This is Why Economists Don’t run for President

The other day I was listening to a rerun of a Planet Money Podcast and it made me want to revisit my stance on the housing market manipulation (Planet Money: Episode 387; article) .  They brought six (6) ideologically divided economists into the studio to discuss what policies they could all agree on, and then jokingly mentioned how “This is why economists don’t run for President”.  I agree that the results of the panel are unpopular and think that they managed to properly address the real reason people don’t want to listen to economists; we use boring language and tell people what they don’t want to hear.  I agree with some of these policies, disagree with others. The policies were: eliminate the mortgage tax deduction; end the tax-deduction companies get for providing health care to employees; eliminate the corporate income tax; eliminate all income and payroll taxes; tax carbon emissions; and legalize marijuana.  Obviously, no voter in their right mind would agree to most of these, especially using words like “eliminate” and “tax”.

Eliminating the mortgage tax deduction:  This is, across the board, agreed to be a positive change by the experts and if you read my other blogs about the housing market you would think I agree.  I do, mostly, but there are flaws in simply “eliminating” a policy that has been on the books for so long and helps a lot of people hold onto their money.  The argument made is that this would decrease the demand for the wealthy to own property, lowering the overall price of real-estate, and thereby making all housing more affordable for everyone.  Sounds nice, but it’s not as simple as it sounds.  Real-estate prices (like wages) are sticky and, as the market always shows, people would rather hold onto a property than sell it for less than they paid for it.  What does that mean exactly? It means that the price of homes may plateau, they may build fewer homes, they may build more rental properties, but the only way to ensure the overall price of housing will not go down is by lowering the amount of homes in the market not lowering the price of existing homes.  This is a key point that we need to understand.  If your home is worth $300,000 today, it will not cost $299,999 tomorrow; the entire economic system would go into chaos, not to mention the deflationary expectations associated with that.  If prices begin to fall, people will expect them to keep falling, taking more people out of the market who are waiting for the price to stabilize.  As more people exit the market, this will send the prices down even further, and then it’s 2007 all over again.  Eliminating this deduction would cause developers to build more rental properties since there would be less demand for purchasing homes.  People need a place to live, so intuitively as the demand to buy homes decreases, the demand for renting would increase, forcing people into higher rents and further creating an imbalance in the market.

My solution: Eliminate the deduction but wait until there is another structural shift in the market.  In economics, if prices of final goods are trending upwards as most do, changing a piece of that market won’t make a big difference; i.e. lowering the price of tires won’t cause the price of cars (a final good) to go down; lowering the price of gas won’t make airfare cheaper; and lowering the demand for home loans won’t cause the price of homes to go down. Unless you catch the trending price when there is a market correction.  We saw one in 2007, that would have been the time to eliminate the deduction since the housing market was already changing structurally.  Doing it now would be white-noise and may possibly slow the growth of the price of housing but not cause the intended multiplier effect the economists in the podcast are discussing.

End the tax-deduction companies get for providing healthcare to employees:  This is wildly unpopular but hear me out.  Everyone needs healthcare and it has become a part of an employee’s compensation, but incentivizing companies to provide more and more comprehensive healthcare coverage instead of paying employees causes stagnation of wages (which we are currently experiencing) and unsustainable healthcare costs (which we are also current experiencing).  Someone with a “Cadillac” health insurance plan is more likely to go to the hospital for small ailments and doctors are more likely to run unnecessary test since they know their insurance will pay.  X-rays do not cost $500, bandages do not cost $250, and it does not cost $600 for an ambulance to drive ½ of a mile.  Hospitals charge these insane prices because for every seven (7) people who use these services and can’t pay, there’s one person with a Cadillac plan who can, eliminating their marginal loss.  So Cadillac plans pay out more, making them cost more, but companies keep offering them and people are happy to accept them as part of their compensation.  Eliminating a deduction for employer-provided healthcare would decrease the unchecked pricing of hospital services and the price of insurance overall.

Eliminate the corporate income tax: Sounds like a terrible idea, and it probably is, but it just might work if done correctly.   Corporate income tax keeps companies from redistributing their earnings back into growth and their stakeholders.  Even if they keep it in the bank and do nothing with it, it will increase the amount of loanable funds on the market, lowering the interest rates, and helping everyone else get access to better loans.  We want people to pay their fair share, but blanket-taxing corporations for simply doing business here is an oversimplification of the problem. We need to tax the individuals receiving dividends on corporate profits.  It’s a delicate balance of taxing companies enough to maintain a healthy revenue stream and preventing them from leaving and going overseas.  Regular citizens can’t vote with their feet and relocate, corporations can.  It’s unfair and upsetting but it’s the world we live in.

Eliminate all income and payroll taxes, tax carbon emissions, and legalize marijuana: Eliminating payroll taxes would be an easy sell.  Nobody likes paying taxes and it would increase the real wage.  Companies would be pressured to raise wages since taxes are lower and people would have more income to spend on goods. This would have to be done in stages to eliminate too much inflation at once, but switching to a consumption tax rather than an income tax would redistribute the tax burden to the wealthy, who buy more stuff, and less on the poor, who don’t.

Taxing carbon emissions is a natural conclusion to the times we live in.  Taxes serve two purposes – raise revenues and create disincentives for that activity by raising the price.  Seems like a no-brainer.

Legalizing Marijuana is inevitable, people are doing it anyways and it’s less dangerous than drinking.  Legalize it, tax it, get rid of the underground market, tell people not to drive while on it, penalize them if they do, and move on to other issues.

These proposals are universally recognized and systemic problems in the current economy.  The panelists have excellent ideas with sound economic reasoning.  I got hung up on the housing deduction proposal because of the follow-through, but if these policies are worded correctly to the public and implemented responsibly there’s no reason why they couldn’t be successful.

Thank you for you time.

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