Moving the Jobless to the Jobs: Crucial for Economic Growth

We know that external immigration is almost always a winner. Businessweek finds that internal immigration has similar benefits, but in the US seems to slowed almost to a stop because of high housing costs in the high growth cities. The high costs are often caused by local housing policies. But costs nationally are amplified by the home mortgage interest tax deduction. It is past time to end that subsidy.

(…) But more recent analysis by Peter Ganong and Daniel Shoag of Harvard finds that the rate of convergence across U.S. states has slowed dramatically over the past 30 years—. (…)

Ganong and Shoag note that the slowdown in migration has been particularly severe for low-income workers. They suggest that rapidly rising house prices in wealthy areas help account for that. As house prices rise, the benefits of living in productive areas erodes for low-skilled households. And the researchers note that the impact of housing regulation measured through land-use court cases is a big factor behind rising house prices. More regulation leads to higher house prices at a given income level—pricing poor people out of the housing market. Rich areas haven’t needed a passport system to keep poor people out of their communities; they’ve just regulated land use so much that there’s no cheap housing available.

Of course, that’s not necessarily easy for Washington to fix. Most of the regulations involved are made at the state and local level. But one thing Congress could do to help reduce the cost of housing and help deal with the fiscal cliff: Dump the home mortgage interest tax deduction.The $100 billion the U.S. government provides each year in home mortgage interest tax relief makes housing more expensive. Three-quarters of the tax relief on home mortgage interest goes to the top 20 percent of earners, according to the Tax Policy Center—and hardly any people at the other end of the income distribution benefit from the credit. The credit encourages richer Americans to borrow more, bid up prices, and buy bigger houses on bigger plots. All that squeezes out the affordable rental housing that poor migrants need if they are going to get to where the jobs are.

Republican and Democrats agree that we should focus on equality of opportunity. But one of the best opportunities we can give people is to move from areas of little economic potential to areas with jobs and quality education. Getting rid of the home mortgage interest tax deduction is one way both to raise revenue and to help poor people help themselves. Of course, it’s also an idea with no political traction at the moment—but we’ve seen such things change before.