Sunday, April 27, 2008

Frank: Demand for high quality education (partially) responsible for housing crisis

Robert Frank in the WaPo:

But while Congress clearly should not rescue borrowers who lied about their incomes or tried to get rich by flipping condos, such borrowers were at most a minor factor in this crisis. Primary responsibility rests squarely on regulators who permitted the liberal credit terms that created the housing bubble.

Hints of how things began to go awry appeared in ... a 2003 book in which Elizabeth Warren and Amelia Warren Tyagi posed this intriguing question: Why could families easily meet their financial obligations in the 1950s and 1960s, when only one parent worked outside the home, yet have great difficulty today, when two-income families are the norm? The answer, they suggest, is that the second incomes fueled a bidding war for housing in better neighborhoods.

It's easy to see why. .... Because the labor market has grown more competitive,... [i]t is no surprise that two-income families would choose to spend much of their extra income on better education. And because the best schools are in the most expensive neighborhoods, the imperative was clear: ... you must purchase the most expensive house you can afford.

But what works for any individual family does not work for society as a whole. ... When we all bid for houses in better school districts, we merely bid up the prices of those houses.

It seems somehow counterproductive to spend lots of money bidding up the price of housing near good schools. Wouldn't it be better to divert some of those resources to increasing the supply of good schools? Yes, this requires the belief that increasing money to schools would lead to improved schools -- which is controversial; however, as I mentioned in class, I think it is possible for money to improve school quality (but increasing money may not improve schools as frequently as it could).

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