Some Economist Love (and Politician Hate)

There's nothing worse than sub-optimal economic policy, however, time and time again, policies that would deliver positive net benefits don't get passed. Six policies, summarized in Six Policies Economists Love (And Politicians Hate), are prime examples. On NPR's Planet Money podcast, five economists, each having a different political ideology, are given "a simple task: Identify major economic policies they could all stand behind."

I'm going to discuss the public choice context of Proposal One- eliminate the mortgage tax deduction (I'll leave Proposal Six--legalize marijuana-- for somebody else to rant about).

When I read Mueller 5.1, on majority rule and redistribution, I thought of this proposal as a good example of the majority imposing a tax on the whole to subsidize the consumption of one group. Apart from home ownership being a quintessential part of the American dream, it doesn't provide any positive externalities over renting. However, this deduction discourages renting (which is a better option for lots of people, it lubricates their employment possibilities), redistributes money to the middle and upper-class individuals who purchase homes, and, worse yet, distorts both the housing and loan markets (causing inefficient allocation of scarce resources).

A politician who votes in favor of dismantling the mortgage tax deduction, however, wouldn't get to stay a politician for long. According to the US census, about 70% of homes are occupied by their owners. A proposal that would increase taxes for 70% of people isn't going to win a majority. People vote, not for fair policy (this is just one of many regressive redistribution schemes!), but to maximize their own utility.

Economists don't like to agree with each other, so when 5 different economists unanimously see positive net benefit that could be inexpensively realized, decision makers should listen. In a representative democracy, considering the well-being of, not just the majority, but the whole, is the only ethical (and by ethical I of course mean economical) way to act. Ethics, however, never got anyone elected twice.