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Wisdom from Arnold

Posted By Russ Roberts On October 30, 2012 @ 11:02 am In Competition,Housing | Comments Disabled

Arnold Kling carefully lays out [1] the economics of owning vs. renting and the implications for public policy. This is beautiful writing and thinking. BUt maybe the best part is his analysis of political vs. economic competition:

If you own your home, then a lot of your wealth is tied in with the quality of your neighborhood. In theory, this should motivate you to vote more carefully in local elections. On the other hand, if you are a renter, and the neighborhood goes downhill, you will simply leave.

Collectivists prefer to trap households within specific government service areas. Their thinking is that with the “exit” option foreclosed, households will be forced to exercise their “voice” option, to everyone’s benefit. This is an argument against private schools. It goes back at least as far as A.O. Hirschman’s classic book, Exit, Voice, and Loyalty.

In my view, the “exit” option works much better than the “voice” option. If a local grocery store does not carry the produce I prefer, the best solution is for me to go to a competing grocer. I feel the same way about schools and local governments. Compared with choosing a competing supplier, it strikes me that writing complaint letters and participating in elections is a feeble way to try to bring about change.

A tradition in the economic literature, going back to a classic article by Charles Tiebout, argues that competition among local jurisdictions, promoted by the exit option, is the best way to stimulate governments to provide a desirable mix of services in a cost-effective manner.

Overall, I think that the collectivist case for home ownership makes sense — provided that you are a collectivist. However, the way I look at it, if being a renter weakens your commitment to local government and helps to facilitate Tiebout competition, then that is a good thing.

I am not saying that we should aim for the scenario in which everyone is a renter. However, we certainly should not be keeping a national scorecard in which a rise in the home ownership rate fills us with joy and a drop in that rate fills us with dismay. Home ownership subsidies have imposed costs that are large and clear. The benefits of such subsidies are, at best, small and vague. Of course, the calculation looks different to real estate agents, mortgage bankers, and their allies in the housing lobby. That is why good public policy is to do the opposite of what they recommend.

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[1] Arnold Kling carefully lays out: http://american.com/archive/2012/october/who-needs-home-ownership

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