09 August 2010

Are We Too Invested In Our Homes?

Local communities often suffer when residents have too small a stake in their homes — a point underscored by recent rashes of foreclosures and abandonments, and implicated by longstanding questions about the effects on communities of renters and owner-occupants, respectively. However, homeowners with too great a financial stake in their homes can also cause difficulties for local governance by acting as risk-averse NIMBYs. Local governments should have a strong interest in helping members of their communities move away from problematic forms of stakeholding and toward more desirable intermediate positions.

From here.

The financial engineering used to address the problem is doubtful in my humble opinion (basically various forms of housing derivatives sponsored by local governments), but the articulation of the problem is a good one.

One reason to support the school choice movement is that it decouples two very big household investments from each other: the investment in your home, and the investment in your child's education. If one's address does not dictate the place where your child goes to school (particularly in urban areas where it is feasible to provide many choices within a reasonable distance) then it is far easier for people with children much more room for flexibility in buying homes and also greatly reduces the stakes people have in trying to regulate who lives in their neighborhood as a way of regulating the peers that their children will have in school.

If education and a home investment were decoupled, the real estate market might invest in currently low income neighborhoods much more readily.


Dave Barnes said...


Did you just enunciate your inner libertarian?
School choice?
Next, you will want to rein in public-sector pensions.

Andrew Oh-Willeke said...

School choice certainly has a place, although it isn't a godsend either, and doesn't work in all circumstances. For example, it can be quite harmful in situations where a community can only economically support one school.

It can be done in better or worse ways. The Colorado approach in which public charter schools predominant and where every public school in the state can be choiced into, providing many secular options, has much to recommend it. It would be better if more existing school infrastructure were repurposed for charter schools.

There is also the reasonable concern that if misused school choice funds could be used predominantly for religious education, rather than other purposes, and this concern was particularly great in the early voucher programs.

Another delicate and important issue is how to draw a line between having suitable minimum standards, and not including charter schools in the full fledged public school system bureaucracy. We don't want convicted child molesters in charter schools any more than we do in day care centers or public schools. But, drawing the line between which regulations should be minimum standards, and which should be public school system policies is a non-trial problem that is inherent in having public funding for private entities carrying out social services on a grant basis. He who pays the piper . . .

There is also the complex issue of when, if ever, and in what form, extra funding beyond public grants should be required or available in charter schools. For example, should tuition, for all, or on a means tested basis, be an option for charter schools.

And, there is the complex issue of how to maintain political support for funding programs without institutional guardians. Are vouchers are politically sustainable approach or will they ultimately be shaved down to get smaller or to only be available on a means tested basis.

So, I see definite benefits to school choice in some form, but also a need for caution for something that isn't a panecea.

As to public-sector pensions, there are really two debates. Is total compensation of civil servants unreasonably high or low (in fact, it is unreasonably high for some, unreasonably low for others and about right for yet other)? Second, at a given level of total compensation is the pension contribution portion appropriate? Third, what are the arguments in favor of defined benefit v. defined contribution plans and of particular defined benefit formulas v. other possible formulas.

Public sector compensation is IMHO not generically too high. Senior managers and professionals tend to be underpaid in public service. Very low level employees are sometimes modestly overpaid, although that has some merit of its own (by making it possible for unskilled workers to work to earn stable lower middle class lives and provide a stable workforce in return). Mid-level government employees have compensation that tends to be about right. As far as the fringe percentage, most public sector employees are making (not always voluntarily) a better choice between now and later than most private sector employees, so that isn't bad.

The main issues with defined benefit plans are: (1) undue impact on labor mobility since it creates a strong incentive not to leave the system, (2) undue influence on retirement age (it strongly biases retirements that are neither too early or too late by an arbitrary measure), and (3) it puts investment and actuarial risk on governmental entities that already have highly cyclic budget demands (basically, it puts state government in the annuity business carried out in the private sector by life insurance companies that get a much bigger share of contributions as compensation).

Public sector pensions thus pose some important and difficult questions, but those problems are not the ones (unduly favorable compensation government employees) often claimed and the questions aren't quite as pressing as they seem.