Arnold Kling  

Progressive Nudges for Household Savings

Heritabilities Are Meaningful ... An Urgent Defense of Optimism...

If I were a card-carrying progressive, I would not stoop to being a lapdog for Wall Street and the real estate industry, playing the violin for "affordable housing" and low-down-payment mortgages. True, if somebody buys a house with little money down, they may accumulate equity both by paying off loan principal and through house price appreciation. But they are still gambling, and most of the people who gambled that way five years ago have lost everything. In fact, even when house prices were rising, the asset-accumulation was dissipated as households discovered home equity credit lines and cash-out refis.

Instead, I propose:

1. Saved-income tax credit. Like the earned income tax credit, except that you don't get to use the cash on current consumption. It goes into a saving account, where it might be used for a down payment or for paying for your kids' tutoring or private schooling. (Or is only government-run education acceptable to a progressive?)

2. Rent 'n'save. To mimic the automatic discipline of mortgage payments, create a program where your monthly rent payment includes an extra 10 percent that the landlord deposits in a saving account for you. Again, the saving account can only be used for some long-term purpose.

3. Get rid of the mortgage interest deduction, and instead lower the taxes on savings and corporate profits.

COMMENTS (17 to date)
Silas Barta writes:

Heh, I'd actually had a similar idea to 2) before. See, I'm not picky about the quality of an apartment, but if I stay in a cheap one, I have to live among people who can *only* afford that much, who tend to be a lot more unpleasant and disrespectful of their neighbors (e.g. noise). Which means I end up renting more apartment than I need.

So my idea was for there to be a kind of apartment that charges enough so that only certain people can afford it, but then deposits a large portion of your "rent" payment in a restricted savings/investment account.

Actually, come to think of it, it shouldn't be that hard to give pseudo-renters a good ROR on such savings: since the apartment has a much larger cost of capital than the savings rate, it could pay them some rate between the two.

Thomas L. Knapp writes:

You're only "gambling" when you buy a house if your intent in buying the house is to treat it as an investment. Back in the day -- and I'm not that old -- most people bought houses to, um ... live in.

Guess what? If you buy a $100k house and five years later it would only sell for $80k and not $150k, you've lost nothing, any more than you've lost something if you pay $15 for a radio last week and this week it turns up on sale for $12.99. You bought a house or a radio, and you have a house or a radio.

As a matter of fact, if your area's assessor is honest and timely, reduced sale value of your home merely means that your property tax bill goes down.

Arnold Kling writes:

I don't mind your making comments, but what you wrote is incorrect and unsound reasoning. Since a big purpose of this blog is educational, I must correct you.

You are missing a fundamental economic concept, called opportunity cost. You could have put your money into savings, and then you would have accumulated assets.

rpl writes:


Sure, you could have put your money in savings instead of buying a house, but then you would have had to pay rent to live somewhere. Would the return from those savings offset the rent you were paying? It's doubtful, especially if your finances were such that you were considering putting down 2.5% on a house purchase.


That's a great theory, right up until you have to move for some reason (e.g., finding a new job). Then you find that you can't get out of your house without either defaulting or coming up with a few tens of thousands of dollars. So there is a bit of a gamble involved.

Ryan writes:

I'm with RPL on this one. That's the decision I had to make and given the history of home appreciation, it didn't seem unreasonable that the time. Hindsight is always 20/20.

Yancey Ward writes:
As a matter of fact, if your area's assessor is honest and timely, reduced sale value of your home merely means that your property tax bill goes down.

I would really like to live there. Where is that?

Saxdrop writes:

Don't the Coverdell and Roth tax accounts essentially accomplish your first suggestion?

John Fast writes:

"If I were a card-carrying progressive" I would start by cutting (preferably eliminating) all corporate welfare, "community development grants" (which go to big construction firms and real estate speculators) and other government programs that primarily benefit the rich. I'd put an income limit on who was allowed to receive agricultural subsidies.

Remember, all income tax *deductions* (as opposed to credits) are perverse because they benefit the rich more than the poor, because a poor man getting a $1000 deduction only gets 15% of it, while a rich guy gets 30% or more. So I'd change all income tax deductions (primarily mortgages and health insurance) to tax credits.

For the record I *am* a card-carrying progressive, or at least a bleeding-heart libertarian. Which means I care more about the poor than Obama, Rahm, and the rest of the "let's bail out the rich and ignore the poor" gang in both parties. And I also know which policies actually work, as opposed to the "let's have rallies and riots" all-mouth no-brain crowd.

Thomas L. Knapp writes:

I guess I'm going to have to quibble in a more detailed manner.

If by "gambling" you mean "taking risks," then virtually any human activity is "gambling." When you cross the street you're "betting" that you won't be hit by a truck, etc.

In the normal course of things, however, "gambling" is at the very least generally understood to be risking money -- usually but not necessarily in an enterprise with a considerable element of "chance" -- with an eye toward turning that money into more money.

I guess there's a "gambling" element in the mortgage credit process. The lender and the borrower are both gambling against the universe as "house" -- both betting that the borrower will be able to pay back the loaned sum plus interest -- and both see themselves as having done so for gain (the lender for interest, the borrower for eventual full ownership of the home).

The more closely I look at Mr. Kling's posts, the more I understand that this is mostly what he's referring to, but it still seems to have a tinge of the notion that buying a house per se is gambling in some meaningful sense, and I don't and can't agree with that.

When I talk to friends who claim to be "underwater" and to have "lost money" because their house, if they sold it today, would go for less than the amount they paid (in down + mortgage) for it, I have to strongly resist the urge to grab them by the shoulders and shake them vigorously.

If you bought the house for $X and it would sell for $X - something now, you've only lost money if you sell it now.

There's not really any "gamble" involved outside of "ability to pay mortgage" considerations, because in this casino you're allowed to keep your stake on the table for as long as you want, and to make personal use of that stake until you decide, for whatever reason seems good to you, to "cash out" at some lower, higher, or equal value.

The main thing I'm getting at here is that there's been a cultural change. When I was a kid, my parents rented at first and then bought a house (actually a farm). A few years later, they sold the farm and bought a house in town, where they lived for about 20 years. They sold that, and bought another house.

At no point that I'm aware of did the notion of "will this house sell later for more than we're paying for it now?" enter seriously into their calculations (although in fact they made huge bank on the last move, as that second home was the last house on the block to sell out to a commercial enterprise).

They needed a place to live, they found it more financially sound to buy than to rent, and if the "market value" of the house they were living in fell below what they were paying for it, they didn't bellyache about being "underwater" or "losing money" any more than they would have about the resale value of their used Pontiac or their Magnavox color television.

They weren't "gambling," they were buying something and using it. That the value of what they bought tended to appreciate rather than depreciate was nice, of course, but it wasn't a "bet" or an "investment," it was a friggin' home.

Ditto for the house I live in. If we decide to move some day, we'll try to sell it. Naturally, we hope that we'll get more for it than we paid for it, and we might even sit on it for longer to make sure that happens, but it's our house, not our 401k or stock portfolio -- it's a useful object, not an investment.

These days, everyone who buys a house seems to act like he's taking a flier on stock in an Internet startup or something.

jsalvatier writes:

@ Kling / Thomas : you guys should keep in mind that "We were born with a short position in housing" . This should clarify some of your disagreement.

David N writes:

Contrary thoughts:

Rich folk itemize deductions, mortgage interest and property taxes for the most part. Poor folk get a big fat standard deduction even if they have no mortgage and pay no property taxes. Totally unfair. ;-)

There is an opportunity cost to renting that is being overlooked. Rents often increase. Getting priced out of a place you love after a decade or so and having to leave is not an intangible cost. Owning a home is protection against rising rents.

The amount you put down on your house should be between you and your bank. That means no GSEs and no bailouts. A real libertarian doesn't have "progressive" fantasies, Arnold. ;-)

Lori writes:

Instead of "lower the taxes on savings and corporate profits," how about "lower the taxes on savings OF corporate profits"? In other words, incentives to reinvest profits in the enterprise, rather than distribute them to investors as dividends? Make the rightists happy by entirely tax-exempting capital gains, but treat dividends (when part of an individual's personal income) the same as any other kind of income, subject to tax brackets, etc. I mean, I assume you're incentivizing savings on the grounds that it's a means to the end of capital formation.

The people being Wall Street's lapdogs are not so much card-carrying progressives as DLC "Democrats".

Why should the landlord be the custodian of the tenant's savings? I thought "libertarianism" was supposed to be about not treating adults like children.

Lori again writes:

Oh, I almost forgot, this is a thought experiment with you as a progressive. But I don't think progressive thought approves of 'in loco parentis' type roles for landlords and other businesses. Your hypothetical progressive thinking looks to me more like the technocratic wing than the progressive wing of the Democratic Party.

David N writes:

I agree with Lori that making landlords into fiduciaries is a terrible idea, but I disagree that companies are incentivized to distribute dividends. If anything the opposite is true. Dividends should be taxed only once, as regular income to the recipient. This would put the decision to retain earnings or pay them out on an equal footing. Corporations shouldn't favor acquisitions or buybacks to avoid taxes.

Chris Koresko writes:

@Lori: As a "rightist" I'm not happy about taxes on either capital gains or dividends, because they both tend to lead to double-taxation of income: taxed once when it's collected from one's employer, and then again after it's invested and the dividends or capital gains are taken.

The effect of capital gains / dividends taxation is approximately the same as taxing the original income a rate equal to the sum of the nominal income tax rate and the capital gains tax rate.

I thought "libertarianism" was supposed to be about not treating adults like children. But Arnold's premise was that he is a card-carrying progressive, not a libertarian.

Tom Lindmark writes:

Like all subsidies, the "saved income tax credit" may initially be earmarked for some legislatively mandated purpose, but in time there will be all manner of reasons advanced for "hardship" exemptions and so like the 401K it will become a honey pot to be dipped into. Let's disabuse ourselves of the notion that these sorts of technocratic schemes ever stay within their originally intended boundaries.

More to the point, we seem to be (hopefully) at a turning point at which we have begun to realize that "nudging" via the tax code has led us down a path to ruin. We "nudged" on employer paid medical insurance, we "nudged" on deducting mortgage interest deductions, we more recently "nudged" on eco-friendly investments of all manner and we continue to "nudge", "nudge" and "nudge" ourselves into revenue black holes. Why then as a man who seems to understand the futility and perverse results of this sort of behavior modification are you proposing more "nudges"?

Buzzcut writes:

Thomas is on to something. It is only in the realm of housing that we expect to buy a capital good and have its value increase over time.

People buy cars, appliances, and other capital goods, and accept that they are worth less than they paid for them.

And being "upside down" on a car loan is not uncommon. People often buy new cars while being upside down on an old one. What do they do? They make up the difference out of their own pocket.

Now the scale of home prices is such that being upside down on a mortgage has more severe consequences than a car loan. But the principle is the same.

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