Tag Archives: MSNBC

What the Mortgage Interest Deduction can Teach us About Government Failure

Is it hypocritical for a business or a politician to publicly oppose a government program only to turn around and ask for a share in it? Stephen Koff of the Cleveland Plain Dealer posed this question to me a few weeks ago. Likening it to the mortgage interest deduction, I said I didn’t think so.

I oppose the mortgage interest deduction. It pads the pockets of housing-industry special interests. It puts pressure on marginal tax rates to rise in order to make up for the lost revenue. And it likely has little impact on the incidence of home ownership since the value of the deduction is capitalized into the price of homes. (Even if it worked as intended and didn’t end up being capitalized into the value of home prices, it would be a regressive privilege for relatively wealthy home-mortgagers). For all these reasons, I—like most economists—oppose the mortgage interest deduction.

But come April 15, I take the deduction. And though I can’t say for certain, I suspect the same is true of most economists. Why?

The main reason is that not taking the deduction would have approximately zero impact on the problems I mentioned. Those problems only go away if the whole policy goes away. So, I do what I can to expose its faults when I talk to journalists but I don’t forgo it myself.

Whether or not you find this hypocritical, it is an empirical fact that lots of people see things this way. More importantly, this phenomenon is at the heart of the public choice critique of government failure. It explains why bad policy exists.  

Consider pork-barrel spending, as modeled in the prisoner’s dilemma (economists should skip the next two paragraphs). Imagine a community of two constituents. And imagine that each has the choice of two options: take pork or abstain from pork. Taking pork yields a private benefit of $10 for the taker. But because there are deadweight losses associated with taxation, $10 in pork will cost the community $12 in taxes and unrealized economic gain. If this cost is split evenly between the two constituents, and Constituent A is the only one who takes it, then he obtains $4 = $10 – 0.5*$12 (his gain, minus his share of the cost). Constituent B, however, only gets the cost of A’s pork: -$6 = -0.5*$12. The situation is reversed if B takes and A abstains. If both take, then each pays -$2 = $10 – 0.5*24 (the value of the pork minus the cost of paying for two peoples’ shares). Lastly, if both abstain, neither is taxed and neither obtains a benefit. The table below shows these outcomes. The first number indicates Constituent A’s payoff, while the second indicates Constituent B’s.

Player B
Abstain Take Pork
Player A Abstain 0.0 0.0 -6.0 4.0
Take Pork 4.0 -6.0 -2.0 -2.0

 

Irrespective of what Constituent B does, it always makes sense for Constituent A to take the pork. If B abstains, then A should take it because he gets $4.00 instead of $0. And if B takes, then A should also take because losing $2.00 is better than losing $6.00. Similarly, it is always in B’s interest to take. So the “equilibrium” of the game is for both A and B to take pork and for them both to be worse off than if neither took.

The point of the exercise is to show that the incentives of the system lead people to a socially suboptimal outcome. If they could somehow change the entire system—say by prohibiting taxes that fund special interests instead of general welfare—then they could get to the optimal outcome. But without changing the incentives of all players, it makes little sense for any one person to act against his or her interest.

MSNBC has lately taken to airing commercials that highlight federal funding for parochial projects. The commercials are apparently supposed to convince people that the federal government should fund all sorts of local project. As a one-time resident of Arizona I’m sure I benefited from the electricity generated at Hoover Dam. And whenever pork-barrel projects are considered, you can generally count on the local constituents who benefit from them to support them. But that doesn’t mean that the residents of the 48 states other than Arizona and Nevada should have had to pay for the Dam. In fact, the simple model of the prisoner’s dilemma teaches us that the incentives of such a system can lead to suboptimal outcomes.

I take the mortgage interest deduction. And the problem is that I—like every other homeowner—am incentivized to do so, even though the total costs outweigh the total benefits.

What’s the likely impact of Wisconsin’s change to collective bargaining?

Tom Curry of MSNBC has a piece exploring this question. And it is a good one. The literature shows there are alot of nuances in how public sector unions influence fiscal and budget outcomes.

Collective bargaining laws certainly led to rapid unionization. But, what are the effects of these laws on the governments’ books?

Analysis has shown collective bargaining laws have all kinds of impacts. In some cases, they raise spending on unionized activities, but not on overall spending. Earlier studies showed collective bargaining laws led to an increase in wages and employment for unionized workers. However,  O’Brien (1994) refining these earlier studies included a variable for the political activity of unions. He found, collective bargaining may be a pre-condition for unions’ ability to influence budgets, but it is not effective by itself. He finds it is the political activity of unions that is the significant variable affecting municipal spending in fire and police department budgets and that the effect is to increase overall employment.

A great question to consider is will the change in the legal institution of collective bargaining in Wisconsin result in the outcome imagined by reformers?  Collective baragining laws may have changed, but this doesn’t mean that the political influence of unions on public policy is going to suddenly wane. Public sector unions enjoy a degree of “institutional stability” lacking in the private sector which by contrast is subject to market forces.

Brad Pitt Seeks Stimulus

Make it Right House in New OrleansVariety reports that Brad Pitt’s Make It Right Foundation is seeking stimulus money to continue their work building houses in New Orleans’ Lower Ninth Ward:

In a high profile appearance that even drew live coverage on MSNBC, Pitt visited Washington in March to promote Make It Right, meeting with President Obama and House Speaker Nancy Pelosi, along with an array of cabinet secretaries and other elected officials, including Shaun Donovan and Energy Secretary Steven Chu. With Pitt was producer Steve Bing, who has been a benefactor of his housing project.

The foundation was among 12 non-profits joining with the New Orleans Redevelopment Authority to file an application last week for a total of $65 million through the Neighborhood Stabilization Program, which is administered by the Department of Housing and Urban Development. If they get the funding, Make It Right would probably start spending the money in the spring of 2010. Depending on how many homes the foundation has built by then, it could be used to reach their goal of 150 homes in New Orleans or it could expand the program beyond that, said Kim Haddow, a spokeswoman for Make It Right.

The Make It Right Foundation (profiled here on ABC’s 20/20) — as well as dozens if not hundreds of other local initiatives and non-profits — have done incredible work in rebuilding the Gulf Coast after Hurricane Katrina. But much of this success is due to their independence from large government bureaucracies. Stimulus funding has the potential to act as what Jane Jacobs called “cataclysmic money.” There is a real danger that if social entrepreneurs and non-profits like Pitt’s become dependent upon federal funds, they will in effect become arms of the federal government. This would have a dangerous effect on civil society, and reduce our resilience to disasters and shocks, whether natural or economic.

Another problem, of course, is that it’s not a lack of committed federal funds that have slowed rebuilding in New Orleans; it’s the difficulty with getting that money to the street level, and the mixed and oft-changing signals emanating from all levels of government. Stimulus money has the potential to be yet another promise that never comes to fruition, or comes too late to be helpful.

And moreover, having one of the lowest unemployment rates in the country, is New Orleans really the ideal place to invest stimulus cash?

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