Posts tagged with: ownership society

[Part 1 is here.]

Some might answer any defense of the free economy by pointing to the housing and financial crisis that came to a head in 2008, holding it up as proof positive the free economy is a wrecking ball swinging through communities and leaving all manner of economic and cultural destruction in its wake. The financial crisis did enormous damage, but the major drivers of the crisis were a series of public policies that manipulated the market in pursuit of certain desired ends.

It all began modestly enough. The federal government built incentives into the tax code in favor of taking out a home mortgage. Many local governments also provide property tax breaks to home owners unavailable to renters. While people who are forced by circumstances to rent might question the fairness of such tax breaks, these measures are seen by most as relatively benign. Eventually, however, other top-down manipulations of the housing market were piled on top of these tax breaks.

The U.S. government offered implicit backing to mortgage giants Fannie Mae and Freddie Mac so that the companies understood that if they got into financial trouble, Washington would bail them out. This allowed Fannie and Freddie to offer low interest home loans to high risks borrowers, since the companies knew the government would come to their rescue if too many of these borrowers started defaulting on their loans.

The government also passed regulations that actually pushed mortgage companies, including Fannie and Freddie, to provide home loans to people with bad credit—subprime loans.

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Forbes recently ran a profile of Christian billionaire and Hobby Lobby CEO David Green. According to Forbes, Green is “the largest evangelical benefactor in the world,” giving “at upwards of $500 million” over the course of his life, primarily to Christian ministries.

Yet, for Green, his strong Christian beliefs don’t just apply to how he spends his wealth; they’re integral to how it’s createdin the first place:

Hobby Lobby remains a Christian company in every sense. It runs ads on Christmas and Easter in the local paper of each town where there’s a store, often asserting the religious foundation of America. Stores are closed on Sundays, forgoing revenue to give employees time to worship. The company keeps four chaplains on the payroll and offers a free health clinic for staff at the headquarters–although not for everything; it’s suing the federal government to stop the mandate to cover emergency contraception through health insurance. Green has raised the minimum wage for full-time employees a dollar each year since 2009–bringing it up to $13 an hour–and doesn’t expect to slow down. From his perspective, it’s only natural: “God tells us to go forth into the world and teach the Gospel to every creature. He doesn’t say skim from your employees to do that.”

Economists have increasingly recognized the ways in which healthy stewardship and property rights are linked—how increased ownership leads individuals to weigh costs and benefits more thoughtfully and effectively. Green’s comments add a slight twist to this approach, calling Christians in particular to reconsider who the “owner” actually is and how we might weigh particular costs/benefits and subsequent action accordingly:
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Urban prairie Detroit 2I wrote a bit about my short essay describing some of the principles and concepts at play concerning intergenerational ethics and economics. There are also important intergenerational cultural consequences following the Great Recession. A decade ago there was much concern about the rootlessness of current generations and the transience of the workforce. But that ability for workers to move quickly to new jobs in other cities and states has been undermined by the housing crash. Most anyone who bought a home in the last decade will not be moving anywhere anytime soon.

As Robert Bridges contends in a WSJ op-ed, “Coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence.” The “ownership society” means something far different today than it did even a decade ago.

In her book How the West was Lost, Dambisa Moyo describes well some of the background leading up to the housing crash. One of the contributing factors was this cultural ideal of a “homeownership” society and resulting government policy to promote homeownership. She contends,

The direct consequence of the subsidized homeownership culture was the emergence of a society of leverage, one where citizen and country were mortgaged up to the hilt; promoting a way of life where people grew comfortable with the idea of living beyond one’s means.

She also judges that there are significant intergenerational implications:

Under the government guarantee system which propels the rapid appreciation of house prices, the only winners are those who can downsize (downgrade) their housing, or move to a different area, and buy a smaller (cheaper) place. Everyone else loses…. This ‘escalator’ effect continues until the time that the kids go to college. It’s a wealth transfer from the younger generation to the older generation as house prices become more expensive.

One of the effects of what Moyo calls “government guarantee system” is that resources (capital) was increasingly invested in homes that might have been invested in other, more productive, sectors.

An incisive piece by Roben Farzad explores why the aftereffects of the housing bubble are not likely to go away anytime soon. He quotes Doug Ramsey of Minneapolis investment firm Leuthold Group, “a student of asset bubbles,” who says, “The housing decline will be a long, multiyear process, and the multiplier effect across the economy will be enormous.”

Jonathan Smoke, head of research for Hanley Wood, a housing data company, argues, “We’ve gone through a period when we should have been tearing down houses. The supply of total housing stock is beyond what is necessary.”

Why then are we still celebrating “new housing starts” as signs of a rebounding economy rather than a continuation of misplaced investment and cultural priorities?

My editorial, “Intergenerational Ethics and Economics,” appears in the latest issue of the Journal of Markets & Morality (more details about that issue here). In this short piece I explore some of the implications and intergenerational consequences of public debt. For this I take my point of departure with the much-discussed “A Call for Intergenerational Justice,” but I also point out the importance of considering opportunity cost and how that concept has been applied in an analogous conversation about climate change. Focusing particularly on the current generations of workers, however, I observe:

Younger workers have not had as much time in the workplace to earn wages, collect benefits, and save, as those who have been working for decades and are nearing or have already entered retirement. As we learn from what has been called the “miracle of compounding interest,” small deductions of available capital at earlier points in time have major consequences for long-term growth.

In a recent piece for City Journal, Nicole Gelinas reflects on the federal government’s move to take on troubled securities from private firms. She writes,

The politicians we elect have three choices—the same choices they had four years ago. They can admit that this debt isn’t worth much and allow the financial sector to bear the consequences. They can hope that the Fed tries to use inflation to raise the price of everything else, making the debt seem a lighter burden in comparison. Or they can maintain their silence, letting the financial sector take another half-decade or more to make enough money on new ventures so that it can finally admit what it should have admitted back in the fall of 2007: bad debt is never good. At least the Fed acknowledges this strategy: it says that it’s using “time” to manage toxic securities and “minimize disruption to the financial markets.” But prolonging government control of financial markets just prolongs investors’ uncertainty.

Her conclusion underscores what I contend in the editorial about the importance of opportunity cost and the intergenerational effects of (in)action: “As the Fed notes, the cost of this policy isn’t measured in dollars but in something more precious: time. Washington’s refusal to confront the debt problem is costing millions the most productive years of their lives.”

Also in the current issue of the journal, James Alvey explores “James M. Buchanan on the Ethics of Public Debt and Default.” Buchanan has a good deal of interest to say on these questions, and Alvey concludes that “Buchanan’s favorite policy agenda, constitutional/legal limitations on public spending, deficits, and debt, needs to be revisited.”

Blog author: jballor
Monday, September 29, 2008
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Last week an email newsletter from Sojourners featured a quote from U2 rock star and activist Bono (courtesy the American Prospect blog):

It’s extraordinary to me that the United States can find $700 billion to save Wall Street and the entire G8 can’t find $25 billion dollars to saved 25,000 children who die every day from preventable diseases.

The quote is pretty striking given the current shape of the debate over the Wall Street bailout. Bono’s insight is instructive: Once the government takes upon itself tasks that fall outside its regular purview, how do we rightly adjudicate between all the different needy causes? It simply becomes a game of which special interest can hire the most lobbyists.

Indeed, the $25 billion that Bono points out would be necessary to save 25,000 children a day is the same amount that the US government just paid to bailout the domestic auto industry over the weekend.

If the feds are willing to dole out $600-700 billion in corporate welfare for Wall Street, it only seems right that poor families and individuals get their own relative share of government redistribution.

The size of the government bailout relative to the critical debate about the execution of these policies is positively shameful compared to the fiscal cost of the war in Iraq (roughly $560 billion on the upper end) and the critical attention that the war has and continues to receive. Of course dollars aren’t the only costs we’ve incurred in the Iraq war, but they are one salient measure.

On the one hand conservatives often point out that government involvement in provision of welfare should be sharply curtailed or eliminated because it isn’t primarily the government’s task to directly offer assistance to the poor. Rather, that’s the job of institutions of civil society, like church ministries, non-profit charities, and groups promoting individual giving. So it seems inconsistent to claim this and at the same time assert that it is the government’s responsibility to bailout overextended (and therefore irresponsible) corporations with taxpayer money.

UPDATE: A HuffPost blogger takes this logic to its political terminus (emphasis original):

The Democrats, if they truly constituted an opposition party, which they prove every day they do not, could demand that if monies are going to go to bail out Wall Street, at least an equal amount would go to bail out average Americans in the way of health care, full funding for social security and medicare, mortgage and rent protection, infrastructure repair, decent public transportation, investment in green jobs and technology, etc.

One great virtue of the market is that over time it tends to punish bad players. Those who engage in unsustainable business practices will eventually get what’s coming to them. Debt catches up with you and you go bankrupt (unless in an election year cowardly politicians aren’t willing to let companies pay the due penalty for their error).

There’s been some talk about the moral hazards associated with the bailout. One moral hazard is that bad business practices aren’t going to be appropriately punished, and so such short-sighted and unsustainable behavior will be incentivized by reduction or elimination of risk. There’s now going to be an implicit government guarantee of corporations that are “too big” or too important to fail. The cost of this bailout may be $700 billion, but it sets a precedent for future bailouts whose costs are inestimable.

But enough hasn’t been said on another moral hazard that has to do with the good players, people who didn’t take out gimmicky mortgages to finance half-million dollar homes or rush into home ownership when they should have been renting. That’s the flip-side of bailing out bad players…good players get punished and are less likely to continue responsible behavior. And in the face of a government and businesses that are telling us to spend all we can, why should we be financially responsible?

Blog author: jballor
Wednesday, September 24, 2008
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I don’t think government ownership is what President Bush had in mind when he talked about his vision for an “ownership society,” which had ostensibly included a plank focused on “expanding homeownership.” But it looks like that’s where we’re headed in an era of government takeovers and bailouts.

For some background on how we go to this place, check out this 1999 piece from the New York Times (HT): “In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.”

All this seems like case of good intentions (increasing private ownership, extending capital access to the poor and oppressed) executed by means of bad policy (lowering credit standards for loans, bailing out failed corporations) resulting in negative (albeit unintended) consequences (foreclosures and bankruptcies).

Oh, and are you one of the people who didn’t borrow beyond your means? Guess what? You got pwned. As one blogger wonders, “Am I just a sucker or something to play by the rules? Are all of us who paid taxes suckers?” Think of that as the “pwnership” society.