Emphasizing Homeownership Is Questionable Policy

Posted on by Christine Harbin

According to a Post-Dispatch article, the housing market in Missouri is very weak, to the surprise of probably no one. Housing groups propose the following solution:

[T]hey would like to see more state money directed to counseling and prevention, to help keep more people […] out of foreclosure. But with the tight state budget, they said a good first step would be a task force, to better organize and coordinate anti-foreclosure efforts, and to raise awareness of the problem.

It would be preferable if government stopped intervening in the housing market because then housing prices would return to their equilibrium level. The high foreclosure rate is yet another example of a government-created problem that would be better solved with less government, not more.

Throwing more state money at the problem is more likely to incite people to buy more expensive houses than they can afford than to reduce the rate of foreclosure. Programs that encourage homeownership already exist at practically every level in the government, but despite these programs, the rate of homeownership has remained steady over time. The $8,000 federal first-time home buyer tax incentive was recently extended, and there are additional ways in which Missouri homeowners can obtain financial assistance, such as a $1,250 tax incentive under the Missouri Homeowners Purchase Enhancement Program and additional incentives for energy-efficient home purchases or upgrades.

Is a task force really necessary “to raise awareness of the problem [of foreclosure?]” Last time I checked, everybody was well aware that the housing bubble burst.

When the government nudges individuals and families into homes that they may not want or be able to afford, the consequences are overwhelmingly negative. Missourians and Americans are better off when individuals live within their means, because fewer people will lose their homes, and fewer people will have to pay to keep others in theirs.

Owning a home may be preferable for some, but homeownership is not suited for all. There are financial and lifestyle factors to consider, and the government does not have enough information to know what is best for each individual and family. I know that homeownership is not for me. Although I am missing out on lucrative tax incentives from the state and federal governments, I choose to rent because it suits my lifestyle and budget better than owning. I have no desire to spend my time doing yard work, fixing things that break around the house, or cleaning guest bathrooms. Similarly, I don’t want to pay to repave a driveway, install new rain gutters, or have an insurance umbrella. I get much more utility from a new iPad than a new patio set. These are my preferences, which would be inappropriate to impose on others; similarly, it’s inappropriate for the government to set artificial incentives that encourage homeownership by individuals like me.

Additionally, encouraging homeownership over renting is poor policy. It could negatively affect the economic recovery, because it prevents workers from moving where the jobs are. Owning a home increases the cost of relocation because it ties an individual and his or her family to a geographic location. It is easier for a renter to relocate for a new job than for a homeowner to do so. Renters can relocate at the end of their lease or find a subletter, but homeowners have to sell their homes — a process that can take years.

Real estate is not a risk-free investment. I am reminded of an article that appeared last year in the Washington Post, “5 myths about home sweet homeownership,” in which Joseph Gyourko, chairman of the real estate department at the University of Pennsylvania, argues against the commonly held idea that homeownership is a investment with good returns and no risks.

Between 1975 and 2008, the price for houses of comparable quality and size appreciated an average of about 1 percent per year after inflation. You would have earned well over 2 percent per year after inflation had you invested in Treasury bills over the same period.

When a person invests her money, she assumes risk. Higher returns are supposed to be the payoff for accepting larger amounts of risk. With the possible exception of Treasury bonds, there is no such thing as a riskless investment. Unfortunately, real estate is all too often viewed as one. Buying a house is just like any other investment — there is a possibility that the purchaser will lose money. In some aspects, real estate is riskier than stocks because houses are not diversified (i.e., in the event of a natural disaster, a person’s entire investment is wiped out). Thorough research and cost-benefit analysis are crucial before potential home buyers make what will be one of the largest financial decisions of their lives.

Vacancy, Legitimated

Posted on by Thomas Duda

According to the United States Census Bureau’s American Community Survey, the city of Saint Louis has an estimated 21.5-percent residential vacancy rate. This rate compares unfavorably to the 12-percent rate for the nation as a whole and aligns closely with those found in Cleveland, Ohio, and Buffalo, N.Y. In raw numbers, this amounts to 38,743 empty housing units within the boundaries of Missouri’s second-largest city.

With vacancy pervasive throughout our community, St. Louisans may often logically conclude that said emptiness is the direct consequence of the stark reality that persons simply do not want to live here in the same numbers that they once did. In fact, it would be difficult to argue that losing nearly two-thirds of the city’s peak population would have a negligible impact on the appearance of the city’s landscape.

But does so much property necessarily remain vacant from a lack of market demand for single-family homes, larger yards, and new business locations, or could vacancy be the product of market distortion by a governmental agency?

At the urging of a colleague, I attended my first ever hearing of the St. Louis Land Reutilization Authority (LRA) on Wednesday morning, looking for an answer.

Land Reutilization Authority Commission Hearing June 30 2010

Within moments of its commencement, the meeting shattered every expectation that I had for a body with the following statutory mandate (emphasis and link added):

The land reutilization authority is hereby created to foster the public purpose of returning land which is in a nonrevenue generating nontax producing status, to effective utilization in order to provide housing, new industry, and jobs for the citizens of any city operating under the provisions of sections 92.700 to 92.920 and new tax revenues for said city.

Instead of operating in a manner consistent with its above-enumerated legislative intent, the LRA appeared to operate according to a morass of opaque cultural practices that stand divorced from any legislative language. Indeed, the insistence by the assembled commissioners that prospective buyers of tax-foreclosed properties have the express written support of the alderman representing the ward that is home to the vacant property struck me as patently absurd. (After all, the word “alderman” does not appear in Chapter 92 of the Revised Statutes of Missouri.) Five people attempted to purchase property from the LRA this month without a letter of support from their alderman. Of those five, four offers were rejected, because the LRA purportedly treats a lack of aldermanic support as a reason to reject a prospective buyer’s offer.

After witnessing Wednesday’s proceedings and perusing the many purchase offers on the LRA agenda, I can say with great certainty that much of the vacancy subject to the LRA’s jurisdiction in St. Louis city is not a consequence of a lack of private demand for property; rather, much of it derives from government legitimation and infringements on the free market.

Growth by State

Posted on by Vince Smith

Many variables affect a state’s economic growth, including public policy, natural resources, geographic location, business centers, etc. The large number of contributing factors make it difficult to definitively attribute growth, or the lack thereof, to any particular variable. However, it is clear that, on the margin, income tax rates matter.

Every dime that the state takes away from an individual or business, through an income tax, is essentially taken out of the productive economy. Consequently, the capital that would have been spent investing in future goods is no longer available to the entity that would have otherwise used it. This, in effect, stifles growth.

Some might argue that public spending pumps that money back into the economy, but the 2009 American Recovery and Reinvestment Act is a perfect example of that kind of Keynesian theory failing in practice. The bill massively increased government spending,but did little to stimulate growth in the economy; unemployment remains around 10 percent. In practice, government spending provides much less of a stimulative effect than comparable tax cuts.

It would be in Missouri’s best interest to lower — or even abolish — the state income tax, thus enabling Missourians to spend and invest more of their own money to grow our stagnant economy. As demonstrated in the table below, which displays average annual growth rates per state between 1997 and 2008, Missouri’s growth ranks seventh-worst in the nation. Abolishing or reducing the state income tax would be a step in the right direction toward positive change.

State Annual Avg. Growth Rate State Annual Avg. Growth Rate State Annual Avg. Growth Rate
Alabama 1.63% Kentucky 0.48% North Dakota 3.39%
Alaska -0.45% Louisiana 1.09% Ohio 0.70%
Arizona 1.69% Maine 1.30% Oklahoma 1.63%
Arkansas 1.32% Maryland 2.00% Oregon 2.71%
California 2.48% Massachusetts 2.55% Pennsylvania 1.68%
Colorado 1.65% Michigan 0.07% Rhode Island 1.84%
Connecticut 1.46% Minnesota 1.78% South Carolina 0.53%
Delaware 0.93% Mississippi 0.86% South Dakota 3.05%
District of Columbia 2.50% Missouri 0.60% Tennessee 1.21%
Florida 1.72% Montana 2.03% Texas 1.65%
Georgia 0.38% Nebraska 1.61% Utah 1.12%
Hawaii 1.35% Nevada 0.75% Vermont 2.74%
Idaho 2.24% New Hampshire 2.04% Virginia 2.14%
Illinois 1.25% New Jersey 1.43% Washington 1.80%
Indiana 0.94% New Mexico 1.67% West Virginia 1.23%
Iowa 1.98% New York 2.95% Wisconsin 1.35%
Kansas 1.77% North Carolina 1.21% Wyoming 2.04%

Source for GDP Numbers: Bureau of Economic Analysis

Cut Spending or Raise Taxes?

Posted on by Vince Smith

The state government is facing a dilemma over whether to cut spending or raise taxes because of a constitutional requirement that the governor sign a balanced budget. It seems like a rather easy decision to cut spending, especially in the midst of an economic downturn, but others do not agree. A letter to the editor published in the St. Louis Post-Dispatch argues that Missouri’s budget problems would best be solved through higher taxes, saying that “the cuts have inflicted irreparable damage on the citizens.”

The faltering economy has certainly made it tough for Missouri, but raising taxes is the last thing we should do. Cutting the budget obviously hurts some state programs but it is a far better option than tax hikes. Higher taxes would lead to fewer productive jobs and less economic growth — this is not a remedy for a healthy recovery. Increased taxes would take more money out of the pockets of individuals and feed it to the wasteful beast that is government. At a time when Missouri’s families are tightening their belts, the Missouri government should follow suit. Missouri and its citizens would be better off if the government let the people of this state keep more of their own money, allowing them invest and grow Missouri’s economy.

Hat tip to John Combest for the link.

Can We Tax the Sun Now, Too?

Posted on by Caitlin Hartsell

Phase one of the federal health care reform starts today! Those who indulge in a certain activity that could increase the likelihood of cancer will feel the effects on their wallet: tanning salons are now subject to a 10-percent tax that is meant to fund further insurance coverage expansion.

This can be seen as a form of Pigovian tax, which raises the costs of certain activities in order to correct for social costs or negative externalities that are not covered in the market price. In this case though, the externalities of tanning beds are internalized: If I choose to tan, I accept the increased risk that I may get skin cancer. If that were to happen, my insurance company and I would have to pay for the cost of treatment. (And it could be that my insurance company chooses to raise my premium if I indulge in risky behaviors, which is their prerogative.) One could argue that a hypothetical person with tanning bed–induced skin cancer could end up costing others in medical bills, but if that were the issue, the problem would lie in the structure of health care provision, not natural externalities.

What’s next? Should we impose more taxes on roller blades, lest I skin my knee or break my ankle? Or junk food? If we want to really get to the root of what causes skin cancer, shouldn’t we be placing the blame where much of it belongs: the sun? It wouldn’t be the first time someone proposed legislation against the sun.

Holding Wall Street Accountable Your Wallet Hostage

Posted on by Joseph Steelman

Right now, our country is in the process of passing legislation that many see as badly needed reform in the financial industry. The reform comes as a reaction to the most recent banking crisis, which sent the world economy into a tailspin.

As we climb our way out of this recession, the last thing we need is monetary policies that would stagnate private capital flow. The second-to-last thing (but if anyone would like to convince me it should at the top of my list, I’d be willing to listen) we need is a rise in the costs of necessary consumer products. Financial products like savings and checking accounts exhibit relatively inelastic demand trends, which gives the producers of those products, the banks, better pricing power. If the proposed regulations are enacted, financial institutions across the nation will incur new costs. My bet is that at least a substantial proportion of those costs won’t come out of their profit margin — they will come out of our pockets.

A recent article in the St. Louis Beacon debates the pros and cons of the proposed regulations. In the article, Dr. Joseph Haslag, the Show-Me Institute’s chief economist and an economics professor at the University of Missouri–Columbia, points out that the proposed regulations miss the mark.

“It’s not the derivatives or the swaps or any of the other complicated financial contracts that are problems by themselves,” said Haslag, who holds the Kenneth Lay chair in economics at Mizzou. “They are mechanisms that parcel out risk. People see these as ways to make big gambles, and there are risks in the world. If you line up your gambles all in one direction, and the risks come out in a certain way, you can lose a lot of money.”

As people in the finance industry seek to maximize their profits, they will find ways around the new regulations. It may very well be the case that these regulations force bankers into even riskier behavior that is outside the scope of presently foreseeable action. The government has no way of knowing or policing the instruments that may be developed next. In fact, by mandating this type of regulatory environment they might very well cause a new variant of the type of behavior they were trying to quash.

As regulatory protocols are activated, the banks with the best chance to survive the rough waters are the the same banks that were implicated in the financial crisis in the first place. On the other hand, small community banks that keep capital localized will have a tough time staying afloat. This is all trouble for consumers.

Yesterday, the Wall Street Journal ran a piece titled “The End of Community Banking. From the article:

What does all this mean for our customers? Less credit will be available, costs will increase, and we will be less able to make loans to regular people who were creditworthy in the past. This is the perfect storm for the small retail banking customer.
[…]
Small community financial institutions care about the people in their communities. Unfortunately, the new financial regulatory reform bill will greatly inhibit our ability to help them.

Reduce Agricultural Subsidies to Reduce Waistlines

Posted on by Christine Harbin

According to a study cited in an article in the Wichita Eagle, obesity rates are increasing in Missouri, and faster than the national average.

The author of the study says that the rising rate is largely attributable to the fact that snack foods and soda are priced lower than healthier foods. He proposes that:

[…] there is more that federal, state and local governments can do to reduce obesity, including taxing sugary drinks, providing incentives to grocery stores that locate in underserved areas and requiring restaurants to clearly label nutritional information on their menus.

Neither the article nor the author of the study discusses the fact that the federal government heavily subsidizes the production of corn, which significantly reduces the market price of starchy and sugary foods to consumers.

Instead of subsidizing the production of a good, and then taxing the consumption of the ensuing unhealthy products, it would be more efficient for the federal government to remove the subsidies entirely. This would cause the price of sugary and starchy foods to increase relative to other foods. Consumers would face a greater natural incentive to eat healthier substitutes like fruits and vegetables because they would be relatively less expensive. This would benefit low-income people in particular, because they pay a greater percentage of their income for food, so eliminating corn subsidies could help to reduce the difference in the rates of obesity across income levels.

As contributors to this blog have argued previously, an individual’s waistline is the responsibility of the individual, not of the government.

Trade Codes and Rent Seeking Are Hot in Missouri Tonight

Posted on by David Stokes

St. Louis County, the city of St. Louis, and Kansas City are all seeing examples of preferred legislation for favored construction trade groups. Thankfully, some of the examples have not gone forward, but others have.

Let’s start in Kansas City, where the city council appears set to establish new code requirements for doors. That’s right — doors. Apparently, the incentive we all have not to get robbed isn’t good enough in KC; now you’ll be subject to mandates to install special doors on new homes, which will raise the cost of housing in KC (although probably only marginally). At least they got rid of one bad part of the proposal:

[Councilwoman Cathy] Jolly brought the idea to the council in April, but encountered resistance from some council members who worried that some of the new code requirements would give a competitive advantage to an Overland Park company that specialized in a device to reinforce door frames.

Jolly insisted she was not trying to play favorites, and the latest version of the ordinance deleted language aimed at a particular device or specification.

I still think the reinforced door requirement is unnecessary, but at least the most “rent-seeking” aspect of the proposal was removed.

On to St. Louis. Before I criticize, I shall praise. There was an insanely obvious example of rent-seeking this month as the fire sprinkler industry attempted to get a county code passed that would require a comprehensive fire sprinkler system in every new home built in the county. I give both the sprinkler industry and the union credit for not even trying to deny the obvious benefits to them. The next item will get no such credit. The article features this quote from the president of the Home Builders Association of St. Louis & Eastern Missouri:

“The sprinkler industry has been basically advocating mandatory sprinklers in all new homes for probably 20 years and realized, ‘We can’t sell this to the general public, so let’s focus our efforts on convincing the fire service community,'” he said.

Mike Mahler, business manager for the 500 members of Sprinkler Fitters Local 268, conceded [the] point but said that did not mean residential sprinklers were not a good idea.

“We got the ball rolling on this because this is a great product,” Mahler said. “We educated the fire marshals: Here’s what sprinklers can do, here’s how they can save lives. And the fire marshals carried the ball from that point on.”

I commend the St. Louis County Council for removing this requirement from the new building code. Mandatory sprinklers are not needed for safety in the county and were properly taken out of the bill.

But on the other hand, the council seems set to approve a new licensing requirement for residential HVAC workers in St. Louis County. The city of St. Louis just passed the same requirement in April. Jefferson County is supposedly going to consider it later this year. Wherever it passes, it’s bad. This type of licensing requirement is a totally unnecessary handout to current HVAC contractors who want to push current and future competitors out of their way. It is “rent-seeking” at its worst. I testified against the bill yesterday at a committee hearing. At least two of the councilmembers asked some terrific questions of the public works director, and appear set to vote against it — although it will still probably pass. One of them summed up the real reasons behind the move in the a Post-Dispatch article about the licensing proposal:

“There is no evidence of a dangerous situation,” [Councilman Greg] Quinn said after the committee meeting. The licensing “was not generated by the public. It was generated by the industry to protect itself from competitors and increase profit,” he said.

To sum up, the makers or installers of doors, fire sprinklers, and heating and air conditioning units have all sought protective measures from local government. The same thing happens all the time at the national level, and it is one of the most depressing aspects of democracy.

Jobs for Sale

Posted on by Joseph Steelman

Good news for Missouri. In a recent press release, Unisys announced that its forthcoming Application Modernization Center of Excellence is expected to create 300 IT jobs right here in St. Louis. And it only cost Missouri taxpayers more than $5 million dollars.

This means someone in Jefferson City thought that it was a good idea to award more than $5 million dollars in tax credits to a Fortune 500 company. Although tax credits aren’t a direct transfer of funds from taxpayers to industry, if a targeted company receives such credits and government spending is not also reduced by that same amount, the marginal tax rate increases for everybody else. Shifting the tax burden in this way is in itself a form of corporate welfare.

There must be a mistake. Someone must have thought that Unisys’ $4.6 billion in revenue last year was a typo. I mean, sure, if the “b” in “billion” were an “m” instead, I would say, “Why not? They are obviously struggling for survival. Last time I checked, kids didn’t need that money for scholarships, the elderly sure don’t need it for health care, and our roads are in pristine shape everywhere I drive. Yep, go ahead and give our $5 million dollars to Unisys; we don’t need it around here.” Unfortunately, in immediate retrospect, I realize that a similar thought had to go through someone’s mind — and what may be even scarier is that this individual has the ability to shift hundreds of millions of dollars in tax burden away from whomever he or she deems worthy.

I’m glad we have safety nets for companies like Unisys; you never know when one of those multinational companies (whose revenue stream is more than half of Missouri’s revenue for last year) might just slip through the cracks.

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