What is the “ownership society”?

This term cropped up on in a recent NYT article which blames the financial crisis on Bush administration policies, including its advocacy of an ownership society. The article goes too far: the financial crisis is the result of bipartisan regulatory decisions going back decades and the Fed’s easy money policies—and it is important to understand that financial crises will almost certainly occur even when government regulators do everything right. They are like hurricanes: we can blame the government for failing to build strong levees but not for failing to stop the hurricane from forming over the Atlantic ocean. If the hurricane is bad enough, even strong levees will do no good. (A lot of people also blame market actors but that does not make much sense. People act rationally or greedily or stupidly, as they always have, and blaming them for the financial crisis is just another way of arguing that government regulation was inadequate. Might as well blame hurricanes for destroying cities.)

But what is the “ownership society,” anyway? It is a political slogan that the Bush administration apparently first used in 2003 to refer to three of its policy goals: (1) privatization of Social Security; (2) the creation of private health care accounts; and (3) subsidization of home ownership. The underlying theme is that it is better if people own than if they do not own, but what does this mean? Ownership compared to what?

The Social Security example suggests one interpretation: ownership compared to government sponsorship. In one scenario, people earn wages, a portion of their paycheck goes to the government, and then, much later, they receive money back from the government. They don’t own anything, though they might have a reasonable expectation that the government will eventually pay something that bears some relationship to the payroll tax. In the ownership scenario, the sum of money that would otherwise be used for Social Security can be invested in securities. Note an odd feature, from a market or libertarian perspective: people don’t have true ownership rights in their labor; they are obligated to put a portion of the return on their labor into an account. Their “ownership” of securities in that account therefore does not reflect a commitment to a free market in some pure sense. What is true is that risk and return is increased, which is a normal feature of ownership. If you invest unwisely, or wisely but unluckily, you will end up impoverished when it comes time to retire. As a result, people have strong incentives to think about retirement, and to inform themselves about financial instruments and the likely future of the economy. Whatever you might think of this outcome—some people find it appealing, others do not—the odd thing is that if you like the idea of people having control over their finances rather than being dependent on the government, then you should want to do away with Social Security altogether rather than privatize it. Let people decide how much to spend and how much to save, as well as how they save their money. The ownership society in this setting boils down to the claim that we should subsidize investment and penalize consumption. If that is really the goal, why not just advocate a consumption tax and do without the ownership metaphor?

Let’s turn to home ownership. Here, the compared to what question seems to be—compared to renting an apartment or perhaps renting a government-subsidized apartment or living in public housing. If government subsidizes home mortgages, then people who would otherwise rent or live in public housing are more likely to buy their own home. Again, the effect of channeling people into ownership is to increase the risk and the payoff. If you rent an apartment, and its value appreciates, you don’t obtain the return—your landlord does. If its value declines, you aren’t hurt—your landlord is. Finance theory tells us that investments have higher payoffs when they are riskier, and this is true for owning a home just as it is true for owning a piece of stock in a business. It was also thought, as in the case of Social Security privatization, that people who own homes will end up being better citizens: they will invest more in their homes, which will improve the neighborhood and hence the home values of others; they will care more about the future and therefore they will inform themselves about politics and vote responsibly; they will join the rentier class and become Republicans.

The problem with this theory, as I noted yesterday, is that ownership does not have any intrinsic value. It is often wise to rent rather than own, as everyone understands from everyday life, and we might think that low-income people who chose to rent apartments rather than buy them knew what they were doing. Home ownership has some attractive features—you needn’t fight with your landlord, or worry that he will terminate the lease—but it is basically an enormous financial gamble that many people, particularly low-income people, shouldn’t make. Your neighborhood, for reasons outside of control, could become worse over the years; in addition, you might find that you need to move for family or employment reasons. If you are a low-income person, most of your savings will be tied up in your home, which means that you will be inadequately diversified against these future risks. These basic truths were obscured for many years because home prices tended to increase and not to collapse during recessions, but home ownership is just a kind of investment and does not enjoy immunity from the business cycle.

Home ownership policy of the Bush and Clinton administrations was, in essence, an attempt to pay low-income people to make a risky investment that they would otherwise rationally avoid. I cannot understand why anyone would think that such a policy would be sensible. In some cases, these people will do well and enjoy the upside of their investment, but in other cases they will do poorly, with the result that they will be worse off than ever.