Mortgaging the Economy

Marc Comtois highlights another fascinating glimpse into the reasoning behind policy ideas that he and I agree are, well, in error. I’m speaking of this paragraph from Slate’s Matthew Yglesias:

… I’m especially enthusiastic about the mortgage part. Suppose homeowners in expensive coastal cities couldn’t deduct their mortgage interest, what would happen? Well, what would happen is that prices would fall. But nothing more dramatic than that. All the deduction does is encourage further bidding up of the price. In a normal market, that bidding up of the price might lead to additional construction. But the main reason those blue metro areas have such expensive houses is that zoning doesn’t allow demand to be matched with supply. No matter how expensive Georgetown or Harvard Square or Park Avenue gets they’re not demolishing the existing structures and replacing them with much larger ones. So you’d get some extra tax revenue this way with no real change in the amount of underlying economic activity.

Look, I’ve been known to make statements about the effects of policies that are arguably over-confident, but at this level of detail, human behavior has a definite x-factor of which policymakers (and policy-propounders) should beware.
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Russ
Russ
8 years ago

“That there are only four potential buyers for a house, rather than eight won’t affect the price if those four are still willing to bid it up.”
And if there are no buyers instead of one, what does that do to the price?

Russ
Russ
8 years ago

That’s right, homeowners. In the world of the fringe-right, buyers are lining up at your door by the dozen to buy your house. No need to worry if a few less think it’s worth it. It’s you who need to pay more taxes! Oh, and please don’t hand the keys over to the bank.
Merrry Christmas,
Wall Street

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