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Housing Subsidies: Capitalism’s Smoke and Mirrors

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Housing SubsidiesI have always looked at government subsidies with suspicion… trying to identify whether they are designed to assist (those in need) or to render support (for a cause). And looking at housing subsidies has been no different.

Housing subsidies to provide assistance with shelter have existed for centuries now, and continue to exist, particularly in developing nations with a high level of poverty, a low level of sophistication in the mortgage and banking systems, and an inefficient or poor land titling system.

There has been economic justification for providing such subsidies based on both the public health argument: due to problems caused by the concentration of population in major urban areas; and the sociopolitical argument: redistribution of wealth to those considered economically disadvantaged to make up for imperfections in the market, and, oftentimes, as a preventive measure of social unrest.

Many, if not most, people would agree with the general use of subsidies in a vertical equity fashion, or the efficient redistribution of wealth for a common social purpose: social justice to provide shelter for those who need it. It is subsidies in housing designed to support a political and not a socioeconomic purpose that bother me. Subsidies as they continue to exist in the US in housing follow in this category – much in exclusivity these days to the subsidies in other developed nations the world over, at least in quantifiable terms. 

There is well over two-thirds of a trillion dollars yearly in interest and property taxes claimed as deductions in the federal income tax, or allowed as a component of the standard deduction for those who do not itemize. As a result, there could be as much as $170 billion ($130 b. in interest and $40 b. in property taxes) in subsidies in 2012 by the federal government; and possibly another $30 b. in the other tiers of government, mostly from the states.

That elicits the question… could those resources, $200 billion annually, be reallocated in the economy in a more efficient way?  I believe most economists would argue, without needing to resort to Debreu’s CRU (Coefficient of Resources Utilization) that the macroeconomic stability of the US would be better served by using those resources in other areas; some providing a larger multiplier effect for the economy, while others might be used to fund much needed infrastructural changes for the long term economic viability of future generations. So, if this distortionary tax/subsidy is a sad anomaly in a mature economy such as the United States, why do we have it and proudly tout it? And even more importantly, why are all of us, citizens/taxpayers, unaware… no, truly ignorant… of the true cost of this tax subsidy and its positive alternative uses? As most of us would suspect, the reason is political… with a touch of greed and self-serving by politicians.

America’s economy, our capitalistic magical perpetual-motion machine has been forever lubricated by that friction-reducer in Washington known as lobbying… the “illuminated” teaching that takes place on the politicians we elect to serve us in Congress. A division of lobbyists, between 20 and 24 for every representative and senator in the Capitol, tutor these elected officials on what’s good for the country, what might be called the gospel of free enterprise according to the special interests they represent.

One might expect some direct proportionality in the money spent by these lobbyists and the economic impact on the industries/causes they represent. And, if housing and healthcare come close in their share of the gross domestic product, shouldn’t both lobbying groups spend similar amounts? Interestingly enough, according to figures from the Center for Responsive Politics, the “healthcare giants” (American Medical Assn., American Hospital Assn., Blue Cross/Blue Shield and different groups of “Big Pharma”) spent $870 million in the last 14 years to indoctrinate (and help reelect) our politicians. Yet, the National Association of Realtors (NAR) spent only $178 million during the same period to spread their industry gospel and keep those government subsidies in place.

It should come as no surprise to find the NAR spending only one-fifth as much as the healthcare mafia. Home ownership has been made part of the American psyche, and the capitalist system, for generations… as were the other myths of exceptionalism or the American dream. Yet, after decades of blotted subsidies, the US fares no better than most industrialized nations in either the ratio of owner-occupied units to total residential units (about 68 percent) or in actual ownership (equity after mortgages are deducted)… a figure which has been decimated after the recent housing bubble.

The bottom line to housing subsidies in America – that is, allowing deductions for interest and property taxes in owner-occupied residences when computing the federal and state income tax – is one of total absurdity, more so than ever now that we have come to accept a global economy which is shifting middle-class wealth from the haves to the have-not nations… and the prospect of increased mobility due to a chronic state of high unemployment in the form of underemployment.

Housing subsidies have been not only economically inefficient, but deceivingly used by a political system using smoke and mirrors to convince us that we are all “capitalists”, instead of pawns in a capitalist system.

© 2012 Ben Tanosborn


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