Subsidizing Middle Class Undermines It?
Subsidizing the markers of middle class attainment may undermine the traits that lead to it.
Glenn Reynolds observes,
The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle-class people. But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits — self-discipline, the ability to defer gratification, etc. — that let you enter, and stay, in the middle class. Subsidizing the markers doesn’t produce the traits; if anything, it undermines them.
I’m not sure how you’d go about testing this empirically but it strikes me as plausible.
Now, obviously, the easiest way to get to the middle class is to be born there. Aside from the substantial financial benefits of having middle class parents, there’s also the fact of being surrounded by appropriate role models. Going on to college is just something you do. Ditto, to a lesser extent, saving up for a down payment on a house. (Although, again, wealthier parents are more able to stake their kids a loan.)
Conversely, giving someone without this upbringing a lot of money doesn’t necessarily transform them into the kind of people who can keep it. Examples of that abound in the world of sports and entertainment, where people from impoverished backgrounds suddenly find themselves millionaires – and are then soon broke once the money stops rolling in.
Simply giving someone a home likely undermines their appreciation of what they have. Having no sweat equity in it, they’re less likely to do what it takes to keep it.
But is the same thing true of education? While working one’s way through college by tending bar or waiting tables or serving in the military likely increases one’s commitment to the process, it also makes it more difficult to concentrate on one’s studies. And, again, many children of middle class parents never have to think about the bills.
If one were to carefully tax the rich to carefully subsidize the middle class, it might all work out. Unfortunately we don’t do that. We take from the middle class to sloppily subsidize that same class. That can’t work.
This is an interesting point. However, I have to say that criticizing home ownership is awfully easy right now. If there’s an article where he was saying this from a few years ago – before the collapse – there would be more weight behind the point.
By the same token, one of the reasons the government subsidized home ownership as a means to increase the middle class was because it seemed like such a sure-fire road to economic freedom. It made sense, using the assumptions of the time. Now it makes less sense. So if his idea is to rethink those subsidies given the new reality, then I agree.
It was also a de facto subsidy to the home construction industry and a third rail, untouchable because so many middle class voters took advantage of it.
My parents were the first people in their families to graduate from grade school, high school, or college. Both got advanced degrees. It never occurred to me that I wouldn’t go to college or get a post-graduate degree.
Would that it were true! The allowable deductions are carefully crafted to give the most deductions to the highest income earners. By far the greatest amount of the home mortgage interest deduction or the deduction for taxes, much of which is for property taxes, goes to the top 1% of income earners.
Additionally, the very structure of the tax system tends to favor people who own assets, generally a quality of the wealthy. Taxing income as opposed to consumption or wealth isn’t a law of nature, it’s a policy decision.
We do subsidize the middle three income quintiles. However, the amount by which we subsidize the highest quintile and moreover that top 1% of income earners dwarfs that subsidy by comparison.
James,
Like you, I think Reynolds has a point. But I also think your rejoinder is more correct. Achieving “middle class” outcomes can indeed be a signal of certain characteristics. The ability to achieve them, though, is itself conditioned in part by one’s surrounding, culture, role models, etc.
As TG points out, subsidizing home ownership appears to have been a net positive for decades. Turning mortgages into securities and socializing the risk, however, has not been. Investing in public higher education for decades has been a net positive, slashing that investment is not.
Reynolds’ argument appears to be that which often gets termed “glibertarian”. Nothing matters except individual effort and ability. I believe those things matter a lot, and a world where they were indeed all that mattered would be an awesome world, indeed.
This is not such a world. I encourage people like Reynolds to spend some time in, for example, the rural South. James is a veteran of life at a less-selective rural public university, and I imagine he would readily concede both the frustrations of life as a faculty member therein and also the massive benefits of such institutions to the areas they serve.
It’s hard for me to see Reynolds’ arguments as much more than wishing fewer people had opportunities to succeed.
It almost seems as if there were an underlying motive to “subsidizing” the middle class with both student loans and mortage loans, both of which government now mostly control. Three really expensive things in life: one’s home, costs of education and of course, health care. What with so much of business having gone to the developing world with profit thresholds being what they are, government needs to make lots of money from the rising costs of both education and homes, so as to pay for all the healthcare costs which are also rising. I wonder if the public is going to keep going along with that.
It wasn’t subsidizing homes and education that got us into the mess we are in. It’s when the people making those loans decided it was more profitable to bet on people not being able to afford those loans that the system broke down, becuase there was an incentive for loan givers to put more and more people into loans they knew were not affordable.
I don’t think we inflated that bubble from families buying reasonable homes for their kids. The problem was greed. Maybe Gordon Gecko was wrong. Maybe greed isn’t good.
If you believe in supply and demand, and that sellers raise their prices to what the market will bear, then you have to believe that home buying subsidies work one time only – if that. That is, after they are first passed and before anyone figures out to raise their selling price.
After that, prices are at equilibrium. Everybody is buying with subsidized loans, and so no one is benefiting. Well, not quite. The only thing that lasts long term is the subsidy from renters to home buyers. Renters pay more tax. Home buyers pay less.
I think that’s wrong on both levels. It’s bad economics to think this is still helping buyers, and it’s immoral to tax renters more.
BTW, note in this housing crash environment that the people harmed by a repeal of the home buying subsidies would be the net-sellers (ie. the dead and dying). It would be a wash for trade-in buyers.
“Subsidizing the markers doesn’t produce the traits; if anything, it undermines them.”
The GI bill subsidized the markers. Did it undermine the growth of the middle class? To ask the question is to answer Reynold’s absurdist proposition.
a failure?
That’s an interesting case. The counter, presumably, was that the GI Bill was an earned benefit rather than a handout. It was given, in the initial case, for combat duty in WWII.
FWIW, I was thinking of good college subsidies up at top when I said “carefully subsidize the middle class.” I do think indiscriminate educational funding is a problem right now, but certainly education is good, and has positive externalities.