Timing Is Everything

Greg Mankiw endorses the suggestion of the WaPo's Sebastian Mallaby the the mortgage interest deduction is an upper-class subsidy whose time has passed.

Ahhh!  However good an idea this is (and with a long phases-in to avoid jolting folks, I have no problem with it), the timing is awful, since we may very well be on the verge of a real-estate bust.

And this WaPo story does not exactly suggest that now is the time for this policy initiative:

'Mortgage Moms' May Star in Midterm Vote
With Wages Stagnant and Debt Growing, Democrats See an Opportunity

By Jeffrey H. Birnbaum and Chris Cillizza
Washington Post Staff Writers
Tuesday, September 5, 2006; A01

BURLINGTON, Ky. -- Life is cramped at the Condit household. Dale and Sharon Condit and their two young sons need more room but can't seem to sell their current home -- on the market now for three months.

In a year when politics is being roiled by angry debates over the Iraq war and immigration, it might seem odd to imagine the midterm elections being waged over square footage and closet space. But these are parts of a lifestyle that Sharon Condit, a deputy clerk of court, describes as dogged by a sense of limits: "We have dreams of this future, but we can't get it right now."

Had we been eerily prescient we would have tackled this *before* the latest real-estate boom, so that price gains caused by other factors could have offset any loss in value associated with this tax reform.  Now?  This has gone from politically tough to politically suicidal.

MORE ON SPITE AND ENVY:  Brad DeLong had a post which Greg Mankiw and Jane Galt both interpreted as arguing that the problem with income inequality was that it prompted the poor to envy the rich, and that net societal welfare could be increased by, for example, a progressive income tax that reduced envy-inducing wealth.

After being called on this, Brad DeLong then argued, in "Making 'em Feel Small", that he had been mis-understood:

I wrote that one reason that America's rich today live the expensive and ostentatious lifestyles they do (rather than spending much more money on charity, or philanthropy) is that it is a way of making other people feel small and unhappy:

...

[Greg Mankiw] misses the import of the phrase "conspicuous consumption." It's not the hard work and entrepreneurship that is to be discouraged. Make inventions, build enterprises, donate money for hospitals and libraries--that is all extremely meritorious and praiseworthy. It's the conspicuous consumption that is the problem.

Surely spite is at least as offensive an other-regarding preference as envy, isn't it? Surely public policy should weigh the spite-generated utility the rich gain from their conspicuous consumption as worth less than nothing, shouldn't it?

This post (and the first) prompted a reader revolt for a few reasons:

- status seeking behavior is common across all income classes, cultures and even animal species.

- much status seeking behavior is oriented towards impressing one's peers, not one's "lessers".  Just for example, Bill Gates, Larry Ellison, and Waren Buffet all have private jets.  per the DeLong theyr, a part of the satisfaction they gain from having these jets is their knowledge that it makes the rest of us envious.

So quick - what type of jet do each of these three guys fly - are they in top of the line Gulfstreams, converted Boeings, or what?

I doubt that one person in a hundred knows.  So just how is it that Gates, Ellison, and Buffet are enjoying our envy when we don't even know what we ought to be envious of?

The obvious answer - Larry Ellison knows darn well what Bill Gates is flying, and vice versa.  And each of them wants to impress the other with his toy collection.  However, very few of the rest of us ever enter into this competion, even as spectators.

A second element of the reader revolt was the subtle point that even if a rich person sets out to spite a poorer one, it is only the reaction of the poorer one that creates a net loss of societal utility.

For example, I could, I suppose, done an orange fright wig and dance down Main Street shouting "Flee before my majesty, working class minions! Fall down before my fine country wig!"  And it may be that, while I dance and yell, I am the happiest guy in America.

Now, although I lack empirical data, I'll bet that not many folks will feel diminshed by my performance.  So, in the deLong framework, my spiteful behavior ought to represent a net societal gain - I am happier, and no one elese is worse off.

But suppose I swap the fright wig for an expensive cigar.  Now, maybe someone will actually think, gee, that guy looks like a real hitter brandishing that expensive stogy; I feel so... small.

Per DeLong, society now has a problem.  But note - the problem is not my behavior; the problem is the reaction of others to my behavior.  Which means that DeLong's position distills to the notion that some forms of envy are so well-justified that they ought to form the basis for public policy.

Now, some might argue that DeLong addressed that with this rhetorical question:

Surely public policy should weigh the spite-generated utility the rich gain from their conspicuous consumption as worth less than nothing?

Surely not - if the behavior is private(i.e., not conspicuous) society should not have an issue; if the bahavior is a pleasant but failed attempt to create envy, I have a hard time seeing why it should be banned.  Only behaviors which evoke an envious response are problematic, which leads us back to envy as the basis for public policy.

Yet another strand of the reader revolt amounted to, hunt with a rifle rather than a tactical nuclear device.  DeLong called for a progressive income tax as a solution to the "problem" of spiteful behavior by the rich.  Why not a consumption tax on the envy-producing items?  Who knows - maybe all of "the rich" are so annoying in so many different ways that only a broad attack can keep them at bay.

My guess - Delong is just trying out an argument to which he has not given a great deal of thought, and it is not developing well (In his latest stab, he posts a paper documenting that "the rich" spend proportionately more on status-seeking items.  Uh huh.  Does this also document anything at all about their motivation?  Didn't think so.)

Let's give the near-final word to DeLong and Krugman, from back in 2005:

To the extent that goods are valued not for the services they provide by themselves but as indices of exclusivity, it is pointless to produce them for more people because then they become less exclusive and so less valuable. Paul Krugman, for example, has placed himself on Orwell’s side: he would rather be middle-class in the fifties than working poor in the nineties-—even though the material standard of living of America's working poor in 1990 is higher than that of America's middle class in 1950. He: 

know[s] quite a few academics who have nice houses, two cars, and enviable working conditions, yet are disappointed and bitter because they have never received a [job] offer from Harvard and will probably not get a Nobel Prize. The live very well... but they judge themselves relative to their reference group, and so they feel deprived. And on the other hand, it is an open secret that the chief payoff from being really rich is, as Tom Wolfe once put it, the pleasure of "seeing ‘em jump." Privilege is not merely a means to other ends, it is an end in itself.

"They feel deprived" relative to "their reference group".  Nothing at all about how someone outside their reference group is tormenting them with displays of wealth, so that their sense of deprivation is not "their" fault at all.

Comments

[noah]

Yep, wouldn't it be neat if the Dems proposed abolishing the mortgage interest deduction?

Another train that is leaving the station is SS/entitlement reform. As the boomer's retire, reform will likely require a catastrophe.

[jwest]

The Fair Tax plan eliminates the mortgage interest deduction, but it is worth it.

[MeTooThen]

...greater unionization and repealing saving incentives."

Wow.

That oughta' work great.

Are there any ideas beyond wealth redistribution that these people could agree to?

Just askin'?

[Sue]

on the market now for three months.

Three months? My goodness, an eternity to sell a house. (/sarcasm off)

[Wilson's a Liar]

It does suck if you get caught trying to sell your house when the housing market turns. I've been lucky every time I have sold a house and when I've bought, but I know plenty of people who haven't. And they survived.

The single most powerful lobbying group in the U.S. right now is the National Association of Realtors. So you don't need to worry about anything happening to the mortgage interest deduction. Even Charlie Rangel won't go there if he ends up chairing Ways and Means.

[Lost my Cookies]

I think it's interesting that the Wapo went looking for "Mortgage Moms" who were worried about the future and came up with a judge and an assistant clerk of court.

[ed]

Hmmm.

Real estate markets are always local. So it could tank in some spots but not in others.

That said I've always thought this real estate market would tank. Which I'd admit isn't exactly a feat of prediction. The issue being the ARM, and other even more questionable mortgage vehicles, mortgages coming due with rate hikes and vastly increased tax assessments because of wildly inflated home values.

[Sue]

Yes, but they don't tell you what condition the house is in. What the asking price is. Where it is located. Just they have had it on the market for 3 months.

[larwyn]

At NewsBusters, Mark Finkelstein wrote of Boston Globe article insulting WalMart Workers:
"Wal-Mart claims its low prices saved the average family $2,300 last year. Which is great, until you compare it to that $3,200 premium unskilled workers could make if they had a union shop."

Here the Globe engages in some classic static analysis. They apparently assume that if Wal-Mart were to pay each worker $3,200 more per year, everything else would remain the same. But the roughly $3.8 billion in higher labor costs such a raise would represent [given Wal-Mart's 1.2 million employees] would invariably translate into higher prices, reduced sales, and in turn fewer jobs, in a cycle that could ultimately send Wal-Mart the way of Woolworth's.

Note the faulty logic. What is truly inane about using a court clerk for the housing piece is we know she's not getting transfered to another city/state. We also know that she is rather a dim bulb as this is now Sept. Do you know many parents that suddenly decide to sell a house and hope to be into a new one in June? Most parents are most concerned about school schedules unless they are determined to stay in same school district.
In that case our court clerk with house on market for 3 months, if only looking for more space in same area can reduce her asking price knowing that she will also be able to reduce her offering price for any larger home in the same area/school district.
Any one want to bet both Judge and court clerk are Dems/Dems appointee/Dem patronage job.

[Florence Schmieg]

When don't the Dems "see an opportunity". This election season is already getting boring.

[Daniel DiRito]

Mom's Mad...Somebody's In Big Trouble!

If soccer, security, and now mortgage moms are all angry; someone better look out. While the GOP plans to invoke national security and the fear of terrorism, issues that worked well in 2002 and 2004, it is hard to imagine they would be sufficient to overcome what holds the most weight with moms, the economic security of their own families.

www.thoughttheater.com

[Paul Zrimsek]

I've been following this debate on various economically-inclined blogs and I can't begin to tell you how bemused I am by the whole thing. All these years I've looked down my nose (spitefully!) at the less open-minded, more partisan confreres who've been telling me that liberalism is motivated by envy; but what's the point of giving the devil his due if the devil refuses to accept it?

Krugman seems to be making a career out of refusing to learn from his own experience, doesn't he? You'd think that being surrounded by people who are consumed with envy for reasons having nothing to do with money would cure him of the idea that we can fix envy by moving money around.

[Patrick R. Sullivan]

Hmm. Any academics ever engage in intellectual status-seeking, conspicuous consumption, within their profession? I think I just read an article about which economists are the the most cited in the profession.

I've even heard of some intellectually insecure professors deleting comments from their blogs that made the professor look not quite as intelligent as he thought he was.

[srp]

I've always felt that the center-left academic and journalistic obssession with inequality and the superrich, with status and envy, is a form of projection. Most normal people don't begrudge big-shot salaries and perquisites--they just want more stuff themselves.

Speculation 1: The NY factor. New York City (esp. Manhattan) is more of a zero-sum place than anywhere else in the US. The shortage of space means that getting a few more square feet in your apartment is a big deal, and there really isn't much room to enjoy consumption goods for their own sake. When people want to get together with friends, they have to go out to restaurants and bars because their abodes are too darn small. So having the right friends and getting into the right places is disproportionately important.

Speculation 2: "If you're so rich, why aren't you smart?" Journalists and academics confuse a facility with words and/or abstract concepts with overall intelligence and sagacity. They also confuse economic value with intrinsic merit. Hence they get upset when those they perceive as intellectually inferior have a lot more stuff than they do.

Speculation 3: Academics and journalists are especially dependent on peer recognition for advancement and job security. Hence, they are extremely sensitive to rankings of all kinds.

Try your own hand at unsupported speculation! It's easy and fun!

[Joe Mealyus]

Actually, the "reader revolt" was pretty weak stuff, except for the two amazing James Galbraith mini-lectures on Thorstein Veblen.

"Please excuse the conspicuous erudition displayed here. It's the poor academic's one little weapon..."

If Galbraith wasn't funny enough, there's always the fact that Delong actually links to a comment by "Blissex" at Jane Galt, by saying that "Blissex takes on the role of Apostle to the Gentiles, and tries to shed light on the issues."

Blissex:

"To me this is is a thoroughly vile and utterly dishonest misrepresentation of the position of DeLong.... Shame ''Jane Galt'', shame on you, and shame on Mankiw too...."

Is the "Apostle to the Gentiles" usually used as shorthand for "thuggish toady?" (How about "Blissex takes on the role of Ed McMahon doing a small, mean favor for Johnny?")

[MayBee]

Funny about the jets and envy.

It reminds me of my old boss, when he was going to his 10 year High School reunion in a working class town. He bought an expensive suit, expensive watch, and got himself a Porsche. At the reunion, however, all his classmates were too awed by another classmate's new Firebird to notice his foreign car.

There is also the flip side of the envy argument. How many middle class people have been reminded to not "put on airs" and not "sell out"? Isn't there often some pressure to remain in your own social class?

[Tom Maguire]

If Galbraith wasn't funny enough, there's always the fact that Delong actually links to a comment by "Blissex" at Jane Galt, by saying that "Blissex takes on the role of Apostle to the Gentiles, and tries to shed light on the issues."

That was classic.