August 24, 2011

HOUSING FIX: End the Government’s Subsidy ‘Ponzi Scheme,’ Says NYU Professor.

NYU finance professor Viral Acharya writes in his new book Guaranteed to Fail that the only way to fix the housing market is to end government subsidies like the mortgage interest tax deduction.

The less told story on such subsidies is what they have done to generate more demand and push up prices, he says. “One the one hand you are actually getting all your subsidies, but you are actually paying more for the property you would have liked to consume,” says Acharya. “Therefore the real subsidy goes only [to those] at the very top. It is for people who are buying a second house. It is for people who are buying more land than they would otherwise.”

Not only have government subsidies failed to really help everyday people, except to “prop up the housing market artificially,” says Acharya, but the big question also remains: Who’s paying for all these subsidies? “It’s sort of a Ponzi scheme, because the current generation is reaping all its benefits, but we’re basically scaling up our government debt in response, and someone else is going to pay for it down the road.”

Sounds like some other government subsidies I can think of. Meanwhile, if the GOP wants to let the blue-state crowd experience the joy of tax increases, they should get behind plans to eliminate or cap the mortgage interest deduction, which will hit residents of higher-priced blue-state houses harder.

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