Bryan Caplan  

Talk About Perverse Incentives

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An Important Point Concerning ... Should Steven White Brand Hims...

I hope I'm misunderstanding Ed Glaeser, but I don't think I am:

Since the rich should not be subsidized, the transfer payments should be means tested and limited to families earning less than $75,000 per year. There should also be income checks to make sure that applicants did not misrepresent their income on their loan application. In one sample of 1,000 loans that relied on stated rather than documented income, more than one-half of all loan applicants overstated their incomes by more than 50 percent.
I guess Glaeser might mean that people who lied about their income should not get help. But the most natural reading of this passage is that if someone lied about his income to get a loan, we need to make sure that his lie does not disqualify him from a bailout by putting him over the income maximum.

This would make a nice Monty Python sketch:

Guy Behind in His Mortgage Payments: I'd like to apply for a transfer payment to cushion the foreclosure.

Glaeser: Sorry, your loan application says your income is $90,000. Only people who earn $75,000 or less qualify.

GBHMP: Right, but my actual income is only $60,000. Here's my proof. [Hands Glaesar his pay stubs]

Glaeser: Oh, so you lied to get the loan?

GBHMP: Through my teeth!

Glaeser: Hmm, do you think that could partly explain why you can't make your mortgage payments?

GBHMP: Anything's possible.

Glaeser: Well, you're in luck! As a member of the deserving middle class, the state of Massachusetts has you covered.

GBHMP: [big grin]

Glaeser: NOW DON'T DO IT AGAIN!

GBHMP: [smirking] Wouldn't dream of it, professor!

Here's my admittedly less humorous plan for the "lending mess": People come to terms with the holders of their mortgages, or lose their homes.

That's what the contracts say.

That's what should be done.

Update: Ed says that I was misunderstanding him - see the comments for details.

Come on Bryan-- guess something reasonable. I accept that my editor may have made the sentence confusing-- but I certainly meant that people who lied on their applications should not get aid.
Sorry, Ed, hope there are no hard feelings. :-)


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COMMENTS (5 to date)
Nacim writes:

But what about the children??

Rick Stewart writes:

I don't see anything wrong with giving people in trouble a helping hand. On the other hand (so to speak) I don't trust the gov to figure out who deserves it (just like they haven't figured out who deserves to get corn subsidies in my state, Iowa).

My suggestion, therefore, is to take the amount of the maximum subsidy being suggested, and give it back to all of us in the form of a tax rebate. In addition, we should get a list of all the people who are having trouble with their loan payments, perhaps sorted by zip code.

Then we can decide for ourselves who to subsidize. If it turns out my neighbor is in trouble, for instance, I probably won't decide to subsidize him, because I would prefer the bank owned the house, since he throws a lot of garbage in the street and seldom mows his lawn.

If it turns out my son is in trouble, however, I'll probably give him my check. Or perhaps not - how is he to learn if he doesn't experience the pain of failure?

In any event, I'm sure I'll like the outcome of my decision, which is more than I can say about the outcome of the decision if the gov makes it.

General Specific writes:

I'm all for government spending on matters like R&D, cool telescopes, heck, I'd even agree to spend my tax dollars on rapid transit (maybe).

I'm obviously not a libertarian.

But I can't imagine letting people who lied receive assistance. And I also prefer that we not allow those who didn't lie to receive assistance. The "home owners" will become renters (without scare quotes), the homes will find their appropriate price (and new owners) based upon supply and demand, and whatever mess results in the markets will have to be dealt with through interest rates (as necessary).

ed writes:

I think Rick was joking, but I sort of agree with him. Maybe a better idea would be to send the money to everyone who lives in a neighborhood with high foreclosure rates. Those are the people who are innocent bystanders of this whole mess.

And stop saying these people are losing "their homes." They are losing a house they lived in for a while, but was it ever really theirs? Many of them never put any money down or made anything but a few teaser payments.

Ed Glaeser writes:

Come on Bryan-- guess something reasonable. I accept that my editor may have made the sentence confusing-- but I certainly meant that people who lied on their applications should not get aid.

I include the pre-edited version that I wrote below-- which hopefully should make things clearer--

"And while we are checking on people’s incomes, we should make sure that the families did not misrepresent their income in their loan application. In one sample of 1,000 loans which relied on stated rather than documented income, more than one-half of all loan applicants overstated their incomes by more than 50 percent. We should reward neither deceitful borrowing nor deceitful lending."

The last sentence was eliminated by the editor because it seemed redundant. Perhaps it wasn't-- best wishes, Ed Glaeser

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