May 17, 2015

The Economist
25 St. James Street
London SW1A 1HG

Well you have baffled me.  (A Senseless Subsidy, The Economist vol. 415 no. 8938 May 16, 2015 page 19) Somehow you have come up with the concept that an income tax deduction on a mortgage is a bad thing.  Seems to me not so long ago respected people had the attitude that home ownership is such a good thing that we should push it on people who could ill afford it.  Well that turned into the obvious disaster.  Then very recently indeed we were indulging in “quantitative easing,” which appears to mean just printing money. 

You point out that a business can deduct interest on the loans they take out on an income stream.  That is like air; winds change.  A company that excelled at buggy whip and dirigible manufacturing must needs have scrambled over the past century.  Quantitative easing isn’t even backed by air; it’s backed by the fact that the government has more weapons than the citizens, and if they want to take away our money they can. 

Sure loans can be a good thing.  When I was a child and saw something in a store I wanted a real consideration was whether the coins in my pocket would cover it.  Now I just use a credit card to take out a loan, and presto the wheels of commerce turn a tiny bit.  If everyone has made wise decisions, everybody is better off. 

A problem arises when a debt cannot be repaid.  Then expensive experts have to spend time picking the deal apart.  It would be a jolly good thing if that were very rare.  But people take far greater care choosing a house than choosing a stock.  My father made a little hobby of playing the market.  After some decades he cast up his accounts and found that with the exception of one lucky purchase and after considering taxes and commissions his interest in stocks had not made him one cent.  On the other hand when it came time to buy a house he consulted my mother.  Every house they ever bought is now either in a far flossier neighborhood than it was or is still in the family and attracting calls from real estate agents yearning to get their hands on such a good choice. 

You point out that the deduction of interest on home loans favors the rich, and I take your point.  Cap it. 

Then to add confusion to discombobulation you point out that too much debt is a bad thing.  Well anything that is good for you will kill you in overdose.  Sure.  And you calculate what that level might be.  You adduce two ways of calculating it, and find that half the countries you look at have debts at or close to the maximum advantageous level by one measure or the other.  Doesn’t that mean that it’s just right?

Well debts are growing, so slowing that down seems like a good idea.  Return to the cap idea.  Tax the rich who overspend on housing and encourage them to go start business ventures that hire people and make money.  But to drive people who otherwise could afford houses out of the home ownership and make them pay rent instead?  No I don’t like it, nor do you present an acceptable case.

I suspect what is going on.  Your readership is from good old families, who are shifting from traditional families with homes for children to largely more alternative lifestyles more suited to apartments. 


M. Linton Herbert MD

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