which has generated controversy since video has surfaced with Bloomberg stating that the financial system got in trouble because anti-redlining policies required banks to make loans to customers in poor neighborhoods.

Other candidates, such as Elizabeth Warren, argue that this makes Bloomberg a supporter of racist practices (with the obvious implication that he might actually be a racist).

I’m reluctant to make such accusations, especially when I tracked down this longer version of the video and discovered that Bloomberg merely listed a bunch of policies that contributed to the housing bubble and financial crisis.

Redlining was the first thing he mentioned, but he also cites the Federal Reserve (dispenser of easy money) and Fannie Mae and Freddie Mac (dispensers of housing subsidies).

In the latter part of his answer, he focused on “securitization,” which is what happens when mortgages are bundled together and sold to investors (as “mortgage-backed securities”).

Much of what he says isn’t controversial.

But I want to point out a sin of omission.

Bloomberg mentioned Fannie Mae and Freddie Mac, but only in passing. This is troubling because these two government-created entities, as explained in this video, deserve much of the blame for both the bubble and the subsequent crisis.

Yes, the Federal Reserve also deserves criticism for flooding the economy with too much liquidity.

But it was the government’s housing intervention, specifically Fannie Mae and Freddie Mac, that channeled much of that excess liquidity into the housing market.

Simply stated, financial institutions were willing to make sloppy loans because they knew those mortgages could be bundled into securities and sold to Fannie Mae and Freddie Mac.

Though many banks were steered into also investing in mortgage-backed securities thanks to other misguided government regulations.

P.S. The wise approach, needless to say, is to shut down Fannie Mae and Freddie Mac as part of an agenda to end government intervention in the housing sector.

P.P.S. Obama was bad on this issue and Trump is bad on this issue, so I won’t be surprised if Bloomberg also is bad on this issue if he gets to the White House.

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How Government Intervention Makes Housing More Expensive

Just as the sun rises in the east and sets in the west, there are some consistent patterns with government.

Politicians, for instance, will enact a policy that distorts the economy and causes damage (with regards to trade, bailouts, guns, health, whatever). And they’ll then point to the damage and assert that even more intervention is needed.

I call this Mitchell’s Law, though I certainly don’t claim to be the first to observe this distressing tendency.

Today, we’re going to examine a classic example of this phenomenon by looking at how politicians are distorting the housing market with supply restrictions that produce higher costs, and then compounding their mistake with subsidies and price controls.

Edward Pinto of the American Enterprise Institute offers some economic analysis.

Recently there has been a flurry of legislative proposals to add yet more housing subsidies to the housing sector, already one of the most heavily subsidized. …These are the most recent in a long history of ill-conceived policies that increase housing demand but do nothing about supply. The result: higher home prices and rents, particularly for low-income and minority households, the very ones these initiatives profess to help. …layers of subsidies combined with federal, state, and local regulations act to drive up costs while simultaneously constraining supply. …For example, Los Angeles has a median home price that is 8.8 times median income, up from 4.2 times in 1979. And median rent in LA is 49% of the median income, up from 32% in 1979. These results are largely driven by (i) easy access to credit which drive demand and prices ever higher, (ii) local land use restrictions and regulations that constrain new supply and drive building costs higher, and (iii) housing subsidies that make it even more difficult for market rate housing to compete. …Market-based solutions are the only way to bring home prices and rents back in line with median incomes and improve accessibility.

While there are plenty of bad housing policies in Washington (Fannie Mae and Freddie Mac, Department of Housing and Urban Development, mortgage-interest deduction, etc), much of the problem is caused by state and local governments.

Kevin Williamson of National Review cites a regulation in Dallas to show that government intervention causes problems.

…smaller secondary residences built on the lots of other houses..have long been a go-to source of cheap housing in college towns and other places with substantial itinerant populations of temporarily penniless young people. …Dallas…prohibited the building and rental of these residences in the 1970s on the theory that this would help to improve the living conditions on the south side of town… To the great surprise of nobody except politicians and their creatures, prohibiting the construction and rental of affordable housing did not do much to help poor people in Dallas connect with affordable housing. …The politicians have decided that there is an affordable-housing crisis in America. They should know: They created it. …Why? Because people who own homes have more political power than people who might want to buy one at some point in the future.

The Wall Street Journal opined today about the inane anti-housing policies in the Beaver State.

Politicians bemoan the lack of affordable housing, but their policies often create the problem. Look no further than Oregon… Oregon’s population grew by nearly 400,000 between 2010 and 2019. But the state added a mere 37 housing permits for every 100 new residents… Oregon’s land-use rules have been dysfunctional for decades. …strict limits on urban expansion…urban growth boundaries… Rising housing prices are the inevitable result of this government-imposed scarcity. …Portland has enforced an “inclusionary zoning” requirement on new residential buildings with 20 or more units. The city now compels many landlords to rent up to a fifth of new units at below-market rates. …Permits for 20-plus-unit residential buildings plummeted 64% in 25 months after inclusionary zoning took effect, while applications to build smaller multi-family structures spiked… The rest of Oregon is following Portland’s bad example with more price controls. Last year it became the first state to impose universal rent control.

To show the impact of regulatory restrictions, the invaluable Mark Perry of the American Enterprise Institute has a must-read comparison of Los Angeles with two Texas cities.

Adjusting for population, there are about 600 homeless people per 1 million population in Houston and Dallas, but nearly five times as many in LA at 2,707. The comparisons…highlight the simple economic logic that if you restrict the supply of new housing units (especially multifamily homes, duplexes, and large apartment buildings) in states like California with onerous building, land use, and zoning regulations, those restrictions are guaranteed to result in higher housing costs, higher apartment rents, and ultimately a greater homeless population. …The increasing rents, escalating home prices, and growing homelessness problem in California cities like LA are a direct result of local and state restrictions that artificially constrict the supply of new housing units. The solution is therefore simple, but politically unpopular and probably not politically feasible: California should increase its supply of housing by reducing its onerous restrictions on building new housing units.

Here’s his accompanying table. Notice how Dallas and Houston are much more affordable than Los Angeles.

And there’s less homelessness as well, in large part because housing is cheaper.

Kevin Williamson wrote in National Review about the anti-housing policies of New York’s governor.

Some of the inflated expenses associated with life in New York can be avoided… But you have to live somewhere. As in the Bay Area, Washington, and other Democrat-dominated cities, housing is the real killer in New York City and environs. …Like most U.S. cities advertising themselves as “progressive,” New York has a lot of political leaders who talk about affordable housing and a lot of political policies that keep affordable housing — and many other kinds of housing — from being built. This is not accidental: People who already own property typically have a lot more political influence than people in the first-time home-buyer market. …At the behest of moneyed environmental interests, Cuomo has stood athwart the building of practically any new conventional energy infrastructure, including pipelines for clean-burning natural gas. …Much of New York’s gas comes from Pennsylvania and West Virginia, but there isn’t enough carrying capacity to get it to New York. And New York has plenty of gas of its own, too, but New Yorkers can’t use it — thanks again to Cuomo, who has banned modern gas-extraction techniques in the state, again at the behest of the anti-energy ideologues who enjoy an outsized financial footprint in the Democratic party.

In addition to zoning laws and other land-use restrictions, the government also makes construction more expensive, as explained in a report in the Wall Street Journal.

The average cost for home builders to comply with regulations for new home construction has increased by nearly 30% over the last five years, according to new research from the National Association of Home Builders. Regulatory costs such as local impact fees, storm-water discharge permits and new construction codes, which have risen at roughly the same rate as the average price for new homes, make it increasingly difficult for builders to pursue affordable single-family construction projects… The cost of regulation imposed during the land development and construction process on average represented $84,671 of the cost of the average new single-family home in March. That is up from $65,224 in 2011, the last time the home-building industry group conducted a similar survey on regulatory costs. …A study this week from housing research firm Zelman & Associates found that local infrastructure “impact fees” have increased by 45% on average since 2005 in 37 key home building markets across the country, to about $21,000 per home.

Here’s a sobering graphic from the article.

All this regulation is bad for macroeconomic performance.

A recent study by two economists finds that land-use restrictions result in substantial misallocation of labor, causing a non-trivial reduction in economic output and family income.

The increase in spatial wage dispersion is driven at least in part by cities like New York, San Francisco, and San Jose, which…adopted land use restrictions that significantly constrained the amount of new housing that can be built. As described by Glaeser (2014), since the 1960s coastal US cities have gone through a property rights revolution that has significantly reduced the elasticity of housing supply… Instead of increasing local employment, productivity growth in housing-constrained cities primarily pushes up housing prices and nominal wages. The resulting misallocation of workers lowers aggregate output and welfare of workers in all US cities. This paper measures the aggregate productivity costs of local housing constraints… We use data from 220 metropolitan areas in the United States from 1964 to 2009… we calculate that increasing housing supply in New York, San Jose, and San Francisco by relaxing land use restrictions to the level of the median US city would increase the growth rate of aggregate output by 36.3 percent. In this scenario, US GDP in 2009 would be 3.7 percent higher, which translates into an additional $3,685 in average annual earnings. …We conclude that local land use regulations that restrict housing supply in dynamic labor markets have important externalities on the rest of the country. Incumbent homeowners in high productivity cities have a private incentive to restrict housing supply. …this lowers income and welfare of all US workers.

So how can this problem be fixed?

In a column for the Foundation for Economic Education, Cathy Reisenwitz explains that state and local politicians need to remove barriers.

America is in the middle of a housing crisis. The cause is simple: we’re not building housing fast enough to keep up with jobs. While the number of U.S. households grew by 11.2 million between 2005 and 2015, we only added about 9.9 million new housing units. …this isn’t a problem Washington can fix. That’s because this problem, and its solution, lies in cities and towns across the country. …Cities across the country make it impossible to build enough housing to meet demand by blocking, restricting, and delaying housing developments. …Even in areas where you can technically build multi-unit homes, other land-use restrictions make it all-but-impossible. These exclusionary land use practices include height restrictions, setback requirements, parking minimums, community review, aesthetic considerations, and minimum lot sizes. …A recent statistical analysis…showed that in 44 out of 50 states, the more land-use regulations on the books, the more homes cost. Reducing land use regulations is the right move for getting Americans out of poverty and into work.

Let’s close with some good news.

Salim Furth has a new article for City Journal, and he argues that all the evidence is actually changing minds and leading to some deregulation.

Last year, Democratic- and Republican-led states and municipalities passed legislation addressing housing affordability, a hopeful sign that housing deregulation is beginning to attract bipartisan support… Encouragingly, Arkansas and Texas have squelched such requirements through bipartisan state legislation. Arkansas has restored autonomy to homeowners on virtually all building-design choices, from color to roof pitch, while Texas has purged local restrictions on building materials. …North Carolina and Texas…passed legislation requires cities and counties to issue project approvals within a few weeks. In Texas, a developer can now move forward with construction if a municipality takes more than 30 days to review a completed application. North Carolina now imposes a 15-business-day limit for building permits involving one- and two-family dwellings. …State legislators will likely continue to address housing-supply restrictions in the years ahead. …The battle over rent control and inclusionary zoning could intensify as well, as it already has in California and Oregon. …policymakers in blue and red states alike should consider how current regulations restrict housing supply and drive up prices.

The bottom line is that housing across the nation will be much more affordable if state and local governments let markets operate.

Here’s a map showing estimates of land-use restrictions in major metropolitan areas. The goal for the nation should be more green and less red.

Incidentally, Fairfax, VA, is part of the D.C. area, so that red spot indicates that my home’s value is being subsidized (as are the homes of Washington’s parasite class).

But since I believe in a just society, I hope my part of the map becomes green, even if it means my home becomes less valuable (folks on the left are willing to hurt the poor so long as they also hurt the rich, whereas I’m willing to sacrifice myself so long as unjust favoritism for others also vanishes).

 

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The Trump-Obama Approach on Fannie Mae and Freddie Mac Will Lead to Future Financial Instability

The 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie Mac.

This video is 10 years old, but it does a great job of explaining the damaging role of those two government-created entities.

The financial crisis led to many decisions in Washington, most notably “moral hazard” and the corrupt TARP bailout.

But the silver lining to that dark cloud is that Fannie and Freddie were placed in “conservatorship,” which basically has curtailed their actions over the past 10 years.

Indeed, some people even hoped that the Trump Administration would take advantage of their weakened status to unwind Fannie and Freddie and allow the free market to determine the future of housing finance.

Those hopes have been dashed.

Cronyists in the Treasury Department unveiled a plan earlier this year that will resuscitate Fannie and Freddie and recreate the bad incentives that led to the mess last decade.

This proposal may be even further to the left than proposals from the Obama Administration. And, as Peter Wallison and Edward Pinto of the American Enterprise Institute explained in the Wall Street Journal earlier this year, this won’t end well.

…the president’s Memorandum on Housing Finance Reform…is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending. …Most of the U.S. economy is open to the innovation and competition of the private sector. Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country. …The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Wallison also authored an article that was published this past week by National Review.

He warns again that the Trump Administration is making a grave mistake by choosing government over free enterprise.

Treasury’s plan for releasing Fannie Mae and Freddie Mac from their conservatorships is missing only one thing: a good reason for doing it. The dangers the two companies will create for the U.S. economy will far outweigh whatever benefits Treasury sees. Under the plan, Fannie and Freddie will be fully recapitalized… The Treasury says the purpose of their recapitalization is to protect the taxpayers in the event that the two firms fail again. But that makes little sense. The taxpayers would not have to be protected if the companies were adequately capitalized and operated without government backing. Indeed, it should have been clear by now that government backing for private profit-seeking firms is a clear and present danger to the stability of the U.S. financial system. Government support enables companies to raise virtually unlimited debt while taking financial risks that the market would routinely deny to firms that operate without it. …their government support will allow them to earn significant profits in a different way — by taking on the risks of subprime and other high-cost mortgage loans. That business would make effective use of their government backing and — at least for a while — earn the profits that their shareholders will demand. …This is an open invitation to create another financial crisis. If we learned anything from the 2008 mortgage market collapse, it is that once a government-backed entity begins to accept mortgages with low down payments and high debt-to-income ratios, the entire market begins to shift in that direction. …why is the Treasury proposing this plan? There is no obvious need for a government-backed profit-making firm in today’s housing finance market. FHA could assume the important role of helping low- and moderate-income families buy their first home. …Why this hasn’t already happened in a conservative administration remains an enduring mystery.

I’ll conclude by sharing some academic research that debunks the notion that housing would suffer in the absence of Fannie and Freddie.

A working paper by two economists at the Federal Reserve finds that Fannie and Freddie have not increased homeownership.

The U.S. government guarantees a majority of mortgages, which is often justified as a means to promote homeownership. In this paper, we estimate the effect by using a difference-in-differences design, with detailed property-level data, that exploits changes of the conforming loan limits (CLLs) along county borders. We find a sizable effect of CLLs on government guarantees but no robust effect on homeownership. Thus, government guarantees could be considerably reduced,with very modest effects on the homeownership rate. Our finding is particularly relevant for recent housing finance reform plans that propose to gradually reduce the government’s involvement in the mortgage market by reducing the CLLs.

For those who care about the wonky details, here’s the most relevant set of charts, which led the Fed economists to conclude that, “There appears to be no positive effect of the CLL increases in 2008 and no negative effect of the CLL reductions in 2011.”

And let’s not forget that other academic research has shown that government favoritism for the housing sector harms overall economic growth by diverting capital from business investment.

The bottom line is that Fannie and Freddie are cronyist institutions that hurt the economy and create financial instability, while providing no benefit except to a handful of insiders.

As I suggested many years ago, they should be dumped in the Potomac River. Unfortunately, the Trump Administration is choosing Obama-style interventionism over fairness and free markets.

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Time to Fully Repeal the Tax Deduction for Home Mortgage Interest

In my libertarian fantasies, we dramatically shrink the size of the federal government and return to pre-1913 policy by getting rid of the income tax.

But if I’m forced to be at least vaguely realistic, the second-best option is scrapping the current tax code and replacing it with a simple and fair flat tax based on the “Holy Trinity” of good policy.

• Low marginal tax rates on productive activity such as work and entrepreneurship.
• No tax bias (i.e., extra layers of tax) against saving and investment.
• No preferences and loopholes that encourage inefficient economic choices.

The third-best option (i.e., the best we can hope for in the real world) is to adopt incremental reforms that move the tax code in the right direction.

That happened in 2017. I’ve written many times about why it was a very good idea to reduce the tax rate on corporate income. And I’ve also lauded the 2017 law’s limitation on the state and local tax deduction.

Today, let’s focus on the changes in that law that reduced the tax preference for residential real estate.

The housing lobby (especially builders and realtors) tried to scare lawmakers that any reduction in their privileged tax status would cause a large amount of damage.

Yet, as reported last year by the New York Times, there was no adverse effect in the first year of the new tax law.

It wasn’t supposed to take long for the Trump tax cuts to hobble housing prices… Nearly nine months later, those warnings have not materialized. …Economists see only faint effects from the new law so far in housing data. They’re small, and they’re contained to a few high-priced, highly taxed ZIP codes, largely in blue states. They’re nothing close to the carnage that real estate groups warned about when the law was under debate last fall. …the tax law has unquestionably diminished the value of several federal subsidies for homeowners. It limits deductions for state and local taxes, including property taxes, to $10,000 per household, which hurts owners of expensive homes in high-tax states. It lowers the cap on the mortgage interest deduction, which raises housing prices by allowing homeowners to write off the interest payments from their loans, to $750,000 for new loans, down from $1 million.

To the extent the impact could even be measured, it was a net plus for the economy.

After the law passed, ZIP codes in the Boston area saw a 0.6 percentage point slowdown in home appreciation on the Massachusetts side — and a 0.1 percent acceleration on the New Hampshire side. The effect there is “not huge, it’s small,”… Experts say several forces are helping to counteract the diminished federal home-buying subsidies. …said Kevin Hassett, “…if you’re getting a lot of income growth, the income growth increases the demand for housing, and the mortgage interest deduction reduces it. And the effects offset.”

This chart from the story is particularly persuasive. If anything, it appears housing values rose faster after the law was changed (though presumably due to bad policies such as building restrictions and zoning laws, not just the faster growth caused by a a shift in tax policy).

There’s also no negative effect one year later. A report from today’s New York Times finds that the hysterical predictions of the housing lobby haven’t materialized.

Even though the tax preference was significantly reduced.

The mortgage-interest deduction, a beloved tax break bound tightly to the American dream of homeownership, once seemed politically invincible. Then it nearly vanished in middle-class neighborhoods across the country, and it appears that hardly anyone noticed. …The 2017 law nearly doubled the standard deduction — to $24,000 for a couple filing jointly — on federal income taxes, giving millions of households an incentive to stop claiming itemized deductions. As a result, far fewer families — and, in particular, far fewer middle-class families — are claiming the itemized deduction for mortgage interest. In 2018, about one in five taxpayers claimed the deduction, Internal Revenue Service statistics show. This year, that number fell to less than one in 10. The benefit, as it remains, is largely for high earners, and more limited than it once was: The 2017 law capped the maximum value of new mortgage debt eligible for the deduction at $750,000, down from $1 million.

Once again, the evidence shows good news.

…housing professionals, home buyers and sellers — and detailed statistics about the housing market — show no signs that the drop in the use of the tax break is weighing on prices or activity. …Such reactions challenge a longstanding American political consensus. For decades, the mortgage-interest deduction has been alternately hailed as a linchpin of support for homeownership (by the real estate industry)…. most economists on the left and the right…argued that the mortgage-interest deduction violated every rule of good policymaking. It was regressive, benefiting wealthy families… Studies repeatedly found that the deduction actually reduced ownership rates by helping to inflate home prices, making homes less affordable to first-time buyers. …In the debate over the tax law in 2017, the industry warned that the legislation could cause house prices to fall 10 percent or more in some parts of the country. …Places where a large share of middle-class taxpayers took the mortgage-interest deduction, for example, have not seen any meaningful difference in price increases from less-affected areas.

Incidentally, here’s a chart from the story. It shows that the rich have always been the biggest beneficiaries of the tax preference.

And now the deduction that remains is even more skewed toward upper-income households.

As far as I’m concerned, the tax code shouldn’t punish people simply because they earn a lot of money.

But neither should it give them special goodies.

For what it’s worth, the mortgage interest deduction is not a left-vs-right or statism-vs-libertarian issue.

I’ve crossed swords on a few occasions with Bill Gale of the Brooking Institute, but his column a few months ago in the Wall Street Journal wisely calls for full repeal of this tax preference.

With any luck, the 2017 tax overhaul will prove to be only the first step toward eventually replacing the century-old housing subsidy… This is a welcome change. The mortgage-interest deduction has existed since the income tax was created in 1913, but it has never been easy to justify. …Canada, the United Kingdom, and Australia have no mortgage-debt subsidies, yet their homeownership rates are slightly higher than in the U.S. A large reduction in the mortgage-interest deduction in Denmark in 1987 had virtually no effect on homeownership rates. …The next step should be to eliminate the deduction altogether. The phaseout should be gradual but complete.

Here’s another example.

Nobody would ever accuse the folks at Slate of being market friendly, so this article is another sign that there’s a consensus against using the tax code to tilt the playing field in favor of residential real estate.

One of the most remarkable things about the tax bill Republicans passed last year was how it took a rotary saw to the mortgage interest deduction. The benefit for homeowners was once considered a politically untouchable upper-middle-class entitlement, but the GOP aggressively curtailed it in order to pay for cuts elsewhere in the tax code. …just 13.8 million households will subtract mortgage interest from their 2018 returns, down from 32.3 million in 2017. …if Democrats ever get a chance to kill off the vestigial remains of the mortgage interest deduction down the line, they might as well. …any negative effect of the tax law seems to have been drowned out by a healthy economy.

I’ll close by digging into the archives at the Heritage Foundation and dusting off one of my studies from 1996.

Analyzing the flat tax and home values, I pointed out that rising levels of personal income were the key to a strong housing market, not the value of the tax deduction.

Everything that’s happened over the past 23 years – and especially the past two years – confirms my analysis.

Simply stated, economic growth is how we get more good things in society. That’s true for housing, as explained above, and it’s also true for charitable giving.

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Is Trump’s Treasury Department Supporting a Cronyist Plan to Empower Fannie Mae and Freddie Mac?

What’s the worst thing the government does?

That’s a difficult question to answer. I’ve argued that giving U.S. tax dollars to the OECD is the worst item in the budget, on a per-dollar-spent basis.

And I’ve expressed scathing disdain for the horrid practice of civil asset forfeiture. There are also really destructive features of the tax system, such as FATCA and the death tax.

But you could make a strong case for Fannie Mae and Freddie Mac as well.

These two government-created corporations not only reduce long-run growth by distorting the allocation of capital, they also bear considerable responsibility for last decade’s financial crisis since they played a major role in fueling the housing bubble.

The U.K.-based Economist describes America’s interventionist regime as a form of socialism.

…the mortgage system…is…largely nationalised and subject to administrative control. …America’s mortgage-finance system, with $11 trillion of debt, is probably the biggest concentration of financial risk to be found anywhere. …The supply of mortgages in America has an air of distinctly socialist command-and-control about it. …The structure of these loans, their volume and the risks they entail are controlled not by markets but by administrative fiat. …the subsidy for housing debt is running at about $150 billion a year, or roughly 1% of GDP. A crisis as bad as last time would cost taxpayers 2-4% of GDP, not far off the bail-out of the banks in 2008-12. …the securitisation of loans, most of which used to be in the private sector, is now almost entirely state-run. …There are at least 10,000 relevant pages of federal laws, regulatory orders and rule books. …In the land of the free, where home ownership is a national dream, borrowing to buy a house is a government business for which taxpayers are on the hook.

In other words, our system of housing finance is mucked up by government intervention (very much akin to the way healthcare is a mess because of government).

That’s the bad news.

The good news is that Fannie and Freddie have been in “conservatorship” every since they got a big bailout last decade. And that means the two cronyist firms are now somewhat constrained. They can’t lobby, for instance (though Republicans and Democrats still seek to expand subsidies in response to campaign cash from other housing-related lobbyists).

But the worst news is that there are people in the Trump Administration who want to go back to the bad ol’ pre-bailout days.

The Wall Street Journal opined on the issue as Trump prepared to take office. The editorial noted that the implicit government guarantee for Fannie Mae and Freddie Mac led to an explicit bailout.

Fan and Fred’s owners feasted for decades on an implied taxpayer guarantee before the housing crisis. Since everyone knew the two government-created mortgage giants would receive federal help in a crisis, they were able to run enormous risks and still borrow cheaply as they came to own or guarantee $5 trillion of mortgage paper. When the housing market went south, taxpayers had to stage a rescue in 2008 and poured nearly $190 billion into the toxic twins.

As part of that bailout and the subsequent “conservatorship,” Fannie and Freddie still get to operate, and they still have a big implicit subsidy that allows near-automatic profits (at least until and unless there’s another big hiccup in the housing market), but the Treasury Department gets those profits.

Needless to say, this upsets the shareholders. They bought stock so they could get a slice of the undeserved profits generated by the Fannie/Freddie cronyist business model.

They claim going back to the pre-bailout days would be a form of privatization, but the WSJ editorial correctly warns that it’s not pro-free market to allow these two government-created companies to distort housing markets with their government-granted favors, preferences, and subsidies.

…the expectation that Treasury secretary nominee Steven Mnuchin is going to revive the Beltway model of public risk and private reward. …private shareholders of these so-called government-sponsored enterprises keep pretending that something other than the government is responsible for their income streams. As if anyone would buy their guarantees—or give them cheap financing—if Uncle Sam weren’t standing behind them. …what they really want is to liberate for themselves the profits that flow from a duopoly backed by taxpayers. …We’re all for businesses getting out of government control—unless they’re playing with taxpayer money. Americans were told that Fannie and Freddie were safe for years before the last crisis. The right answer is to shut them down.

Amen. Not just shut them down, dump them in the Potomac River.

The Wall Street Journal then revisited the issue early last year, once again expressing concern that the Treasury Secretary wants to go back to the days of unchecked cronyism.

Fannie Mae is again going hat in hand to taxpayers… Washington should take this news as a kick in the keister to finally start winding down the mortgage giant and its busted brother, Freddie Mac . But the Trump Administration seems to be moving in the opposite direction. …The pair, now in “conservatorship,”…were left in limbo. Hedge funds bought up their shares, betting they could pressure Washington into bringing back the old business model of public risk and private reward. …Treasury Secretary Steven Mnuchin told the Senate Banking Committee: “I think it’s critical that we have a 30-year mortgage. I don’t believe that the private markets on their own could support it.” But many countries have robust housing markets and ownership rates without a 30-year mortgage guarantee. Mr. Mnuchin sounds like his predecessor, Democrat Jack Lew. Wasn’t Donald Trump elected to eliminate crony capitalism?

This issue is now heating up, with reports indicating that the Treasury Secretary is pushing to restore the moral hazard-based system that caused so much damage last decade.

The Trump administration is at war with itself over who should take the lead in the reform of the government-backed mortgage companies Fannie Mae and Freddie Mac… The battle centers on whether the Treasury Department should continue to advocate what it views as a plan for the future of the mortgage companies or cede control of those efforts to the incoming chief of the Federal Housing Financial Agency (FHFA), economist Mark Calabria.

The good news is that Trump has nominated a sensible person to head FHFA, which has some oversight authority over Fannie and Freddie.

And it’s also good news that some of the economic people at the White House understand the danger of loosening the current limits on Fannie and Freddie.

White House economic officials…are seeking to prevent a repeat of the risk-taking activities by the companies that contributed to the mortgage bubble, leading to its 2008 collapse and $200 billion government bailout. These officials, who spoke on the condition of anonymity, also say any reform must have the blessing of Calabria, a long-time libertarian economist and frequent critic of the outfit’s pre-crisis business model. ..He is also wary of returning Fannie and Freddie to their previous incarnations as private companies that have shareholders, but also receive backing from the federal government if they get in trouble as they did in 2008.

But it seems that the Treasury Department has some officials who – just like their predecessors in the Obama Administration – learned nothing from the financial crisis.

They want to give Fannie and Freddie free rein, perhaps in order to help some speculator buddies.

Treasury Secretary Steve Mnuchin and his top house advisor Craig Phillips, have so far taken the lead… In January, acting director of the Federal Housing Agency Joseph Otting privately told employees about plans…, referring to Mnuchin’s past statements on the matter… Mnuchin also has business ties with at least one of the major investors in the GSE’s stock that has benefited amid the speculation… Paulson – who has stakes in the GSE’s preferred class of stock — has also submitted a proposal… A key feature of the framework touted by Mnuchin, Phillips, Otting and Paulson is that both Fannie and Freddie would have some backing from the federal government in times of emergency while remaining public companies, a business model similar to the one the GSEs operated with before 2008.

Given the Treasury Department’s bad performance on other issues, I’m not surprised that they’re on the wrong side on this issue as well.

Tobias Peter of the American Enterprise Institute outlines the correct approach.

The GSEs, however, do very little that cannot be done – and is not already done – by the private sector. In addition, these institutions pose a significant financial risk to U.S. taxpayers. Weighing this cost against the minimal benefits makes the case that the GSEs should be eliminated. …regulators have tilted the playing field in favor of the GSEs. …GSE borrowers can thus take on more debt to offset higher prices. With inventories lower than ever, this extra debt ends up driving prices even higher, creating a vicious cycle of more debt, higher prices, greater risk and, ironically, more demand for the GSEs. What keeps the GSEs in business are the same failed housing policies that brought us the last financial crisis. The GSEs are not needed in the housing market – and they have become detrimental to the market’s long-term health. They could be eliminated… This would create space for the re-emergence of an active private mortgage-backed securities market that ensures a safer and more stable housing finance system with access for all while letting taxpayers off the hook.

Mr. Peter is correct.

Here’s a flowchart that shows what happened and the choice we now face.

At the risk of stating the obvious, real privatization is the right approach. This would mean an end to the era of special favors and subsidies.

• No taxpayers guarantees for mortgage-backed securities
• No special exemption from complying with SEC red tape.
• No more special tax favors such as special exemptions.

Sadly, I’m not holding my breath for any of this to happen.

The real battle in DC is between conservatorship and fake privatization (which really should be called turbo-charged and lobbyist-fueled cronyism).

And if that’s the case, then the obvious choice is to retain the status quo.

P.S. This is a secondary issue, but it’s worth noting that Fannie and Freddie like to squander money. Here are some excerpts from a report published by the Washington Free Beacon.

Fannie Mae is charging taxpayers millions for upgrades to its new headquarters, including $250,000 for a chandelier. The inspector general for the Federal Housing Finance Agency (FHFA), which acts as a conservator for the mortgage lender, recently noted $32 million in questionable costs in an audit for Fannie Mae’s new headquarters in downtown Washington, D.C. …The inspector general reported that costs for the new headquarters have “risen dramatically,” to $171 million, up from $115 million when the consolidated headquarters was announced in 2015. …After the inspector general inquired about the chandelier, officials scrapped plans for a $150,000 “hanging key sculpture,” and $985,000 for “decorative screens” in a conference room.

The bottom line is that Fannie and Freddie, at best, undermine prosperity by diverting money from productive investment, and, at worst, they saddle the nation with financial crisis.

They should be shut down, not resuscitated.

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The Folly of Rent Control

People sometimes ask me how I’ve managed to write a column every single day since November 2009.

Sadly, the answer has a lot to do with politicians having a vote-buying and power-grabbing incentive to produce a never-ending supply of bad policies.

Consider what just happened in Oregon.

Oregon Gov. Kate Brown signed into law a first-in-the-nation rent control bill Thursday…Senate Bill 608′s rent control and eviction protections go into effect immediately. …The law caps annual rent increases to 7 percent plus inflation throughout the state, which amounts to a limit of just over 10 percent this year. …The bill passed quickly through the House and Senate amid a Democratic supermajority.

This is spectacularly bad policy.

• My first reaction is that such laws should be unconstitutional since politicians are violating a provision of the Bill of Rights by taking part of the value of private property without compensation.
• My second reaction is that such laws will backfire because they address (in a bone-headed fashion) the symptom of rising rents rather than the (usually government-caused) problem of inadequate housing supply.
• My third reaction is that price controls never work, regardless of the market or sector, so limits on rent will exacerbate housing problems.

By the way, economic illiteracy is not confined to Oregon. Or even to the United States

Berlin is contemplating rent control as well.

…local politicians here have proposed a radical idea to tackle the problem: introducing a rent cap that would freeze all existing rents for the next five years. …By freezing existing rents for five years, Zado said, the city could help prevent massive increases. …but there could also be significant downsides. Such a policy could exacerbate the city’s existing housing shortage: some experts say it might lead developers to seek buyers, not renters, for their new apartments. …said Michael Voigtländer of the German Economic Institute in Cologne. “That lack of housing won’t be solved if the rents are capped.” …head of the German Housing Industry association, told German newspaper Die Zeit it could even keep developers from building additional housing in the coming years: “A rent stop would lead to our member companies building about 50,000 fewer apartments in the next five years,” he said.

The national government also is acting in a self-destructive manner.

Germany has taken nationwide action in recent years to begin grappling with this problem: in 2015, parliament passed a law restricting how much landlords could raise rents. Under that legislation, the rental price on a new contract should be no more than 10% higher than the average price in that particular neighbourhood.

Let’s see what experts have to say about this issue.

We’ll start with the perspective of landlords, which was included in this New York Times report.

…landlords say that the legislation will compel owners to take their properties off the rental market because they will no longer be able to earn enough rent from them — deepening the housing crisis rather than easing it. …Mr. DiLorenzo said his primary fear was that lawmakers would ultimately bar rents from rising more than a bare minimum, which would prevent landlords from meeting their expenses and eventually drive them out of business. The real solution to rising rents, he said, is to make it easier to build decent and affordable housing in Oregon by eliminating a multitude of fees and regulations.

Landlords have an obvious interest in this issue, so let’s now share some insights from people who don’t have a dog in the fight, but who understand economics.

Megan McArdle debunks this inane example of price controls.

Serial experimentation with this policy has repeatedly shown the same result. Initially, tenants rejoice, and rent control looks like a victory for the poor over the landlord class. But the stifling of price signals leads to problems. …incomes rise, and rents don’t. People with higher incomes have more resources to pursue access to artificially cheap real estate: friends who work for management companies, “key fees” or simply incomes that promise landlords they won’t have to worry about collecting the rent. …lucky insiders come to dominate rent-controlled apartments, especially because having gotten their hands on an absurdly cheap apartment, said elites are loathe to move and free up space for others. The longer the rent-control policies remain, the more these imbalances grow. …Deprived of the ability to make a profit, landlords skimp on maintenance and refuse to build new housing.

Megan also explains that the damage of rent control is compounded by policies that restrict the development of additional housing.

Rent control is one of the most effective ways to destroy a city’s housing stock, but it’s far from the only one. You can also enact extremely strict building codes, with lengthy and highly bureaucratic processes, which will restrict the supply of housing. This is what has happened in many American cities… policymakers should remember that a price is just the intersection of supply and demand. If you alter the price, but don’t alter the supply or the demand, the problem doesn’t go away; rationing just shows up in different forms.

Mark Hemingway, originally from Oregon, explains in the Wall Street Journal what is happening in the state.

Virtually every mainstream economist, from Paul Krugman to Thomas Sowell, has condemned rent control as bad policy. Oregon’s problem isn’t rising rents. It’s the lack of affordable housing… the state remains resistant to new development. Oregon adopted widely hailed “smart growth” policies in the 1970s, imposing “urban growth boundaries” around cities to prevent sprawl. …This has artificially inflated the price of land within the boundaries. …On top of all this, Oregon has a red-tape problem that skews developer incentives. “Systems and development charges and permit fees for even a 500-square-foot unit in the city of Eugene right now are close to about $20,000 per unit,” says real-estate agent James St. Clair. “There’s no incentive to build small affordable units…” Rather than addressing the lack of housing supply, legislators have seized on rent control.

For those who prefer videos over words, here’s a succinct video from Johan Norberg on the folly of rent control.

Mark Perry of the American Enterprise Institute summarize the real problem in a column for the Foundation for Economic Education.

…rent control is making a comeback in response to rising housing prices in urban areas across the country in states like California, Illinois, Washington, and Massachusetts. …As the graphical Supply/Demand analysis…illustrates very clearly, rent control laws that artificially force the rental price of housing (P₁ above) below the market-clearing equilibrium price (P₀) are guaranteed to create a housing shortage by: a) increasing the number of rental units demanded at the artificially low rents (Q_D) and b) decreasing the number of rental units supplied to the market (Q_S). You can artificially restrict the amount of rent a landlord can legally charge for a rental unit, but you can’t force developers, builders, and landlords to build or supply more rental housing in the future. And the supply of rental housing in markets with rent control is guaranteed to decline. …Price controls aren’t the answer. Building more housing is the only real solution to increase the supply of affordable housing.

Here’s Mark’s graph.

In another column for FEE, Luis Pablo de la Horra summarizes why rent control is so misguided.

Rent control is one of those policies that continues to attract the favor of the public despite the fact it has repeatedly proven to be ineffective when it comes to improving the lives of those it is aimed at. …Rent controls often lead to a shortage of rental houses since landladies and landlords find it unprofitable to rent out their apartments at capped prices. In addition, the stock of dwellings tends to deteriorate because home-owners will have little incentive to invest in the maintenance and refurbishment of their houses. …here is some empirical evidence. A 2017 paper published by three Stanford economists shows that rent controls in San Francisco reduced rental housing supply by 15 percent, which in turn increased rental prices in the other parts of the city by around 5 percent. Another recent paper blames restrictions on the use of land (the so-called zoning) for the increasing housing prices in large US cities.

Let’s see what the other side has to say on the topic. Unsurprisingly, the New York Times is on the wrong side.

Here are some excerpts from an editorial that is a case study of economic illiteracy.

New York’s system of rent regulation, limiting how much landlords can charge tenants, began in the 1940s to help a growing middle class. There are about one million apartments covered under rent-restricting regulations now… here are some actions lawmakers can take: …Return control of the rent laws to New York City… Landlords’ ability to raise the rent by 20 percent every time an apartment is vacated is a perverse incentive… Lawmakers should scrap this incentive entirely. …the state agency that enforces rent laws…needs more funding… require landlords to submit receipts for improvements to individual apartments to the agency and the tenant.

This is remarkably bad. And sad as well. The New York Times in recent memory was actually economically sensible, endorsing a flat tax and urging elimination of the minimum wage.

Now it fully embraces policies that even rational left-leaning economists condemn.

Indeed, you can probably tell a lot about the ethics of your left-wing friends if you ask them about rent control.

The ones with good intentions will reject rent control while the demagogues (and the ignorant) will applaud this foolish example of price controls.

Minneapolis provides a good example of ethical leftists, as Elliot Kaufman explains in the Wall Street Journal.

Earlier this month the City Council overwhelmingly approved an ambitious plan to encourage higher-density development and increase the supply of housing. …The Comp Plan would allow the construction of duplexes and triplexes in areas once reserved for single-family homes, rezoning areas near public transportation for larger apartment buildings, and doing away with parking requirements for new housing. …The Comp Plan takes a market-based approach but proclaims left-wing goals. It vows to “eliminate” racial and economic disparities and aggressively fight climate change. …The Comp Plan promotes denser development, which urbanists on both left and right see as the solution to a host of problems. More density in a city like Minneapolis could help renew both geographic and economic mobility.

We’ll close with this great quote from a Swedish economist.

P.S. Rent control can be a great scam for privileged insiders.

P.P.S. Rent control also rewards and empowers unscrupulous and reprehensible people.

P.P.P.S. Amazingly, California voters actually rejected a state referendum to allow rent control (though this isn’t stopping one of their politicians from trying to muck up rental markets).

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A Government “Success Story”

I often write about the failure of government.

• The federal government launched a multi-trillion dollar War on Poverty and the poverty rate, which had been consistently falling, now is stuck around 13 percent.
• Governments at all levels have pumped ever-increasing amounts of money into government schools, but there have been no positive effects on student achievement.
• The federal government created programs to make college more affordable, yet the main effect has been to make it easy for colleges and universities to charge higher tuition.

In other words, there’s lots of evidence that government spending makes things worse.

Needless to say, this puts a lot of pressure on folks who favor bigger government. They desperately want to find any type of success story so they can argue that increasing the size and scope of the public sector generates some sort of payoff.

And they got their wish. Check out the ostensibly good news in a story from the San Fransisco Chronicle.

Investing billions of dollars in affordable housing and homeless programs in recent years has apparently put the brakes on what had been a surge in California’s homeless population, causing it to dip by 1 percent this year, a federal report released Monday showed. …The report put California’s homeless population this year at 129,972, a drop of 1,560 in the number of people on the streets in 2017. …“I think San Francisco has shown that when targeted investments are made, we see reductions in homelessness here,” Kositsky said. He pointed out that family, youth and chronic veterans homelessness dropped in the city’s last full count — although the number of chronically homeless people went up.

Maybe I’m not in the Christmas spirit, but I don’t see this as a feel-good story.

Are we really supposed to celebrate the fact that the government spent “billions of dollars” and the net effect is that the homeless population dropped just 1 percent?

The story doesn’t contain enough details for precise measurements, but even if we assume “billions” is merely $2 billion, then it cost taxpayers close to $1.3 million to get one person off the street. For that amount of money, taxpayers could have bought each of them a mansion!

In other words, the program has been a rotten investment. Heck, it makes Social Security seem like a good deal by comparison.

To be sure, maybe the number isn’t quite so bad because we’re comparing multi-year outlays with a one-year change in the homeless population. Though maybe the number is even worse because taxpayers actually coughed up far more than $2 billion.

The bottom line is that if my friends on the left see this as an example of success, I’d hate to see their definition of failure.

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Using the Tax Code to Increase Rents and Enrich Landlords

There’s a problem in California. No, I’m not referring to the punitive tax laws. Nor am I talking about the massive unfunded liabilities for bureaucrat pension.

Those are big problems, to be sure, but today’s topic is the state’s government-created housing crisis. The population keeps expanding, but local governments use zoning laws to restrict development of new homes and apartments.

And guess what happens when supply is constrained and demand keeps climbing? Even a remedial student in Economics 101 will probably understand that this is a recipe for ever-rising prices.

The solution, of course, is to expand the housing stock. Build more homes, apartments, and condos.

But local governments don’t like that option because existing homeowners (who vote) benefit from scarcity-induced increases in home values. And environmentalists also don’t like any development because of ideology.

Moreover, why fix the problem when politicians in Washington are willing to promote crackpot ideas. And that’s a very apt description of Senator Kamala Harris’ scheme to subsidize rental payments.

Under the Rent Relief Act, anyone who spends more than 30% of their income on rent would be eligible for a federal tax credit. What would you do with that extra money in your pocket?

— Kamala Harris (@KamalaHarris) July 28, 2018

Why is this a crackpot idea? Because prices go up in every sector of the economy that is subsidized. This is why health care keeps getting more expensive. It’s why higher education keeps getting more expensive.

And if Washington politicians decide to subsidize rent, the same thing will happen.

Writing for National Review, Jibran Khan explains why Harris has the wrong solution for the wrong problem. He starts by explaining why there’s a housing shortage.

Harris’s subsidy won’t improve the situation, and could even make things worse by drawing attention away from actual solutions. The Bay Area’s rent crisis is driven by a drastic shortage in housing. Strict rent control in San Francisco and “NIMBY” (not in my backyard) zoning policies have ensured that the area constructs only a fraction of the housing it needs. The San Francisco metro area added 373,000 new jobs between 2012 and 2017, but it allowed the construction of only 58,000 new units of housing. …Per Lawrence Yun, an economist who studies housing trends, the norm is for one housing unit to be built for every two jobs created. In the San Francisco area, there is less than one unit built for every six jobs created. …under Harris’s proposal, the currently homeless would remain homeless, while renters would receive some very short-term relief at the cost of other taxpayers.

He then explains why a subsidy will lead to higher rents, and a windfall for landlords.

Why would the relief be short-term? Because as landlords become aware that renters are receiving a subsidy, they will simply raise rents by the amount of the subsidy. The cost will be the same for the renters — who today are lining up for a chance to rent, showing that they are willing to pay it. In the end, then, this would be an effective subsidy for landlords, not renters.

Which, as mentioned above, is exactly what’s happened in other sectors that have received subsidies.

It’s not just libertarians who understand that Harris will make a bad situation worse.

Matt Yglesias is hardly a small-government zealot. He’s accused me, for example, of being insane and irrational because of my libertarian views. But we both agree that the real problem in California is government rules that limit development.

A good federal housing policy, IMO, would be to take something like Harris’ Rent Relief Act and make it an incentive program where cities can get the money if they change land use regulations.

— Matthew Yglesias (@mattyglesias) August 1, 2018

And I assume he also would agree that Harris’ plan will wind up enriching landlords rather than helping renters.

So why, then, is Harris proposing such a destructive policy?

There are three possible answers.

1. She’s ignorant, and her staff is ignorant. Simply stated, there’s no understanding of indirect effects. Bastiat would be very disappointed.
2. She’s malicious. In other words, she’s smart enough to realize the policy is bad, but she doesn’t care. Call this the Venezuela approach.
3. She’s ambitious. In this scenario, she has no intention of pushing a bad idea, but she thinks it’s a good way of getting votes from renters.

I assume #3 is the right answer.

Regardless of her motives, she’s doing the wrong thing.

I’ve shared this chart on many occasions because it does a great job of showing that subsidized sectors are characterized by rising prices.

Give politicians enough leeway and maybe the entire economy can be dysfunctional!

P.S. I’m not being partisan. Republicans are quite capable of supporting very stupid policies in exchange for votes or campaign contributions. Just look at the GOPers who support the Export-Import Bank, Fannie-Freddie subsidies, or ethanol handouts.

P.P.S. Needless to say, I also object to the Harris scheme because it would make the tax code an even bigger mess. I realize it’s unlikely that I’ll ever see a simple and fair flat tax, but is it too much to ask for politicians not to make the system even worse?

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Everything You Need to Know about Tax Reform and the Mortgage Interest Deduction

Both the House and Senate have approved reasonably good tax reform plans.

Lawmakers are now in a “conference committee” to iron out the differences between the two bills so that a consensus package can be a approved and sent to the White House for the President’s signature.

Sounds like we’re on the verge of getting a less-destructive tax system, right?

I hope so, but there are still some major hurdles. The conference committee has a difficult task. They’re only allowed $1.5 trillion in tax relief in the short run and have to produce a bill that is “revenue neutral” in the long run. That won’t be easy in an environment where interest groups are putting heavy pressure on lawmakers.

I joked that doing tax reform with these restrictions is like trying to fit an NFL lineman in Pee Wee Herman’s clothes. But the serious point is that genuine tax reform requires some revenue-raising provisions to offset the parts of the bill that reduce revenue.

Needless to say, the right way of doing this is by going after economically harmful tax preferences. I’ve already written (over and over and over again) that the deduction for state and local taxes should be on the chopping block. To their credit, lawmakers are curtailing that loophole.

Today, I want to make the case that housing preferences in the tax code also should be targeted. I’m not naive enough to think politicians are suddenly going to decide to eliminate the mortgage interest deduction. But the bills – especially the House version – slightly curtail preferences for housing and it would be nice if they went a bit further.

That would free up more revenue for pro-growth tax cuts and also be smart policy. Let’s look at what some expert voices, starting with market-oriented people.

Edward Pinto of the American Enterprise Institute explains the provisions in the House bill for the Wall Street Journal.

Tax reform could make housing more affordable. Done correctly, it could increase the supply of homes by reducing federal tax subsidies for homeownership. The House’s Tax Cuts and Jobs Act furthers this aim in several ways—by raising the standard deduction, capping new loans qualifying for the mortgage-interest deduction at $500,000, eliminating the deduction on loans for second homes and the deduction on cashing out home equity, and capping the property-tax deduction at $10,000.

The Senate bill raises the standard deduction as well, but otherwise basically gives housing a pass. In the conference committee, Senators should agree to the House approach. Pinto explains that homeownership will be higher with less “help” from Washington.

…the House tax bill would create about 870,000 additional available units over 10 years. This represents a boost of 14% (the current build rate will yield about 6.2 million units over 10 years). Cutting homeowner subsidies out of the tax code provides other important benefits. The percentage of mortgage holders who itemize would drop from about 60% to 12%. This would free nearly half of mortgaged homeowners from a massive federal tax incentive hanging over their financial decisions, thereby greatly reducing the market-distorting impact produced by the interest deduction. …Lower prices due to loss of subsidies will ultimately allow more low-wealth Americans to become homeowners, since less cash will be needed to close a purchase. Rents will remain roughly constant as house prices decline, thus reducing the cost of homeownership compared with renting—another positive outcome. …It is time to put the interests of taxpayers and aspiring homeowners ahead of the interests of the housing lobby. Tax reform—especially if the final bill fully implements the House’s subsidy cuts—will improve the housing market and make homeownership more accessible to all.

Professor Jeffrey Dorfman of the University of Georgia (home of the national championship-bound Bulldogs, I can’t resist pointing out) discusses the issue in Forbes.

About 64% of Americans own a house. Roughly two-thirds of those homeowners have a mortgage. Only 6% of all mortgages are for $500,000 or more. Put all those numbers together and you will find that home builders and realtors think their world is ending over policy changes to the mortgage interest deduction that impact only about 2.5% of American households. Plus, existing mortgages are grandfathered in, so anyone who purchased a home expecting the deduction will continue to enjoy it. …doubling the standard deduction means fewer people will itemize, meaning fewer will use the mortgage interest deduction. Importantly, those households that stop itemizing are doing so because the newly enlarged standard deduction provides them a lower tax burden. Households that have more after-tax income have more money to spend on houses, mortgage payments, and everything else in the economy. Housing is not being made unaffordable by the proposed tax reform since the vast majority of Americans will receive a moderate tax cut under the plan. Home builders and realtors seem concerned that a few rich Americans might not buy as expensive houses without as big a tax break, even though they will have more disposable income. …Housing depends much more on disposable income, the health of the job market, and Americans’ confidence in the economic future than it does on tax breaks. Don’t listen to the real estate industry; they will be just fine if the Tax Cut and Jobs Act passes.

George Will is not a fan of housing preferences in the tax code.

…only around 30 percent of taxpayers itemize their deductions. …not even half of all homeowners use the deduction. …the unpleasantness of 2008 demonstrated the downside of encouraging too much homeownership. Furthermore, the deduction might actually suppress homeownership by being priced into rising housing costs. Besides, Australia, Canada and Britain, which have no mortgage interest deductions, have homeownership rates comparable to that of the United States. …Homeownership is…not an investment because “it does not improve the productive capacity of the economy.” Indeed, the more money that flows into housing, the less flows into stocks, bonds or banks.

Amen. We should have learned from 2008 that it’s bad news for government to muck around in housing.

Yet some politicians can’t resist because of their desire to buy votes.

Kevin Williamson of National Review adds his two cents.

It’s time for…a proposal to reduce or eliminate the mortgage-interest deduction, a tax subsidy that makes having a big mortgage on an expensive house relatively attractive to affluent households… Do not hold your breath waiting for the inequality warriors to congratulate Republicans for proposing…significant tax increases on the rich. …Slate economics editor Jordan Weissmann, who is not exactly Grover Norquist on the question of taxes, describes the mortgage-interest deduction as “an objectively horrible piece of public policy that should be reformed,” and it is difficult to disagree with him. It distorts the housing market in favor of higher prices, which is great if you are old and rich and own a house or three like Bernie Sanders but stinks if you are young and strapped and looking to buy a house. It encourages buyers to take on more debt at higher interest rates than they probably would without the deduction, and almost all of the benefits go to well-off households in the top income quintile. It is the classic example of upper-class welfare. …mortgage subsidies are not randomly distributed. The mortgage-interest deduction is much more important to rich people in San Francisco, where the median home price exceeds $1 million, than it is to middle-class people in Tulsa, where the median home price is about $110,000. …The best course of action would be to eliminate the mortgage-interest deduction entirely over a relatively short period of time, say five years. …it is difficult to make a compelling case that subsidizing Lena Dunham’s mortgage on her $5 million Brooklyn apartment (or helping out whoever took that $4.2 million Trump apartment off Keith Olbermann’s hands) needs to be a top national policy priority.

Writing for the City Journal, Howard Husock explains why the deduction is bad policy.

…the deduction should be pruned or eliminated—not just because it is inequitable but also because it distorts the housing market. Currently, a taxpayer can deduct interest on a mortgage up to $1.1 million—substantially more than the median U.S. home value ($203,000). Not surprisingly, the Government Accountability Office has found that higher-income households are generally more likely to use the mortgage-interest and property-tax deductions. In 2008, the most recent tax year for which data are available, taxpayers with adjusted gross incomes of $100,000 or more “accounted for 13 percent of all returns but claimed nearly half (47 percent) of all mortgage interest and property tax deductions.” …The core problem with the MID, though, lies in how it affects housing markets. Inevitably, any policy that provides a tax reduction for those who buy or own homes increases the price of housing, through the implicit promise that the tax code will lower the effective house payments. MID supporters say that it encourages homeownership, but the Urban Institute finds that it mostly “rewards affluent households who would have bought homes anyway,” …Not surprisingly, the homebuilders lobby—among the hardiest of Washington swamp creatures—is fighting the proposal. …Reducing tax deductions that put the U.S. at a competitive disadvantage should not be impeded by a special-interest group that has achieved its purported social goal—homeownership—in the U.S. at a rate (64 percent) that lags that of Canada (67 percent), where mortgage interest is not deductible.

Even folks on the left realize that housing preferences are bad policy.

Here are some excerpts from a Slate column.

It also must be said that the mortgage interest deduction is an objectively horrible piece of public policy that should be reformed. Currently, it’s an estimated $80 billion-plus subsidy that disproportionately helps upper-middle-class and wealthy households—according to the Tax Policy Center, 72 percent of its benefits go to the highest-earning 20 percent of taxpayers. This is to be expected, since wealthier people can buy larger houses and take out bigger mortgages. It also explains much of its political invulnerability; people who earn low- to mid-six-figures vote and very much treasure their slice of the welfare state that’s submerged in our tax code. But as a result, the deduction mostly encourages people who could have afforded homes anyway to buy bigger. Research has shown it does little if anything to expand homeownership overall, and may actually discourage it among younger American by driving up prices.

Derek Thompson of the Atlantic points out that housing preferences are a reverse from of class warfare.

Although about two-thirds of American households own a home, only one-quarter of them claim the deduction…households earning more than $100,000 receive almost 90 percent of the benefits. …it makes it harder for poor renters to join the class of homeowners. …Desmond writes, “a 15-story public housing tower and a mortgaged suburban home are both government-subsidized, but only one looks (and feels) that way.”

Scholars also find he deduction is not good policy.

A just-released academic study confirms that the right kind of tax reform will be very good for society, the economy, and homeownership.

The model demonstrates that repealing the regressive mortgage interest deduction decreases housing consumption by the wealthy, increases aggregate homeownership, improves overall welfare, and leads to a decline in aggregate mortgage debt. The mechanisms behind these results are intuitive. When both house prices and rents are allowed to adjust, the repeal of the mortgage interest deduction decreases house prices because, ceteris paribus, the after-tax cost of occupying a square foot of housing has risen. Reduced house prices allow low wealth, credit-constrained households to become homeowners because the minimum down payment required to purchase a house falls. At the same time, the elimination of the tax favored status of mortgages, acting in concert with the fall in equilibrium house prices, causes unconstrained households to reduce their mortgage debt. Because rents remain roughly constant as house prices decline, homeownership becomes cheaper relative to renting, which further re-enforces the positive effect of eliminating the mortgage interest deduction on homeownership. Importantly, the expected lifetime welfare of a newborn household rises because the tax reform shifts housing consumption from high income households (the main beneficiaries of the tax subsidy in its current form) to lower income families for whom the additional shelter consumption is relatively more valuable.

Now let’s look at experts who have strong arguments against the deduction, but who also comment on the distasteful role of special interests.

Matt Mitchell and Tad DeHaven, in a column for U.S. News & World Report, point out that the only real beneficiary of the deduction are interest groups (I call them swamp creatures) that want homeowners to go into debt in order to spend more money.

Motivated in part by a need to find revenue offsets for its broader tax cut proposal, the House has proposed to reduce the amount of mortgage debt taxpayers may deduct interest on from $1.1 million to $500,000; the Senate version would slightly reduce it to $1 million. But even these modest reforms have raised the ire of Big Housing. Indeed, even if both chambers had proposed to leave the mortgage interest deduction alone, this powerful lobby would still be upset that Congressional Republicans intend to raise the standard deduction: Doing so would cause fewer taxpayers to itemize, which means fewer people would claim the deduction. … the mortgage interest tax deduction…benefits wealthier Americans and the housing lobby at the expense of the majority of taxpayers, who receive no benefit…even the benefit for wealthier taxpayers is illusory “because the tax gains to homeowners are largely offset by increases in home prices.” That leaves the powerful housing lobby – represented most prominently by the National Association of Realtors and National Association of Homebuilders – as the real beneficiary. …why, then, has Big Housing fought so hard to keep the mortgage interest deduction? The answer is that although the deduction doesn’t affect home ownership, it does incentivize people to purchase more expensive homes. That translates into more money for realtors and home builders. And because the deduction is taken against the interest payment and not the down payment, it encourages home buyers to put more of the purchase on credit. So in reality, the deduction encourages home-borrowship, not homeownership. Did we mention that the Mortgage Bankers Association is also a prominent defender of the mortgage interest deduction?

Since we’re on the topic of swamp creatures, Tim Carney of the Washington Examiner explains that housing preferences are bad for families and good for interest groups.

That means a married couple who rents (or owns a modest house, say, less than $225,000) making $70,000 would probably see their federal income taxes fall by 25 percent. Some lower-income families — including homeowners — would have their federal income tax liability wiped out. Middle-class families who currently itemize their deductions (because they spend more $12,600 a year on mortgage interest and charitable giving) would have their taxes go down, and their tax-filing simplified. …Will this lower home prices? Probably yes, because the value of this deduction gets priced into homes. That is, this deduction wasn’t really helping homeowners anyway. Who was the deduction helping? Mortgage lenders and homebuilders mostly, also realtors. These are the special interests who created and who fight tirelessly to save this deduction. Removing an economic distortion that has inflated home prices will create some losers, sure, but that doesn’t make it bad. Inflated home prices have stultified mobility, delayed family formation, increased household debt, and otherwise tied up families’ assets.

Tom Giovanetti of the Institute for Policy Innovation also criticizes the interest groups defending special preferences.

One of the obstacles to fundamental tax reform has always been that there is an entrenched constituency that benefits in some way from every provision in the tax code, and that can be counted on to noisily oppose any change to it. These constituencies are often not taxpayers themselves but business interests that have built a business on a particular tax provision. An obvious example is the residential mortgage interest deduction. …current tax reform plans would increase the standard deduction available to taxpayers who choose not to itemize their deductions. In other words, the real estate industry has a targeted tax preference that is only available to home owners through the itemized deduction, and they don’t want to see that tax preference diluted by a higher standard deduction available to everyone else. This is an obnoxious argument for the real estate industry to be making. Giving a higher standard deduction to those who do not itemize doesn’t take anything away from taxpayers who do, and it would simplify tax filing for many taxpayers because it would make the standard deduction more attractive. Apparently the real estate industry doesn’t want Americans to get a tax break unless they agree to go into massive debt to buy a house.

The Wall Street Journal also opined about the odious role of interest groups.

…doubling the standard deduction…would make the first $24,000 of income for a married couple tax-free. What’s not to like? Plenty, says the housing lobby. The National Association of Homebuilders (NAHB) and the National Association of Realtors each bashed the larger standard deduction on grounds that it would make the tax subsidy to their industries less appealing. …a reminder of how misguided the mortgage-interest deduction is. For starters, it distorts the allocation of capital by favoring housing, a form of consumption, over investments that might be more productive and raise everyone’s living standards. The deduction also disproportionately benefits the affluent, who buy more expensive homes with bigger mortgages. A 2013 Congressional Budget Office study found that 75% of the benefit of the mortgage-interest deduction goes to the top 20% of income earners. Two of three American tax filers don’t even itemize, which means they can’t deduct mortgage interest even if they have it. It’s also not clear the mortgage deduction is as critical to home ownership as advocates contend. Canada and Britain have similar rates of home ownership as the U.S. (nearly two thirds of their citizens) without a mortgage-interest deduction. …Republicans should reconsider giving housing a pass. For example, the GOP could limit the amount of mortgage-interest that could be deducted, or limit the deduction to borrowing below, say, $250,000. This would make the tax benefit less tilted to the affluent, and it would also provide more revenue for lower tax rates.

Since the WSJ editorial mentions that Canada has very high homeownership without any loopholes, let’s close today’s column by reviewing some additional global evidence.

In a chapter for a book on tax reform, Bill Gale of Brookings points out that the U.K. dramatically curtailed the tax benefit of housing without any adverse impact on homeownership.

Great Britain conducted a fascinating experiment showing both the political and economic viability of reducing mortgage subsidies.’ When tax subsidies for most forms of borrowing were eliminated in 1974-1975, subsidies for interest on the principal primary residence were retained, subject to a loan limit of £25,000. No subsidies were provided on second homes. The limit was raised to £30,000 in 1983-1984 and has stayed fixed since. …More recently, the subsidy has been provided only up to a fixed rate, set at 25 percent and then reduced to 15 percent for new loans in 1998. The British experience raises several interesting possibilities. …because the £30,000 limit is well below the average new mortgage loan, mortgage subsidies provide no marginal incentive for most taxpayers. …the decline in the value of the mortgage interest subsidy has been gradual, but huge. From 1974 to 1996, the value-thought of as the interest rate times the rate at which the subsidy is taken times the real loan limit-fell by about 90 percent. Nevertheless, finding much of an effect of the policies on the housing sector is difficult. From 1974 to 1994, homeownership rates, the ratio of mortgage debt to GDP, the ratio of mortgage debt to the housing stock, and the ratio of housing to fixed capital rose faster in the United Kingdom than in the United States. …the significant reduction in mortgage subsidies when homeownership rates were rising (by thirteen percentage points from 1974 to 1994) may make the events even more remarkable from a political perspective. The British experience and cross-country evidence that the presence of a deduction for mortgage interest does not greatly influence homeownership rates suggest that the value of subsidies for owner-occupied housing could be reduced.

Charles Hughes of the Manhattan Institute writes about the deduction’s downsides, but the part of his article that I want to highlight is the description of how Denmark curtailed housing preferences with no adverse consequences.

Many areas in the tax code introduce substantial distortions that are ripe for reform. One area is the mortgage interest deduction (MID), which allows claimants to deduct mortgage interest on their primary or secondary residences, up to a certain threshold. The Joint Committee on Taxation estimates that the deduction for mortgage interest will reduce revenue by $72.4 billion this year, and by $234 billion through 2020, making it one of the most expensive tax expenditures in the tax code. Even at this magnitude, only about a quarter of tax filers claim the deduction… A new working paper analyzing the effects of the mortgage interest deduction in Denmark finds that it has no effect on homeownership rates in the long run, and it distorts decision-making about the size and price of which homes to buy. …the economists found no short- or long-run effects on home ownership.

Here’s a chart from that study. As you can see, dramatically curtailing the value of the deduction for mortgage interest did not have any noticeable impact on homeownership.

P.S. If you like the gory details of tax policy, I explained in 2012 that the problem with the tax code and housing isn’t the mortgage interest deduction, per se, but rather the fact that business investment doesn’t get the same treatment as residential real estate.

P.P.S. While lawmakers are debating whether to slightly limit preferences for housing, I should point out that there are two other huge loopholes – the municipal bond interest exemption and the healthcare exclusion – that basically were left untouched. Hopefully they will be on the chopping block for the next installment of tax reform.

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Tax Reform, Lobbying, the Swamp, and Political Reality

It’s not easy being a libertarian in the policy world of Washington. I view the flat tax as a timid intermediate step, with the real goal being a tiny federal government (like the Founding Fathers envisioned) that can be financed without any broad-based tax.

Yet even my timid intermediate step is considered radical and impractical by DC standards. There’s no discussion of fundamental tax reform. Instead, the  debate revolves around whether we can reduce a couple of tax rates in one part of the code and “pay for” those changes by altering some provisions in another part of the code.

This is very frustrating, which is why I joked with Neil Cavuto that we could kill two birds with one stone by trading Trump, Hillary, Manafort, and Podesta to Russia in exchange for that country’s 13 percent flat tax.

But I want to address a couple of serious points in the interview.

• First, it would be very good for long-run growth if the tax system created a level playing field between housing and business investment.
• Second, Republicans would have a lot more flexibility to produce a very popular tax reform plan if they had imposed some spending restraint.
• Third, because it is vitally important to reduce the corporate tax rate, even a curmudgeon like me will accept half a loaf (or less, ugh).

To conclude, most people assume that something will pass simply because GOPers desperately need some sort of victory to compensate for their failure to repeal (or even just tinker with) Obamacare.

That’s true, but that doesn’t change the fact that any bill can be defeated if Democrats are unified in opposition and a small handful of Republicans decide to vote no.

By the way, I’m not completely unsympathetic to some of the Republicans who are wavering on whether to vote for a reform bill. Consider their predicament: If there’s a bill that cuts the corporate tax rate and gets rid of the deduction for state and local income taxes (to my chagrin, I’m assuming property taxes will still be deductible), that will be a net plus for the economy. But, depending on other provisions in the legislation, it may mean that a non-trivial number of voters (especially from high-tax states) will be hit with a tax increase.

Members of Congress who want good policy can explain to those voters that the economy will grow faster. They can tell those voters that their state politicians now will be more likely to reduce state income tax burdens. I think those assertions are true, but voters looking at higher tax burdens probably won’t care about those long-run effects.

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Shut Down Fannie Mae and Freddie Mac and Unleash the Free Market

Remember the financial crisis and market meltdown from late last decade? That wasn’t a fun time, and we’re still dealing with some of the fallout.

Let’s specifically look at Fannie Mae and Freddie Mac, the two privately owned but government-created housing finance institutions (also known as government-sponsored enterprises, or GSEs). Fannie and Freddie received giant bailouts during the crisis, but they weren’t shut down. Instead, they have continued to operate, continued to benefit from implicit government subsidies, and continued to dominate housing finance because of their government-protected status.

Under the conditions of the bailouts, however, the excess cash generated by this government-subsidized duopoly have gone to the Treasury rather than to shareholders (incidentally, I wrote “excess cash” rather than “profit” because I think of the latter as money that is fairly earned in a competitive marketplace, whereas the earnings of the GSE’s are the result of an artificial, subsidized, and protected system).

In any event, the bailout will have been repaid at some point in the near future, so the government has to decide the next step. Should Fannie and Freddie be allowed to simply go back to their old model?

As you might expect, Cato’s expert on the issue, Mark Calabria, has a lot to say about the issue. In a column co-authored with Alex Pollock of the American Enterprise Institute, he proposes a set of reforms.

Nobody wants the old Fannie and Freddie back; nobody wants them to stay on indefinitely in conservatorship. What is required are practical steps forward.

Mark and Alex identify specific requirements that should be met before allowing Fannie and Freddie off the leash, starting with basic capital requirements and other reforms so the GSEs are less likely to create instability and excessive risk.

Take away Fannie and Freddie’s capital arbitrage and set their equity capital requirements in line with other financial institutions of similar size. Equity of at least 5 percent of total assets should be their required leverage capital ratio. …Given their undiversified business, something more might be prudent. In any case, the hyper-leverage which allowed Fannie and Freddie to put the whole financial system at risk needs to be permanently ended. …Designate them as the Systemically Important Financial Institutions (SIFIs) they indubitably are. Fannie and Freddie…have conclusively demonstrated their ability to generate huge systemic risk.

They also say Fannie and Freddie should no longer have special privileges. If these GSEs want to act like private companies, the should be subjected to all the laws and rules that apply to private companies.

End all their securities law exemptions. …End all their preferences in banking law and regulation. …End their exemption from state and local income taxes. …End all their exemptions from consumer protection rules. …Open up their charters to competition just like banking charters.

In a column for the Wall Street Journal, the former heads of the FDIC and Wells Fargo, William Isaac and Richard Kovacevich, point out that President-Elect Trump wants to do the right thing and shrink the risky role of government.

…the president-elect want[s] to privatize the home-mortgage market and “will get it done reasonably fast.” That’s good news for American homeowners, the economy and taxpayers who were forced to foot the bill after the 2008 subprime mortgage meltdown. …this is not a radical proposal. The private sector provides mortgages in most major countries, and there is little difference in the share of homeownership between the U.S. and other developed countries. No other country has the equivalent of the private-public model of Fannie Mae and Freddie Mac—crony capitalism at its best.

Isaac and Kovacevich explain why the old approach is unacceptable.

…many politicians and industry participants believe that housing cannot prosper without government support. We disagree. The U.S. cannot afford to go through another financial crisis, which started with subprime mortgages and would never have been so large if the residential mortgage industry had been market-based. Subprime mortgages have existed for decades. But they were a small percentage of the mortgage market until Fannie and Freddie reduced credit standards to increase their market share and meet low-income homeownership targets mandated by Congress. By 2007 nearly 50% of mortgages originated in the U.S. were subprime and “alt-A” types with government agencies guaranteeing about 70% of those… Without these government guarantees, the subprime bubble and financial crisis would have never happened. Bank regulators and industry experts warned Congress for decades about Fannie and Freddie and their increasingly large and risky portfolios, but Congress failed to act.

They then point out how we can move to a system based instead on market, and that any subsidies and handouts should be limited and transparent.

The solution is straightforward: The public-private hybrid of Fannie and Freddie—“government-sponsored entities”—should be abolished, their existing business sold or liquidated, and the mortgage market privatized. …The current $686,000 cap on new mortgages guaranteed by Fannie and Freddie should be reduced by $100,000 a year. This would put the companies out of originating new mortgages within seven years. …if the government still wants to subsidize mortgages for low-income families and minorities, the cost should be on budget and transparent. The Federal Housing Administration already does this.

By the way, a private system wouldn’t mean an end to conventional mortgages.

Others speculate that, without Fannie and Freddie, mortgage rates would skyrocket and the 30-year, fixed-rate mortgage would vanish. We disagree. Nonconventional or “jumbo” 30-year mortgages not guaranteed by Fannie and Freddie have existed for decades. In the decade preceding the financial crisis, the interest rate on these jumbo mortgages averaged only about 0.25% higher than similar guaranteed mortgages, a difference of a little over $40 a month on a $200,000 mortgage. Shouldn’t Americans, like homeowners throughout the world, pay a tax-deductible $40 extra a month so taxpayers aren’t on the hook for hundreds of billions to bail out Fannie and Freddie?

Amen. Fannie and Freddie never should have been created in the first place.

And today, with the memory of their disastrous impact still fresh in our minds, we should do everything possible to shut down these corrupt GSEs. I’ve argued for this position over and over and over again.

Sadly (but not surprisingly), there are many people who want to move policy in the wrong direction. The Obama Administration has pushed for more risky housing handouts, often aided and abetted by Republicans who care more about pleasing lobbyists rather than protecting taxpayers.

And it goes without saying that Fannie and Freddie are proposing more handouts in order to create a bigger constituency that will advocate for their preservation.

Kevin Williamson of National Review looks at a crazy idea to create more risk from Fannie Mae.

…government-sponsored mortgage giant Fannie Mae roll[ed] out a daft new mortgage proposal that would allow borrowers without enough income to qualify for a mortgage to count income that isn’t theirs on their mortgage application. …Claiming that the money you are using for a down payment is yours when it has been lent to you by a family member or a friend was a crime… Fannie Mae, the organized-crime syndicate masquerading as a quasi-governmental entity, has other ideas. Under its new and cynically misnamed “HomeReady” program, borrowers with subprime credit don’t need to show that they have enough income to qualify for the mortgage they’re after — they simply have to show that all the people residing in their household put together have enough income to qualify for that mortgage. We’re not talking just about husbands and wives here, but any group of people who happen to share a roof and a mailing address. …That would be one thing if all these people were applying for a mortgage together, and were jointly on the hook for the mortgage payments. But that isn’t the case. HomeReady will permit borrowers to claim other people’s income for the purpose for qualifying for a mortgage, but will not give mortgage lenders any actual claim against that additional income. This is madness.

Madness is certainly an accurate description. If you want to be more circumspect, economic illiteracy is another option.

The bottom line is that government-subsidized risk is not a good idea.

And also keep in mind that shutting down Fannie and Freddie is just part of the solution. So long as deposit insurance exists, we’re going to have some instability in the financial system. And so long as government wants to subsidize housing for people with poor credit, taxpayers will be on the hook for losses. And so long as there are biases in the tax code for debt over equity and residential real estate over business investment, the economy won’t grow as fast.

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Critical Charts about the Future of the American Economy and the 2016 Election?

James Pethokoukis of the American Enterprise Institute has an intriguing idea. Instead of a regular debate, he would like presidential candidates to respond to a handful of charts from the recent Economic Report of the President that supposedly highlight very important issues.

We’d quickly find out — I hope — who has real deep knowledge on key economic issues and challenges facing America.

I don’t always agree with Pethokoukis’ views (see here, here, and here), but he has a very good idea. He may not have picked the charts I would rank as most important, but I think 5 of the 6 charts he shared are worthy of discussion (I’m not persuaded that the one about government R&D spending has much meaning).

Let’s look at them and elaborate on why they are important.

We’ll start with the chart of labor productivity growth, which has been declining over time.

I think this is a very important chart since productivity growth is a good proxy for the growth in living standards (workers, especially in the long run, get paid on the basis of what they produce).

So what should we think about the depressing trend of declining productivity numbers?

First, some of it is unavoidable. The United States has an advanced economy and we don’t have a lot of “low-hanging fruit” to exploit. Simply stated, it’s much easier to boost labor productivity in a poor country.

Second, to the degree we want to boost labor productivity, more investment is the best option. That’s why I’m so critical of class-warfare policies that penalize capital formation. When politicians go after the “evil” and “bad” rich people who save and invest, workers wind up being victimized because there’s less saving and investment.

But this isn’t just an issue of machines, equipment, and technology. We also should consider human capital, which is why it is a horrible scandal that America spends more on education – on a per-capita basis – than any other nation, yet we get very mediocre results because of a government monopoly school system that – at least in practice – seems designed to protect the privileges of teacher unions.

The next chart looks at the number of companies entering and exiting the economy. As you can see, the number of businesses that are disappearing is relatively stable, but there’s been a disturbing decline in the rate of new-company formation.

As with the first chart, some of this may simply be an inevitable trend. In a mature economy, perhaps the rate of entrepreneurship declines?

But that’s not intuitively obvious, and I certainly haven’t seen any evidence to suggest why that should be the case.

So this chart presumably isn’t good news.

Some of the bad news is probably because of bad government policy (capital gains taxes, regulatory barriers, licensing mandates, etc) and some of it may reflect undesirable cultural trends (less entrepreneurship, more risk-aversion, more dependency).

Speaking of which, the next chart looks at the share of the workforce that is regulated by licensing laws.

This is a very disturbing trend.

Licensing rules basically act as government-created barriers to entry and they are especially harmful to poor people who often lack the time and money to jump through the hoops necessary to get some sort of government-mandated certification.

By the way, this is one area where the federal government is not the problem. These are mostly restrictions imposed by state governments.

The next chart looks at how much money is earned by the rich in each country.

I think this chart is very important, but only in the sense that any intelligent candidate should know enough to say that it’s almost completely irrelevant and misleading.

The economy is not a fixed pie. Income earned by the “rich” is not at the expense of the rest of us (assuming honest markets rather than government cronyism). It doesn’t matter if the rich are earning more money. What matters is whether there’s growth and mobility for people on the lower rungs of the economic ladder.

A good candidate should say the chart should be replaced by far more important variables, such as what’s happening to median household income.

Lastly, here’s a chart comparing construction costs with housing prices.

This data is important because you might expect there to be a close link between construction costs and home prices, yet that hasn’t been the case in recent years.

There may be perfectly reasonable explanations for the lack of a link (increased demand and/or changing demographics, for instance).

But in all likelihood, there may be some undesirable reasons for this data, such as Fannie-Freddie subsidies and restrictionist zoning policies.

As with the licensing chart, this is an area where the federal government doesn’t deserve all the blame. Bad zoning policies exist because local governments are catering to the desires of existing property owners.

By the way, while I think Pethokoukis shared some worthwhile charts, I would have augmented his list with charts on the rising burden of government spending, the tax code’s discrimination against income that is saved and invested, declining labor-force participation, changes in economic freedom, and the ever-expanding regulatory burden.

If candidates didn’t understand those charts and/or didn’t offer good solutions, they would be disqualifying themselves (at least for voters who want a better future).

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The Obama Administration Wants another Housing Bubble…Plus Final Predictions for the 2014 House and Senate Mid-Term Elections

More than 100 years ago, George Santayana famously warned that, “Those who cannot remember the past are condemned to repeat it.”

At the time, he may have been gazing in a crystal ball and looking at what the Obama Administration is doing today.That’s because the White House wants to reinstate the types of housing subsidies that played a huge role in the financial crisis.

I’m not joking. Even though we just suffered through a housing bubble/collapse thanks to misguided government intervention (with all sorts of accompanying damage, such as corrupt bailouts for big financial firms), Obama’s people are pursuing the same policies today.

Including a bigger role for Fannie Mae and Freddie Mac, the two deeply corrupt government-created entities that played such a big role in the last crisis!

Here’s some of what the Wall Street Journal recently wrote about this crazy approach.

Federal Housing Finance Agency Director Mel Watt has one heck of a sense of humor. How else to explain his choice of a Las Vegas casino as the venue for his Monday announcement that he’s revving up Fannie Mae and Freddie Mac to enable more risky mortgage loans? History says the joke will be on taxpayers when this federal gamble ends the same way previous ones did. …unlike most of the players around a Mandalay Bay poker table, Mr. Watt is playing with other people’s money. He’s talking about mortgages that will be guaranteed by the same taxpayers who already had to stage a 2008 rescue of Fannie and Freddie that eventually added up to $188 billion. Less than a year into the job and a mere six years since Fan and Fred’s meltdown, has he already forgotten that housing prices that rise can also fall? …We almost can’t believe we have to return to Mortgage 101 lessons so soon after the crisis. …Come the next crisis, count on regulators to blame everyone outside of government.

These common-sense observations were echoed by Professor Jeffrey Dorfman of the University of Georgia, writing for Real Clear Markets.

The housing market meltdown that began in 2007 and helped trigger the recent recession was completely avoidable. The conditions that created the slow-growth rush into housing did not arise by accident or even neglect; rather, they were a direct result of the incentives in the industry and the involvement of the government. Proving that nothing was learned by housing market participants from the market meltdown, both lenders and government regulators appear intent on repeating their mistakes. …we have more or less completed a full regulatory circle and returned to the same lax standards and skewed incentives that produced the real estate bubble and meltdown. Apparently, nobody learned anything from the last time and we should prepare for a repeat of the same disaster we are still cleaning up. Research has shown that low or negative equity in a home is the best predictor of a loan default. When down payments were 20 percent, nobody wanted to walk away from the house and lose all that equity. With no equity, many people voluntarily went into foreclosure because their only real loss was the damage to their credit score. …The best way to a stable and healthy real estate market is buyers and lenders with skin in the game. Unfortunately, those in charge of these markets have reversed all the changes… The end result will be another big bill for taxpayers to clean up the mess. Failing to learn from one’s mistakes can be very expensive.

Though I should add that failure to learn is expensive for taxpayers.

The regulators, bureaucrats, agencies, and big banks doubtlessly will be protected from the fallout.

And I’ll also point out that this process has been underway for a while. It’s just that more and more folks are starting to notice.

Last but not least, if you want to enjoy some dark humor on this topic, I very much recommend this Chuck Asay cartoon on government-created bubbles and this Gary Varvel cartoon on playing blackjack with Fannie Mae and Freddie Mac.

P.S. Now for my final set of predictions for the mid-term elections.

On October 25, I guessed that Republicans would win control of the Senate by a 52-48 margin and retain control of the House by a 246-189 margin.

On October 31, I put forward a similar prediction, with GOPers still winning the Senate by 52-48 but getting two additional House seats for a 249-187 margin.

So what’s my final estimate, now that there’s no longer a chance to change my mind? Will I be prescient, like I was in 2010? Or mediocre, which is a charitable description of my 2012 prediction?

We won’t know until early Wednesday morning, but here’s my best guess. Senate races are getting most of the attention, so I’ll start by asserting that Republicans will now have a net gain of eight seats, which means a final margin of 53-47. Here are the seats that will change hands.

For the House, I’m also going to move the dial a bit toward the GOP. I now think Republicans will control that chamber by a 249-146 margin.

Some folks have asked why I haven’t made predictions about who will win various gubernatorial contests. Simply stated, I don’t have enough knowledge to make informed guesses. It would be like asking Obama about economic policy.

But I will suggest paying close attention to the races in Kansas and Wisconsin, where pro-reform Republican Governors are facing difficult reelection fights.

And you should also pay attention to what happens in Illinois, Connecticut, Maryland, and Massachusetts, all of which are traditionally left-wing states yet could elect Republican governors because of voter dissatisfaction with tax hikes.

Last but not least, there will be interesting ballot initiatives in a number of states. Americans for Tax Reform has a list of tax-related contests. I’m particularly interested in the outcomes in Georgia, Illinois, and Tennessee.

There’s also a gun-control initiative on the ballot in Washington. And it has big-money support, so it will be interesting if deep pockets are enough to sway voters to cede some of their 2nd Amendment rights.

Returning to the main focus of the elections, what does it mean if the GOP takes the Senate? Well, not much as Veronique de Rugy explains in a column for the Daily Beast.

Republicans are projected to gain control of Congress this time around, worrying some Democrats that major shifts in policies, cutbacks in spending, and reductions in the size and scope of government are right around the corner. I wish! Rest assured, tax-and-spend Democrats have little to fear. Despite airy Republican rhetoric, they are bona fide big spenders and heavy-handed regulators…. Republicans may complain about bloated government and red tape restrictions when they’re benched on the sidelines, but their track record of policies while in power tells a whole different story—and reveals their true colors. …When in power, Republicans are also more than willing to increase government intervention in many aspects of our lives. They gave us No Child Left Behind, protectionist steel and lumber tariffs, Medicare Part D, the war in Iraq, the Department of Homeland Security and its intrusive and inefficient Transportation Security Administration, massive earmarking, increased food stamp eligibility, and expanded cronyism at levels never seen before. The massive automobile and bank bailouts were the cherries on top.

Veronique is right, though I would point out that there’s a huge difference between statist Republicans like Bush, who have dominated the national GOP in recent decades, and freedom-oriented Republicans such as Reagan.

We’ll perhaps learn more about what GOPers really think in 2016.

In the meantime, policy isn’t going to change for the next two years. Remember what I wrote last week: Even assuming they want to do the right thing, Republicans won’t have the votes to override presidential vetoes. So there won’t be any tax reform and there won’t be any entitlement reform.

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Subsidies and Third-Party Payer = Inefficiency and Higher Prices

People sometimes think I’m strange for being so focused on the economic harm that results from third-party payer. But bear with me and we’ll see why it’s a very important issue.

If you’re not already familiar with the term, third-party payer exists when someone other than the consumer is paying for something. And it’s a problem because people aren’t careful shoppers when they have (proverbially) someone else’s credit card.

Moreover, sellers have ample incentive to jack up prices, waste resources on featherbedding, and engage in inefficient practices when they know consumers are insensitive to price.

I’ve specifically addressed the problem of third-party payer in both the health-care sector and the higher education market.

But I’ve wondered whether my analysis was compelling. Is the damage of third-party payer sufficiently obvious when you see a chart showing that prices for cosmetic surgery, which generally is paid for directly by consumers, rise slower than the CPI, while other health care expenses, which generally are financed by government or insurance companies, rise faster than inflation?

Or is it clear that third-party payer leads to bad results when you watch a video exposing how subsidies for higher education simply make it possible for colleges and universities to increase tuition and fees at a very rapid clip?

That should be plenty of evidence, but I ran across a chart that may be even more convincing. It shows how prices have increased in various sectors over the past decade.

So what make this chart compelling and important?

Time for some background. The reason I saw the chart is because David Freddoso of the Washington Examiner shared it on his Twitter feed.

I don’t know if he added the commentary below, or simply passed it along, but I’m very grateful because it’s an excellent opportunity to show that sectors of our economy that are subsidized (mostly by third-party payer) are the ones plagued by rising prices.

It’s amazing to see that TVs, phones, and PCs have dropped dramatically in price at the same time that they’ve become far more advanced.

Yet higher education and health care, both of which are plagued by third-party payer, have become more expensive.

So think about your family budget and think about the quality of PCs, TVs, and phones you had 10 years ago, and the prices you paid, compared with today. You presumably are happy with the results.

Now think about what you’re getting from health care and higher education, particularly compared to the costs.

That’s the high price of third-party payer.

P.S. This video from Reason TV is a great illustration of how market-based prices make the health care sector far more rational.

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Deconstructing Barack Obama, Part II

Yesterday, Part I of this series looked at what motivates Barack Obama. We reviewed a Kevin Williamson column that made a strong case that Obama is an ends-justifies-the-means statist.

Today, we’re going to look at the President’s approach to economic policy and we’ll focus on an article by my former debating partner, the great Richard Epstein.

And since Epstein and Obama were colleagues at the University of Chicago Law School, he has some insight into the President’s mind.

In a nutshell, Professor Epstein says “Obama’s Middle Class Malaise” is the predictable result of bad policy. And the bad policy exists because the President has no clue about economic policy.

…the president is using the bully pulpit to argue for redistributive, pro-regulatory, pro-union policies that he claims will serve the middle class. …The President, who has never worked a day in the private sector, has no systematic view of the way in which businesses operate or economies grow. He never starts a discussion by asking how the basic laws of supply and demand operate, and shows no faith that markets are the best mechanism for bringing these two forces into equilibrium. Because he does not understand rudimentary economics, he relies on anecdotes to make his argument.

I’m not sure whether I fully agree. I suspect Obama doesn’t understand anything about economics, but it’s possible that he does understand, but simply doesn’t care.

Epstein then makes an elementary point about the harmful impact of government intervention.

Unfortunately, our President rules out deregulation or lower taxes as a way to unleash productive forces in the country. Indeed, he is unable to grasp the simple point that the only engine of economic prosperity is an active market in which all parties benefit from voluntary exchange. Both taxes and regulation disrupt those exchanges, causing fewer exchanges to take place—and those which do occur have generated smaller gains than they should. The two-fold attraction of markets is that they foster better incentives for production as they lower administrative costs. Their comparative flexibility means that they have a capacity for self-correction that is lacking in a top-down regulatory framework that limits wages, prices, and the other conditions of voluntary exchange.

I particularly like his point about self-correction. I frequently explain in speeches that markets are filled with mistakes, but that at least there’s a big incentive to learn from those mistakes. With government, by contrast, mistakes get subsidized.

Professor Epstein looks at recent economic history and wisely doesn’t get trapped in partisanship. He correctly notes that we got good results under both Reagan and Clinton when the burden of government was reduced.

Obama speaks first of how the economic engine began to stall, but he offers no timeline. His general statement may square with the economic malaise of the Carter years, but it hardly describes the solid growth during most of the Reagan and Clinton years, as both presidents grasped, however imperfectly, that any expansion of the government footprint on the economy could dull the incentives to production. The situation turned south the past ten years. The second George Bush administrative gave us No Child Left Behind and Sarbanes-Oxley, while Obama followed with Obamacare and Dodd-Frank.

The Bush-Obama years, by contrast, have been rather dismal.

Epstein next speculates whether Obama has any understanding that his policies hurt those he supposedly wants to help.

…his speech offers not one hint that he is aware of the deep conflict between his abject fealty to union objectives and the poor people he wants to lift up. Yes there is an increasing gap between the rich and poor, but that gap won’t narrow if the President keeps plumping for a higher minimum wage that will block poor individuals, many of whom are African-American, from getting a toehold in the economy. No jobs at artificially high wages—which is what will happen, per Wal Mart—is no improvement over plentiful jobs at market wages.

By the way, an even more egregious example of Obama hurting the less fortunate is his opposition to school choice.

Let’s conclude by looking at my favorite part of the article. Epstein writes that Obama is so deluded that he thinks his biggest failures are actually his greatest successes.

…he constantly thinks of his greatest regulatory failures as his great successes. No other president has “saved the auto industry,” albeit by a corrupt bankruptcy process, or “taken on a broken health care system,” only to introduce a set of unworkable mandates that are already falling apart, or “investing in new technologies,” which tries to pick winners and ends up with losers like Solyndra. The great advances in energy have come from private developments, most notably fracking, and not from the vagaries of wind and solar energy, which no one has yet figured out how to store for future use when needed. …It is easy to see, therefore, why people have tuned out the President’s recent remarks. They have heard it all countless times before. So long as the President is trapped in his intellectual wonderland that puts redistribution first and regards deregulation and lower taxation as off limits, we as a nation will be trapped in the uneasy recovery.

Here’s a good example of Obama’s upside-down world where he thinks failure = success. The Washington Examiner today commented on the President’s latest scheme to intervene in housing markets. They start by explaining how Obama’s policies already have failed.

…in February 2009, Obama spoke in Mesa, Ariz., on the housing crisis, promising that his then-forthcoming Home Affordable Mortgage Program would help “between seven and nine million families” stay in their homes. A little over four years later, HAMP was exposed as a flop by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). Just 1.6 million households had actually received HAMP assistance, seven million fewer than Obama promised in February 2009. Worse, many of the HAMP-assisted households ended up defaulting again. As of March 31, according to SIGTARP, 46 percent of the oldest HAMP modifications re-defaulted, compared to 37 percent of the more recent beneficiaries. Many homeowners would have been better off without HAMP, according to SIGTARP: “Re-defaulted HAMP modifications often inflict great harm on already struggling homeowners when any amounts previously modified suddenly come due.”

But the President hasn’t learned from his mistakes. He still wants the government to dictate how the housing market operates.

…middle Americans have every right to be suspicious when Obama says his newest round of policies will make homes more affordable. …while Obama expressed mild interest in reducing the federal government’s role in the housing sector, he also insisted that the government must ensure that Americans will always be able to buy 30-year, fixed-rate mortgages. Why? No other country on the planet has a housing market dominated by 30-year fixed mortgages, and many countries that have no long-term mortgage market at all, like Canada, avoided the 2008 housing bubble and financial crash entirely. There is simply no reason why America should repeat the same housing policy mistakes of the past. But for reasons that aren’t immediately apparent, that appears to be pretty much what Obama is determined to do in his remaining years as president.

I especially like the point about Canada avoiding the financial crisis and the housing bubble. There’s a simple explanation. Our neighbors to the north avoided the government mistakes that caused the housing bubble in America.

Remember, if more government is the answer, you’ve asked a very strange question.

P.S. There’s no such thing as too much Richard Epstein. You can click here for his analysis of the flat tax and click here to watch him destroy George Soros in a debate.

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President Obama Threatens America: “We’re Not Done Yet”

I suggested last year that President Obama adopt “my work here is done” as a campaign slogan.

Admittedly, that was merely an excuse to share this rather amusing poster (and you can see the same hands-on-hips pose, by the way, in this clever Michael Ramirez cartoon).

But I want to make a serious point.

For those of us who want the prosperity and liberty made possible by smaller government and free markets, it would be ideal if the President actually did think his work was done. If that was the case, presumably he wouldn’t propose new schemes to expand the size and scope of the public sector.

Unfortunately, that’s not the case. Indeed, he bragged about providing handouts, subsidies, and bailouts for housing in his recent pivot-to-the-economy speech and he specifically stated “We’re not done yet.”

As I said in this interview on FBN, that phrase could replace “I’m from Washington and I’m here to help you” as the most frightening sentence in the English language.

Obama’s phrase is particularly distressing since he wants more intervention in housing markets – yet it was misguided government intervention that caused the housing bubble and financial crisis in the first place!

Simply stated, you don’t solve the problems caused by the Fed’s easy-money policy with more government. And you don’t solve the problems caused by corrupt Fannie Mae-Freddie Mac subsidies with more government.

The right approach is to get government out of housing altogether. That means getting rid of the Department of Housing and Urban Development. It means privatizing Fannie Mae and Freddie Mac. It even means eliminating preferences for housing in the tax code as part of a shift to a simple and fair system like the flat tax.

Once we achieve all these goals, then we can say “we’re done”…and move on to our other objectives, like dealing with the damage caused by government in the health sector, the education sector, the financial markets sector, etc, etc…

P.S. Some people doubtlessly will complain that bad things will happen if the government no longer is involved in housing, but I think we’ll survive just fine without bureaucrats screwing over poor people and mandating “emotional support” animals in college dorms.

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The Link Between Systemic Risk and One-Size-Fits-All Regulation

After the financial crisis, the consensus among government officials was that we needed more regulation.

This irked me in two ways.

1. I don’t want more costly red tape in America, particularly when the evidence is quite strong that the crisis was caused by government intervention. Needless to say, the politicians ignored my advice and imposed the costly Dodd-Frank bailout bill.

2. I’m even more worried about global regulations that force all nations to adopt the same policy. The one-size-fits-all approach of regulatory harmonization is akin to an investment strategy of putting all your retirement money into one stock.

I talked about this issue in Slovakia, as a conference that was part of the Free Market Road Show. The first part of my presentation was a brief description of cost-benefit analysis. I think that’s an important issue, and you can click here is you want more info about that topic.

But today I want to focus on the second part of my presentation, which begins at about the 3:40 mark. Simply stated, there are big downsides to putting all your eggs in one regulatory basket.

The strongest example for my position is what happened with the “Basel” banking rules. International regulators were the ones who pressured financial institutions to invest in both mortgage-backed securities and government bonds.

Those harmonized regulatory policies didn’t end well.

Sam Bowman makes a similar point in today’s UK-based City AM.

Financial regulations like the Basel capital accords, designed to make banks act more prudentially,  did the opposite – incentivising banks to load up on government-backed mortgage debt and, particularly in Europe, government bonds. Unlike mistakes made by individual firms, these were compounded across the entire global financial system.

The final sentence of that excerpt is key. Regulatory harmonization can result in mistakes that are “compounded across the entire global financial system.”

And let’s not forget that global regulation also would be a vehicle for more red tape since politicians wouldn’t have to worry about economic activity migrating to jurisdictions with more sensible policies – just as tax harmonization is a vehicle for higher taxes.

P.S. For a more learned and first-hand explanation of how regulatory harmonization can create systemic risk, check out this column by a former member of the Securities and Exchange Commission.

P.P.S. Politicians seem incapable of learning from their mistakes. The Obama Administration is trying to reinflate the housing bubble, which was a major reason for the last financial crisis. This Chuck Asay cartoon neatly shows why this is misguided.

P.P.S. Don’t forget that financial regulation is just one small piece of the overall red tape burden.

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Why Are Young Americans Supportive of Obama When His Policies Are So Bad for Them?

Young people voted for Obama in overwhelming numbers, but the question is why?

As I explain in this interview for Blaze TV, they are being hurt by his policies.

It’s not just that youth unemployment is high. Obama’s policies also are hurting those who found jobs. Simply stated, these “lucky” folks are getting below-average pay.

The Stepford Students?

I specifically explain that academics have determined that those entering the labor market in a weak economy will suffer a long-run loss of income.

Some of you may think I’m clutching at straws because I don’t like Obama, but perhaps you’ll believe the man who formerly served as the Chairman of President Obama’s Council of Economic Advisers.

Here’s some of what Austin Goolsbee wrote several years ago for the New York Times.

…starting at the bottom is a recipe for being underpaid for a long time to come. Graduates’ first jobs have an inordinate impact on their career path and their “future income stream,” as economists refer to a person’s earnings over a lifetime. The importance of that first job for future success also means that graduates remain highly dependent on the random fluctuations of the economy, which can play a crucial role in the quality of jobs available when they get out of school.

Goolsbee cites some research based on the career paths of Stanford MBAs.

Consider the evidence uncovered by Paul Oyer, a Stanford Business School economist… He found that the performance of the stock market in the two years the students were in business school played a major role in whether they took an investment banking job upon graduating and, because such jobs pay extremely well, upon the average salary of the class. That is no surprise. The startling thing about the data was his finding that the relative income differences among classes remained, even as much as 20 years later.

He also reports on what other scholars found for regular college students.

Dr. Oyer’s findings hold for more than just high-end M.B.A. students on Wall Street. They are also true for college students. A recent study, by the economists Philip Oreopoulos, Till Von Wachter and Andrew Heisz…finds that the setback in earnings for college students who graduate in a recession stays with them for the next 10 years. These data confirm that people essentially cannot close the wage gap by working their way up the company hierarchy. While they may work their way up, the people who started above them do, too. They don’t catch up.

Now think about today’s young people. They’re buried in debt, thanks to government programs that have caused a third-party payer crisis. Yet they are having a hard time finding jobs because Obama’s policies are stunting the economy’s performance.

And even if they do find a job, the research suggests they will get paid less. Not just today, but for the foreseeable future.

Yet they gush over Obama. Go figure.

P.S. Goolsbee’s recent columns have been less impressive, perhaps because he feels the need to defend Obama.

P.P.S. I’m not suggesting that young people should have gushed over McCain or Romney. Just that they should view almost all politicians with disdain.

P.P.P.S. I also say in the interview that the government should get out of the housing business – both on the spending side of the budget and the revenue side of the budget. And it goes without saying that I also explain the need to reduce the burden of government spending.

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Apparently Learning Nothing from the Fannie Mae-Freddie Mac Disaster, the Obama Administration Wants to Subsidize Banks to Make More Dodgy Loans

Let’s assume you didn’t understand how a garbage disposal worked and, for whatever reason, you decided to stick your arm in one and turn it on. You would do some serious injury to your hand.

The rest of us would wonder what motivated you to stick your arm down the drain in the first place, but we would feel sympathy because you didn’t realize bad things would happen.

But if you then told us that you were planning to do the same thing tomorrow, we would think you were crazy. Didn’t you learn anything, we would ask?

Seems like a preposterous scenario, but something very similar is now happening in Washington. The Obama Administration is proposing to once again put the economy at risk by subsidizing banks to give mortgages to people with poor credit.

“Let’s party like it’s 2006!”

Even though we’re still dealing with the economic and fiscal damage caused by the last episode of government housing subsidies!

Here are some of the unbelievable details from a report in the Washington Post.

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit…officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default. Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.

Brings to mind the famous saying from George Santayana that, “Those who cannot remember the past are condemned to repeat it.”

But what’s especially amazing – and distressing – about this latest scheme is that “the past” was only a couple of years ago. Or, to recall my odd analogy, one of our hands is still mangled and bleeding and we’re thinking about putting our other hand in the disposal.

Some people understand this is a nutty idea.

…critics say encouraging banks to lend as broadly as the administration hopes will sow the seeds of another housing disaster and endanger taxpayer dollars. “If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from,” said Ed Pinto, a resident fellow at the American Enterprise Institute.

What’s also discouraging is that the government already is deeply involved in the housing market – even though this is an area where there is no legitimate role for the federal intervention.

Deciding which borrowers get loans might seem like something that should be left up to the private market. But since the financial crisis in 2008, the government has shaped most of the housing market, insuring between 80 percent and 90 percent of all new loans, according to the industry publication Inside Mortgage Finance. It has done so primarily through the Federal Housing Administration, which is part of the executive branch, and taxpayer-backed mortgage giants Fannie Mae and Freddie Mac, run by an independent regulator.

So I guess the goal is to have taxpayers on the hook for 100 percent of loans.

“Don’t worry, it’s not our money”

Anybody want to guess whether this will end well?

By the way, this is bad policy even if we somehow avoid a new bubble and big taxpayer losses. Even in a”best case” scenario, the federal government will be distorting the allocation of capital by discouraging business investment and subsidizing residential real estate.

And as shown in this powerful chart, that will have adverse consequences for wages and living standards.

The part of the article that most nauseated me was a quote from the head bureaucrat at the Federal Housing Administration.

“My view is that there are lots of creditworthy borrowers that are below 720 or 700 — all the way down the credit-score spectrum,” Galante said. “It’s important you look at the totality of that borrower’s ability to pay.”

Gee, isn’t that nice that Ms. Galante thinks there are lots of borrowers with good “totality” measures? But here’s an interesting concept. Why doesn’t she put her money at risk instead of making me the involuntary guarantor on these dodgy loans?

I’ve already said on TV that we should dump Fannie Mae and Freddie Mac in the Potomac River. And I’ve  argued that the entire Department of Housing and Urban Development should be razed to the ground.

But perhaps this cartoon best shows the consequences of the Obama Administration’s new subsidy scheme.

P.S. We also should get rid of housing preference in the tax code. Our economy should cater to the underlying preferences of consumers, not the electoral interests of politicians.

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Sequestration’s Impact on HUD: Just 358 More Days and Mission Accomplished

As part of my “Question of the Week” series, I had to decide which department of the federal government was most deserving of abolition.

With a target-rich environment of waste, fraud, and abuse in Washington, that wasn’t an easy question to answer. But I decided to pick the Department of Housing and Urban Development, and I had some good reasons for that choice.

• HUD engages in racism and social engineering.
• Urban renewal projects destroy neighborhoods and foment corruption.
• HUD subsidies are grotesquely wasteful.
• There are epidemic levels of waste, fraud, and abuse at HUD.

Well, thanks to the sequester, we can say that we’ve achieved 1.9 percent of our goal. Here are some blurbs from a Reuters report.

The U.S. Department of Housing and Urban Development on Monday said it plans to shut its doors for a total of seven days between May and September due to budget cuts and will furlough more than 9,000 employees on those days. …The agency will determine the exact shutdown dates at a later time.

The motto of special interests

This is what I call a good start.

You won’t be surprised to learn, though, that the bureaucracy is whining that these tiny cutbacks will have horrible effects.

In cataloging the impact of sequestration to a Senate panel last month, HUD Secretary Shaun Donovan warned lawmakers that the government spending cuts would have harsh consequences for housing programs and could threaten Superstorm Sandy recovery efforts in the U.S. Northeast. “The ripple effects are enormous because of how central housing is to our economy,” Donovan told lawmakers.

Well, I hope that the “cuts” will have “harsh consequences for housing programs.” I’ve read Article I, Section VIII, of the Constitution, and nowhere does it say that housing is a function of the federal government.

And I’ve also explained that disaster relief is not Washington’s responsibility.

Most worthless department in Washington?

Last but not least, I agree that housing is important to our economy. But that’s precisely why I don’t want the federal government involved.

Didn’t we learn from the Fannie Mae/Freddie Mac debacle that bad things happen when the federal government tries to subsidize that sector.

Heck, I don’t even want tax preferences for housing.

No wonder I picked the Department of Housing and Urban Development for the background for my video on bloated and wasteful bureaucracy.

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Question of the Week: Which Department of the Federal Government Should Be the First to Be Abolished?

I was asked last week which entitlement program is most deserving of reform.

While acknowledging that Social Security and Medicare also are in desperate need of modernization, I wrote that Medicaid reform should be the first priority.

But I’d be happy if we made progress on any type of entitlement reform, so I don’t think there are right or wrong answers to this kind of question.

We have the same type of question this week. A reader sent an email to ask “Which federal department should be abolished first?”

I guess this is what is meant when people talk about a target-rich environment. We have an abundance of candidates:

• Department of Education
• Department of Agriculture
• Department of Energy
• Department of Veterans Affairs
• Department of Transportation

But if I have to choose, I think the Department of Housing and Urban Development should be first on the chopping block.

Raze the building and put a layer of salt over the earth to make sure it can never spring back to life

I’ve already argued that there should be no federal government involvement in the housing sector and made the same argument on TV. And I’ve also shared some horror stories about HUD waste and incompetence.

• HUD engages in racism and social engineering.
• Urban renewal projects destroy neighborhoods and foment corruption.
• HUD subsidies are grotesquely wasteful.
• There are epidemic levels of waste, fraud, and abuse at HUD.

Heck, I even made HUD the background image for my video on the bloated and overpaid bureaucracy in Washington.

It’s also worth noting that there’s nothing about housing in Article I, Section VIII, of the Constitution. For those of us who have old-fashioned values about playing by the rules, that means much of what takes place in Washington – including housing handouts – is unconstitutional.

Simply stated, there is no legitimate argument for HUD. And I think there would be the least political resistance.

As with the answer to the question about entitlements, this is a judgment call. I’d be happy to be proven wrong if it meant that politicians were aggressively going after another department. Anything that reduces the burden of government spending is a step in the right direction.

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Time to Get Rid of Tax Preferences for Housing in the Internal Revenue Code

Even though I knew some people would call me Scrooge, I wrote a few days ago about why we should get rid of the tax deduction for charitable contributions in exchange for lower tax rates.

Simply stated, I’m a big advocate of fundamental tax reform, and I would like to scrap the corrupt internal revenue code and replace it with a simple and fair flat tax.

Needless to say, that also means getting rid of tax preferences for housing. I make the case against the home mortgage interest deduction in this interview on the Fox Business Network.

Since a short TV interview doesn’t allow much time for a detailed and wonky analysis of tax policy, this is a good time to explain why tax reform doesn’t really change the tax treatment of housing. But also I’ll explain why it is a big change.

I realize that makes me sound like a politician, talking out of both sides of my mouth, but bear with me.

One of the key principles of tax reform is that there no longer should be any double taxation of income that is saved and invested. As you can see in this chart, people who live for today and immediately consume their after-tax income are basically spared any additional layers of tax. But if you save and invest your after-tax income (which is very good for future growth and necessary to boost workers’ wages), then the government tries to whack you with several additional layers of tax.

The solution is a system that taxes income only one time. And that means all saving and investment should be treated the way we currently treat individual retirement accounts. If you have a traditional IRA (or “front-ended” IRA), you get a deduction for any money you put in a retirement account, but then you pay tax on the money – including any earnings – when the money is withdrawn.

If you have a Roth IRA (or “back-ended” IRA), you pay tax on your income in the year that it is earned, but if you put the money in a retirement account, there is no additional tax on withdrawals or the subsequent earnings.

From an economic perspective, front-ended IRAs and back-ended IRAs generate the same result. Income that is saved and invested is treated the same as income that is immediately consumed. From a present-value perspective, front-ended IRAs and back-ended IRAs produce the same outcome. All that changes is the point at which the government imposes the single layer of tax.

So why am I boring you with all this arcane tax info? Because the home mortgage interest can be considered as a front-ended IRA involving more than one party. The interest paid by the homeowner is deductible, and the interest received by the mortgage company is taxable.

Under a flat tax, the system gets switched to something akin to a back-ended IRA. The homeowner no longer deducts the interest and the recipient of the interest no longer pays tax.

Some of you may be thinking that this is a good deal for financial institutions, but a ripoff for homeowners. But here are two very important points.

• First, homeowners that already have mortgages presumably would be grandfathered, thus allowing them to continue taking the deduction. They made a contract under the old rules and shouldn’t have the rug pulled out from under them.
• Second, people taking out new mortgages would benefit since mortgage interest would get the same tax treatment now reserved for tax-free municipal bonds. And because there’s no federal income tax on municipal bonds, that means there’s no tax wedge built into the interest rate.

In other words, homeowners or homebuyers in the new system won’t be able to deduct mortgage interest, but they’ll benefit from lower interest rates. Six of one, half dozen of another.

So why, then, is the housing lobby against the flat tax?

In part, they don’t know what they’re talking about. But what about the smart ones, the ones who understand that there’s no meaningful change in the after-tax cost of getting a mortgage in a flat tax world? Why are they opposed to tax reform.

The answer is very simple. They understand that housing isn’t directly affected by a flat tax, but they are very concerned about the indirect impact. More specifically, they understand that the flat tax eliminates all forms of double taxation in the tax code, and that would mean a level playing field.

In other words, the housing sector is now taxed rationally, and other investments are taxed punitively. Under a flat tax, by contrast, all would be taxed rationally.  So the housing sector would lose its relative advantage. 

So if your industry or sector is the beneficiary of a tilted playing field, then it’s understandable that you’ll be worried about tax reform even if there’s no real change in how you get taxed.

And I suspect the impact of tax reform wouldn’t be trivial.

To get an idea about the potential impact, let’s look at some academic research. Professor Dale Jorgenson of Harvard and another economist from Yonsei University in South Korea estimate that most of the economic benefit of tax reform occurs because capital shifts out of owner-occupied housing and into business investment.

…progressivity of labor income taxation is another major source of inefficiency in the U.S. tax system. This produces marginal tax rates on labor income that are far in excess of average tax rates. A high marginal tax rate results in a large wedge between the wages and salaries paid by employers and those received by households. A proportional tax on labor income would equalize marginal and average tax rates and would sharply curtail the losses in economic efficiency due to high marginal rates. An important challenge for tax reform is to eliminate the barriers to efficient capital allocation arising from ―double‖ taxation of assets held in the corporate sector and the exclusion of owner-occupied housing from the tax base… If both income taxes and sales taxes are replaced by a Flat Tax, and a lump sum tax is used to compensate for the revenue shortfall, the welfare gains are very substantial, $5,111.8 billion U.S. dollars of 2011 for HR and $5,444.3 billion for AS. …Our overall conclusion is that the most substantial gains from tax reform are associated with equalizing tax burdens on all assets and all sectors and eliminating the progressive taxation of labor income… We have shown that the most popular Flat Tax proposals would generate substantial welfare gains.

I don’t pay much attention to the estimates in the study about an extra $5 trillion-plus of wealth. That number is very sensitive to the structure of the model and the underlying assumptions.

But I do agree that tax reform will generate big benefits and that much of the gain will occur because there will be less tax-induced over-investment in housing and more growth-generating investment in business capital.

But as I note in the interview, that’s a good thing. It means more prosperity for the American people and a more competitive American economy.

Government shouldn’t be trying to lure us into making economically irrational decisions because of tax or regulatory interventions. Didn’t we learn anything from the Fannie Mae-Freddie Mac fiasco?

The clowns in Washington have been mucking around in the economy for decades and they keep making things worse. Perhaps, just for a change of pace, we should try free markets and small government and see what happens.

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Middle-Class and Poor People Shouldn’t Subsidize the Mortgages of Rich People

I don’t like coercive redistribution. But I really hate redistribution from ordinary people to rich and powerful vested interests, and I even developed an “ethical bleeding heart” rule to express my disdain for this approach.

Especially since programs that redistribute from the poor to the rich almost always involve corruption – often involving morally bankrupt Republicans.

For whatever reasons, the housing sector has a disproportionate amount of this type of redistribution. Here are some sordid details from a Reuters report about how housing subsidies are lining the pockets of the rich.

In Santa Clara County, the center of the global tech industry and one of the wealthiest places in the United States, most home buyers get help from the government, an analysis of government lending data shows. The same is true in other wealthy enclaves such as Nassau County, outside New York, and Arlington County, outside Washington, the analysis of more than 50 million loans finds. ..What the analysis by Reuters makes clear is the extent to which government programs have helped some of the nation’s most well-to-do communities.

The story provides an example, showing how the government is coercing the rest of us into subsidizing rich people.

Julie Wyss earns $330,000 a year selling real estate in Silicon Valley. When the time came to look for a new home for herself, Wyss settled on a four-bedroom, three-bathroom house in Los Gatos, California, an enclave of young technology entrepreneurs. It has about 2,400 square feet of floor space, four sets of French doors and a price tag of $1.45 million. When she bought the house in June, her main financing was a $625,500 mortgage from Wells Fargo guaranteed by government-backed Fannie Mae. The benefit to Wyss was an interest rate, of 4.125 percent, that was lower than she could have gotten on a loan that was not guaranteed by the government. “It’s a totally sweet deal,” Wyss said.

As happens so often, the government expanded bad policy when problems developed as a result of previous bad policy – sort of Mitchell’s Law on steroids in the case of housing.

Before the financial crisis, the limit on loans guaranteed by Fannie Mae and Freddie Mac was $417,000. But in 2008, …Congress changed the rules so that the companies could back mortgages of up to $729,750 in high-priced areas like Santa Clara. The result is that the government guaranteed 89 percent of U.S. mortgages taken out in the first half of 2012, up from 85 percent in 2011 and 30 percent in 2006, according to data compiled by Inside Mortgage Finance. Big banks still offer mortgages without government backing, but interest rates are higher, standards are more stringent and most people don’t even consider them, said Dave Walsh, a realtor based in San Jose, California. …In 2006, the two entities guaranteed only about one-third of new mortgages in the 20 highest-income mortgage markets in the country. By 2010, that share had risen to about three in four, the data showed.

In other words, we have lots of rich people now sucking on the government teat. This is bad housing policy, bad fiscal policy, and bad social policy (and, as this cartoon illustrates, you eventually hit a point when there’s nothing left to steal).

I have nothing against rich people. But I utterly despise people who get rich using the state. If they earn their money honestly, I’ll defend them to my last breath and I’ll fight against those who want to seize their earnings via class-warfare tax policy.

Sadly, we may be getting to the point where there are more of the wrong kind of rich people in America. That may represent a very dangerous turning point for society, sort of a bizarre version of the famous riding-in-the-wagon cartoons.

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Thomas Sowell Exposes How the Left Advances Statism by Distorting Language

Even though it’s important – particularly in a world with slippery politicians – to define words and terms accurately, I haven’t focused on this issue.

Indeed, a quick search through my archives shows that the only glossary I’ve ever published was this humorous list of financial terms.

And the only dictionary I’ve ever published was this clever example of Republican-to-English humor by a leftist.

Fortunately, Thomas Sowell is taking this issue seriously and he has two columns addressing how certain words are distorted to advance a statist agenda.

Here’s some of what he writes in Part I. He starts with the elastic definition of “racism.”

“Racism” is another term we can expect to hear a lot this election year, especially if the public opinion polls are going against President Barack Obama. Former big-time TV journalist Sam Donaldson and current fledgling CNN host Don Lemon have already proclaimed racism to be the reason for criticisms of Obama, and we can expect more and more other talking heads to say the same thing as the election campaign goes on. The word “racism” is like ketchup. It can be put on practically anything — and demanding evidence makes you a “racist.”

I also like his assessment of “compassion” and “greed.”

In the political language of today, people who want to keep what they have earned are said to be “greedy,” while those who wish to take their earnings from them and give it to others (who will vote for them in return) show “compassion.”

But my favorite from Part I is “hungry.”

A political term that had me baffled for a long time was “the hungry.” Since we all get hungry, it was not obvious to me how you single out some particular segment of the population to refer to as “the hungry.” Eventually, over the years, it finally dawned on me what the distinction was. People who make no provision to feed themselves, but expect others to provide food for them, are those whom politicians and the media refer to as “the hungry.” Those who meet this definition may have money for alcohol, drugs or even various electronic devices. And many of them are overweight. But, if they look to voluntary donations, or money taken from the taxpayers, to provide them with something to eat, then they are “the hungry.” I can remember a time, long ago, when I was hungry in the old-fashioned sense. I was a young fellow out of work, couldn’t find work, fell behind in my room rent — and, when I finally found a job, I had to walk miles to get there, because I couldn’t afford both subway fare and food. But this was back in those “earlier and simpler times” we hear about. I was so naive that I thought it was up to me to go find a job, and to save some money when I did. Even though I knew that Joe DiMaggio was making $100,000 a year — a staggering sum in the money of that time — it never occurred to me that it was up to him to see that I got fed.

Now let’s shift to Part II of Sowell’s glossary, which focuses on the meaning of “access.”

Politicians seem to be forever coming to the rescue of people who have been denied “access” to credit, college or whatever. But what does that mean, concretely? …To take a personal example, Michael Jordan became a basketball star — and a very rich man. I did neither. Was that because I was denied “access” to professional basketball? Anyone who saw me as a teenager trying to play basketball could tell you that I was lucky to hit the back board, much less the basket.

Sowell explains why this debate matters.

When statistics showed that blacks were turned down for conventional mortgage loans at twice the rate of whites, that was the clincher for those saying that “access” was the problem and that racial discrimination was the reason. Since this fit the existing preconceptions in many quarters, what more could you want? Other statistics, however, showed that whites were turned down for conventional mortgage loans at nearly double the rate for Asian Americans. By the very same reasoning, that would suggest that whites were being racially discriminated against by banks that were mostly run by whites. …Statistics on the average credit ratings of people in different racial groups likewise seldom saw the light of day. The average credit ratings of whites were higher than the average credit ratings of blacks, and the average credit ratings of Asian Americans were higher than the average credit ratings of whites. But to lay all these facts before the public and say, “We report, you decide” might well result in the public’s deciding that banks and other financial institutions prefer lending to individuals who were more likely to pay them back.

Fans of Professor Sowell can read more of his work here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here. And you can see him in action here. A truly gifted public intellectual and (thankfully) a prolific writer.

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Despicable and Corrupt Republicans Vote for More Housing Subsidies

Remember my post from a week ago when I said I was not a Republican even though Ronald Reagan and Calvin Coolidge are two of my heroes?

Well, now I have another reason to despise the GOP. Those reprehensible statists just voted to expand federal housing subsidies.

Here are some excerpts from an excellent National Review column by Andrew McCarthy.

Almost two weeks ago, when they figured no one was watching, the Republican-dominated House of Representatives, by an overwhelming 292–121 margin, voted to increase funding for the Federal Housing Administration. Just as government debt hit $15 trillion, edging closer to 100 percent of GDP, these self-proclaimed scourges of spending decided Uncle Sam should continue subsidizing mini-mansion mortgage loans — up to nearly three-quarters of a million dollars.  Given the straits that the mortgage crisis has left us in, to say nothing of the government’s central role in getting us there, one might think Republicans would be asking whether the government should be in the housing business at all. …the Republican House — installed by the Tea Party in a sea-change election to be the antidote to Obamanomics — decided the taxpayers should guarantee FHA loans up to $729,750. Had they not acted, the public obligation would have been reduced to “only” $625,500 per FHA loan — couldn’t have that, right? …thanks to GOP leadership’s good offices, this government mortgage guarantor now sports expanding portfolios, capital reserves acknowledged only in the breach, and the potential for hundreds of billions of dollars in losses. …If Republicans really thought the growth of government was unsustainable, they’d stop growing it.

I complained last month when 8 Republican senators voted to expand housing subsidies via Fannie and Freddie. Well, 17 GOP senators voted for destructive FHA subsidies, along with 133 Republican representatives.

So let’s recap. Everyone knows that government intervention caused the housing crisis, which is why Republicans should be voting to shut down the Department of Housing and Urban Development and enacting legislation to get government out of the housing sector.

But they decided instead that campaign loot from the corrupt housing lobbies was more important than doing the right thing.

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Should Washington Re-Inflate the Housing Bubble?

I have no idea whether George Santayana was a good philosopher, but he certainly was right when he wrote, “Those who do not learn from history are doomed to repeat it.”

Consider the fools in the U.S. Senate. They just voted to expand Fannie Mae and Freddie Mac subsidies, apparently thinking that re-inflating the housing bubble would be a good idea when every sensible person thinks we should abolish these government-created entities.

Here are some blurbs from the Business Week story.

The U.S. Senate adopted a measure that would raise the maximum size of a home loan backed by mortgage companies Fannie Mae, Freddie Mac and the Federal Housing Administration to $729,750. Senator Robert Menendez, a New Jersey Democrat, offered the increase as an amendment to a spending bill today. The measure was approved less than a month after the limit on so-called conforming loans was automatically reduced to $625,500. …The Senate adopted the amendment 60-31. The amendment required 60 votes for approval and was offered during the chamber’s consideration of a package of spending measures. If the Senate passes the underlying bill, the House would then have to vote for it to become law. …The limits, which vary by locale, apply to loans backed by the FHA and government-controlled mortgage companies Fannie Mae and Freddie Mac, which together buy or guarantee about 90 percent of all residential home loans.

For what it’s worth, every Democrat voted for the measure, as well as these Republicans.

Blunt – Missouri

Brown – Massachusetts

Chambliss – Georgia

Graham – South Carolina

Heller – Nevada

Isakson – Georgia

Murkowski – Alaska

Snowe – Maine

Maybe these feckless and irresponsible jokers should spend a bit of time reading Peter Wallison’s work. And here’s a George Will column if they can’t comprehend anything longer than 800 words.

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A Powerful Moral Argument to Get Government Out of the Housing Business

I’ve previously explained that the federal government should have no role in housing and that the Department of Housing and Urban Development should be abolished.

If I haven’t convinced you, then you should watch this powerful video from the folks at Reason TV.

What an outrage.

Politicians create a program, claiming that they will help the less fortunate. But as is so often the case, it’s a scam that winds up hurting poor people and instead lines the pockets of politically connected rich people.

Using the coercive power of government to redistribute from rich to poor is economically misguided. Using the coercive power of government to redistribute from poor to rich is far worse – a combination of bad economic policy and complete moral depravity.

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Another Compelling Reason to Shut Down the Department of Housing and Urban Development

I’ve already explained why the Department of Housing and Urban Development should be eliminated, but a superb column in the Wall Street Journal by my old friend Jim Bovard has my blood boiling.

After reading Jim’s piece, I no longer want to merely abolish HUD. I want to bulldoze the building, cover the ground with six feet of broken glass and rusty nails, and then add a foot of salt to make sure nothing can possibly spring forth again.

In the 1990s, the feds were embarrassed by skyrocketing crime rates in public housing—up to 10 times the national average, according to HUD studies and many newspaper reports. The government’s response was to hand out vouchers to residents…, dispersing them to safer and more upscale locales. Section 8’s budget soared to $19 billion this year from $7 billion in 1994. HUD now picks up the rent for more than two million households nationwide; tenants pay 30% of their income toward rent and utilities while the feds pay the rest. Section 8 recipients receive monthly rental subsidies of up to $2,851 in the Stamford-Norwalk, Conn., area, $2,764 in Honolulu and $2,582 in Columbia, Md. But the dispersal of public housing residents to quieter neighborhoods has failed to weed out the criminal element that made life miserable for most residents of the projects. “Homicide was simply moved to a new location, not eliminated,” concluded University of Louisville criminologist Geetha Suresh in a 2009 article in Homicide Studies. In Louisville, Memphis, and other cities, violent crime skyrocketed in neighborhoods where Section 8 recipients resettled. After a four-year investigation, the Indianapolis Housing Authority (IHA) in 2006 linked 80% of criminal homicides in Marion County, Ind., to individuals fraudulently obtaining federal assistance “in either the public housing program or the Section 8 program administered by the agency.”

In other words, the federal government decided that it wasn’t doing enough damage by being a slumlord. It then decided to directly subsidize rents (often at scandalously high levels), often for the benefit of criminals.

Not surprisingly, proponents of big government are playing the race card, claiming that opposition to rental subsidies is a form of discrimination since a disproportionate share of recipients are minorities. Yet this controversy actually pits law-abiding people, regardless of color, against social-engineering bureaucrats.

…middle-class blacks are the program’s least inhibited critics. Sheldon Carter of Antelope Valley, Calif., testified at a recent public hearing on local Section 8 controversies: “This is not a racial issue. It is a color issue. The color is green and it’s my dollars.” Shirlee Bolds told Iowa’s Dubuque Telegraph Herald in 2009: “I moved away from the city to get away from all this crap. Dubuque’s getting rough. I think it’s turning into a little Chicago, like they’re bringing the street rep here.” Remarkably, HUD seems bent on creating a new civil right—the right to raise hell in subsidized housing in nice neighborhoods.

The bureaucracy’s perverse definition of civil rights is not a recent development, as illustrated by this previous post critiquing HUD’s bean-counting mentality.

The moral of the story, though, is that the federal government has no business being involved in housing. Jim’s closing sentences are a pretty good summary of this outrageous situation.

The Obama administration is now launching a pilot program giving local housing authorities wide discretion to pay higher rent subsidies to allow Section 8 beneficiaries to move into even more affluent zip codes. Hasn’t this program helped wreck enough neighborhoods?

Heck, let’s also add arsenic, lead, and strychnine to the glass, nails, and salt. Maybe some radioactive material as well. No sense taking any chances.

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