House Lust and Mass Overconsumption

Home ownership is a good thing. As Washington Post columnist Robert Samuelson observes, people who own homes take better care of them than people who rent. Homeowners invest in their property and stabilize neighborhoods. Perhaps most important, home ownership gives people an opportunity to accumulate wealth. It gives them something to protect. It gives them a stake in society.

But it’s possible to have too much of a good thing, Samuelson argues. Fueled by $89 billion a year (in 2008) in mortgage deductions, home ownership has become a driving force of Mass Overconsumption. In Sweden, England and Italy, new homes average less than 1,000 square feet. By 2005 in the United States, the average newly built U.S. home measured more than 2,400 square feet. Samuelson quotes the president of Toll Brothers, a builder of 5,000-square-foot McMansions:

“We not selling shelter. We’re selling extreme-ego, look-at-me types of homes.”

Stoking egos with bigger homes requires more furniture to fill the extra space and the consumption of more energy to heat, cool and light it. All of that consumption costs a lot of money, which goes a long way to explaining why Americans save so little, rack up so much personal debt, run such huge trade deficits with thriftier nations, and consume so much energy. (If you believe the global warming hype, it also explains how McMansions are an indirect contributor to greenhouse gases as well.)

Now, I personally believe that people should be free to live how they want, as long as they’re not hurting anyone else. If people want to indulge their egos by buying a 5,000-square-foot house, then that’s their business. (I live in a 3,900-square-foot house, and my wife wants to add on to it, so it would be hypocritical for me to suggest otherwise.) But I don’t see a compelling social benefit that justifies $89 billion in mortgage subsidies, most of which goes to affluent households like mine. The mortgage deduction should be capped at $5,000 or so in annual interest payments — if not eliminated entirely.

While we’re on the subject of “house lust,” as author Dan McGinn calls it, let us not forget: The federal government is not the only level of governance that encourages Mass Oversconumption in housing. Here in Virginia, municipal governments favor homes that yield more in property taxes. Through all manner of strategems, from large-lot zoning to restrictions on the building of multi-family housing, municipal governments promote the construction of large homes and discourage the construction of smaller units.

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54 responses to “House Lust and Mass Overconsumption”

  1. Vivian J. Paige Avatar
    Vivian J. Paige

    The mortgage deduction will never go away. I have a 1913 income tax return (the first year of our current permanent income tax) and the deduction was included.

    As for capping the deduction – well, we have that, too. Interest is only deductible on the first $1 million, plus a max of $100K in equity loan, making the limit $1.1 million. A lot of folks buying the McMansions are unaware of this cap.

  2. Anonymous Avatar

    The compelling social benefit that justifies $89 billion in mortgage subsidies, most of which goes to affluent households is that the affluent households with much higher values help foot the tax bill for all those 1500 sq ft homes that “don’t pay their own way in property taxes”.

    Besides, where else are they going to put the money?


  3. Jim Bacon Avatar
    Jim Bacon

    Vivian, it’s nice to know that there is a cap at $1.1 million! You’re right, the mortgage deduction will never go away. But thanks to that $1.1 million cap, all we have to do is wait for another 30 or 40 years of inflation, which will push the median home price to $1.1 million, and we’ll have a de facto cap that covers the middle class!

  4. Anonymous Avatar

    I think something like 36% of homes have no mortgage.

    Considering that the government is giving away money, you sort of have to wonder why.

  5. Anonymous Avatar

    This strikes me as being somewhat similar to the AMT. When designed years ago, it was meant to capture the truly well-off in a manner that ensured they paid some reasonable level of taxation. But, as well all know, the AMT nails many who are far from the top of the income ladder.

    A $1.1 M cap arguably limits the ability of the same people to claim a tax deduction for all of the interest costs for a huge mortgage. But with inflation and absent indexing, Jim is correct, this cap will begin biting the less-than-mega-wealthy in the future.

    Yet, at the very same time, the real mega-wealthy will never be touched by these so-called “hard-line” tax laws. Advocates of progressive taxation generally are not willing to go after those who are truly at the top.

    For example, many liberals are calling for long-term retention of the estate tax, while leaving unlimited deductions for donations to charities and foundations. So the successful person with the $10 M estate would get hammered, but Warren Buffet and Bill Gates can still donate their billions and have power from the grave.

    It would be more progressive, IMO, for Congress to set the taxable level for estates at $100 M, but permit only $100 M to be ignored/deducted for tax purposes whether it is passed on to heirs or donated to charity. Thus, Warren Buffet could only avoid paying taxes on his first $100 M irrespective of what he did with it. The rest would be taxed by Uncle Sam. This seems more progressive to me than allowing massive foundations created by the ultr-wealthy to live on forever, while nailing those who made a lot, but cannot afford to create their own Bill Gates Foundation.


  6. Jim Bacon Avatar
    Jim Bacon

    TMT, Interesting observation about the AMT. I was thinking exactly the same thing when I made the original post. I’m glad to see you pick up on it.

    As for the mega-foundations and the inheritance tax… There’s another good reason to limit the ability of the ultra-rich to endow their own foundations. Those foundations/endowments account for a significant percentage of the GNP, and the reside outside the profit-making, wealth-creating sector of the economy. As such, they are usually captured by professional administrators who often subvert the founder’s intent for their own social/political goals. Witness the Ford and Rockefeller foundations. In sum, the inheritance tax exemption for charitable trusts is arguably the biggest funder of liberal, anti-free market causes in the entire planet.

  7. Anonymous Avatar

    “…the inheritance tax exemption for charitable trusts is arguably the biggest funder of liberal, anti-free market causes in the entire planet.”

    Whew, that’s cold. You don’t think there are endowments to conservative causes?

    Surely there can be some argument for inheritance taxes designed to prevent people from accumulating all the property and meas to create wealth: to prevent them from becoming Baron’s.

    But, isn’t the inheritance tax also a case of AMT. Originally the limits were high enough to affect very few people, but over the years inflation meant that it wasn’t all that hard for a farm or small business to get ruined by the death tax.

    Surely $100 million ought to be enough to give your heirs a decent start.

    But, if the difference goes to the government, what would they do with it?


  8. Groveton Avatar


    You’ll have to run the math for me on this one:

    “Here in Virginia, municipal governments favor homes that yield more in property taxes. Through all manner of strategems, from large-lot zoning to restrictions on the building of multi-family housing, municipal governments promote the construction of large homes and discourage the construction of smaller units.”.

    Aren’t the government officials trying to maximize the tax dollars in their jurisdiction? If I zone an area one house per acre instaed of one house per half acre I am reducing the total tax dollars – no?

    My math:

    10 acres of land
    1 house per acre
    $1M per house
    1% real estate tax

    = $10,000 per year per house
    = $100,000 per year in total

    10 acres of land
    2 houses per acre
    $750,000 per house
    1% real estate tax

    = $7,500 per year per house
    = $150,000 per year in total

    Of course you can debate the drop in market value based on the size of the lot.

    However, assuming a 6 person family in each house, you get 60 people vs 120 people on those same 10 acres.

    So, in my example, I can get 50% more tax dollars but have to serve 100% more people.

    I think the low density zoning laws are designed to create the biggest difference between taxes paid and services rendered.

    The few people statistically at the top of the economic food chain actually pay an amazingly high percentage of the total taxes. And these are the people the politicians want in their locations. They can buy votes from those of average income by paying for services with the surplus of the few with very high incomes.

    Tell me where I am wrong here.

    As for the inheritance tax – I vote for 100% tax on everything on the death of the surviving spouse. My only exceptions would be a reasonable trust for minor children and trust to educate children while they are in their 20s. After that – when it comes to money – use it or lose it.

    Family farms would suffer? Here’s a news flash – they’re suffering with the inheritance tax deduction.

    What should the government do with all this new found money?

    1. Pay off the national debt.
    2. Increase the military.
    3. Fund education.

    Remember, if you’re not flying first class then you heirs will be flying first class.

  9. Jim Bacon Avatar
    Jim Bacon

    Groveton, You have hit the nail on the head. Perhaps I over-simplified the explanation in my post for the sake of brevity, but I meant what you said:

    What municipal government really seeks to maximize is the difference between taxes paid on a house and the cost of services required by the residents of that house. Larger houses offer a superior taxes generated/services demanded ratio. Therefore, it is in the interest of municipal governments to encourage the construction of large houses and discourage the construction of smaller units.

    To use your example, two houses on a one-acre lot might generate more tax revenue than one house on the same lot — but two households will demand more in services from the county. Therefore, from the county’s perspective, one house is to be preferred.

    It is important to note that such logic is not applied universally. Some jurisdictions understand the need for “affordable” housing or “workforce” housing. As a rule, they tend to have significant constituencies of poor and working class people.

  10. Anonymous Avatar

    “I think the low density zoning laws are designed to create the biggest difference between taxes paid and services rendered.”

    “Larger houses offer a superior taxes generated/services demanded ratio.”

    Even if the larger lots increase the costs of providing those services? Shucks, let’s solve all our problems with more sprawl, then. I’ve been telling you taht more density isn’t necessarily cheaper. ;-).

    “100% tax on everything on the death of the surviving spouse.”

    That’s pretty harsh. That would take an awful lot of incentive to work out of the system. A lot of people work to provide their children with stuff they never had. It would mean liquidating a lot of assets, which would then do what? – be accumulated by the next generation, so THEY could have it taken away.

    I’d hate to think that everything I DON’T consume will be consumed by the government. Talk about an incentive for mass overconsumption.

    It seems to me that the point of government is to provide a setting where everybody can fluorish, and thereby pay more taxes so that government can fluorish, and therefore do a better job of providing a still better setting for the next round. What Groveton is suggesting would reset that cycle back to zero every time someone dies.


    Family farms are suffering. Why make it worse? Almost no one can go into farming unless they inherit the farm.

    It is too bad really. Think about what a farm is capable of, using renewable resources.

    Theoretically, you start with $2500to buy five sheep and a ram. A year later you could have 25 sheep and a ram (two litters of twins). Where else can you get that kind of renewable ROI? Yet despite their potential, farms are so abused by the system that there is no way to generate anything like what potential profits that are possible.

    That is because the government has failed to create a setting in which farms can fluorish. We have policies that have emptied the farms to provide cheap urban labor for businesses that are far more energy intensive and far less sustainable.


    “They can buy votes from those of average income by paying for services with the surplus of the few with very high incomes.”

    Which is pretty much the message here in Fauquier. “We have to keep these farms (which pay high taxes relative to the services) in order to keep taxes (for everyone else) low. And, to rub it in, they sell it with a seasoning of environmental feel-good.

    The assumption is that those that live on the farms can afford to pay more taxes, which isn’t always true. In fact it is (partly) the burden of extra taxes that make it so that farms cannot fluorish and live up to their potential.

    I’m not a big believer in the Laffer curve, but there must be some point when too much tax hurts more than it helps.


    1. Pay off the national debt.
    2. Increase the military.
    3. Fund education.

    Why pay off the debt? Debt is a valuable instrument for letting future generations pay for investments we make now, but which they will still be using. Too much debt is bad, but some is valuable.

    Increase the military against what threat? North Korea? How much is enough?

    Education is the one thing that government could easily privatize. Funds still might be needed, but why take money from the (dead) parents just so you can use it funding (their) kids education?


    “Of course you can debate the drop in market value based on the size of the lot.”

    Larger lots are generally worth LESS per square foot, unless they actually come with the associated extra building rights. The same house an a smaller lot in a similar area will bring less, but not a lot less.

    6 people is a lot, but yes you could double the people, this increases sales, generates more money, etc. etc. Zoning large lots keeps expenses down, from the counties standpoint, but it also keeps wealth down. Fauquier has kept growth down and Loudoun has not, but (partially) as a result Loudoun is worth more and earns more, per person.

    Yep, they have higher taxes, but does that mean they are worse off? Does it mean that conservation in Fauquier is worth all the personal wealth it has cost, by comparison to Loudoun?


  11. Larry Gross Avatar
    Larry Gross

    In Spotsylvania, a 400K house generates $2480 in taxes.

    Spotsylvania funds it’s share of education locally at about 5k per student.

    A house assessed at a 800K dollars generates $4860.

    Virtually all of the approved rezones in Spotsylvania for the last 3 years have been for active adult 55+ developments.

    Most of the remaining growth has been “by-right” fairly high dollar homes … for NoVa commuters looking for “affordable” housing and the remaining build-out of earlier approved rezones prior to 2004.

    So.. the irony is is folks who cannot afford the higher property taxes in NoVa .. look for homes in Spotsy.. which, in turn, is getting killed at budget time because their tax rate does not generate enough property taxes per house to pay for the services needed (primarily education).

    Spotsylvania has already decided. Don’t approve rezones for new subdivisions…

    You can calculate the loss to the county for each new home by simply multiplying the number of units times 5K minus the tax on the assessed values of the units.

    so a subdivision of 400 homes selling for 400K each translates into a loss to the county of about 8 million dollars or 4 cents on the property tax rate.

    So if the country approves such a rezone.. it means they will have to raise the tax rate by 4 cents at budget time.

    Hey.. don’t look now.. but the Homebuilders are lobbying the GA to do away with the proffer system and go to a statewide impact fee system AND a fee on the sales of existing homes.

    But you can bet that as long as approved new homes essentially result in increases in the property tax to cover the shortfalls will result in less and less approvals of rezones anyhow. The proffers are a one time charge. The increases in the property taxes are annual.

  12. Vivian J. Paige Avatar
    Vivian J. Paige

    To get back to the taxes for a second – there is another cap that comes into play in addition to the $1.1 mil I mentioned. It has to do with the phaseout of itemized deductions (and exemptions) if your adjusted gross income is over a certain amount. For 2007, that amount is $156,400, which I would consider middle class.

  13. Larry Gross Avatar
    Larry Gross

    errr… a GS15 at grade 10 (top of the scale) makes $120K.

    I must be out of the loop.

    Name some typical “middle class” occupations that pay 150K a year.

    Also.. what is the justification for the mortgage interest deduction on second homes/condos, RVs and rental properties?

  14. Politically Incorrect Avatar
    Politically Incorrect

    We can’t build housing where the jobs are because we might have more children to educate.

    One more good reason to get the government out of the education business.

    Here’s a radical proposal.

    Let developers build to whatever density they want provided all the children in the new development go to non-government schools. And reduce the property taxes in these new developments by whatever percentage is normally spent on government education.

    This would be a win win for taxpayers and children.

  15. Anonymous Avatar


    For 2007, a GS-15 at step 10 made $143,471 in the D.C. metro. I don’t know what the top pay is for 2008.

    Given the cost of living in this area (Fairfax County, I’m supporting Vivian’s conclusion.


  16. James Atticus Bowden Avatar
    James Atticus Bowden

    Please give us a principle or a political reason for capping the housing deduction.


  17. Jim Bacon Avatar
    Jim Bacon

    JAB, The housing deduction should be capped because it represents an unjustified subsidy of housing consumption. People buy larger houses than they otherwise would, fueling execessive indebtedness, excessive expenditures on home furnishings as well as heating, cooling, lighting, etc. “House lust” is a root cause of Americans’ conspicuous inability to save.

  18. Larry Gross Avatar
    Larry Gross

    re: middle income in Wash Metro

    okay.. so 143K for a GS-15. Now tell me how many GS-15’s there are compared to the rest of the Federal workforce. What would be the median GS level in the DC area?

    what is the median income level in NoVa?

    If it is 143K.. I’ll eat my hat. 🙂

  19. Larry Gross Avatar
    Larry Gross

    re: reason for capping the mortgage subsidy.

    This one is easy.

    One is the reason for the subsidy in the first place?

    I suspect it is somewhere along the lines of encouraging/helping people own a home who otherwise could not afford to.

    So, let’s cap the subsidy at a starter home size/price.

    You could always buy “more” but the only part of the subsidy that applies is the first-tier threshold to get you into a house.

    from that part on, size, price, etc are market based transactions between buyer and seller without government involvement.

    I believe that the current housing meltdown has it’s roots in the subsidy in the first place..

    This is the way that virtually every government subsidy evolves over time.

    They start out with a good core purpose and then they get pumped up with special interests “tweaks” until they are cash cows for those who know how to properly game the system.

    e.g – “help the family farmer” morphs… over time to “corporate farm welfare”.

    It was just a matter of time before the financial wizards found a way to leverage sub-prime mortgages into investment vehicles – courtesy of Uncle Sam.

  20. Larry Gross Avatar
    Larry Gross

    “We can’t build housing where the jobs are because we might have more children to educate.”

    Education is 1/2 of the equation. Roads are the other.

    Even if you took the education costs out of the loop – building subdivisions off of rural two-lane roads inevitably leads to too many vehicles on a road never designed to have that many vehicles – and no easy way for a locality to upgrade that road.

    The same goes for “density” in places like NoVa. Same issue, bigger scale.

    For years, VDOT made promises and localities foolishly believed the promises – or worse, they knew the truth but were so “pro-growth” that as long as citizens believed the promises, all was well.

    Comprehensive Plans were/are jokes. They designate land-use, i.e. invite development to those designated areas and they have the “plan” for the road upgrade but there is no CIP – just some fanciful lines showing how the new road might look “some day” when VDOT got around to it.

    Now, VDOT is getting out of the local road business and it is truly up to the locality to figure out how to improve/update their roads to accommodate new growth.

    so schools are 1/2 of the problem.

    I note that the Homebuilders lobby is going to sponsor legislation to do away with proffers.. so the ensuing dialog ought to be interesting…

  21. Anonymous Avatar

    OK, so two people bringing home $75k bring home $150k. It is still a lot of money compared to most families.

    You can also bet that as long as approved new homes essentially result in increases in the property tax to cover the shortfalls, and as long as this result in less and less approvals of rezones, that home prices for existing homes will continue to rise. No growth is a subsidy to existing homeowners, courtesy of the remaining landowners. Somewhere, there has to be a happy medium, but as long as existing homes aren’t “paying their way” either, they can’t very honestly point the finger at new homes.


    “So, let’s cap the subsidy at a starter home size/price.”

    That seems reasonable, to me.

    But, I don’t think we have a housing meltdown. That is overblown. 36% of people own their homes outright, another large percentage have fixed rate mortgages. The subprime loans where most of the defaults are represent less than 4% of the market. The fact that mortgages have been packaged as investment vehicle is a separate issue. Already, people are snapping up good deals on both homes, and loan based investment vehicles, looking toward the turn around.


    “People buy larger houses than they otherwise would, fueling execessive indebtedness, excessive expenditures on home furnishings as well as heating, cooling, lighting, etc. “House lust” is a root cause of Americans’ conspicuous inability to save.”

    You assume they wouldn’t have some other root cause if this one went away. Maybe we are just bad at saving.

    OK, suppose they didn’t spend it on housing and related expenses. Where would that money go? If they save and invest it, it would have to be invested in some business that sells things. That means someone would have to be buying stuff, probably with the money they saved on housing. Relative to a lot of other things they could buy, housing is relatively benign, environmentally speaking, aZnd it soaks up a lot of money for a long time.

    The other alternative is that if people don’t spend on housing related stuff, all the people that sell housing related stuff suffer, and the economy along with it. Then, with no good place to invest the money, and nobody making money by selling stuff, it just stops happening. As my Mexican friend says, it no go round and round.

    With no money going round and round, sales taxes and income taxes decline. Then, just like if real estate declines, taxes have to go up.

    There is no point in saving or economizing, unless you know what you are saving FOR. And if Groveton has his way, all that savings would revert to the government at death anyway.

    So, one reason for this subsidy is to keep the money going round and round, instead of sitting under the mattress doing nothing.


    “They start out with a good core purpose and then they get pumped up with special interests “tweaks” until they are cash cows for those who know how to properly game the system.

    e.g – “help the family farmer” morphs… over time to “corporate farm welfare”.”

    Well, there you have a point, as a general rule, but you picked a bad example. Farm subsidies have NEVER helped the family farmer. That idea is foreign to the actual history of farm subsidies.

    Otherwise, you are right, we start off with a good idea, like zoning, and then it gets tweaked and tweaked until it has far outlived its usefuleness, or original intended purpose.

    You are also correct that comprehensive plans are a joke. A plan needs goals, schedule, and budget. For many comprehensive plans the goal has become do nothing, the shcedule is forever, and the budget is zero. Such a situation is bound to fail.



  22. James Atticus Bowden Avatar
    James Atticus Bowden

    Jim: So let me understand better the principles in political play.

    1. Government should subsidize individual home ownership.
    2. At some specific financial point the home ownership subsidy becomes unjustifiable.
    3. Government should make people save more by taxing their consumption.

    Is that it? What am I missing?

  23. Larry Gross Avatar
    Larry Gross

    re: money NOT spent on homes and “stuff” for homes goes POOF!


    so we’ll end up with all these folks standing around with fat bank accounts saying “woe is me.. I can’t find anything to spend it on”.


    Here’s an easy one.

    The government decides that it will be “good” economic policy if it subsidizes Caribbean Cruises.

    They’ll let you write off 25% on your taxes.

    What will happen?

    Well.. guess what.. Cruises go up 25% – right?

    I’ve got a better idea.

    Let’s let folks write off 50% of their solar/wind power.

    At least then… we’ll be manufacturing and selling something that will provide a longer term benefit than 5 days of higher than normal bowel movements after the cruise.

  24. Jim Bacon Avatar
    Jim Bacon

    JAB, I’m not sure what you’re referring to. Are your three points the way you are interpreting my post? Here’s how I would rephrase them:

    1. Government should NOT subsidize individual home ownership; if politicians cannot refrain from meddling in the marketplace, they should limit subsidies to entry-level homeowners only.

    2. The home ownership subsidy is unjustifiable. The only remotely viable justification in my mind is to help first-time home buyers acquire a home and get on the wealth-accumulation bandwagon. After that, the government is subsidizing conspicuous consumption.

    3. Government should encourage people to save more by ending subsidies to their consumption.

    Instead of targeting tax breaks to favored constituencies like home owners, the feds should apply that $89 billion to the reduction of other taxes — like perhaps cutting the top tax bracket by a couple of percentage points.

  25. Anonymous Avatar

    If you put in solar power, you can already do that with your mortgage and deduct the interest. What’s the problem?

    Home windmill would require a zoning variance that you probably won’t get. If you can’t put up an 80 ft tower for a cell phone, imagine what it would be like for a noisy windmill.

    The point is that you WON’T have people sitting around with fat bank accounts. Bank accounts have to get invested in Something, and with NO-growth everywhere and the housing slump, it won’t be mortgages.

    If the bank account money isn’t invested it returns no interest, which is even worse than putting it in your house, where you can at least enjoy it. So, if the local bank is out of the housing business, where DO you put the money?

    The housing slump is now affecting the entire economy, which means any investment could turn sour. So yes, in fact, the money does go POOF, because if it “no go round and round” it doesn’t exist.

    So the question remains, if we encourge people to save more, where does the money go? What do we want them to use their money for, if not shelter?

    You could change the mortgage subsidy for a solar energy subsidy or write off, as you suggest. What was that about subsidies? Oh yeah, a subsidy is an incentive you don’t agree with. If the government should’t subsidize home ownership, why should it subsidize solar cell ownership?

    From the standpoint of keeping money going round and round, one might be as good as the other, depends on the ROI. I think the ROI on solar is down around 1.5%.

    I think I can still do better than that on real estate.


  26. Anonymous Avatar

    What’s the ROI on subsidized Carribbean Cruises?

  27. Anonymous Avatar

    If we end subsidies to consumption, and still need to consume the same amount of stuff, how does that encourage people to save? Even if they consume less, without the subsidies the stuff costs more per unit, and that doesn’t help savings either.

    And of course the vendors sell less stuff and pay less taxes, which we have to make up somewhere. That comes out of savings, too.


  28. Larry Gross Avatar
    Larry Gross

    “no go round and round”

    yeah.. if you put it in a sock and stuff it in your mattress.

    most folks put their extra money into an interest-bearing account or they’ll buy an investment and the money then does go “round and round”

    Same difference, if you spend it on remodelling … new garage/basement/pool/cruise to Antartica/new SUV….

    the only money that goes “poof” is money that is hoarded and/or literally burned… anything else goes “round and round”.

    you may not agree on WHERE it should go round and round vs where it really does but that does not mean that it does not go round and round…

    and you don’t have to put a wind turbine up on your own roof to “buy” a wind turbine.. now do you?

  29. Anonymous Avatar

    My point exactly. But where does the interest bearing account get its interest? From an investment that turns a profit, ususally from people buying stuff.

    A very popular one, until recently was mortgage backed securities. But now, the housing slump is causing slumps across the economy, from lumber to drywall, to sod.

    So, if we all stop the mass overconsumption, then the investments stop turning a profit and paying interest/dividends. In that case it really does go POOF. Ask anyone who owned Enron, or TREX for that matter. If enough goes POOF we call it a recession, and if more goes POOF we call it a depression, which is pretty closely aligned with people not buying stuff.

    It only goes round and round as long as the investment makes EVERYONE better off the investor, the company, and the customer. So then you have to figure how fast it goes around.

    You have a choice between investing in Dominion and earning 12% or investing in your own home solar and earning 1.5%. Even if your investment in Dominion makes you feel bad about what you are doing to the environment, you’ve still got 10% to play with, to buy carbon offsets, or solar panels if you like.

    If you are not averse to speculation, you could buy stock in a company that makes solar panels (or as you point out windfarms). One of them returned 700% last year. You just have to ask yourself how long that can go on, when their products only return 1.5%.

    Your Dominion Stock will pay for your solar panels faster than the solar panels will pay for themselves, and then, you still have the original money to invest in something else, and sooner.

    And it is not the same as a cruise to Antarica wich gets you Zero return, unless you sell the story or photos.

    So it does make a difference in what you spend your (disposable) money on, and it does make a difference what you put your (investing) money in.

    That’s why it is possible (although not necessary) that government investing in the wrong widgets will do real harm.

    That is as opposed to perceived harm, which is when someone thinks someone else is getting a free ride, or benfiting from a wealth transfer that fails the test of making everyone better off.

    The question of eliminating the mortgage deduction boils down to who does it hurt and who does it help, and by how much. If we can convince ourselves we will all be better off as a result, then we should do it.

    But, if the result is going to be that we all “save” a lot of money, but now there is no place to put it except in the sock under the mattress, well, maybe we are not better off.


  30. Anonymous Avatar

    “you may not agree on WHERE it should go round and round vs where it really does but that does not mean that it does not go round and round…”

    Sure. Some people even made money off the Enron disaster, but he is dead now. Some people are making money off the housing crunch, too. So you can argue about WHERE it goes around. But if you keep taking out more than you put in….
    it can’t last.

    Then, POOF.

  31. Larry Gross Avatar
    Larry Gross

    right… when I walk down to the local WalMart and see they have a sign on the door that says…”

    ” Due to reduced consumption, we will only be open 3 days a week from now on from 9 til 5″

    then I’ll buy what you’re attempting to sell here…


    Until then… it’s all about what consumers decide what to send their money on… especially in the NoVa Area where they get paid for pushing paper instead of making widgets…

    As long as the Feds buy Warships, HR/TW will have folks buying Playboys and condos…and Ford Explorers…

    As long as folks go get their innards illuminated by GE MRI machines, folks will be upgrading to granite counter tops

    … when I see that Walmart sign… I’ll start believing something different.

    until then – money goes round and round… not poof….

  32. Anonymous Avatar

    Jim, I think what you are missing is that the mortgage deduction is really more historically based on being a business tax deduction than an individual deduction. To eliminate it for individual homeowners you would most likely also have to eliminate it as a business expense which would open up a huge can of worms in terms of expensing. Reason being that even if you take that deduction out for the individual, you would leave open massive loopholes, that could only be closed via either intrusive auditing or elimination of the deduction for businesses and other entities.

    To simplify, basically an individual could put their home into a fund, trust or other entity and then pay a rent payment to the entity to cover costs. The entity would then utilize the interest deduction and provide ROI to the original owner based on appreciation.

    By keeping the cap at $1M it basically covers the vast majority of mortgages and actually in essence simplifies the tax code, as most users of the deduction tend to have more money and could probably afford to set up a tax shelter if the deduction was eliminated. It’s unlikely you would see close to the $89B in deductions that come from it.


  33. Anonymous Avatar

    “until then – money goes round and round… not poof….”

    Which goes to the first part of my statement. JB thinks we should not invest in overconsumption of housing, and that we could “save a lot of money by not doing it.

    So then the question is, where do you put the money, if not in housing.

    Yep, you could put it in solar or wind, but you wouldn’t see it again for a long time.


  34. James Atticus Bowden Avatar
    James Atticus Bowden

    Thanks, Jim Bacon. I wasn’t following any logic in what you wrote, so it seemed out of sorts.

    You have your principles fixed in your mind. I thought you did.

  35. Anonymous Avatar

    Why should I pay for other people’s rise in property values?

    Because the tiny amount you would pay in taxes would be more than made up for in wealth creation and additions to the social capital of the town, in addition to the services delivered by said raised property values.

  36. Jim Bacon Avatar
    Jim Bacon

    ZS, I hadn’t considered the angle you raise — but I don’t quite understand it. I can see how a real estate investor could claim deductions for houses he owns and rents to others. But that’s clearly a business transaction. How does that apply to a homeowner claiming a deduction for the house he lives in?

  37. Anonymous Avatar

    I think the point is that if you didn’t have it for individuals and did have it for businesses, then it would take about two seconds for you and your neighbor to write a lease to each other, and then take the deductions anyway. Plus the depreciation.

    Might still be a good idea.

  38. Leslie Carbone Avatar
    Leslie Carbone

    Great discussion. While I’m generally in agreement with the post’s indictment of “house lust”, I can’t agree that the mortgage interest deduction constitutes a subsidy. Letting people keep their own money is not a subsidy.

  39. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    I had a couple hundred thousand dollars go poof in the past couple of years. I know the money was there, the tax assessor said so. In fact he still thinks I have the money.

    A few years ago I had my IRA go poof because the guy that was entrusted with the money wasn’t very good at managing it. I don’t know where it went round to, I just know there is no money in my account.

    See, a house is just like a savings account. You put money in with no guarantee that you will have the same money when you need it. The only way to make sure you have the money is to keep it under your mattress. Then it isn’t going round and round.

    I also feel that a house should be treated just like a business. You are after all in the business of accumulating a paycheck and buying assets, just like a business owner does. The difference is he gets to expense every dime he invests, and the homeowner… well.. he gets a few hundred bucks back come April. A benefit of being ‘subsidized’ by the mortgage deduction.

    A company couldn’t afford to stay in business if they were treated like homeowners. As we are witnessing, homeowners aren’t staying in business under those rules either. If corporations can be legally recognized as a person, then families should be legal corporations formed, not under a social compact, but as a home business.

  40. Anonymous Avatar

    A couple clarifying points:

    When the income tax came in the early 1900s the majority of mortgage users owned farms or other trades so they would be utilizing the property for income producing reasons. Therefore it made sense to deduct interest payments as a business expense. Fast forward today though not as prevalent, a home can still be utilized for income producing reasons.

    This is why you can easily get around the mortgage deduction if it’s eliminated. Through various accounting methods you can alter your home to be a rental income producing property of sorts. You would likely even seen funds or co-ops of sorts formed to compensate for the loss of the personal deduction. Since the majority of the $89B comes from those with higher incomes, it’s even more likely to occur if the deduction was removed as those households would more likely have the means to do it.


  41. Larry Gross Avatar
    Larry Gross

    well.. are we talking about the merits of the subsidy ….

    .. or the fact that some folks will evade their taxes in various ways so therefore.. it does no good to do away with the subsidy.

    Cap the subsidy and also “means test” it on an inflation-adjusted basis and put strict rules and penalties for evading taxes (for instance – “no owner-occupied rentals” and move on…

    and I’d actually make the subsidy a loan – to be repaid when the property is sold. In other words, you get a one-time subsidy and the only way you keep it, is to keep the house.

  42. Anonymous Avatar

    While you are at it, put a cap and a means test on real estate tax. there is no reason the taxes on your home should drive you out just because your neighbors become more affluent. Especially if they do it by putting a big addition on with a subsidized mortgage.

    I am amused by the idea that it is not alright to subsidize a mortgage, but it would be alright to put an even bigger subsidy on solar and wind power.

    We live in the most mobile society the world has ever seen, with frequent job changes and household moves. To make this a one time subsidy premised on keeping your present home, would be a big mistake. We ought to be making it easier and less expensive to move (so people can afford to make better locational decisions), not more expensive.

    No one has yet answered my question: If we are opposed to massive overconsumption on housing, we do away with the mortgage exemption, we think that will allow people to save more, but we don’t think that will slow the economy, then we must think that they will still spend the money they “saved”. If they don;t spend it on massive overconsumption on homes, then it must be spent on some other kind of overconsumption, or invested ins ome other business that depends on it.

    What exactly do we think they will spend it on that turns out to be less damaging to the environment than housing? What will they spend it on that represents a bigger long term (and still useful on a daily basis) place to stash their cash?

    We can say we want them to spend it on solar and wind power, but now we are just telling people what to do. usually you have to pay people to get them to do what you want, which is what a big subsidy for solar and wind would do.

    But, if you do that, then there goes the $89 billion you thought you were going to save by eleiminating the mortgage deduction. And the payback on those technologies is (still, but not forever) low. Which means that you will have sequestered that money for a long time. As far as using it again, for some other purpose goes, it will have gone POOF.

    If we are not going to get the $89 billion in savings, the money is going to be spent anyway, and people won’t have their homes to show for it, what esactly is the big advantage here?

    Is this just to score points against subsidies in general, or just one we don’t like?


  43. Larry Gross Avatar
    Larry Gross

    re: ..”but it would be alright to put an even bigger subsidy on solar and wind power.”

    I’m not in favor of them – except as loans which would essentially allow folks to buy more expensive energy-saving widgets up-front that result in long term savings, part of which would be used to repay the loan.

    There is no real justification of a subsidy because – by definition – if everyone does not get it – then one group gets the subsidy and the other one provides it.

    And “trading” subsidies… aka “give me this subsidy and I’ll give you one in exchange” is no different than everyone getting a subsidy – which is then NOT a subsidy but just giving each other money – the same amount.

    The subsidy has to have a beneficial long-term ROI to the folks that PROVIDE the subsidy.

    Otherwise, it’s a wealth transfer and wealth transfers usually are based on helping folks at the lower end of the economic scale – not the middle or higher ends…

  44. Anonymous Avatar

    “I’m not in favor of them – except as loans “

    At least that is consistent with your other position.

    “There is no real justification of a subsidy….”

    There could be justification. In some cases, government, holding a long term view of things, can afford to do things that are not economical in the short term. There are cases where certain kinds of risk cannot be accepted by private business, but those risks can be mitigated by government. There are times when a little push in the beginning can result in a lot more acceleration later.

    As long as the winners can pay back the losers and still come out ahead, the subsidy is not a bad thing. As you say, “The subsidy has to have a beneficial long-term ROI to the folks that PROVIDE the subsidy.”

    I think that is exactly right. Unfortunately, lobbying by special interests seems to ensure that the government is not very good at discerning or evaluating this.

    It would be nice if we COULD have a wealth transfer from the lower end to the upper end: that would be right up there with perpetual motion machines, wouldn’t it?

    I think we make a mistake by assuming all subsidies are bad: we just don’t have a fair system for evelauating them. Unfortuanately, the history is so bad that the feeling against subsidies has become a kind of mantra.


    “Government efforts at benevolence always backfire. Inevitably, unintended consequences overwhelm the short-term and narrow benefits of authoritarian programs designed to make the economic system fair, the people morally better, and the world safe for democracy. One hundred years of intense government “benevolence” in the United States has brought us to the brink of economic collapse, a domestic police state, and perpetual war overseas. And now our obsession with conquering and occupying Iraq is about to unleash consequences that no one can accurately foresee. The negative possibilities are unlimited and the benefits negligible.

    This war, if of any significant duration, in time will be seen as a Republican war plain and simple. Along with a weak economy, it could easily usher in a “regime change” here in the United States. The conditions may justify a change in leadership, but the return of control to the opposition party will allow them to use the opportunity to promote their domestic liberal agenda and socialize the entire economy.”

    Ron Paul, 2002


    On the other hand, a recent study the Metro Fare increase has concluded that it was a mistake. Although the fare structure is progressive, in that it charges more for rush hour and longer distances, the study concludes the fares are too high.

    The increase in fares will result in a net decrease in public wealfare as more people abandon Metrro for their cars, and it is in fact the auto drivers who will pay the biggest price for the fare increases!

    The conclusion was that metro riders now pay around 40% of their actual costs, but the socially optimum amount should be only 10%: that 90% of their ride should be subsidized!


  45. Larry Gross Avatar
    Larry Gross

    how will the auto drivers be paying for the increase?

  46. Anonymous Avatar

    Good question.
    I didn’t make myself clear.

    With respect to the current Metro fare increase, this was considered a net social negative because a)more metro riders would switch back to cars (so they pay those operating costs) and it would result in more congestion for which the costs would be borne by drivers.

    “Traveling by mass transit is not the only option commuters have. If the cost of commuting by rail goes up, while the costs of other transit modes stay the same, commuters will substitute towards their other primary option: driving! And more driving has its own very real costs — more accidents, more pollution, and most costly of all, more congestion. Raising rates on Metro might close the budget gap for mass transit but still reduce societal welfare because of the externalities from shifting commuters towards driving.”

    “But the truly striking result comes if you look at the authors’ results for the rail transit in the Washington area during peak times in Table 3: they calculate that the optimal subsidy is over 90%! The two main reasons are the average-marginal cost gap for a public transit system — more riders mean increased service frequency and fuller trains — and… [drumroll]… the reduced congestion externalities from the shift to mass transit! The paper suggests that decreasing the subsidy for peak rail transit will be welfare-reducing at the margin, in large part because drivers are going to pay the cost of increased congestion. “

    Then we get to the future proposal part, not related to the current fare increase:

    “Metro’s fare increases may help close the system’s budget shortfall, but that doesn’t mean it’s a wise policy for the area’s citizens. Far better to start charging drivers for the externalities they impose — congestion, pollution, and the like — and use some of those funds to start subsidizing mass transit.”


    Now, this is a different conclusion than that reached by Winston and Shirley. Their conclusion is that mass transit only pays in the very best markets and on the very best routes. Maybe Metro fits those desriptions.

    But here is the problem. Despite the externalities imposed by drivers, they still pay a far higher proportion of their total societal costs than other modes, primarily because they provide, maintain, insure, and operate their own machinery.

    If we are going to start charging them for the remainder of externalities, and use the money to support mass transit at the 90% subsidy level, then we are going to have to stop making the argument that drivers are not paying their own way.

    If we then discover that driving is STILL the preferred and most used mode, then we will have argued ourselves into a corner.

    But, the point of this was to show that it is possibe to make an argument for a substantial subsidy that creates a substantial net social benefit.

    In this case, the argument seems to be that the motorists paying for the subsidy, also get the benefit in reduced congestion. Therefore the subsidy to METRO is free.

    I didn’t sy it was possible to make a GOOD argument for the subsidy.

    I don’t know how you separate motorists paying for the subsidy and receiving no benefit (because they don’t drive near Metro Routes and still have congestion) from those that do benefit.

    The link to the document is

  47. Anonymous Avatar

    To see how confusing this is, here is a footnote from the paper.

    “For London, Glaister and Lewis (1978, Table 4, line 3b) estimate optimal rail and bus fares at about 50 to 60 percent of marginal operating costs. For the San Francisco Bay Area and for Pittsburgh, Viton (1983) finds optimal fares to be virtually zero. Winston and Shirley (1998) find quite the opposite for the United States as a whole, with optimal bus and rail fares covering 84 percent and 97 percent of marginal operating costs, respectively. For a prototype Belgian city, De Borger et al. (1996) estimate optimal transit fares are 50 to 114 percent of average agency costs, depending on how service frequency adjusts to passenger demand. For Brussels, Van Dender and Proost (2004) estimate optimal transit fares to be nearly zero in peak periods and about double current fares in off-peak periods. Two recent studies of Washington, D.C., by Winston and Maheshri (2007) and Nelson et al. (2007), estimate net total benefits from transit but with conflicting results. Insofar as possible, we relate our findings to this previous literature in Section 4.3.”


  48. Anonymous Avatar

    “Dender and Proost (2004) estimate optimal transit fares to be nearly zero in peak periods and about double current fares in off-peak periods.”

    What does that say about peak period pricing?

  49. Larry Gross Avatar
    Larry Gross

    thanks for posting the reference…

    makes my head hurt to read it…

    …”Our analysis suggests that today’s substantial operating subsidies for transit systems appear to be warranted on efficiency grounds…”

    page 24 Conclusion

    Now this is quite a statement from the world of the Reason Foundation.

    my question is .. is it really a subsidy if it is more efficient than the alternatives?

    does it mean, in effect, that the alternatives external costs are higher?

    with respect to peak hour.. it’s a no brainer…

    one lane of autos at peak hour maxes out at about 2400 per hour whereas transit can carry 10, 20 even 40K people per peak hour.

    I think we’re on to something here.

    If mass transit is more efficient than mass automobility especially at peak hour – and we are taxing people to pay for transportation facilities – then why do we call it a subsidy if the money is being spent to obtain the most cost-effective mobility obtainable?

  50. Anonymous Avatar

    Yeah, the good stuff is in Appendix A, which I read like comic books.

    Well, there you have it, there is such a thing as a good subsidy. This whole thing is off topic, but I dragged it in because of the subsidy.

    But remember the conclusions says “Our analysis suggests….” while the footnote suggests there are many other analyses which might suggest otherwise.

    The authors even point out the diference between the Winston and Shirley study and their own: Winston and Shirley included the annualized capital costs while the authors of this study included only operating costs. Their reasoning was that sunk costs have no beraing on the optimal current operations! Also, Winston and Shirley Eliminated most of the auto externalities by allowing for congestion tolls sufficient to cover them …..

    Then look in Appendix B.

    “Pollution and accident external costs per passenger mile for rail are taken to be zero.” Try telling that to all the people who got killed by trains last year. whatever number they used for VSHL to concoct the externality for auto accidents should be the same one used for train fatalities.

    And we know, for example that Vienna metro is partially responsible for auto congestion in that area, so let’s not give Metro a free pass on externalities, including pollution due to use of electricity.

    If you look at table two carefully, you can see a lot.

    The peak period occupancy for autos is 1.34, but off peak it is higher – 1.45. What does that tell you?

    They calculate the external costs of autos at 25 cents per passenger mile. Add to that the operating costs of 45 cents per mile or 33 cents per passenger mile (My Prius is 26 cents, including capital depreciation. Remember transit was not charged with capital costs. Neither are the cars if you consider the capital cost of roadways, so the comparison is not right, either way.) For now, call it 85 cents per mile.

    Now look at transit. At peak time, rail is 93 cents per passenger mile. And the bus is $2.35 per passenger mile (That doesn’t include capital cost of the roads for the bus, either).

    And Yep, transit can carry more passengers, but how many DO thay carry? A train leaves every 6minutes and carrys, on average 151 passengers times 8 cars. Thats around 7500 to 10,000 per hour, if you don’t mind standing, not 20 or 40 thousand.

    If you play fair, and give everybody seats, it’s only 5120 passengers per hour. So lets’ get real. It’s right there in Appendix B. No wonder your head hurts.

    “If mass transit is more efficient than mass automobility especially at peak hour….”

    But it just isn’t. If it was, we would have railroads everywhere we have roads. And the reason we don’t, is the reason our dear authors left out – capital costs.

    It is more efficient under certain specialized conditions, and THAT is the killer. One of those conditions is that you have enough roads and parking to deliver the passengers to the train – by car.

    The question you have to answer is what is the best total system, and who should pay for it? Apparently the argument the authors are making is that if we DON’t have Metro, then auto drivers pay. (Obviously, there isn’t much other choice.) And in order to have optimum Metro, it must be heavily subsidized. (Just as obviously that money has to come from somewhere else – drivers.) But the (remmaining) drivers are the primary beneficiaries because they suffer less traffic congestion (We know tht isn’t true) and anyway the poor Metro oriders have a) wait for their ride, b) travel slower at greater cost, and c) stand up.

    All of that is just ducky, but now explain to me how it is that autos are not paying their full costs, if they are paying their full costs, plus the Metro costs.


  51. Larry Gross Avatar
    Larry Gross

    well which is it?

    is METRO “worth” it or not?

    and if so.. why and if not.. why not.

    oh.. 10 cars with 100 folks each times 40 cars = 40,000 people per hour.

    This is a real number on some transit systems.

    even if in your minimal example of 5K people.. that is still TWICE as many folks that a lane of road.. TWICE as many..

    take a look at how many people most rail transit moves at peak hour and most systems move far more than 5K per hour.

    the fact that now, even the reason foundation is agreeing about the cost effectiveness of transit is pretty interesting…

    Of course they also advocate congestion pricing

  52. Anonymous Avatar

    The paper says metro averages 151 persons per vhicle during rush hour. I assume tht is per Car. I also assume that is the average in one direction since the cars max out at 164 per car.

    Metro trains have a maximum of 8 cars. If they leave six minutes apart that’s ten trains an hour. Ten times 8 times 151 is 12,080 per hour.

    There is no way to get Metro up to 40k. Can’t be done. They are now removing the seats so they can get more people in by standing. But if they had to give each passenger a seat, they would transport fewer than 5000 per hour.

    And that is based on one way. Since the trains mostly come back empty, the real efficiency is half of that.

    “This is a real number on some transit systems.”

    Show me the numbers. I don’t beleive it. For the system, maybe. per train, not a chance.

    Is Metro as a whole worth it? I don’t know: we don’t have enough impartial information. Frankly, I doubt it, although pieces of it might be worthwhile.

    How did you pick up that was Reason Foundation? I didn’t see it.

    Whatever they advocate doesn’t matter: the estimates are still all over the place. My only point is that if you accept their argument, and their means of paying for it, THEN the argument that autos aren’t paying their way goes out the window.

    The only rational thing to do in that case, is to advocate for MORE auto use, because that is how you pay for transit.


  53. Anonymous Avatar

    Using their numbers autos cost less per passnger mile than rail transit, during rush hour. off rush hour autos are a lot cheaper.

    But Transit can increase peak hour capacity, and that is worth something, to somebody. What we don’t understand is who and how much.

    Again, the only reason I brought it up was to discuss the value or not of subsidies.

  54. Anonymous Avatar

    The averae daily ridership for ALL of metro is around 700,000. If all of that is concentrated during the eight hours of rush hour then that is 87,500 per hour for the entire system.

    There are five lines with one track in each direction. Each track is then carrying, on average, 8750 passenger per hour.

    And thats if you credit the whole days ridership just to rush hour. If you average it across the day, it is less than 5000 per hour.



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