Chip Taylor

Subsidizing homeownership, cont.

This time from Hal Varian:

Sure, homeownership is a good thing from society's point of view. Areas with high rates of homeownership tend to be good places to live - but it is hard to disentangle cause and effect in such statements.

Even if one thinks that homeownership deserves some subsidy, does it really deserve as much as it gets?

An excessive subsidy on one asset means that less will be invested in other assets. The money put into building those huge villas on the hillside could have been put into factories, office buildings and schools. Investment in physical capital and human capital makes the economy as a whole more productive, unlike investment in housing.

Given the huge subsidies to housing, it is likely that we as a country have overinvested in this area. Cutting back some of those subsidies would be good economic policy.

That being said, I hasten to add that this is unlikely to happen anytime soon. People have put substantial amounts of their wealth into housing in large part because it has been so highly subsidized. The housing tax subsidy has been built into housing prices, to some degree, and cutting back could lead to painful capital losses on home values.

Earlier post.

UPDATE: Responding to a post by Brad DeLong concerning the article, David Sucher kind of misses the point.

The argument against the mortgage interest deduction (for housing) is that it skews the market....encourages people to buy a residence (free-standing or attached.) The test offered is that we don't have enough "factories, office buildings and schools." I haven't noticed a particular lack of any of those structures.

First a quibble: Varian offered underinvestment in non-residential capital as the likely outcome of oversubsidizing investment in residential capital.

I'm not exactly sure what David means by "test." I think he means that because he can look around and see "factories, office buildings and schools" then Varian must be wrong; we aren't oversubsidizing homebuilding. Now, homeownership also has social benefits, so there are arguments that can be made that counter Varian, but David doesn't make any of them. Perhaps because he thinks the whole issue is a waste of time.

It could well be that the mortgage interest deduction is not a good idea in some ultimate sense -- but there are far higher priorities: the politics are so intractable that why even discuss it? Except as a purely academic exercise?

One good reason for discussing things that aren't politically feasible today is to try to make it more politically feasible in the future. The first step to making a policy change tractable is to change its public image. Hal Varian is trying to make a small contribution in that direction. I say "bravo." David is free to boo.