How to think about makers and takers

Here is my latest NYT column, on how we ought to be thinking about the issue of makers vs. takers.  Excerpt:

EVERYONE FEELS ENTITLED People tend to think that they have justice on their side, whether it comes to making or taking.

For example, millions of homeowners have spent hundreds of thousands of dollars on the premise that the tax deduction for mortgages will be continued. If they support a continuation of that deduction they hardly feel like brigands, even though a bipartisan consensus of economists doubts the efficiency of this tax break.

As years and decades pass, recipients of this deduction and other benefits start to see them as deeply and richly deserved. Furthermore, almost all of us reap one or more of these benefits, so few individuals are consistently opposed to all government transfers.

It becomes difficult for a politician to articulate exactly what is wrong with this arrangement when the audience itself is in on the game and perhaps does not want to hear about its own takings.

Mark Thoma comments.

You also should read the new (short) book out by Nicholas Eberstadt, A Nation of Takers: America’s Entitlement Epidemic, which came to my attention quite recently.

Comments

The worst and most egregious "taker" is the government -- taxes are theft

And when they "give" you something (1) it's not their and (2) it's generally not for your edification.

Most people (not libertarians it should be pointed out) believe the government is trying to help them and society by things like promoting home (bank) ownership. So, they are understandably confused when economists disagree and then the whole thing blows up.

I think most libertarians fundamentally misunderstand why entitlement programs are so popular. It is not because half the population prefers "taking" to "making." It is because most people realize that they are vulnerable to any number of worst case scenarios involving accident or illness and outliving other family members.

When they consider such possibilities, most people see a lot more dignity in relying on a program of social insurance that we all participate in than relying on charity.

This was a thoughtful and constructive column by Tyler.

Indeed, notice that the most popular entitlement programs are ones that people feel they 'paid into'. Social Security, Medicare and unemployment are structured in this way. If you press people, they will acknowledge that it may or may not be 'their money' they are getting back (die a few months after you turn 65, you probably won't get back what you put into programs like this, live to 95 you'll probably get much more than you put in) but they see the system as integrated into the nature of life.

Dividing the world between makers and takers misses a point. A more mature way to view things begins with the understanding that most of us will play both roles at different points in our lives. As children, unless we were very well paid child actors, we were all takers. As adults we will hopefully be makers for a good long period but the fact that most of us will decline before mortality sets in means we will also become takers again before the grim reaper shows up to collect our ticket.

Curious side note....the space shuttle was going thru LA a few days ago on its way to its eventual home and they had to close down some major roads for the day. A small businessman was complaining that he rents his small storefront for $200 a day so the road being closed directly cost him $200 out of pocket plus whatever profits he would have normally made had it been business as usual that day. Is he also a 'taker'? He didn't build the road, he doesn't maintain it, yet he demands the gov't not close it!

Well, people do not just "feel" they have paid into those programs: they have paid into them as a matter of hard undeniable fact.

Whenever talking about libertarians, it always goes down to "roads" doesn't it?

All right... all right... but apart from better sanitation and medicine and education and irrigation and public health and roads and a freshwater system and baths and public order... what have the Romans done for us?

Rome certainly was good for the soldiers and elite. Not so much for everyone else.
So... good analogy, even though unintentional.

Rome was good for everyone. Just ask the the British around year 450 or Gauls and Italians around year 550. That's why goths were begging the Romans to take them in.

30 to 40% of the population of the empire were slaves. They may not have agreed.

The problem is that people start budgeting for the tax break, and then they get locked in to it

A 20 year fade-out should certainly be painless. I'd go for 10, if it was my choice.

+1

We don't have a tradeoff of all or nothing here, folks.

Indeed. Ignoring the situation will create an all or nothing scenario.

Unfortunately not.

It is well known that the incidence of a property tax increase is borned entirely by the current home owners.

Removing the mortgage interest deduction for future purchases is analogous to a property tax increase; current property owners would immediately bear 100% of the burden.

If the deduction is phased out over time, then the net impact of the tax would be equivalent to the present value of the increasing tax burden, immediately accruing to current owners.

There are political framing, information asymmetry, and other market imperfections at play, but the general result is the same.
Note that we were able to eliminate the deduction for credit card interest a long time ago. That's because the debt holders or prospective debt holders could shift more of the net increased tax burden to creditors because relative supply and demand elasticity differed substantially from the market for real estate and real estate financing.

Notwithstanding the economic objections above, I support any politically pragmatic method of eliminating this welfare destroying subsidy. Unfortunately, sometimes the electorate must be lied to when it cannot be educated. On the other hand, I think the nation is overdue for a leader who would run on a platform of deficit reduction through increased taxes across the base with concomitant spending reductions and guaranteed lower tax rates after eliminating the debt and wasteful subsidies and taxes.

Only a minority of my clients bolt for another financial advisor when I tell them difficult truths. Then again, my clients are, on average, smarter and more responsible than the median voter in Ohio. Also, lying to my clients is a breach of my fiduciary duty, something politicians needn't concern themselves with. Absolute immunity corrupts absolutely.

I don't think that is good "life arc" modeling. Young buyers struggle and need that deduction. We should encourage older demographics to pay it off and deleverage. Whether that would in a net reduction of fees is left to the financial advisor.

(That was speaking of current buyers of course. For future buyers I'd expect prices to be correspondingly lower, and so the change would be pretty much moot. The small net savings would go to renters.)

Nice article (aside the normal quibbles) but where is the vast literature that non-local bureaucracy is superior, especially in light of the first part of your piece and the fact that all the problems we always discuss are big problems and even the small problems in the news are probably big problems. For example, Trayvon Martin may have died in part because of the Federalization of policing- why is it taking 20 minutes for cops to show up when people are begging for them to come?

One fundamental problem with the "Takers" is that political coalitions are normative. Remember, we are at optimum diversity in the recent past. Try explaining that one on a bumper sticker.

I must say, that people put a lot of the responsibility on the voters (the efficient voter theorem? but if lying doesn't work then why lie?) while the government has been telling them over-and-over that they are owed 'their' SS trust fund and the like. The conversation there, for example, will go through the usual cycle: "Of course there is really a trust fund and it is FULL...well, it's not exactly a trust fund...of course there's nothing there, you are silly to have ever thought so...you must hate your grandchildren!...let us tell you how we are going to give you the help you deserve with your medical bills..." I particularly like the one about "well, the market didn't have to take The Fed's offer." Once someone stops committing fraud then I'll buy that it is the consumer's fault.

Yes, here in Greece I've heard the argument that Brussels is superior to regional / national bureaucrats, and there's some truth to that, but the main reason the USA is in trouble IMO is inefficient government and too much of it, as TC has blogged. Does the USA need to be the world's policeman? When no other country seems to either care or contribute? Does the USA need non-means-based Social Security, when most elderly Boomers are both wealthy and are taking more money out than they put in (see: http://www.economist.com/node/21563725?spc=scode&spv=xm&ah=9d7f7ab945510a56fa6d37c30b6f1709 note everybody above age 30 is a leach)? Does the USA need to subsidize the rest of the world in medical research, by not enforcing their patents and taking an anti-patent stance? Here in Greece the price of medical care is about one-third to one-fifth the price in the USA, the standard of care is about the same (having been to both countries). Does the USA need a immigration lottery, when in fact either taking all qualified professionals or having completely open borders makes more sense? Here in Greece they have more or less open borders and nobody seems to mind too much. And btw they pick up trash here 7 days a week, and work at night so the streets don't get congested as they are narrow. People here are fine, the government is broke. Same will happen in the USA unless you can fit all this in a bumper sticker...good luck and keep your investments diversified.

Several times recently I've experienced the thought that some central rule is created because elites like Capitals, but then these rules have to be carried out by the bumpkins we have to deal with. So, we are back to dealing with bumpkins, now without the discretion to use common sense even after I explain it to them.

Sounds like it is time to embrace the Greek model.

Already there. The only difference is that others are still willing to lend you money.

Oh, yeah, except we aren’t locked into a fiscal union that is killing our recovery, we don’t have massive tax evasion, total compensation to government workers hasn’t increased by over 50% in less than 10 years, our debt isn’t 160% of GDP, and our economy is growing every quarter. Crap, maybe aren’t there.

*monetary* union.

"Does the USA need non-means-based Social Security, when most elderly Boomers are both wealthy and are taking more money out than they put in "

Ray, really? No, the US would not beneft from means-tested only public pensions...that would be welfare, and all welfare is bad (or so I hear) and must be dismantled. Old age poverty used to be pressing problem in the US. No, most elderly are not independently wealthy in the US, most depend on Social Security to make ends meet. Duh, it's a pay-as-you-go pension scheme, you put in as a young worker, you take out as a retiree.

I think this maker-taker discussion would benefit from some more careful life cycle analysis. Many, many government programs (entitlement and education) are smoothing out shocks and overcoming access to credit barriers over the life cycle that all but the wealthiest would face. We are the 100%...makers and takers alike.

Social Security is already means tested in a roundabout way. If your income is high, your social security benefits become subject to income tax. Granted that income tax revenue isn't credited directly to the Social Security fund but it is all part of the mix, no?

Beyond that what exactly would means testing SSI look like? If it's simply based on income then yes you'll save some money from working seniors and high income seniors, but not much. If it's based on assets and wealth you're going to start having to deal with a lot of asset hiding, gaming the system and intrusive gov't investigations into personal finances (look what happens when people try to get Medicaid to pay for their parent's nursing homes....having to explain cash withdrawls from their bank accounts up to five years in the past!).

And to what ultimate purpose?

"where is the vast literature that non-local bureaucracy is superior?" I wonder if this is a beg for cognitive error. I mean, absent federal rules on X, do you just assume you'd live in a community that made good decisions on X? There are a lot of bad schools and bankrupt cities out there. Indeed localities have rather more dramatic failures in the US than we have at the national level. My county has bankrupted and defaulted in the past.

It boils down to net taxpayers vs. net tax consumers.
Eberstadt and Galston will debate Thursday, Oct. 18 from 6-8 pm, at the John Tishman Auditorium of the New School [for Socialist Research], 66 W. 12th Street, People's Republic of New York.

Dare I point out that your "taker" example is not really a good one. People with mortgage deductions are paying a lower net tax due to deductions, but are still paying taxes. Eliminate the deduction and lower the rate (which is what Romney/Ryan are proposing). This was done with the Tax Reform Act of 1986 - top rates were lowered by a third, deductions reduced and the income tax receipts continued to grow. Joe Biden voted with 96 other Senators to pass TRA86.

So you are suggesting we increase net tax receipts, if TRA86 is your model. And that is something Romney is saying he will not do.

+1 to Jan. Care to rebut, Rich B?

There's a compromise out there where the right gets what they want (lower rates, less deductions) and the left gets what they want (and what is needed...higher overall receipts). But Grover's Army won't bite.

But revenue from business taxes decreased because for the first time in our history the top personal income tax rate was less than the max business tax. so ¨small¨ businesses filed as a LLC.
http://visualizingeconomics.com/2012/01/24/comparing-tax-rates

Their tax could be negative with the MID. Heck. It could be negative without it.

Or, to put it another way, how much in taxes does one have to pay to have a positive net tax? $1 in paid taxes is still a "net taker" obviously. How about $10? $100? $1,000? $10,000? Where exactly is the line?

What all is counted as a gov't benefit? Is there some monetary value placed on one's personal share of the benefit created by "national security?"

"Fundamental improvements to education would ... take some educational finance and control out of the hands of local municipalities. It is no surprise that well-off families want to keep a system that has done very well by them, and that the poor often lose political battles over education."

Your argument here seems to be that we can give the poor the power to win political battles over education by removing from them the power to win political battles over education.

Breitbart caught alot of flack presenting an edited video of Shirley Sherrod talking about racism in granting agriculture grants. It turns out that missing video changed the whole story completely and Breitbart ended up with egg on his face. Now it appears that Romney's 47% remark was also from an edited video missing 1-2 minutes. http://www.breitbart.com/Big-Journalism/2012/09/19/Mother-Jones-Admits-Romney-Tape-Missing-One-or-Two-Minutes

How can you write a whole column about a remark and attribute malice or anything without the full context?

You think reform of the public school system is what this country needs? The entire sector should be privatized. The current system does not benefit poor nor rich.

Isn't this a common problem?

Even if a slave holder disagrees with slavery, he will keep his slaves because to set them free would bankrupt him
Even if a taxi driver disagrees with medallions, he will keep his because to eliminate them would bankrupt him
Even if a homeowner disagrees with the mortgage interest deduction, he will want to keep his because to eliminate them would cost him money
On and on... Its everywhere.

I just assume that economists have analyzed these situations for a "best" (least bad) solution

NormD clearly hasn't gotten his period yet.

Can't help but notice the strawman offered up by Thoma:

"...even with all its imperfections I just don't believe that no government at all will result in a better outcome for the vast majority of Americans....I want to improve government, not kill it."

Right, as if we are having a debate over whether to embrace anarchy.

This also stood out:

"...in many cases the answer is a government that represents all of our interests, not just those who can provide campaign cash in great volumes. Getting there is a problem -- how do you get a captured government to uncapture itself?"

Well yes, an uncaptured government would be great. But has this ever happened in the history of mankind? As long as government exists, people will attempt to influence it, and some will be more successful than others.

This kind of reminds me of the public school/voucher debate. Some people are just more interested in the method (public/government-run schools) than the results. It's not that they want the best-educated kids possible, regardless of what method that takes. They start from the premise that it has to be the government doing the educating, and go from there. Same with Thoma. He knows that government is screwed up, and pretty much always has been, but he is so married to it that his biggest priority is trying to fix it rather than coming up with alternative methods for achieving desired outcomes.

"Right, as if we are having a debate over whether to embrace anarchy. "

You hear this trope a lot, but to be fair the other side calls everything they don't agree with 'Socialist' so there's unwarranted histrionics flying in both directions.

Wow.

Feels like a lot of obfuscation going on here.

Here's the last sentence in Tyler's column:

"It is therefore correct to reject Mr. Romney’s depiction as off-base and misleading. Yet the fact that he didn’t present the truth is an indication that the problem is actually worse than many of us realize."

I think this is Tyler's round about way to say that Mr. Romney is correct, but he did not go far enough because we are all takers. But it's really hard for me to say for sure because his language is so convoluted.

Tyler uses the mortgage deduction as an example of how we feel entitled. The mortgage deduction is not an entitlement. It is a policy intended to promote home ownership. It may or may not work but people rely on it being there because the government has said it would be there. In other words there is an implied contract between the government and the citizen that this deduction would be available. It's an implied contract, not an entitlement.

What Tyler is really talking about are entrenched interests (e.g. farmers, mortgagors, government bureaucrats) and not makers and takers.

Perhaps what Tyler really should have concluded is: "It is therefore correct to reject Mr. Romney’s depiction as off-base and misleading. Mr. Romney would have been better advised to argue that entrenched interests, as represented, for example, by the carried interest loophole, are strangling innovation and growth in America and must be eliminated for America to more forward."

Perhaps Tyler should go read this article: http://www.nytimes.com/2012/10/14/opinion/sunday/the-self-destruction-of-the-1-percent.html

His piece also left me wondering if the "talent drain" to DC was better or worse for real wealth making (relative to taking) than the "talent drain" to Wall Street.

The drain of the smartest and most talented Americans to both Washington and Wall Street is a product of the over-regulation of most of the rest of the economy. Where would you have them go - aside from the lightly regulated and still productive Silicon Valley? To the pharmaceutical industry which is shrinking and cutting R&D budgets? How about the nuclear industry or the aviation industry? Nevermind, the NRC and FAA make it prohibitive to pursue innovations in these fields. Well, perhaps they could develop breakthroughs in the auto industry like the self-driving cars that Marginal Revolution has frequently highlighted?

A test for those who think excessive regulation doesn't negatively impinge upon technological progress and hence economic growth today is when self-driving cars become widely available in the U.S.. Sergey Brin says it will be 5 years - I bet it will be over a decade and quite possibly closer to 20 years.

And I had always pegged you as a pro-government optimist, Ranjit. I must slow down when I read here.

I was complaining about the one-sided critique, not the critique itself. I believe shadow banking and other lightly regulated areas of finance grew too...let me guess you'll blame that on the regulation in other areas too. I agree regulations have costs, but they have benefits too. I very much want a Google car (driving stresses me out, esp. around DC), but I don't want to be in it with my kids when it plows through a road detour. Safety is big for people (maybe too big), but it's a valid objective. Regulation slows us down, but technological advance need not be a high speed chase. As for your test, I'd say 5 to 10 for the driverless car, but I am an optimist.

His piece also left me wondering if the “talent drain” to DC was better or worse for real wealth making (relative to taking) than the “talent drain” to Wall Street.

Any evidence that such a drain exists? By evidence I mean actual data and not anecdotal stories about Smart College Boy/Gal taking a job with the Federal gov't because of the job market? Keep in mind gov't employment has been shrinking these past few years while private employment has been going up. How many workers at Google, for example, have left to take gov't jobs or jobs at private equity firms?

Boonton, you misread and misunderstand the reasons for the high income around the DC area. Smart College kids aren't taking jobs with the federal gov't. Smart college kids are taking jobs lobbying, advising, and consulting in the DC area.

Is being really smart an advantage when it comes to lobbying? I'm thinking an advantage would be having connections and the interesting thing about that is that in a network everyone can't be 'superconnected'. The number of Congresspeople is the same as it was 30 years ago. Perhaps the pay for being connected to a majority of Congressmen is higher than it was 30 years ago, but the number of people who are actually well connected to them can't grow equally as much.

And the question I asked wasn't whether there were smart kids taking jobs in the DC area, it was whether there is any evidence of an actual 'talent drain' to DC and Wall Street? To establish this you should be able to show very low unemployment and high wage increases for the highly talented everywhere but DC and Wall Street. For example, it should be quite easy for a computer science whiz or data minded sociologist to land a high paying job at Google or Bing or Yahoo as these companies are supposedly in an economic battle with DC and Wall Street for 'talent'. Last I heard, though, getting such positions was by no means easy for a highly talented person and while walking around Wisconsion with a PhD in math will probably lead to a better economic outcome for you than walking around as a HS dropout, it's again by no means a sure thing.

It seems to me that virtually all of us in rich countries take more than we give- this is the magic of a free society, and I support it's continuation.

Brian wins the thread

"It becomes difficult for a politician to articulate exactly what is wrong with this arrangement when the audience itself is in on the game and perhaps does not want to hear about its own takings."

This is the theme (kind of) that I would have explored more. I was struck as I suffered through the presidential debate that both candidates took pains to say how their policy changes wouldn't hurt anyone and the other guy's would hurt everyone. (Slight exaggeration, Big Bird was gettin' the axe.) I guess it's the economist in me, but I understand that life is full of tradeoffs. No one can have it all. I don't just see this illusion in politics, but I see it in broader society and I think it's very corrosive. Sometimes we gotta take one for the team (couple, family, office, country, etc.) and sometimes we have to give something up we cherish to move forward. People get this, even if they don't like it. So why do politician mince words so much? Is it their fault or is it ours?

I think it is our (the voters') fault. And I'm not sure people actually have come to grips that there must be trade offs at the national level, because nobody in the limelight is really saying that. There is a reason that politicians have a reputation as bad as that of lawyers. They lie--and they basically have to. It seems like any candidate who tells the whole truth has little chance of success, at least for being elected president. It is foolish for us to believe either candidate when they say they can reduce the deficit at the same time as preserving all the goodies, entitlements, tax breaks and everything else without raising taxes on the middle class. The Democrats used to be more willing to speak honestly about the taxes it will take to support popular programs, but it would be suicide for them to do that now. At the margins one candidate's ideas will probably always better than the other, and there are smart policies out there, but that doesn't mean anyone wants to hear it. Ask Simpson Bowles.

Another excellent comment from Jan.

Truthtellers like Ron Paul or Ralph Nader (even if you disagree with their 'truths') are quite clearly not able to get elected to national office.

This is what scares me about our current democracy.

Entitlement isn't just an American thing. Foreigners think that just because they have their feet in the United States that it's their "right" to stay here. And they will do all the finger wagging and shaming tactics they can to get Americans to give in, ignore immigration laws and to expand immigration.

There are certain ethnic groups despite their high opinion of themselves as very smart, educated, wealthy, moral etc. are takers from the much larger population which they have an adversarial relationship with.

If the goods or services you produce are in the lowest level of Maslow's heirarchy of needs you are a maker, if in the highest level you are a taker.

There are, of course, gaps in this taxonomy :)

I think this Bastiat quote sums it up pretty well:

"Government is the great fiction through which everybody endeavors to live at the expense of everybody else."

I admit he's more pessimistic than the reality. A lot of people who would rather not see so many distortionary government programs go along with them because that's the financially sane option. Are there any economists out there who refuse to take their mortgage deduction? Of course not.

The NAR is always pushing more subsidies for real estate. They make out like bandits during the booms.

I had a conversation with a buddy at work about a cap on the mortgage deduction a year or two ago. He was very upset that there was discussion of getting rid of the deduction. I'm not a fan of it. In my eyes I saw it as encouraging debt - even never ending debt - and encouraging people to buy more than they could afford. This was part of the problem of the real estate bubble itself.

The question I posed was this: "Take two people who make the same amount of money - for example me and you. You buy a home you can afford - so you get a smaller tax break. Why should I be able to go out and buy a home twice as big as you - probably more home than I can afford - and at the same time get a larger tax break for doing so? Why should I be encouraged to get in over my head?"

Granted - there are other points of view and I don't know that I'm even on the right side of this - maybe encouraging more consumption is the way to go - but these type of policies can gain a foothold based on ideology ("somebody wants to raise my taxes") even when there's no good reason to sustain a tax break in the first place.

Aren't many tax breaks a tax on others that don't benefit from them?

A few things to consider:

1. Your friend took out his mortgage and the bank gave him his mortgage understanding that the deduction would make it easier to maintain his lifestyle while paying down the mortgage over time. But consider what would happen if the deduction were abolished tomorrow. Your friend's standard of living would decline, but his bank's wouldn't. The bank would be very well off *unless* he choose to stop paying his mortgage, but then that would rebound on him with a foreclosed house and ruined credit. No doubt then your friend's POV is not just about being a selfish 'taker' but also feeling the proposal somehow violates a social compact that was made. To a lesser degree it impacts him even if you are slowly phasing it out since one reason to pay off this mortgage over nearly all of your working life is to have an asset you can sell or give away later on.

2. In terms of the bubble, I don't think its a factor. Bubbles are characterized by rapid turnover of assets and high use of leverage. To someone who put down a mere $5,000 to buy a $500,000 home he is hoping to either flip for $700,000 in a year or borrow an additional $200K against, being able to deduct interest is just icing on the cake.

3. Note that the deduction has existed for ages, long before and long after many real estate bubbles have come and gone. I don't think it is so easy to make the case that encouraging home ownership creates needless bubbles.

4. In terms of 'encouraging debt', you can't encourage savings without encouraging debt of some type. Ever dollar saved ends up being a dollar borrowed by someone or something. How is the deduction any different than the ability to park your income in a 401K and buy stocks and bonds? An important difference I see is that a home is a real asset which is a pretty reliable way to transfer consumption power into the future. Many homes were built decades ago, some even centuries ago. That use of consumption power to build them long ago in the past is providing our economy with consumption power today. Very few real assets hold their value and provide future income so reliably. Buying the best of the line tractors in 1950. It may today still be able to provide service but it's more than likely to be rusting away in a junkyard or melted down already. Many homes built in 1950 are still perfectly good today, though.

Boonton, thanks for your comments.

I understand the social contract aspect you mention. Social policy should have some stability / not be shifting sands.

I respectfully disagree regarding the real-estate bubble. Many folks were encouraged to buy as much house as they could and to borrow as much as they could to do so (more than many could afford), and I recall even reading financial advocacy articles encouraging people to never pay off their homes to take advantage of tax advantages of carrying large mortgage debts indefinitely. I might be over-stating the influence of the deduction, but it seems we we became a nation that only recently began to reevaluate and question our approach to personal finance and high debt levels.

Re: encouraging homeownership. I still am not sure why someone who buys a bigger house should get a bigger tax break - all else the same. I do think the tax code encouraged buying more than we otherwise would - and am not convinced that we'd want that.

Not all debt is the same as you point out. Not sure on the spectrum of productive assets where homes lie . We're getting into value judgements as to what the tax code should reward / not reward - but I'm firmly in the camp of supporting 401K / retirement advantages in the tax code. The argument of "why should I save for retirement?" is a much easier conversation for me than the issue of tax deductions for large home mortgages. (I am worried about the retirement situation in the U.S. Alot of folks I had worked with, even those who made pretty good money - are often saving very little. They also will have a stripped down pension if any. And the concerns about social security will always be there. It takes alot to encourage folks to save for the future - humans are not naturally wired for saving.)

ShaneM

As I pointed out, the mortgage interest deduction was around long before there was ever a bubble. Savings in 401K's are fine and dandy but remember you're only encouraging the purchase of paper assets. Whether or not they actually product real productive assets for the economy (which is the only real type of savings) is an open question. Maybe your friend brought 'too much house' but for all its faults, it's still a house that's perfectly useful for people to live in. More than one can say about his shares of Enron in his 401K!

The deduction does make it easier to carry a mortgage, but it doesn't alter the fact that it's a mortgage. I'd rather have a mortgage at 0% and not have anything to deduct than to have a mortgage at 8% and be able to take a big deduction against my taxes each year. You don't get a bigger deduction for 'a bigger house', but a bigger debt. Clearly if you put a lot down you can have a big house but a small mortage. All things being equal, though, a bigger house means more risks and more burden on your end....with or without the benefit of the deduction.

In terms of what is a reliable long term productive asset, I encourage you to look around. What assets do you see in the economy that were created, say, before 1960? You have some massive infrastructure (the Interstate highway system, various big bridges and tunnels etc.). You have very few companies...the biggest retail companies like Wal-Mart and Amazon weren't even around back then. Many big companies from back then are either gone now or a shadow of what they used to be (IBM, ATT, US Steel). A very real asset, though, is real estate and if you built a house in 1960 there's a very good chance it's still standing today providing services to the economy. A lot better chance than if you built a hamburger stand in 1960, a corporation, or whatnot.

It's a myth IMO that the 'housing bubble' meant the US built too many houses in the 2000's. The bubble wasn't houses but the financing of houses.

Boonton, fair enough - thanks for the points to consider.

My thought about homes as an asset is that it is productive (shelter, safe place to be, keeps me warm in winter, etc), but it has substantial carrying costs that are not trivial. I bought my home in 2000 and have put considerable money into it since then, considerable taxes and insurance also. I don't know that the value increase has been offset by the maintenance costs, but there is consumptive utility also - so on net it's hard for me to figure where housing sits on the spectrum. Regarding savings: yes there are Enrons. There are also Berkshire Hathaways.

thanks again for the discussion and the conversational responses (as opposed to antagonistic that I see so much of on boards such as this)

The true carrying costs are not that great IMO. Utilities and taxes are not so much carrying costs as use costs (if you rent instead of own you're going to be paying your own utilities as you use them and will pay taxes indirectly). Insurance is a cost *because* the home is such a great asset. If it wasn't there's no need to insure it. That leaves maintenance which if you allocate an amount each year to set aside in a 'big project fund' you can probably get away with $2,000 a year. If you took away the mortgage, home ownership would be very nice and quite easy for many people. Which is why, of course, people demand quite a penny for homes...so much so many have to borrow heavily to buy one unless they are blessed with a great amount of savings already in their hands.

Regarding Enrons v. Berkshire Hathaways...the test is imagine scanning a list of stocks in 1960. Which companies are still here 40 years later compared to which houses built in 1960 are still being lived in today? I suspect you'll see few asset types that survive as well.

And for 'real savings' on the scale of an entire economy the idea is to buy something today that will allieviate your need to buy (or produce) something decades from now. This could be something like R&D, or it could be a collection of capital goods (put into a basket we call a 'corporation') or it could be a single big asset like a plane, a tractor or a house. Buildings and houses in this respect do amazingly well. Empire State Building is closing in on a century old and yet it's still able to generate rents. The Brooklyn Bridge is much older still and it provides transportation to more cars and people than ever.

Boonton, I think the web ate my last post so I'll summarize my thought on homeownership quickly. I've been in my home 12 years so far. I'm guessing at the expenses - but I think it's in the ballpark

Taxes - estimate $18,000 (estimate 1500/yr avg - it's higher now at 2000/yr)
Insurance - estimate $9600 (estimate 800/yr avg - it's higher now at 1200/yr)
Replace Roof - 7000
Replace Heating/Air unit - 6500
Repair/Replace driveway - 6000
New Carpet - 6000 - (twice so far at about $3000 each time)
Clean/Stain/Seal house siding/ window casing repair - 5500
Encapsulate Crawlspace / Humidity/moisture control - 4200
Tree Removal/Trimming - est 3000 (have had several times - estimate 3000 total)
Water heater failure - Repair room/replace damage - 2500
Painting/Repair/Renovate - 2000
Gutters - 1000
Replace Refrigerator - 600
Washer Repair - 200

So int total over $72,000 over 12 yrs (that's a little more than I calced the first time), but it's about $6000/yr carrying cost to own the asset. Note no utilities included or other smaller ongoing upkeep expenses. After stopping and thinking about it it confirms for me that my home is primarily a consumption asset, because I know my home value has not gone up that much. I paid 140K 12 yrs ago and based on home sales around me - if they sell at all - I don't think value has gone up much at all.

I've discussed this with a friend I used to work with, and he questions his home purchase also. (We're both about age 40 now). I think alot of younger folks question it. Conventional wisdom hasn't seemed to serve us well so far wrt homeownership.

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