The Trouble With Homeownership by Robert Shiller
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As professor Shiller is referenced often at this site, this article should be of interest -
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The Trouble With Homeownership by Robert Shiller - It's good for the community but not the wisest investment.
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.......But what's ironic, as any classical economist would tell you, is that homeownership is actually not a great idea from an investment standpoint. A better strategy would be to diversify as much as possible—put your money into stocks, bonds, many different geographies—and then use the income to rent whatever you like, which allows for greater flexibility and efficiencies. The popular argument that renting is equivalent to throwing money down the drain is really fallacious, since the money you save can be invested to produce dividends. Instead of you tinkering with the plumbing and breaking something, a professional can do it. The lawn guy who has the right equipment can come and mow all the lawns faster and better than individuals would, and so on......
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As professor Shiller is referenced often at this site, this article should be of interest -
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The Trouble With Homeownership by Robert Shiller - It's good for the community but not the wisest investment.
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.......But what's ironic, as any classical economist would tell you, is that homeownership is actually not a great idea from an investment standpoint. A better strategy would be to diversify as much as possible—put your money into stocks, bonds, many different geographies—and then use the income to rent whatever you like, which allows for greater flexibility and efficiencies. The popular argument that renting is equivalent to throwing money down the drain is really fallacious, since the money you save can be invested to produce dividends. Instead of you tinkering with the plumbing and breaking something, a professional can do it. The lawn guy who has the right equipment can come and mow all the lawns faster and better than individuals would, and so on......
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Comments
Oh great, he wants us to have to get the government's permission before we buy a house or stocks.
Diversifying away your ownership in a house is fine, until the landlord wants to raise your rent because thanks to the nice work you did on the deck and refinishing the kitchen, your house is now worth more than you are able to pay.
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Your interpretation of a statement taken out of context is quite creative.
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Jon, what's wrong with a little bit of wealth distribution? Don't you think society would be better off with lower income inequality? Isn't it up to government to make that happen?
This is perhaps a uniquely American psyche, but many Americans (even the poor) have an aversion to the idea of wealth distribution because they like to envision a world where they might be wealthy. Our celebrity obsessed culture makes this easier.
The primary difference, seems to me to be based on how one defines wealth distribution. If you say, I'm going to transfer funds from the wealthy to the poor, people don't like that. If you instead say, the wealthy have gained more from this country, therefore I will tax them a little bit higher, then people are more open to it. I think if you talk to those who support more socialization they think in terms of the second and those, like Jon, who oppose it think in terms of the first case.
I would have thought that the tens of millions of people that died in the 20th century under the various wealth and land distribution schemes would have convinced people that is not the way to go, but I guess not.
There are a huge number of problems the come up once you agree that one group of people has the right to take property form another group simply because they outnumber them. Sure you can say that 95% will get a tax cut as part of election rhetoric, but once people get a taste of how easy it is to take money from one group they aren't going to want to stop. You can say that would never happen in the US, but the social fabric of this nation is getting weaker all the time, and the whole blue-state red-state thing is getting worse every election.
Apart from that, there is also the distortions in the market that occur even if things don't get completely out hand. For example,
Congress made a big push through the CRA to force banks to provide financing to people who couldn't afford it, and it put the taxpayers credit behind that. That created a whole culture of rising house prices and living off of that equity. More generally, giving people money that they didn't earn creates all kinds of perverse incentives and causes intelligent people to invest their time and skills in gaming the system (eg. CDS's etc) instead of producing real value to society.
Schiller's remark that "We need to make sure we structure the rules of the game in such a way that we don't get injured while playing it." seems well intentioned, but every step of the way towards the current melt-down was the result of government intervening with rules and subsidies to try to social engineer a result. We have seen that the system is just to complex for us to predict the results of what will happen even just a year or two down the road.
Here's my favorite quote from that article:
Lawrence Yun? Really? Given his track record, shouldn't that be "declines of 4% (plus or minus 100%)"?
Why didn't he just go all out and add a decimal point to his forecast?
That would be the most cynical explanation. I've thought about it a lot and figure that a lot of people that make lots of money just might deserve it. Often people that make lots of money are people that started their own business (either alone or with others). Usually ditching your job and starting your own business is an extremely risky and time consuming venture. A lot of businesses never become successful. The ones that do may only be successful for a short time. And usually the ones that became successful were only able to do so by long long hours put in by the founders. And even while the business is still successful they're probably working 80 hour weeks to keep it that way.
A couple years ago I read an article on Slate, of all places, that talked about the wage gap and the time gap. It turns out people who make more also work many more hours. Their conclusion was that no discussion of ways to close the wage gap is reasonable without an accompanying discussion of ways to close the time gap.
That's not to say that there aren't people out there that totally don't deserve their enormous salaries and basically do no work while raking in the money. Just that there plenty of people out there that make "a lot" of money that more than deserve it. I'm personally glad that there are people out there willing to throw away their lives to become rich because without them people that don't want do that wouldn't have stable, secure jobs with good benefits.
I guess my first caveat would be, that I was speaking in a rather broad brushstroke and of course many people reach conclusions for different reasons. But, we have to also be cautious of coming to an opinion and then finding a better reason to justify it after we've reached that opinion.
Looking at your explanation, I think we pretty much agree. If you read my second paragraph, I said that those who believe in a more socialist response think it's fair for those who have gained the most from our freedoms to give the most, while those who do not see it as a simple wealth transfer from those who earned it (usually) to those who didn't.
Your post pretty much explains why I don't think communism can work on a broad scale - it removes all incentive for innovation or risk taking. But consider this thought jujitsu; if taken to the extreme, capitalism can create a world with too much downside risk, which will also hamper innovation. We all agree with this implicitly, which is why we have laws in place to protect innovation (patent law) and to protect the innovators (corporations).
Rather than take a hard stance, I think the goal should be to find an optimal reward for additional work/risk. If Joe the plumber makes $251k vs $249k, he should still take home more money if he earns an extra $2k. If he takes home less (due to dumb tax laws), then he has no incentive to work. At the same token, if he pays tax of $0.20 on the dollar for the first $250k, and he pays $0.30 on the dollar for the next $1k, that doesn't sound like to horrible of a tax code to me. Maybe you disagree, and think a 25% or a 21% rate for the next thousand is fair, but the point is we should be able to solve this in a fair and reasonable way.
A much higher percentage of people throughout history have died for exactly the opposite reason. Using death tolls from the 20th century is misleading because they are actually such a smaller percentage of the population.
Consider how many died during much of European history due to the feudal system - a system that redistributes wealth from the poor to the rich - from causes ranging from illness to malnourishment to wars. During the Middle Ages, relatively few nobility ever died in combat as they wore metal armor, but the recruited soldiers (many of whom were just farmers) did not fare so well. For a more modern example, consider Columbia or much of Africa.
It is silly to paint all things as black or white. Using your line of reasoning, there is a huge problem with the federal government collecting taxes today, or yesterday, or last century. Same problem at the state level. Shoot, per your argument school levies are a huge problem since the majority in a district must agree to tax only the land owners in order to pay support schools. I think you're just being facetious, but I can't tell.
The main difference between this example and modern day redistributionism is who is the supposed beneficiary. Whether someone takes away property because of military strength or through democratic strength, either way will cause people to focus on taking things from each other instead of productive work. Which way caused more death is hard to untangle from the changes in the technology that has occurred since feudal times, but really isn't relevant to the point that the most rapid progress will occur when people are motivated by enjoying the fruits of their labor.
Having a democratic decision to raise taxes to promote the common good is very different that raising taxes to transfer wealth. There will some people (Rezko, for example) who devote their careers to skimming off of government spending by means of bribes, but the problem is an order of magnitude less than when large numbers of people stand to directly benefit from handouts. Not sure what your point about land owners is, because RE taxes are passed through in rent, and there are sales taxes also.
Joe the Plumber does not have a plumber's license, it turns out. He may be a Republican shill, related to Charles Keating's son-in-law. Yesterday he admitted that he worked as a plumber, so he's a criminal.
First a hypothetical, what if elimination of poverty were a proven common good?
Second, it's flawed to argue that any tax system isn't a redistribution of wealth. Consider one of the most *fair taxes I can think of: gas tax. Assuming the tax goes to road construction and maintenance, you can argue that each cent of tax is paying for the roads that gas is using. But of course, that is false. Perhaps my car gets 5 MPG, I might pay 40 cents in tax for the usage of 5 miles of roads, while my Prius owning friend pays the same tax to use 50 miles of roads. I am subsidizing the Prius owners road use, which is redistributing my wealth to others. Granted, I made a poor choice of automobile, but does that make it fair for me to pay for everyone else?
Consider instead a flat income tax. Bill Gates would pay as much as perhaps a million of the lowest income earners. He surely does not reap one million times the benefit in terms of schools, roads, and libraries so that too is redistribution of wealth. Yet, we all pretty much agree its reasonable for him to contribute more total tax dollars than some random homeless person. A fairer burden (in your sense, that you reap only what you sow) would be a fixed dollar amount for every man woman or child. Fairer still would be the government charging you directly for every service used. Drive on the freeway, pay a fee. Play at a park, pay a fee. Read a library book, pay a fee. So on and so forth.
Essentially everybody (probably even you Jon) agree with redistribution of wealth via taxes so long as it isn't explicitly called that and it seems "fair". The question isn't should the wealthy have a higher tax burden than the poor, but rather what the appropriate tax burdens are. That is all we are really arguing about here.
* fair meaning does not appear to redistribute wealth.
http://money.cnn.com/2008/03/31/news/ec ... /index.htm
Specifically,
So the question is should federal taxes be even more redistributive? (One complication is there are a lot of other federal taxes that are regressive, such as social security, which in part go back to the payer but in another sense are really just another welfare payment.)
That was the question of the Reagan campaigned on, when he asked wouldn't the government get more tax revenue by growing the economy. The fact that the government sent out stimulus checks recently means that point has been generally accepted.
I think you would agree that the best way to combat poverty is not to hand out cash on the street corner. Human behavior being what it is, it is better to build schools, subsidize hospitals, etc. When Obama says he is going to cut taxes for 95%, he is proposing to give money back to taxpayers, but taxpayers are already in the top half. So either he is not addressing poverty, or he plans on handing out cash.
I don't think a progressive tax is actually fair in any sense, but it is a practical matter of buying social stability, combined with an enforced sort of charity (which is an oxymoron because charity originally meant love). One hundred years ago when poverty was far more extreme in this country, an income tax of 1 or 2% was introduced. Now taxes are much, much higher and yet people are clamoring for even more redistribution, while proverty is much less severe, and to the extent that part of the argument is between middle and upper income tiers, poverty is non-existent there. Any kind of money is addictive and there will never be an end to bickering over it, until humanity enters into a new age.
Excellent question. In general, I would absolutely agree with this. My concern, is that our society is reaching a point where the "teach a man to fish" solution will simply not be viable.
Let's examine "teach a man to fish". The logic is, if you teach a man to fish, he can always get himself a new fish when he's hungry. Even better, he might be able to sell that fish on the market for a small profit. But what happens if there is a limited supply of fish (real world problem by the way) and they are already being fully exploited? If you teach this new guy to fish, he might be able to catch a fish, but since the resource is being fully exploited that means he is actually taking a fish away from some other fisherman.
In other words, it is possible that adding another fisher doesn't mean society as a whole gets any more fish, rather it just means each fisherman is a little bit less effective as there are only so many fish to be caught. The only way to increase their effectiveness again is to reduce the total number of manhours dedicated to fishing. This can be done either by culling the most ineffective fishermen, or by reducing the hours worked by every fisherman. So, instead of fishing maybe the guy learns how to cook fish. It's still a service, but the pay isn't nearly as good.
I am earnestly concerned that western society might have (at least temporarily) approached a "too many fishermen" style scenario. What happens if we have X total manhours of employable labor, but only 0.9X hours of work to do? Or 0.7X or 0.3X? My gut says we need to either lower the maximum work week to something like 35 hours, or we're going to continue to have an every growing income gap. I know the lower full-time hours is a non-starter just because it looks anti-business, which means I expect an increasing disparity between the have's and the have nots (even while the have nots are still better off than they were 100 years ago). I think socialization is the inevitable result of those forces.
I'll add, I'm not particularly fond of socialization even if it sounds like I am. I would much prefer a world where we eliminate most of the service jobs, people spend say 20 hours a week doing the real work, and then they would have more time to do their own cooking or similar activities. It'll never happen though.
Whoops, responded to your post before reading your link. I think his key point is the following:
My last post about fishing, I think, summarizes (IMO) the source of this disparity. I'll point out, that if my thesis is true, this is the first time in the history of our species where not having enough work to do has been a (the) problem.
I was expecting a harsher reaction to my assertion that progressive taxes are not fair. My reason for saying that is the way to earn really large amounts of money is for the most part to provide something really unique to the rest of society. Improvements like that often benefit society cumulatively, so the rewards that society provides ought to encourage innovation that continues across generations.
There is plenty of innovation left to do. There is probably more opportunities for it than now than ever before. The real problem is that there is so much wealth that it is becoming possible to just skate by doing nothing. However, when someone does that, it wastes a God-given life and helps no one else, and there is still plenty of poverty left in other countries. So the resentment is that a high income taxpayer who is forced to support a non-worker can see the consequences and can do nothing about it.
I'm not arguing that ingenuity is the backbone of the future of free enterprise. It absolutely is. I'd rather argue from the angle of niche filling. We've discussed the supply side of the market, but let's not consider demand.
Pretend with me, for a second that we as humans have only a finite number of activities we are interested in (this is hypothetical). For any given activity - eating, communicating, entertainment, rest, or health care to name only a few - there are a near infinite number of solutions. We could find or create new things to eat until the cows come home.
Let's take one activity we wish to supply : eating. We've already created or discovered a solid set of foods, and our demand is already near its maximum (per capita) - noting that some people still have too little to eat. So, ingenuity in the domain of food production may richly reward the entrepreneur, but it will not increase total economic activity related to food, because it cannot create demand.
I consider other major activities to be in a similar state. There is limited total demand for transportation. Sure, a flying car or transporter would ramp demand up, but humans only want to travel so much. Each improvement you make, gets you closer to that maximum, and therein lies the rub. Improvements mean the next improvement will have less demand.
Lately, we've been filling that gap with new entertainment demand. More people, and more free time means they can enjoy more entertainment. But we each only have 24 hours in a day. Even that will have its limits.
I agree that ingenuity will always be there, in fact I think Kurzweil is on to something with the technology singularity hypothesis. I just think that we've evolved (or were created if you prefer) with a limited set of desires, and that the diminishing returns produced by each technological advance will mean that the economic activity spurred by each advancement will be less than the labor required to benefit from it. An economists would say the utility of each advancement declines.
So, to round this all up, the pertinent question is "do we have a limited set of desires". This is pretty broad, but I think we are limited in this way. If we only have a limited (albeit large) number of goals, then it's clear each will eventually be fulfilled as well as physics or our own bodies are capable of providing. If you disagree on that conclusion, then that's probably where the crux of our disagreement is.
If 90% of people decide they need less 20% less then there will be 18% less work for everyone. If those people who lose work are not self-sufficient then they will suffer.
If someone is self-sufficient then it doesn't matter to them whether there is an economy or not, except that house prices are lower. That is the Eleua approach (just kidding).
Oops. That is what I meant to say. Change that 'becomes' to 'isn't'.
This short story descibes a small town where everyone becomes basically self-sufficient:
http://escapepod.org/2006/10/12/ep075-n ... ord-falls/