Suburban Tastes, deductions may apply

Bryan Caplan:

Note: If someone has hard numbers showing that pro-suburban policies outweigh anti-suburban policies, I’m all ears. My point is that the net effect of all levels of the American government on surburbia are far from obvious.

Ryan more or less takes care of it all, but as a request for hard numbers…

Two things:

1) Bryan wrote: “…The houses are spacious…” If you are buying a mortgage, and the interest rate is 6%, and you can write off the interest you pay on the mortgage, you suddenly have the ability to overbid 21% (assuming 1/3rd is the tax rate, the NPV of that deduction monthly adds up to 21%). In dense areas where supply cannot be extended that leads to competitive bidding on smaller places; in suburbs, where housing is being built, it translates into square footage. Builders know this, and set the building larger to take this into account. That deduction has just as much to do with the larger houses that people buy as the regulation in whether or not they have to be detachable homes.

2) Nathaniel Baum-Snow, Did Highways Cause Suburbanization?

Between 1950 and 1990, the aggregate population of central cities in the United States declined by 17 percent despite population growth of 72 percent in metropolitan areas as a whole. This paper assesses the extent to which the construction of new limited access highways has contributed to central city population decline. Using planned portions of the interstate highway system as a source of exogenous variation, empirical estimates indicate that one new highway passing through a central city reduces its population by about 18 percent. Estimates imply that aggregate central city population would have grown by about 8 percent had the interstate highway system not been built.

These are two massive chunks of change the government has thrown at both the idea of suburbs (if you build it, they will come), and how those suburbs would look (like a neo-Victorian Big Gulp). I’d need to see a big chunk of change thrown in the opposite direction for me to think government intervention has been more-or-less even in both directions.

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5 Responses to Suburban Tastes, deductions may apply

  1. Pingback: Did highways cause suburbanization? « See the Invisible Hand

  2. stephen says:

    In dense areas where supply cannot be extended that leads to competitive bidding on smaller places; in suburbs, where housing is being built, it translates into square footage. Builders know this, and set the building larger to take this into account.

    This would be the case with or without the mortgage interest tax deduction, which has been around since the income tax. I just don’t see how this particular subsidy, given the same regulation regime, subsidizes larger housing any more then urban housing.

  3. I’m puzzling over why the existence of suburbia is so hotly debated. I thought it was an accepted fact that the growth of suburbs was linked to Ike’s interstate highway initiative begun a half century ago. Suburbs definitely benefited from the highway system. So did a number of businesses who relied on the interstate transport system to get their products from here to there.

    Should those businesses be penalized for no longer using the rails?

    Should we all still be flying down Route 66 like Jack Kerouac?

    Suburbs have long been attractive to people for reasons of space, cheaper housing, less population density, etc. The highways made them easier to access, but the desire was already there. The mortgage interest deduction seems blamed for many ills these days, but I have a feeling that cheap and available land has as much to do with the size of suburban houses as the deduction.

    In my 20 yrs as a city dweller, there was no lack of growth and development in many urban neighborhoods (sometimes to the detriment of neighborhoods.) There are a lot of people who enjoy city life precisely because it comes with a smaller home and no yard to mow.

  4. Joel Parsons says:

    I fail to see how the mortgage interest deduction preferences suburban development. All it does is subsidise owner-occupied housing of all kinds.

    The subsidy results in either overconsumption of housing or a transfer of wealth to landowners at the time the subsidy is put in place.

    Overconsumption can manifest itself in many forms, urban, suburban or rural:
    – Larger houses than you would otherwise expect (more square feet per house)
    – More elaborate houses than you would otherwise expect (more money spent per square foot on construction)
    – Just plain more houses than you would otherwise expect (more houses per capita as people live in smaller households or households own more than one house)

    Transfer of wealth manifests itself where the subsidy is capitalised into the price of scarce land, as in areas with hard to replicate attributes (e.g. beaches, infrastructure, prestige) such as coastal strips and/or urban areas.

    That the mortgage interest deduction in the US results in suburban development would not appear to be a result of its nature as a subsidy, but a result of the preferences of US consumers and planning authorities for suburban development.

    • OGT says:

      Quite right. It also supports higher cost/income areas relative to lower cost/income areas, it’s a deduction not a tax credit after all. The MID is much more valuable to New York metro residents urban or suburban than say rural Mississippi or Syracuse for that matter.

      Whether that’s a good or a bad thing would seem to be debatable. To the extent that it offsets the perverse effects of a nominal income tax rate that doesn’t make many allowances for the cost of living it may be a good thing.

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