Читать книгу Aftermath - Thomas E. Hall - Страница 8

1. Introduction

While driving along a residential street in the United States, you can often tell which homes are occupied by their owners and which by renters. Usually, but not always, the owner-occupied houses are better maintained, the lawns are well tended, and there is an absence of clutter on the property. Rentals often have a rougher appearance. The main reason for this difference is that owner-occupiers have a strong incentive to take care of their house and land because they live there. Absentee landlords maintain properties, but their incentive to do so is lessened somewhat since they do not occupy the premises. Tenants have even less incentive to be concerned with maintenance.

The benefits to society from homeownership are well known. In addition to the maintenance factor, owner-occupiers have a greater vested interest in the well-being of their community. They are more likely to care about the quality of local schools, roads, and parks. Homeowners are also more stable residents in the sense that they move less often than renters. Also, since house prices have generally risen over time, homeownership has helped raise Americans’ wealth. With these points in mind, wouldn’t it be great if all American families owned their own home?

The advantages of homeownership have long been accepted in the United States, which is why the U.S. government pursues policies to promote it. This effort began in earnest during the 1930s when President Franklin Roosevelt’s New Deal created various programs and agencies that encouraged homeownership: the Federal Housing Administration to insure home mortgages; the Federal National Mortgage Association (Fannie Mae) to buy mortgages insured by the Veterans Administration; the Federal Home Loan Banks to provide assistance to the savings and loan industry, which was the primary source of mortgage lending; the promotion of 30-year mortgages to lower monthly payments and make homes more affordable; the Home Owners’ Loan Corporation that refinanced mortgages in default. In addition, since its inception the federal income tax code has allowed the deduction of mortgage interest from income when calculating taxes. Due in part to these various government programs, the U.S. homeownership rate, which is the proportion of U.S. houses occupied by their owners, rose from 44 percent in 1940 to 63 percent in 1970.¹

After 1970, the growth of homeownership slowed, reaching 66 percent in 1980 before dropping back to 64 percent by the mid-1980s. It remained at that level for roughly the next 10 years. During that time, some Americans expressed concerns that homeownership was not equal across racial groups. Citing the fact that homeownership was more prevalent among whites than nonwhites, banks were accused of “redlining,” an alleged practice whereby they do not issue loans to individuals or businesses in certain sections of cities. Since minorities disproportionately occupied the areas where redlining was said to be taking place, the implication was that banks were practicing discriminatory lending. This claim received support in 1992 when the Federal Reserve Bank of Boston released an influential study that reported that “black and Hispanic mortgage applicants in the Boston area were more likely to be turned down than white applicants with similar characteristics” (Munnell et al. 1992, 42).²

Evidence of discriminatory lending and the implication that minorities were being excluded from homeownership led to enhanced efforts by the U.S. federal government to promote home buying. In 1992, Congress passed the Housing and Community Development Act, which “essentially gave [the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)] a mandate to purchase lower-quality mortgages” (Acharya et al. 2011, 32). Fannie Mae and Freddie Mac are government-sponsored enterprises that purchase mortgages; after 1992, they bought increasing quantities of subprime mortgages, which are loans to higher-risk borrowers.³ Another important factor was the 1995 amendment to the Community Reinvestment Act, which urged banks to increase lending to low-income Americans. If banks failed to meet the standards they were not subject to explicit penalties, but lending data would be made available to community groups. The implied threat was that if banks did not step up lending to minorities, then community groups would find out and organize protests and boycotts of the banks.

These laws helped create a situation that was a disaster waiting to happen. Mortgage lenders issued loans to high-risk borrowers and collected origination fees for doing so. The lenders then sold the mortgages to financial institutions, which were often Fannie Mae or Freddie Mac. If the borrowers defaulted on these mortgages, the losses would be incurred not by the original lenders but instead by the U.S. taxpayers through a government bailout of Fannie Mae and Freddie Mac, or of private banks that were also purchasing these mortgages. This ability to originate and then sell high-risk mortgages is a big reason that the absurd “no-doc” loans came into being. No-doc loans were home loans to borrowers who were not required to provide documentation of their income or assets. It is highly unlikely that such risky loans would have been made without originators being able to unload the risk onto someone else.⁴

The sorry state of affairs was made even worse by the financial industry, which was busy creating volatile financial instruments (credit derivatives) against these mortgages, and in some cases betting the institutions’ fortunes on the assumption that housing prices would continue to rise. The Federal Reserve was also a big part of the problem because it maintained low interest rates during the first half of the 2000s, which encouraged Americans to borrow. Throughout that period, the government regulatory agencies in charge of monitoring the situation raised few alarms.

The expansion in mortgage lending helped raise the demand for houses, and the price increases that resulted were exceptional. Nationally, house prices rose more than 100 percent from 1995 to 2006. This large and sustained increase led to speculative buying, which further increased demand (Case and Shiller 2003). Large numbers of Americans amassed paper fortunes in real estate. The U.S. government’s efforts to promote homeownership were working: the homeownership rate rose from 64 percent in 1995 to 69 percent in 2004.

However, as we know now, those policies to promote homeownership had major unanticipated effects. The housing boom eventually played out as prices peaked in 2006 and then began to decline, slowly at first, then rapidly by 2008. Falling prices caused many homeowners—especially those who had purchased their homes near the peak in prices—to owe more on their mortgage than their house was worth (a situation called “negative equity” or “underwater”). This unpleasant financial position led some homeowners to abandon the premises and stop making payments on their mortgages. In addition, when prices started to fall, fewer potential buyers saw housing as a speculative investment. Meanwhile, further pressure was placed on the housing market by the upward adjustment of interest rates on adjustable-rate mortgages issued during the boom as low introductory “teaser rates” expired. As a result of these and other factors, the demand for houses fell while the supply continued to increase (as homes being constructed during the boom were completed), causing prices to plummet. Large-scale mortgage defaults occurred, which led to losses by the financial institutions holding those mortgages. The result was the 2008 financial crisis. Since the government-sponsored enterprises Fannie Mae and Freddie Mac were heavily exposed to subprime mortgages, they were especially hard hit.

The combination of falling house prices and falling stock prices resulted in a decline of $13 trillion in U.S. household wealth, which was a major factor in causing the U.S. economy to plunge into the 2007–2009 Great Recession. This economic debacle led to the loss of 8 million jobs and the ruin of several financial institutions, including Fannie Mae and Freddie Mac, which required massive federal bailouts to stay afloat. Not surprisingly, the U.S. homeownership rate dropped, and by 2011 was back to where it had been in the late 1990s. Thus, we are left with the irony of government policies designed to promote homeownership helping cause the worst economic recession since the 1930s’ Great Depression.

The 2000s’ housing boom and bust is an example of the law of unintended consequences. This term refers to situations in which government policies enacted to accomplish one set of goals end up causing another set of outcomes that were unanticipated. In the case of U.S. housing policies, the federal government was attempting to achieve the honorable goal of promoting homeownership but caused an economic catastrophe while doing so. The losses to society far outweighed the gains.

How did this fiasco occur? Did the advocates of policies designed to promote homeownership not foresee the negative consequences? Or did they know there might be harmful effects but believed the benefits would outweigh the costs? Or were they aware that the adverse effects would be large but believed so strongly in their goal of promoting homeownership that they ignored the possible negative consequences?⁵

In this case, the answer appears to be that housing advocates understood that raising the homeownership rate would involve increased lending to risky borrowers, which would lead to more mortgage defaults. But housing advocates never imagined the enormous number of defaults that would occur, nor the impact that would have on the U.S. economy and financial system.

So Many Examples

There are countless examples of the law of unintended consequences as applied to government policies. One case much in the news during the last several years involves traffic cameras at street intersections. Traffic cameras have two primary purposes: (1) to motivate motorists to drive in a safe manner by not running red lights and (2) to raise revenue for local governments by allowing them to simply mail traffic tickets (along with a photo of the incident) to offending drivers. There is widespread agreement that traffic cameras raise revenue, and they may reduce the number of T-bone collisions. But there is an unintended consequence: drivers who know their actions are being recorded are much more likely to slam on the brakes to avoid running a red light. But slamming on the brakes raises the likelihood of rear-end collisions, and considerable evidence exists of this outcome taking place.⁶ Since rear-end collisions are usually less injurious than T-bone collisions, traffic cameras seem justified on safety grounds, although there is disagreement on this point.

Another example is China’s one-child policy, which was instituted in 1979. This policy restricts married couples to one child, although there are exceptions, depending on various factors, including the couple’s ethnicity and where they live in China. Couples who violate the policy are subject to severe fines. In addition, some reports mention women enduring forced abortions and sterilizations, as well as government officials seizing babies and selling them on the adoption market. The purpose of the one-child policy is population control; on this score, it has succeeded. The Chinese government claims that the one-child policy has resulted in 400 million fewer births, although most estimates are considerably lower (Nie 2010).

This policy has also caused major unintended consequences. Since Chinese culture places a premium on baby boys, in part because males traditionally care for elderly parents, many couples strongly desire a male child. That preference has led some parents to kill their baby girls so they could try again for a boy. Accounts of widespread infanticide in China began surfacing during the 1980s. In recent years, the availability of modern technology that allows a fetus’s sex to be identified has resulted in huge numbers of abortions of female fetuses. The sex ratio among children has become seriously imbalanced. For example, during 2010 in Guangdong Province, 119 baby boys were born for every 100 baby girls. A decade earlier, the ratio in that province was even worse, 130 to 100.⁷

A related consequence of the one-child policy is a shortage of marriage-age women in China. Estimates suggest that in 20 years, the ratio of Chinese marriage-age women to Chinese marriage-age men will be four to five. The problem could be solved by polygamy in the form of women with multiple husbands, but that is unlikely to happen. A much more plausible outcome is Chinese men seeking non-Chinese brides. Residents of neighboring countries are understandably nervous.

Four Case Studies

This book contains four studies of the law of unintended consequences. The discussion addresses the following questions: How did the policies come into being? Who were the advocates? What were the underlying political considerations? Why are these policies (with one exception) still in place?

The first case considered is the federal income tax and what has resulted from it. The income tax was originally instituted in 1913 for two reasons: (1) to tax high-income Americans who at the time were largely able to avoid taxes and (2) to reduce the U.S. government’s financial dependence on taxes assessed on alcohol, tobacco, and imported goods, which were burdensome to middle- and low-income Americans. Thus, the establishment of the income tax was about shifting the tax burden away from the lower and middle classes and toward the upper class.

The unintended consequence was a flood of tax revenue that amazed everyone, including the income tax’s creators. These funds allowed politicians, who can rarely resist the temptation to spend every cent of available revenue and then some, to go on a spending spree that has lasted decades. The federal income tax is a major reason why we have the huge federal government we live with today, one that is several orders of magnitude larger than the Founding Fathers ever imagined.

Cigarette taxes are examined next. These taxes are collected by the U.S. federal government, along with all 50 states and the District of Columbia, and some counties and cities. They were originally imposed solely as a revenue source for governments, and they have been very effective in that regard because tobacco is an addictive substance. Since the 1960s when the link between smoking and health problems was documented, an additional justification has been on health grounds: taxing cigarettes discourages smoking, which results in a healthier population. More recently, as governments have increasingly funded health care, cigarette taxes have been rationalized on the grounds that the revenue is needed to help pay the higher health care costs incurred by smokers.

The major unintended consequence of cigarette taxes is the criminal activity they create. Large differences in tax rates across jurisdictions present criminals with a profit opportunity: they can purchase cigarettes in low-tax areas and then illegally transport them to high-tax areas where they are sold. Cigarette smuggling is a huge business in the United States and is largely controlled by organized crime syndicates. Most Americans are aware that it takes place but are unaware of its magnitude. Since many states seem intent on raising cigarette taxes to ever-greater heights, this smuggling problem will not only persist, it will worsen.

The third case is the U.S. minimum wage law. Minimum wage laws first appeared at the state level in the early 1900s and were advocated as a method of raising the cost of employing women and children so that employers would replace them with adult men. Several additional arguments were used to justify these laws, such as ensuring that workers earned enough to afford a decent standard of living (i.e., a “living wage”) and encouraging children to attend school instead of working. The federal minimum wage law was enacted in the 1930s and has existed ever since.

The problem with a minimum wage law is that it can artificially raise the wage rate of marginal workers above the value they create while working for an hour. If that occurs, businesses will employ fewer of these low-skill workers, replacing some of them with machines, or altering business practices to save labor. So at a basic level, the minimum wage is about a choice: (1) a smaller number of workers earning a higher legally mandated minimum wage or (2) a larger number of workers earning a lower market-determined wage. Most economists would argue in favor of the latter, yet society chooses the former. One major reason that this law has survived is that the beneficiaries of minimum wage laws tend to be adults, while the losers are often teenagers. Another consideration is that the losers (those who are unemployed because of the law) are harder to identify than the winners (which include those with jobs at the minimum wage).

The final case is alcohol Prohibition, which existed from 1920 to 1933. The unintended negative consequences of Prohibition were so obvious and enormous that the policy was eventually abandoned. The intent was to reduce alcohol consumption, which the Prohibition laws accomplished, although by nowhere nearly as much as the proponents originally predicted. The basic problem was that the law’s intent was easily bypassed through both legal and illegal means. Illegal alcohol was the main factor in causing Prohibition’s undoing, as criminal gangs became major players in the U.S. alcoholic beverage industry. They produced and sold so much poisoned booze that tens of thousands of Americans died and many more were sickened. Prohibition also led to soaring levels of corruption by public officials and caused a major crime wave that filled America’s courts and prisons to capacity and beyond. After experiencing these problems for several years, Americans finally said “enough” and ended Prohibition.

The moral of these stories is that whenever you hear about a new government policy being considered, give thought to potential unintended consequences. Policies created for one set of purposes almost always create an additional set of results that were not part of the original plan. Very often these unintended consequences are seriously adverse.