A Tale of two Subsidies

From the Strong Towns Network, Shane Phillips is a Masters student at the University of Southern California working on a Public Administration and Urban Planning program. His focus is primarily on transportation and land use, with a particular interest in how our public institutions are structured to either promote or discourage safer, healthier, more economically vibrant and environmentally sustainable communities. He blogs at Better Institutions and can be found on Twitter and LinkedIn. You can also email Shane directly.

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Over the past half-century, few ideals have loomed larger in the American mythos than the "security of owning a home" and the "freedom of the open road." In service to those ideals, the federal government—and to a lesser extent, state and local governments—has doled out trillions of dollars in tax expenditures, subsidies, and direct spending. From the mortgage interest and property tax deductions, to general fund transfers into the Highway Trust Fund and military involvement overseas to protect the country's oil interests, we spend lavishly to promote homeownership and to ensure that private automobiles remain as inexpensive and convenient as possible.

To some degree, these efforts are understandable. Commendable, even. Though it's far from the best investment, for many Americans home equity is the only significant form of retirement savings, especially as pensions are pared back and social security is under siege politically. Likewise, though we've gone far overboard in the construction of roads and highways in this country, the historical argument for the interstate highway system was strong on economic grounds. (The defense argument for the interstate system was secondary at best.) Since their inception, however, these programs have grown less and less effective as their costs have ballooned.

The case against homeownership subsidies has been litigated thoroughly in recent years. The housing market has been heavily distorted in favor of sprawl, mostly as a result of how skewed spending has been toward single-family homes, at the expense of multi-family residences. Most of the $80 billion a year spent on the mortgage interest tax deduction goes to families earning more than $100,000 a year. Encouraging greater amounts of investment in the housing sector means less investment elsewhere, and promotes zero-sum housing scarcity. And though we saw an impressive increase in the homeownership rate between 1995 and 2005, much of that gain seems now to have been illusory:

Unfortunately, we don't appear to have learned much from the recession and its attendant crash in home prices. Nearly every pre-2008 housing program that benefits homeowners remains in place even as programs that primarily benefit renters, like Section 8 housing vouchers and Community Development Block Grants, have been cut or on the chopping block. President Obama gave a speech on housing just yesterday, and in it he reiterated his support for the American Dream of Middle Class Homeownership, with relatively little to say on behalf of the 100 million or so people who rent in this country, either by choice or by necessity. Josh Barro of Business Insider summed up:

Why not instead emphasize that renting—that is, not taking all the money you have in the world and putting it into a highly leveraged real estate investment—is a perfectly valid life choice, even for people leading prosperous, middle-class lives?

At least, though, in the case of housing subsidies, our heart seems to be in the right place. All other things being equal (which they are not), it's better to invest your money in a home than to throw it away on rent. The implementation is severely flawed and the outcomes are massively distorting, but the goal is a noble one.

We can't say the same of our road, vehicle, and gasoline subsidies.

The total cost is difficult to estimate on the driving side, but in the case of roads the subsidy probably comes to around $100 billion a year. It's even more challenging to get a reliable estimate for the cost of protecting our oil interests in the Middle East and elsewhere, and estimates range anywhere from $30 billion a year to $225 billion a year since 1976. Even worse is the human cost of lives lost by our military servicemen and women.

And anyone reading this blog is well-acquainted with the many societal and personal ills associated with being dependent on a car for every trip in your life, so I won't get into that here.

Per car, that amount is something to the tune of $7,000 per year. By that measure, the annual cost of every household in the U.S. owning just one car (less than half the actual vehicle ownership rate) comes to more than $800 billion—almost double the amount we spend trying to get people to invest their housing money more wisely. Spending on roads also has at least one other negative impact on housing policy: homes within 1,000 feet of a freeway are 59% more likely to default on their mortgage.

But besides increasing obesity, pollution, carnage, and various other negative outcomes, the money our government spends to make driving cheap and convenient also directly undermines the alleged goals of our housing policy. The theoretical purpose of programs like the mortgage interest tax deduction is to encourage people to put their money into a (generally appreciating) asset, the home. Road and oil subsidies do the exact opposite: they encourage us to take money that we could invest in our homes, or the stock market, or our local community, and to instead pour that money into a depreciating liability (the car) and a consumable commodity (gasoline).

Photo by Dave Wann.

Between the persistence of our sprawl-inducing housing programs, cuts to rental programs, and the direct contradiction between our homeownership and vehicle ownership policies, it's clear that our priorities are way out of whack. Currently, our policy methodology seems to be to look backwards, at what we've done in the past, and to figure out how we can best preserve that system in the face of falling revenues. We need to start looking forward. We need to decide what our vision for the future of this country is, not what it was fifty years ago, and then to design new policies and eliminate old ones accordingly—with respect for the context of history, yes, but also with a recognition that simply changing funding formulas is not a solution. We're in need of a much more fundamental change than that.

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