Friday, February 25, 2011

I Feel So Broke Up, I Wanna Go Home

-- Posted by Neil H. Buchanan

As I clicked the "Publish Post" button yesterday, committing my latest renting-is-better-than-owning post to the eternal blogosphere, I felt a deep sense of unease. At the time, I thought that the unease was caused by my suspicion that I had wimped out. After years of boldly saying that individual home ownership is a bad idea and should be discouraged, I had confronted the transitional issues and flinched. How to change things for the better, I asked? Slowly change people's attitudes, perhaps over the course of decades, I mumbled. Wimpy, wimpy, wimpy.

My discomfort intensified as the day wore on. It soon became clear, however, that the timidity of my position was the least of it. In this post, therefore, I will describe two fundamental errors that infected yesterday's post. Both of them end up further supporting my policy preference (and one might even reduce the wimp factor), but the errors are important for reasons that go far beyond housing policy.

My first error was in describing the housing market and related markets in the stylized terms that one finds in economics textbooks, assuming away real-life complications and acting as if the basic economic models accurately apply to the issues at hand. The most obvious example of this was my blithe assertion that the stock market would immediately and accurately respond to information about future policy changes, adjusting prices to offset those future changes. The closest I could come to a nod of recognition toward the real world was to allow that the market's response would be "adjusted for time value of money and risk," which is actually an even stronger assertion that prices respond perfectly. While many economists point to financial markets as being the closest of all real-world markets to the textbook models, however, it should by now go without saying that financial markets have proven capable of deviating rather severely from what we see in the textbooks.

There was a very good comment on the post, from a reader who goes by the name Doug. Doug gently noted similar errors in my claims about how the prices of houses fully reflect the mortgage interest deduction and other pro-ownership policies, suggesting that I was at least overstating the effect of those policies on home prices. The direct implication of his observations is that I might not need to be so wimpy after all. The more weakly resale prices respond to policy changes, after all, the less we have to worry about current homeowners being hammered by a policy change to discourage home ownership, and the more quickly we can make the changes.

These are merely a few useful examples of broader problems, however. At the very least, they are another illustration of the dangers of reasoning arguendo. Rather than saying, "Assuming (against all reality) that the various markets related to housing work as they do in the textbooks ... ," I said, "Because housing markets work as they do in the textbooks ... ." Even that reading, though, is far too generous. The import of my argument depended almost entirely on the validity of those assumptions. It was not a matter of being able to say that a logical outcome followed even if one stuck to the orthodox assumptions. The outcome was driven by those assumptions.

The first fundamental error in yesterday's post, therefore, was in allowing my traditional economics training to take over my brain entirely. Those who know me would find this at least ironic (and probably hilarious), given how much of my professional life is spent critiquing traditional economics. Still, given how often I have been baited with labels like Marxist, Communist, Socialist, anti-freedom, and so on, it is at least a change of pace to be accused (in this case, correctly) of being too much of a believer in textbook, market-oriented economics.

The second fundamental error in yesterday's post is even more troubling. At its core, my post framed the choice between the current pro-ownership legal structure and my preferred alternative proposal as a matter of removing unnatural policies and returning to an undistorted world where people's true preferences can play out in private, arms'-length transactions. (This is also an assumption in standard economics, but it is much less visible -- and much less widely understood -- than the more standard assumptions that allow the models to "prove" that markets are Pareto-efficient.)

For example, I wrote that "public policy should at least not artificially encourage people to own homes." "Artificially"?! Where did that come from? Obviously, my implicit strategy was to say that the current policy regime is not only bad in terms of its outcomes, but that it is unnatural, a deviation from something pure. This only makes sense, however, if there is a natural baseline against which all other arrangements can be measured. As is acknowledged in the economics literature (and, even more clearly, in the philosophy of science literature), there is no such natural baseline. (I should add, however, that being in the literature has not translated into this concept being widely taught -- or understood -- in economics departments.)

This lack of a neutral baseline means that my argument cannot plausibly be defended as advocating a return to the mythical state of nature, a world where we respect peoples' preferences and get policy out of the the way of happiness and progress. My bottom line, after all, was that we need to change people's attitudes. In that way, I am engaging in what liberals like me are always accused of engaging in: Telling people what is best for them, because I know better. Of course, that is what policy analysis is (liberal and conservative alike), and I do it all the time. I wish, for example, that the vast majority of people would understand that the estate tax will never apply to them, and that they (and the entire society) would be better off if they embraced rather than rejected it. Similarly, I wish that people would come to understand the foolishness (as well as the inherent bigotry) of anti-immigrant and anti-Muslim biases. I wish that gay civil rights were fully recognized and protected, and that women's reproductive rights were not under assault. In short, I wish that whatever is "the matter with Kansas" could be cured.

Preferences for home ownership are no different, in that people are acting in ways that I think are ultimately self-defeating and broadly dangerous. Still, one might argue, is there not something artificial about policies to reinforce those preferences? Given how strongly people believe in the moral importance of home ownership, it is unsurprising that public policy supports those beliefs. Yet we still might say that it is inappropriate for public policy to affirmatively support one view of the good life over others.

The problem with that assertion is that there is no "clean" baseline for public policy when it comes to housing (or anything else). We might look at the deduction for interest on home mortgages and say, "Well, that is clearly an add-on that supports the preference for home ownership. We can just repeal that provision of the tax code, and we will be closer to nature." But what about the failure to tax the consumption value of owner-occupied housing? Any "pure" definition of income or consumption would include this in the taxable base (because it substitutes for renting, which must be paid for out of after-tax funds), yet there is no code section to repeal.

One could still maintain that the tax code would be "purer" if we added a section to make it clear that owner-occupied housing should be taxed as consumption (and thus income). That, however, would undermine the idea that a simpler tax code (i.e., one with fewer sections) is a more natural tax code. More importantly, it assumes that the choice of tax base itself is somehow natural. If we did not have an income tax (or a consumption tax) and replaced it with a wage tax, owner-occupied housing would not be taxed at all. However, if we replaced the federal income tax with a federal property tax, housing would be taxed much more directly (and probably more heavily). And not having any tax at all is not a coherent baseline, because without government enforcement of property rights and contracts, there would be no market for either owning or renting homes.

In the tax area, this is now known as "the Murphy/Nagel point." The idea, however, extends well beyond the question of taxes. Government decisions about zoning, sewage districts, access roads, and so on determine what kind of housing stock will even exist. And non-decisions are decisions. A city with no zoning laws, for example, is still dependent on the range of laws regarding real property, inheritance, nuisance, and so on that will be a necessary part of any gathering of humans living together.

Perhaps an even more obvious example of the baseline problem is in the area of immigration. What is the natural baseline for immigration, against which all other policies should be measured? Being against illegal immigration is no answer, because the issue is what the standard of legality should be. Is no immigration at all the baseline? Or is the non-artificial baseline a "no law/get the government off our backs" world that would amount to open immigration? That latter possibility, at least, would involve no government agents, no government spending, no licensing procedures, no prosecutions, and no apparent government involvement. Of course, the whole notion of being a nation means being able to say what is not part of that nation, so it would be rather odd to say that the natural path to maximum freedom in a country is to abolish the borders of the country.

In short, I framed my argument yesterday to appeal to the idea that we are currently doing something impure and distorted, whereas my supposedly more enlightened proposal would return us to a state of grace. I continue to believe that the current system is a worse choice than a system that would reduce or eliminate private home ownership. No set of policies, however, is the presumptive, non-artificial baseline involving no government intervention. As effective as it can be to frame policy debates as a choice of purity versus contamination, I should have known better.