Consequences of Housing Inflation Policy in the U.S.

From OECD 

The above chart compares the types of countries' 2015 financial assets.  More specifically, it shows the percentage of cash (currency and deposits) held by households as a percentage of overall wealth.  You'll notice the U.S. is an outlier, because most Americans have their life savings in their home equity. From the Federal Reserve, on housing before the 2009 financial crisis:

[H]ousing wealth of U.S. households at the end of 2008 was 25.4 trillion dollars. Housing wealth is about one half of total household net worth (which is 52.9 trillion dollars), and is larger than the Gross Domestic Product (14.4 trillion dollars). Moreover, since financial wealth is more unequally distributed than housing wealth, housing wealth accounts for almost two thirds of the total wealth of the median household.

Housing as the driver of America's savings vehicle is no accident.  Tax policy guarantees housing prices will always increase absent extraordinary circumstances. In fact, tax policy is so potent in this regard, what brought about the 2008-2009 financial crisis wasn't some unexpected event but the overuse of this magical money-making machine.  (Like most sure things, the main threat is overloading and overextension of the thing itself.)

The issue isn't just the well-known mortgage tax deduction, which cost the government about $70 billion in 2013--it's the way it favors banking dependency and excessive borrowing.  You can deduct all of your mortgage interest up to $1 million in principal on the home in which you live, which means banks and buyers are incentivized to borrow as much as they can up to that limit.  By setting a limit by fiat, the government has encouraged everyone to game the system up to that limit (a corollary to Goodhart's Law).  What's worse is the government compounds the problem by guaranteeing the borrowed money indirectly through agencies like Fannie Mae and Ginnie Mae.  Meanwhile, homeownership rates in the U.K. and Canada are similar to the United States, even though the first two countries don't allow such a tax loophole, er, deduction.  (Anything that allows you to minimize your taxes is a "loophole," but if the government likes a loophole, it'll call it a deduction to make it sound nicer and to encourage its use.)  Why set up tax policy that confers so much power to the banking system?

First, in theory, it makes sense to support home ownership.  Owning a home is usually a long-term decision that creates more interest in sustaining your surroundings.  The reality, however, is different--as cities have become larger, community becomes difficult to achieve, and most Americans tend to be private folks anyway--they may bring an apple pie to a new neighbor, but unlike many other countries, an invite into one's home is rare.

Second, by having so much wealth held illiquid and therefore captive and subject to fees (broker fees, closing costs, etc.), which discourages impulse moves, the government can manipulate its citizens' financial freedom and also its currency strength.  In contrast, in other countries, especially China, residents can remove their wealth--such as stock market gains--and transfer it elsewhere, such as Canada (Vancouver) or the United States (Cupertino, CA).  Such options can create havoc for governments, because not only do they lose wealth that supports their own currency, but the wealth they helped created is now captive in another country's currency and protected by law, making its return more difficult.

Third, if wealth is illiquid, easily tracked, and tangible, it can provide stable tax revenue.  How does this help the average resident?  Under a cost-benefit analysis, it doesn't.  In California, even after passage of a proposition that limited the government's ability to raise property taxes, some local governments still tried to over-estimate housing prices for purposes of increasing the applicable tax revenue or granted more developer permits than usual, harming quality of life by not accounting for public transportation or improved roads or new highway lanes.

At the end of the day, globalization requires more flexibility, more consumer disposable income, and more individual labor mobility.  Meanwhile, America's tax code continues to prioritize the exact opposite.  What could possibly go wrong? (Again?)

Bonus: the key to currency strength is reserves, and when your non-gold and non-natural-resource reserves are guaranteed to grow as well as be held captive, the (financial) world is a reserve bank's oyster.  In normal economic circumstances, if you want to make your exports more attractive, you can weaken your currency by issuing more debt; if you want your currency to remain strong, you issue less debt or debt at ultra-low interest rates.  In America, however, you can have the best of both worlds--you can issue more debt, keep it captive in housing, and create tax policies that ensure the debt becomes an asset at some point.  How does this captive wealth, which allows greater government manipulation of both currency and exports/imports, help sustain a growing middle class? Well, it doesn't.  It actually leads to more boom-bust cycles and debacles like the 2003 Cancun WTO trade failure and its continuation. Rendering the sale of essential items like housing and education on the financial sector's willingness to issue debt is a recipe for short-term gains and long-term disaster.

Worse, by ensuring both private and public banking entities have disproportionate influence over the economy, you cede power to the financial sector in the absence of almost perfect regulation and enforcement.  What does the financial sector do in exchange for such power, given that it doesn't make anything?  In theory, it exists to encourage stability, predictability, and the integrity of economic transactions.  Unfortunately, with pro forma accounting and conflicts of interest within banks, it doesn't even do accounting or valuation well.  In short, America's current tax system takes a sector that should be the designated driver in the economy and makes him or her into a Formula One fan itching to get into the driver's seat.  Given the global nature of finance, it's not just America that falls prey to such problems--google "Deutsche Bank hidden losses swaps" for more. 

You Suck, Denver TSA

The TSA exists only because America overreacted post-9/11 and decided to go full metal hard-on while almost every other country in the world decided to wait and see, at least with respect to the body scanners now standard procedure in American airports. 

Many major international airports don't have a single new scanning machine--they've decided to invest in infrastructure, local police, or healthcare instead--and when they do have them, they make it easy for passengers to opt out.  Canada's Toronto airport had about 10 passenger lines but only one of the "new" machines. They rely on the same machines used pre-9/11. In Toronto, the "new" machine is only for "secondary" screening, and even then, the personnel ask if you want to "opt out" and get a patdown.  I was "randomly selected" for secondary screening and asked to opt out.  I was immediately given a patdown by a male agent in full view of my luggage. Because secondary screenings are less common under Canadian standard protocol, it's done as efficiently as possible.  

At Denver International, it took 5 minutes just to find a TSA screener to do a patdown while my luggage was out of my sight at the other end of the conveyor belt.  After a screener finally showed up, it took another 9 minutes to do the actual patdown. He blamed the inefficiency on me opting out as if he was doing me a favor rather than inconveniencing me by being inefficient. Either he doesn't understand how a waiver works with respect to the 2 minute spiel (short version: I'm going to molest you now) or not customer-savvy to explain upfront that the TSA should have written waivers to save experienced passengers time.  

The supervisor was worse. She actually said, "We're in charge" and "You do what we say." When I remarked it sounded like something the "SS would say," she looked confused. (One has to wonder--if the Nazis did take over airport screening, how would they do it differently than the Denver TSA?) 

The TSA has received flak for its handling of travelers who “opt out” of its backscatter radiation body scanners but they appear to have doubled-down under the theory if the opt-out procedure is as uncomfortable as possible, people won't opt out.  A few years ago, I asked a medical doctor and a PhD in radiation physics what they thought about the risk of radiation from the airport full body scanners. Both doctors indicated there wasn't enough information to make a valid judgment about the safety of the full body scanners. Although we receive radiation in small doses almost every single day, much of it is “non-ionizing.” A cell phone, for example, has non-ionizing radiation; however, the TSA scanners use ionizing radiation. Ionizing radiation can alter a person’s cells to the point where the cells cannot recover. In contrast, non-ionizing radiation will jumble or vibrate your cells but not permanently alter them. 

Science aside, what bothers me most about the TSA is its inability to understand a) the agency is routinely castigated for being totally incompetent; b) pissing off taxpayers by being inefficient or stupid is not a good way to get them to pay more taxes (and certainly not 8 billion USD annually); and c) the way the TSA gets paid is mostly by other people's taxes. 

Much has been made of "makers vs. takers," but the reality isn't too far off: most non-research government positions do not sell or produce anything, so they derive their legitimacy by facilitating a better life for the general public.  Such facilitation could be in the form of increased safety (competent police officers); greater accountability (investigations into false advertising); or some other check and balance needed for an efficiently functioning society (honest tobacco research).  

The minute government employees lose integrity or lack accountability, they become worse than useless. Not only are they taking money that could otherwise be used for productive activity or go into your pocket to spend as you see fit, they're being paid to interfere in other people's lives in ways that make their lives worse.  In contrast, someone who sells 200,000 USD in software licenses doesn't need to show anything else to justify his or her salary because the transaction was voluntary, subject to competition, and presumably needed or wanted by the buyer.  That's basically the "makers vs. takers" argument, except that good government employees--if they are efficient and do their jobs with integrity--can argue they are worth more than their salary because they increase trust and accountability and lay the seeds for future success (an excellent, smart public school teacher is probably worth more than what he or she is being paid). This is why I keep arguing we need to stop focusing so much on improving AI and machines and try to perfect a performance evaluation system that is objective and fair for government employees.  

In any case, somehow, the TSA--while taking 8 billion USD every year--manages to be incompetent at everything except pissing off travelers. Listen, I get it--America overextended itself post-9/11, and lower-level military veterans who were taught mainly to handle weapons and security need a job when they come back.  Still, why tolerate total incompetence AND crap customer service?  Why not try to be competent, efficient OR passenger-friendly so you don't create the kind of backlash that leads to voters and citizens turning against their entire government? 

The TSA screening process isn't even standard across America, which is frightening when you understand the whole point of having a federal government is to standardize national processes, thereby promoting national unity through nationwide predictability. Otherwise, why not let states, which are generally more accountable except for California, do it? (By the way, how can McDonald's manage to standardize its procedures worldwide--excepting the sometime addition of automated ordering machines that make the customer experience better--but the TSA can't manage to be consistent in its own country?) 

When I've complained about not being able to see my wallet and personal items while waiting 5 minutes for a TSA screener, one TSA agent told me to keep my luggage with me until the screener showed up.  I like that idea, but I don't get that option in most airports.  Most TSA agents tell me to put my luggage, passport, laptop, and wallet through the conveyor belt so I can pass the initial security check under the rationale that if a problem is found, they can deal with it right then and there as I wait for the screener. The wait times are all over the place but usually last about 5 minutes, plenty of time for someone else to steal any of my items on the other side of the conveyor belt.  

In Denver, the screener argued standard procedure required him to say his opening spiel despite my oral waiver and willingness to sign a written one.  Yet, he added items I hadn't heard in other screenings, such as needing to keep my hands up for 4 minutes straight. (Was it retaliation for asking him to waive the spiel?) 

We need airport security, but we need it done efficiently and with common sense and respect.  In the meantime, I'll be avoiding Denver airports.  Why experience excessive turbulence--standard for Denver flights because of its elevation and location--and terrible customer service? 

I should say it wasn't all bad.  The police officer called by the TSA supervisor--in an attempt to intimidate me--was completely professional. Overall, I had a good time in Denver.  I was going to publish something that would help other travelers, but after my TSA experience, I won't be writing that piece.  You're on your own when it comes to Denver.  

Bonus: Police officers, unlike TSA screeners, can argue they're entitled to greater obedience from the public because officers often don't know the people they encounter; don't know the person's record, if any, until they get an ID and run a check; in a car stop, even with a license plate check, the driver may not be the owner of the car, and the police cannot see the person's hands until a closer examination to determine a threat level; and they haven't had the benefit of already screening the taxpayer's passport and luggage. 

A TSA worker, in contrast, has already had the benefit of multiple screenings and checks before the patdown, especially if the passenger is a frequent flyer; at the time of the patdown, the passenger is without access to luggage or unknown material; and the agent can see the passenger's hands. In addition, the passenger, unlike the TSA worker, has an immediate deadline to meet usually involving financial loss if missed, creating incentives to cooperate with competent agents. In other words, the presumption should go to the passenger, not the TSA screener, and the TSA needs to be as efficient as possible to justify its existence. At 8 billion dollars a year, the American public deserve better. 

Update on June 2017: Ft. Lauderdale TSA, immigration, and customs employees were all professional and efficient.  Why?  1) The cost of living there is lower than larger cities, making a federal salary and benefits more attractive.  Whereas a SF or LA or NY TSA or airport worker might see a TSA job as a last resort or temporary stop, a Ft. Lauderdale employee is being paid competitively; 2) Ft. Lauderdale's economy depends heavily on tourism, creating major disincentives to annoy travelers.  Even in Cuba, where almost nothing works and customer service is non-existence outside touristy Old Havana, Havana's airport was run reasonably well. Same concept--when an airport is in a city that relies on tourist dollars, it cannot afford to annoy tourists. 

America's dependence on gov security jobs like the TSA to lower the unemployment rate, especially for uneducated Americans, provides perverse incentives to make Americans afraid and to exaggerate terrorism threats.  "We're protecting your freedom and lives" sounds a lot better than "We can't figure out how to create meaningful jobs, especially for men without college degrees, so we're going to use a one-off event like 9/11 to divert billions into useless 'security theater.'"  Stay tuned for this news report on violence in other countries...