Arnold Kling  

The Housing Bailout as a Public Good

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Why do we have a housing bailout that spends $75 billion, plus $200 billion in "support" for Freddie Mac and Fannie Mae? By what test is this a public good?

My test is this: would an overwhelming majority of Americans be willing to donate a significant amount of their personal funds to the cause of bailing out troubled homebuyers? If the answer is "no," then it is not a public good.

The answer probably would be "yes" for courts, police, national defense, or cleaner air. If so, then those are indeed public goods.

In a libertarian society, government would not undertake programs for which it could not obtain substantial amounts of voluntary donations. Indeed, one version of an ideal libertarian society is one in which government is funded by donations rather than by coercive taxation.

I do not insist on this latter ideal. However, I do think that it is legitimate to evaluate programs as if they had to be funded by donations. If a program cannot meet that standard but instead is forced down people's throats by our technocratic representative democracy, then that program is immoral. Into that category get placed the housing bailout, the bank bailouts, and the stimulus bill.


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CATEGORIES: Political Economy



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COMMENTS (23 to date)
Pat writes:

Housing bailout to allow 400-year mortgages, control interest rates

[satire]

http://wineandexcrement.com/housing-bailout-to-allow-400-year-mortgages-control-interest-rates/580/

RickC writes:

I watched some of Obama's speech on the housing bailout. He said the money would not go to anyone who had bought a house they clearly couldn't afford. I profess my novice credentials here, but it seems to me that only two types of people took out ARMs or interest only loans; speculators hoping for a quick turn around and profit before the mortage rate jumped and people who really couldn't afford the houses in the first place. Am I wrong? And I'm betting that a great deal of the foreclosures are stemming from those types of mortages.

I'm giving the Prez the benefit of the doubt here. I'll assume he actually believed what he was saying (fatal mistake I know). Frankly though, it boggles my mind as to how one could determine who would qualify and who wouldn't. He threw out the figure of 9 million homeowners. I guess that was pulled out of thin air.

And Professor Kling, all I wrote above aside, I agree with you.

El Presidente writes:

Arnold,

My test is this: would an overwhelming majority of Americans be willing to donate a significant amount of their personal funds to the cause of bailing out troubled homebuyers? If the answer is "no," then it is not a public good.

Does this mean that classification of one thing or another as a public good is a transient property, changing intertemporally with popular sentiment? If so, I'm not sure how we could say anything intelligent about them with respect to their common economic properties. After all, they would be purely arbitrary. What is the utility of ascribing this definition to the term 'public good'? If you are suggesting popular referendum or mandatory scientific polling as a prerequisite for public policy (I think that's what you're saying), I'm not sure that requires redefining the term. So, why do it?

lxm writes:

To RickC: I've always got an ARM. Had four or five over the years. I could afford fixed term and I never bought more house than I could comfortably afford. But ARMs were substantially cheaper. I'd get a seven year ARM and move before the term was over. The first arm I got back in the eighties actually adjusted substantially lower when its term expired. There is nothing intrinsically wrong with ARMs or the people who get them.

Now the people who bought my last house were solid. Had a great family and an income of 130k. They bought too much house and I am sure they are underwater now. They bought at the peak of the market. But they'd been trying to buy a house for about two years and they kept getting out bid. So what were they supposed to do? They had every reason to expect the housing market to continue as it was. They did the best they could, but they did make a mistake. They weren't speculators. They are a family that needed a home. Still does I'm sure. It's easy to say now they should have just rented, but that was not easy to know 4 years ago.

I think Mr. Kling, showing his frustration, frames the question incorrectly. Here's a better way to think about it: Would an overwhelming majority of Americans be willing to donate a significant amount of their personal funds to the cause of saving the American economy from a greater collapse. If the answer is "no," then it is not a public good. But the answer might very well be "yes."

Bob Murphy writes:

Arnold,

I'm really not trying to be a wiseguy here. If you only want the government to fund those activities to which people would voluntarily give their money, then why do we need the middleman? Your rule sounds analogous to, "It's OK if the government levies taxes to pay the wages of all accountants, so long as it pays them their marginal revenue product."

Maniel writes:

Arnold,

When government gives out money - money which does not belong to the decision makers - there are winners and losers, otherwise know as receivers and contributors (and some non-contributors who are not receivers either). The talk about rescuing the economy is a smoke screen to make the losers feel better. It's probably best not to complain too much about this right after the election. If we didn't want this to happen, we should all have voted for Ron Paul.

RickC writes:

Ixm,

Here's my problem. It seems to me, the novice, that the burden of proof concerning the efficacy of this "stimulus" rests squarely on its advocates. I have yet to see any such proof. My own understanding of how we got here has led me to believe that as bad as this will be, the machinations of Bush, Obama and Co. will at best only push the needed correction down the road, and in doing so magnify the eventual and inevitable collapse.

As to the housing bailout itself, I keep thinking of the adage about the seen and unseen. For instance, I am sure there are also many folks who have been saving to buy a house but have been kept out of the market because of inflated prices. Won't the bailout help keep prices inflated instead of allowing for the needed correction? And now they and their children, through taxes (for decades to come), will be paying to help keep the less prudent in the homes they could not afford themselves.

When the current owners/recipients of bailout money, in whatever form it takes, are eventually able to sell their houses for a profit will the taxpayers get a cut?

Aren't Constitution issues being ignored too? Where will contracts stand if bureaucrats or judges are able to modify them at will?

I could go on like this, but I will just end by stating that the law of unintended consequences is being completely ignored by the advocates of the stimulus.

David R. Henderson writes:

Dear lxm,

You write about the people who bought your house:

They had every reason to expect the housing market to continue as it was. They did the best they could, but they did make a mistake. They weren't speculators.

Actually, they were. As you yourself admit, they expected house prices to rise and they made a bet on that assumption.

Best,

David

Randy writes:

El Presidente,

"Does this mean that classification of one thing or another as a public good is a transient property, changing intertemporally with popular sentiment?"

Why not? That's the way it works now. Its just that now the transient properties are cumulative.

Dewey Munson writes:

Nothing illustrates the effect of the failure of the money system to be a store of value than the housing situation.

In almost all cases the high ratio of cost to income requires committing future production to current housing.

The lack of a standard dollar first stimulated dreamy numbers for future dollar value of a home and has now permitted the current dollar value of the identical physical asset to plummet.

All of our other measurements - mass,length, weight,etc have standards - the dollar ??????

I am 87 yrs old living in retirement. My first man-sized job in 1939 paid $.90 an hour.

Had I saved my weekly check for today's expenses it would be useless.

RickC writes:

Mr. Henderson,

Thanks for catching Ixm on the speculation thing. I thought about that last night but it was late and I was trying to get through the couple of thoughts I had.

Actually, I would say all home buyers are in fact speculators. Are they not? And people who got in with ARMs or other such devices were the ones who were gambling the most. They were playing a very dangerous game and now it's time to pay. Except of course, we all have to pay for their debauchery.

Dan writes:

When I am broke and in financial ruin with crippling debt, my answer is to spend more money. Makes sense right?

Yeah Arnold, it is pretty obvious that stealing our money (by taking it or printing it out of thin air) is fairly amoral. Not to mention that they are just giving it to their friends on Wall Street.

Can't wait for the next time our Ponce scheme (economy) collapses when we are all $100,000 in debt instead of the old $25,000 figure. Maybe Obama will take our gold like FDR did.

I think the inflation will be even more fun with the usual sticky wage increases that we all get. This is why I decided to go to Med school a long time ago. Just waiting to open the cash hospitals when the douchebags in congress socialize medicine. I will try to get trauma surgeons to go on strike. See what happens then.

Floccina writes:

lxm was your house the smallest and chapest home available?

Isegoria writes:
If you only want the government to fund those activities to which people would voluntarily give their money, then why do we need the middleman?
For a public good — non-rivaled and non-excludable — we can expect most people to free-ride.

When Kling says voluntarily, I believe he means that the individuals would voluntarily pay their share of the overall cost — and that's what the government is for.

Currently, the government declares what is or is not a public good, how much will be spent, and how much each individual's share will be.

Alternatively, we could move to a clever auction mechanism, which would make the whole process a bit more voluntary.

Richard writes:

Citibank took my toaster oven back!

(satire)

http://www.bondwooley.com

Dan Weber writes:

He said the money would not go to anyone who had bought a house they clearly couldn't afford.

What I understand about the bill is that it helps people whose payments are between (roughly, don't remember the exact numbers) 30% and 50% of their income. If you're under that range, you continue on your own. If you're above that range, triage has declared you dead.

I'm still digesting it, but at first glance it seems a good start. It's definitely true that it will help some people who speculated by over-buying their house. But I'm not sure there is a way out of the mess without some people benefiting that should not. (See: bankers.)

John writes:

The smartest policy for the government would be to (1) encourage renting with tax incentives or subsidies, (2) eliminate the mortgage interest tax-deduction, and (3) initiate some sort of penalty tax on the building of new homes. This policy would essentially drain people who shouldn't own out of homeownership by altering the incentive structure of renting v. buying, while deterring increase in supply of homes. The end result would be more renters and more demand for rentals, which should spur investment in excess housing supply by businesses or moneyed interests with a profit motive. The cheaper cost of rent (subsidized by govt) would allow those former homeowners to avoid bankruptcy or other hardship.

The govt can end the subsidies/tax penalties when the supply of housing has been sufficiently soaked up, and population increases/economic development has enhanced demand enough to create an environment of sustainable ownership again.

jeff writes:

I think there are valid arguments on both side about this government plan. Will it raise the budget deficit? Probably. Will it help? That’s a good question. I think economies go through cycles and this might be one of them. I read a good article on recessions and their history on

http://www.recessioninfocenter.com

lizWCU0966 writes:

I do not believe that the majority of Americans would be willing to donate their personal savings to bail out home buyers who chose to buy "McMansions" and live above their means. In the past the American dream was to own a home. Recently it seems that dream turned into not only owning the biggest home but also the second home, the newest car, the biggest TV, and the best vacations.... the list goes on and on. In the past people saved and budgeted their money. If they couldn't afford it, they didn't buy it. I feel like it is totally unfair to bail out these people. What about all the other Americans who live in modest homes, drive older cars, and save their money in a 401K? Is the government going to give them back the money their 401Ks have lost? I feel these people should have to take responsibility for their actions. Why go into debt buying things they can't afford. They should have to sell off their possessions, cash in
their 401Ks, trade-in their cars and make every
effort possible to get their finances under control.

El Presidente writes:

Randy,

Why not? That's the way it works now. Its just that now the transient properties are cumulative.

The definition I use for Public Goods (others are welcome to use a different one) is something of value which is nonrival and nonexcludable. Those are distinct economic properties. I suppose things could move in or out of those categories, but it is not an arbitrary distinction in terms of economics as it would be in the case of a referrendum. In other words, using my definiton we can't vote to make it so one day and vote to undo it the next.

Jeff writes:

I think there are valid arguments on both side about this government plan. Will it raise the budget deficit? Probably. Will it help? That’s a good question. I think economies go through cycles and this might be one of them. I read a good article on recessions and their history on

http://www.recessioninfocenter.com

Greg Ransom writes:

By the strict economic definition, there really are no "public goods". Not if you go by the strict definition given in economic textbooks.

El Presidente writes:

Good point, Greg Ransom. Not sure I totally agree but there are more shades of grey than either black or white.

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