Economy & Budget

Populism and the denial of the invisible

Experts are hoping the housing market will hit bottom any day now, and begin rebounding in 2012.  The market is in bad shape for a number of reasons, including high unemployment rates which decrease the pool of potential homeowners, and tougher standards for securing a home loan. 

The big problem, of course, is the glut of excess inventory in the housing market.  The subprime mortgage bubble put a lot of house-buying money in the hands of people who really couldn’t afford what they were purchasing.  Large amounts of housing were built in pursuit of that money.  The bubble burst, foreclosures ran wild, and now the fruited plains are covered with empty houses.  Excess supply caused the value of homes to drop – which is much more cheerful news if you’re looking to buy a home, rather than sitting on a house you can’t sell, and watching the value of your investment plummet.  Falling prices have not yet been able to increase demand enough to gobble up that inventory, in no small part because houses remain uniquely expensive purchases, which both buyers and banks are nervous about making.

What caused this awful situation to occur?  Home buying was flat between the mid-80s and the mid-90s, leading President Bill Clinton to conclude that “sadly, in the 1980s, it became much harder for many young families to buy their first home, and our national homeownership rate declined for the first time in forty-six years.”  To reverse this trend, it was decided that the federal government would “partner” with local governments, nonprofits, and private industry to “lower barriers that prevent American families from becoming homeowners.”  We all know what happened next.

Writing at Café Hayek, Russ Roberts offers an alternative explanation for the “problem” that government set out to “solve” by wrecking the housing and financial industries.  After noting that home ownership did indeed decline in the Eighties and stagnate in the Nineties, he writes:

The picture seems to reinforce the claim by Clinton that “it became much harder for many young families to buy their first home.” After all, the home ownership rate fell, didn’t it?

But something else happened in the 1970s that may explain the decline in home ownership. As I have observed before, the divorce rate rose in the 1970s and there was a big increase in the number of households. In the 1970s, population increased 11.5% but the number of households increased 26.7%. Most of those new households were single people, newly divorced. They rented. They didn’t buy their own house. So the home ownership rate fell because the divorce rate rose, not because it became harder to buy a home in any fundamental sense. What a costly error of interpretation.

This is one of many cases in which a populist impulse – make young voters happy by helping them buy a house! – ignored powerful economic undercurrents that were difficult for both central planners and voters to perceive.  The image of benevolent politicians beaming warmly as happy constituents clutched their government-supported loan paperwork and marched into their new houses, on the other hand, was very easy to see.

Politicians are naturally inclined to see only problems they can “solve” in a high-profile way, with the only tools at their disposal: regulation and compulsion.  They didn’t merely fail to notice the forces Roberts describes, which involved large numbers of people making personal decisions.  Politicians are incapable of perceiving such forces.

Populist solutions are all about blindness, short-sightedness, and the arrogant denial of the invisible.  What happens to Social Security now that Obama’s “payroll tax cut” has further drained its already shaky funding?  Who cares?  All anyone can see is a smiling politician waving and telling them how he’s dropped an extra forty bucks in their paychecks, because he really cares about them. 

This impulse keeps providing popular support for government actions that turn into disasters, because of unforeseen consequences.  Pass laws to “help” workers and “protect” them from their cruel employers, and jobs dry up, because hiring someone becomes akin to contracting an incurable disease.  Pick “winners” in the marketplace, bail out politically favored losers… and watch real business opportunities die in the shadows, unseen and unlamented.  Soak the rich with taxes, and watch the economy grind to a halt as they hide the money that otherwise would have provided investment capital.  Rail against “greed” until the masses foolishly grant you the authority to define it.

We set ourselves up for these debacles by talking about what we “deserve,” instead of what we have earned.  The invisible undertow of complex economic relationships, some of which are morally unacceptable to discuss according to the ruling class, does not go away because we ignore it. 

Such unseen forces are the ruin of many a private enterprise as well… but there lies the essential difference.  Private enterprises can be ruined.  The blind giants of the State march on forever, until they drop dead in their tracks, crushing us all beneath them.  Somewhere in Washington, at this very moment, a politician is looking at poor home sales and thinking – as if no one else has ever had this thought before – that the solution lies in using government force to make it easier for “young families” to take out loans they can never repay.


Sign Up