The mountain of disincentives

I recommend reading John Cochrane’s post about the job market and his thoughts regarding what a few other prominent economists believe are problems and solutions.

Here he addresses Alan Blinder’s prescription to give tax breaks to companies that expand payrolls (emphasis mine):

Is this really the right way to run a country? When “policy makers” want more employment, they slap on a complex, tax break on top of a mountain of disncentives. Presumably they then will remove this tax break, and pages 536,721 to 621,843 of the tax code describing it, despite the lobbying by large corporations who have figured out how to exploit it for billions of dollars, once the Brookings Institution decides that there is “enough” employment (!), and “policy-makers” no longer need to encourage it?
How are the existing hundreds of bits of social engineering in the tax code working out? Do we really need more of this?  Isn’t it time to return to a tax code that raises money for the government at minimal distortion?

Exactly.

And, great question, how are the existing hundreds of bits of social engineering in the tax code working out? 

Consider one of the most popular bits of social engineering: the mortgage interest deduction. How has that influenced home ownership rates? Does anybody know?

I read a lot of economics and I haven’t heard much about that.

Conventional wisdom is that it encourages home ownership by lowering its cost. But, this assumes home prices didn’t change because of the deduction or that renters don’t realize a similar benefit since their landlords deduct interest on their rental property loans.

Are we to believe that the stock market discounts future cash flows into stock prices, but the housing market doesn’t do the same for home prices?

Let me try are more concrete example. You want to purchase a certain new car and your choice is between two versions of the same model. They are exactly the same, except one thing: gas mileage. Version 1 gets 20 mpg and version 2 gets 30 mpg.

Would you be willing to pay more for version 2? Maybe. How much more? If you drive 10 thousand miles a year, version 2 will save you $500 a year. If you own the car for 5 years, that’s $2,500. You may not be willing to part with the full $2,500 of savings — after all, there’s some risk to that. Gas prices will fluctuate and your driving habits might change, but you would likely pay more.

That’s very similar thinking to how some, not all, home buyers factor in expected tax savings when buying a home.