The Federal Housing Finance Agency (FHFA) is imposing fees on mortgage applicants with high credit scores to assist applicants with low credit scores and small down payments. The 2007 housing crisis illustrated the potential costs of “helping” people buy homes they could not afford. The proposal offers insight on the politics of government favors.
The FHFA new rule will charge the strongest applicants up to $60 per month. Over the term of a 30-year mortgage, this would be over $20,000. Subject homebuyers will qualify for smaller mortgages.
The measure arguably addresses credit score racial disparities. According to Newsweek, average credit scores are 727, 667, and 627 in white, Hispanic, and Black communities. Yet such differences are not evidence of discrimination, since credit scores are based on things like missed bill payments. And Blacks and Hispanics with high credit scores will face reduced home buying opportunities.
The mortgage fees are an example of cross-subsidization, where the government, through regulation, makes some consumers pay higher prices so others can pay less. A cross-subsidy is economically equivalent to a tax and direct government subsidy. The seminal paper by Richard Posner on this was titled “Taxation by Regulation.” To see the comparability, the Biden Administration could ask Congress to impose these fees as taxes. Congress could appropriate the revenue to subsidize home buyers with low credit scores.
Why cross-subsidize instead of tax? Public choice economics offers an explanation. Politicians get credit or blame only for actions voters attribute to them.
Politicians will publicize giving people things. But politicians try hiding the taking of money from people.
Politicians calculate that voters are less likely to notice higher prices than taxes.
And if they notice, they may forget the policy hiking prices. Or politicians could blame
higher prices on corporate greed or Vladimir Putin.
Politicians can also honestly deny the existence of a government subsidy, or a payment by the government to an individual or business. Vehemently denying a subsidy might help voters miss the cross-subsidy.
Cross-subsidies are one component of a public choice debate over the “efficiency of democracy.” The debate has implications for potentially ending government policies benefitting some Americans at the expense of others.
One side sees the hiding or disguising of assistance as crucial to the programs’ continued existence. Consider the Federal government’s price support programs for agricultural crops. The Department of Agriculture sets target prices and buys surplus crops at this price. This drives up the market price, since farmers will not sell on the market for less than the USDA pays.
The price support is a costly way to help farmers. To get government money, farmers must plant crops using tractors, fuel, fertilizer, and labor. They might get $50,000 net of expenses from the USDA. Send the farmer a check for $50,000 could let these resources be used for other purposes.
The price support helps disguise the transfer to farmers. The program can be billed as ensuring America an adequate supply of food. If voters knew what was happening, they would put a halt to these programs.
The other side of the debate holds that government may still be helping the farmers or low credit score home buyers in the cheapest way possible. No less expensive, legal way to benefit farmers or borrowers exists. Congress cannot simply give designated individuals $50,000. The details get very complicated, but one implication is that politicians are not trying to hide these programs from voters. Enough political support exists to keep them going.
As a public choice economist myself, I believe that the assistance must be disguised to persist. Elected officials know what voters will not accept and incur the cost of disguising the programs because they must.
Our governments – local, state and Federal – have many programs favoring some Americans at the expense of others. This might seem depressing. But it is also encouraging.
Elected representatives must hide favors because the voters ultimately hold the power. We the people have the power to rein in favors and cross-subsidization, we just need to use it.
Daniel Sutter is the Charles G. Koch professor of Economics with the Manuel H.
Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.