Home Ownership and Wealth

According to Edward Wolff,

median wealth plummeted over the years 2007 to 2010, and by 2010 was at its lowest level since 1969.

I see this as a result of the policy of encouraging the middle class to take a highly levered position in housing. I had just been looking at an earlier paper by Wolff, which looked at the wealth data through 2007. In that paper, if you looked at the middle 60 percent of the wealth distribution, the gross value of their homes accounted for 65 percent of their wealth (because of mortgage debt, their net equity in homes was less than 40 percent of their wealth).

In my opinion, households would be better off if their savings were in diversified asset portfolios, including shares in funds that invest in stocks and real estate. Instead of making a mortgage payment, you should use that money for a combination of paying rent and saving in a diversified portfolio.

I think that the main reason that debt-financed home purchases are the standard savings channel for most households is that it is a mechanism for pre-commitment. Most households will not have the discipline to put money into savings every month. Moreover, of those that have the discipline, many will shy away from higher-yielding assets because of loss aversion. Taking on a mortgage is a way of pre-committing to sinking money into a risky investment (housing is indeed risky in real terms, even though nominal house prices typically rise), rather than spending the money or putting it into low-yielding safe assets.

If public policy wants to take a paternalistic approach to incent savings, we should be looking to create pre-commitment mechanisms that encourage people to set aside money that they invest in diversified mutual funds, rather than highly levered investments in their homes. Of course, such a policy would have to run the formidable gauntlet of the housing lobby.

Note that I would be rather uncomfortable with the idea that the government should take on this paternalistic role at a time when it is engaged in such heavy deficit spending. Politicians would be saying to households, in effect, “Save more so that we can do the spending.”

The Left’s Post-Election Self-Examination?

Brad DeLong writes,

Massachusetts has been walking down this exchange-and-public-program-expansion road for six years now, since Mitt Romney signed RomneyCare. Massachusetts has been vacuuming up doctors and nurses from Costa Rica and elsewhere and still has been finding that the cost of treating your state population is higher when 97% are insured than it was when 88% were insured. And there aren’t enough loose doctors and nurses in the rest of the world for the ACA to vacuum up enough of them to meet the needs of not 1 state but 50 states.

…What is your guess as to what will happen if the ACA works for access, works for quality, works for coverage–but the extra health-care workforce needed isn’t there, and the lines start to get longer?

Pointer from Tyler Cowen.

Until the election, this sort of question had only been asked by conservative economists.

Perhaps this is an early example of the pattern of self-examination that I thought might take place after the election. When it comes to their policy portfolios, the Republicans will be second-guessing themselves in terms of political positioning. Meanwhile, the Democrats may be second-guessing themselves in terms of feasibility.

The Right’s Post-Election Self-examination

Tyler Cowen points to a David Brooks column that praises a number of right-of-center commentators who are more prominent in the blogsphere than elsewhere. Some thoughts of mine:

I doubt that Mitt Romney ever considered drafting any of the people mentioned by Brooks to serve on his policy team. Instead, he just rounded up the usual suspects. I thought that President Obama could have put up a list of Romney’s economic advisers along with their positions in the Bush Administration and asked, rhetorically, “What do you think will turn out differently this time?”

I expect that most of the advice to Republicans will be of the form, “Move closer to my position.” So, for example, I would advise the Republicans to focus on the fact that the government has made financial promises that it cannot keep. In other words, we are broke. I would like to see Republicans insist on an adult conversation about the budget, while soft-pedaling other issues.

Left-wing Democrats will tell Republicans that they need to move closer to the “center,” by which they mean the positions held by left-wing Democrats. Social conservatives will say that Republicans need to jettison their unpopular economic conservatism and instead emphasize traditional marriage in order to appeal to ethnic minorities. Immigration restrictionists will say that Republicans need to hang tough rather than surrender. Libertarians will dream of a Republican Party that moves to the far left on every issue other than economic policy.

Which brings me back to David Brooks. He wants Republicans to elevate the importance of young pundits who combine the background, tastes, and style of the liberal elite with some conservative political views. Bobos in Paradise meets Hayek, or something like that. I assign a low probability to the Republican Party adopting that identity.

Other Recent Essays of Mine

Reforming the Housing Transaction offers suggested improvements in the real estate process.

Who Needs Home Ownership? suggests that the social benefits of home onwership are overstated.

How to Think About QE3 gives an “on the one hand, on the other” analysis.

Subjective Value and Government Intervention looks at how the Austrian economics focus on subjective value tends to bias one against government intervention. Conversely, justification for government intervention often seems to require an expert to calculate value objectively, and this is problematic.

Libertarians and Group Norms points out that libertarians may not have a simple way to respond to the fact that people display group loyalty.

MOOCs and Other Innovations in Education

In September, I published an opinionated survey of education and technology. Among other things, I said that I thought that the hype around MOOCs (massive online open courses) was overdone.

Since writing that essay, one argument in favor of MOOCs has occurred to me. If you think about it, under the conventional model, most students hate many of the classes that they take. As Bryan Caplan pointed out a year ago, the fact that students are typically happy when class is canceled should give one pause. In the standard model, a sizable fraction of the students are only in the course as part of the process of getting a required certification.

With MOOCs, the student body is an all-volunteer army, as opposed to draftees. That might produce better class discussions, assuming that the technological hurdles to having class discussion over the Internet can be addressed.

Deficit Spending and Political Conflict

In Lenders and Spenders, I recently wrote,

this sets the political system up for conflict and strife in year two, when the burden of paying the debt has to be apportioned. As we have seen, it could be divided any number of ways. However, consider this: Lois is expecting three bushels of corn, based on what she produces and her expectation of having her loan repaid. Meanwhile, Sammy is expecting two bushels of corn, based on what he produces. There are only four bushels of corn available, and there will be a political battle over who gets disappointed the most.

This is one of my favorite essays.

Inflation and the U.S. Debt Problem

Timothy Taylor wrote,

if federal deficits are first definitively placed on a diminishing path, then a quiet surge of unexpected inflation could help in reducing the past debts. But on the current U.S. trajectory of a steadily-rising debt/GDP ratio over the next few decades, inflation isn’t the answer–and could end up just being another part of the problem.

He links to analyses that support this conclusion.

Non-fiction Books of the Year

Tyler Cowen gives his list. I agree on Charles Murray and George Dyson. I also read Gertner and Fallows (primarily on Tyler’s previous blog recommendations), and I was happy I did so but not ready to grant best-of-the-year status.

My additions to the list would include James Manzi’s Uncontrolled, Enrico Moretti’s The New Geography of Jobs (in my opinion, one cannot put Murray on the list and leave out Moretti), Bruce Schneier’s Liars and Outliers (that one does not seem to have impressed anyone else I know), Paul Reid’s completion of William Manchester’s three-volume biography of Winston Churchill, and Jonathan Haidt’s The Righteous Mind (this is on an even higher plane, in my opinion–a candidate for book of the decade? See my review essay.)

Reviewing John Allison

I reviewed John A. Allison’s The Financial Crisis and the Free Market Cure for Reasonpapers. I think that one can learn from reading it. I agree with much of his analysis and I share many of his opinions. However, in my judgment the book fails to live up to the standard of argument that I want to encourage. That is, I want people to constantly consider, “What would someone who disagrees with me think about this issue? What might be the unpleasant consequences of the solutions that I am proposing?” etc.

Recycling Incentives

Timothy Taylor writes,

If we want people to be serious about recycling, having a policy of 5-10 cents for returning cans and bottles is likely to be a more effective tools than curbside recycling.

He points out that beverage companies are the bootleggers in the bootleggers-and-baptists coalition in favor of curbside recycling, because communities often use curbside recycling does not raise the cost of distributing beverages in bottles. For economics teachers, this is a three-fer: the concept of externality (how large is the externality created by putting bottles into garbage?), the use of prices to incent behavior, and public choice theory.