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Posts Tagged ‘Housing’

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.

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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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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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 (Pabove) 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 (QD) and b) decreasing the number of rental units supplied to the market (QS). 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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I often write about the failure of government.

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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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.

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.

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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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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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.

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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