Economists is that investment in residential real

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economists is that investment in residential real estate is substantially less productive (at the margin) than is capital investment by businesses outside the real estate sector (e.g., plant, equipment, inventories), investment in social infrastructure capital (e.g., highways, bridges, airports, water and sewage systems), or human capital (e.g., more and better education and training). In other words, every additional dollar that is spent on residential construction instead of on business or other investment reduces economic growth. Careful research has found that all of the incentives for more house has led to a housing stock that is 30% (!) larger
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128 than would be the case if all of the incentives were absent, and that U.S. GDP is 10% smaller than it could be. 69 The U.S. simply has too much house! The analogy to drug addiction is not without merit. Many politicians on the left and on the right equate reducing these housing subsidies to political suicide. After all, many believe that these policies are at the heart of the social contract with America and that they are therefore untouchable. Conventional wisdom has it that home ownership confers such benefits as good citizens, stable neighborhoods, strong communities, and – of course -- personal wealth accumulation. 70 This “conventional wisdom” has met not only with a massive destruction of home equity in recent years, but also with mixed reviews in academic research. 71 Nevertheless, housing subsidies have been and still are the policy tool of choice for combating income inequality, which has been on the rise in the United States since the 1970s. However, research has shown that these policies predominantly benefit middle- to upper-income groups rather than the low-income group. One recent research paper specifically on the GSE subsidy by Jeske, Krueger, and Mitman (2010) finds that their effect is a loss in overall welfare and an increase in inequality. 72 Their model indicates that low income households would be willing to pay 0.3% of lifetime consumption to live in a world without the GSE subsidy. The wealthy, instead, benefit from the subsidy. Jeske et al. find that the subsidy may not even be that powerful for increasing home ownership because, by stimulating construction, it also makes rental housing cheaper and more attractive for low-income, low- asset households. In earlier research, academics have reached a similar conclusion regarding the home mortgage interest deduction. It too is regressive, benefiting high-income, high-asset households the most. Upper-income households are more likely to itemize on their income tax returns and to have higher marginal tax rates (which is what makes the mortgage interest and property tax deductions more valuable), and they are more likely to buy higher priced houses (which would involve larger mortgages and hence more benefits). Gervais (2001) calculates that abolishing the deduction would benefit the bottom 20% nearly 6 times more than the top 20% of the income distribution.
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