Underblogged Contributors to Credit Contraction

Of the millions of recent words on economic conditions, words about three factors seem relatively underrepresented.

1) the preferential treatment of mortgage interest via its relative subsidy in the form of a tax deduction

2) the preferential treatment of residential capital gains over business investment capital gains

3) margin preferences for residential investment over business investment

Yesterday’s thoughtful Wall Street Journal op-ed by Gjerstad and Smith is the exception that proves the rule.

Economists make careers analyzing effects of tax policy on behavior, but if one believes in S & D curves and P & Q axes, tax and margin factors must be nontrivial. With mortgage interest deductible but interest and dividends from business investment taxable; with residential gains tax free up to certain limits but capital gains on productive business investment taxed; with housing being purchased on 80%-105% margin but much business investment generally limited to 50% margin, it’s little wonder which sector bubbled.

Restoring neutral tax and margin rules would build a healthier economy. Doing so wouldn’t end cycles of creative destruction, but could make the destruction less painful for those who would otherwise be more long the subsidized sectors — and make the creation more productive for those who would then be empowered to tilt more toward today’s penalized sectors.