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You may think I am going to talk about welfare, well I am and I am not. I am going to talk about welfare for the middle/Upper classes.

Recent episodes of Econ Talk have made me think harder about some of the things the government does.

The Federal Government subsidizes people who own homes. Yes people who own homes. It is called the intrest deduction. The Federal Government allows those who itemize to deduct any interest paid on their mortgage.

For many this reduces their taxable income by $10,000 or more a year. My problem is not that there is a deduction (I like the flat tax, or negative income tax). I can’t for the life of me figure out why you would really want to promote home ownership? Really what does it provide? There is the usual argument that people care for it better etc. I don’t think this is it. I think the benefit goes to the state. If this is the case just give some fraction of income taxes to the states!

Here is why I think that. I think people think very differently about renting vs. owning. While currently I am willing to rent a small two bedroom apartment and keep a roommate. I am not willing to buy a similar kind of property. What this does is cause a demand for more high quality housing (no one wants to buy rent quality housing). Because there is more high quality housing property taxes are higher per-capita than in a case where there is not a deduction (incentive to own) on your house.

While I think that is the case I do not think that is the case. Because the deduction on mortgage interest has been around for so long people expect it. I doubt many would have bought as an expensive house if they didn’t expect to get 1/3rd of their interest back from the government. Thus while it might have helped some when first put in place because the prices of real estate would not have adjusted quickly. By now I am sure the benefit of the deduction is baked into prices of all houses now. I don’t think many could even afford their homes without the deduction. I am almost certain though that if there was no deduction that exact same house’s price would have been lower by around the amount of the deduction.

So why do these prices rise to match all added benefits to go along with it. Well the first rule I think to prices adjusting to match something like the deduction is that it must be long term. Prices must be allowed enough time to float to absorb the benefit. Thus a coupon would not have the same affect on prices. A good example is Art Van. Here in Michigan Art Van is always advertising a sale huge amounts off sticker. I have come to think that the sale price is the sticker price and that the “sticker price” is just some made up number. The rest is marketing. On the other hand when another store has its once a year sale I see value in the sale, Not so much for Art Van and its sales 100% of the time.

We are simple animals and like a deal, but we all fall victim to the what have you done for me today. Because the deduction has been around for so long we don’t care any more. Its just extra hoops we will jump into because we have to because the price of houses require it.

The biggest point I hope anyone who reads this (if you do please comment) is that the market will adjust to give housing of X type to someone who produces Y output. The price of the house X will adjust to equal some % of the workers time who has output Y. Thus is the market says programmers should be above average earnings they should have above average housing and the price will reflect all deductions and market realities. People will trade some amount of their Time (read output from work) for housing. And that time will be replaced with a house that takes a builders time, and a loggers time etc. The addition of the deduction does not help in any persons ability to acquire it in the long run. The price of the house will go up (from its deduction free price) to match the deduction. In the end the programmer gets the house a programmer is willing to trade his output for.

I think this idea of we trade time and effort for the output of others (they trade for our output time and effort) and that we always come out to equilibrium is what a large number of people don’t understand. And that any addition/subtraction from the cost will just be subtracted/added back in over time. So that the amount of output is equal.

I will close, I really hate inflation, fed go jump in a creak.