RALEIGH – During the coming weeks and months, it will become increasingly obvious whether the politicians who represent us in Raleigh and Washington have learned anything from the past three years of economic recession, government response, and weak recovery.
Either our political leaders will dance around the edges of the problem – trying to distract us by flailing their arms and shaking their hips to simulate useful activity – or they will wade in and get to work, enacting reforms that are both difficult and indispensable.
One example is financial reform. If politicians have learned their lesson about the role of government tax, spending, and regulatory policy in creating excessive risk in the marketplace, they will take action to avoid a recurrence of the same problem in the future.
That means ending the federal government’s manipulation of the mortgage market through government-guaranteed mortgage debt. Congress and the Obama administration should fold up Fannie Mae and Freddie Mac, letting private firms work out risk-management arrangements without any expectation that taxpayers will bear any of the cost of future defaults. Will the resulting market yield higher rates for some mortgage borrowers? Probably. Their risk has been artificially underpriced for years, setting themselves and their creditors up for a fall.
It also means ending the government’s manipulation of the housing market through the income-tax deduction for home mortgage interest. By making debt artificially less expensive than equity, this policy skews the investment decisions of households and businesses, while conferring a disproportionate share of the benefits on affluent households.
The deduction originated in the 19th century for an understandable reason: at the time, most owner-occupied homes were also farms. Building and maintaining them was a form of business investment that ought to have been shielded from taxation because it generated future, taxable income. But that’s no longer the case. Most homes with mortgages are residential, nothing more.
Industry lobbyists and some politicians say that without government guarantees and mortgage-interest deductions, too few Americans will be able to afford their own homes. Nonsense. Plenty of other countries, including next-door neighbor Canada, have homeownership rates similar to ours despite a lack of such government interventions.
Some things would be different, however. Lenders would require larger down payments, and some new homes would be less spacious, ornate, and costly. Somehow, I think we’d survive.
Another program that recent events have exposed as archaic is the unemployment-insurance system. The Great Recession – and a series of benefit-extension bills supported by lawmakers of both parties – cleaned out most of the UI trust funds the states had accumulated during the boom years. Now, having borrowed some $42 billion from Washington to pay UI benefits, many of these states want Washington to bail them out again, through either loan forgiveness or additional taxing authority or both.
The states have a sliver of a point here. In the past, the federal government made it so cheap to borrow to shore up UI accounts that state governments were essentially punished for acting responsibly. But just because past federal policy encouraged too much risk-taking doesn’t mean that the states should simply have their debts forgiven. The overall system needs to be fundamentally restructured.
I think the best solution is to transition to a system of worker-owned UI accounts. Instead of states levying taxes, paying benefits, and scrambling to change benefit and tax levels when recessions arrive, we should have a system in which workers are required to pay a certain percentage of their wages into savings accounts, from which they can draw during periods of joblessness to pay bills or acquire necessary education and training for reemployment.
The current system of benefits paid weekly encourages longer bouts of unemployment – and, once again, encourages excessive risk-taking on the part of some workers, firms, and industries.
There are other policy changes that would also reduce governmental distortions of the markets for capital, labor, financial services, and other goods. I’d like to see an end of the tax break for state and municipal bonds, for instance. The bottom line is that if politicians preserve all these broken systems, pledging merely to “make them work better,” they’ll be demonstrating their inability or unwillingness to learn from history.
Hood is president of the John Locke Foundation.