Thursday, November 20, 2014

Free Homes for Newlywed Couples. Seriously?

Despite the fact that lawmakers in Korea's National Assembly are still struggling to find funding for existing welfare programs a la free school meals and child-care programs, it seems that the New Politics Alliance for Democracy (NPAD) Party, the moribund main opposition party, has proposed yet another welfare program.

(One, does this mean that we can finally all agree that “free” is not really free? Two, I hope NPAD's advisers are unpaid interns. Even the most amateur gambler will tell you never to double down on a losing hand unless you are really good at bluffing, which the NPAD is not good at doing.)

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Specifically, NPAD lawmaker Representative Hong Jong-hak stated that his party intends to push to provide up to 30,000 free homes for newlywed couples, as well as push to lower the National Housing Fund's interest rates.

Representative Hong said that the NPAD Party will push to allocate ₩243.2 billion (US$221.7 million) for the project in next year's budget.

Again, the National Assembly is still struggling to fund existing welfare programs.

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In an article in the JoongAng Ilbo, the Ministry of Land, Infrastructure, and Transportation released a report to Saenuri lawmakers that stated that “assuming that the National Housing Fund's 2015 interest rates are held constant, constructing 30,000 homes over a period of four years will cost up to ₩3.6 trillion (US$3.2 billion). Furthermore, constructing 100,000 homes over a period of four years will cost up to ₩12.1 trillion (US$10.7 billion)”

Sense seemed to prevail when members of the ruling Saenuri Party opposed the NPAD Party's plans. They said that the plan was “unfeasible.”

However, lest anyone begins to think that the Saenuri Party is somehow the bastion of rational thought, I think this would be a good time to remind everyone that it is the same party that is still throwing its full weight behind Abenomics' even-uglier stepsister, Choinomics.

You decide which is which
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At this point, I could go into an in-depth discussion about economic theories and present different kinds of arguments to state why this latest proposal is a harebrained idea.

I could talk in-depth about the Laffer Curve, which postulates that after a certain point of taxation, tax revenues actually fall rather than rise.

I could also talk, again, about Frédéric Bastiat's Broken Window Fallacy, which explains how opportunity costs affect economic activity in unforeseeable ways.

I could also talk about how economists/partisan economists/politicians can never predict economic conditions of the future (as even the OECD admits) because central bankers and political leaders who like to think of themselves as enlightened leaders tend to only see positive signs in the economy than spot potential problems because, like everyone else in the world, they like to think that they are doing a good job (see confirmation bias). This is why no one should ever trust a politician when a politician says “Trust me.”

Finally, I could talk about the pitfalls of populism. I could talk about how populism is, by its very nature, more focused on “redistribution” rather than thinking of ways to create new wealth. I could talk about how the problem with populists is that for all their flowery rhetoric, most of them have little to no idea about how to realize their lofty goals without having to “break a few eggs.” I could talk about how populism may be an attractive means to achieving short-term political victories, but that in the long-term, when its leadership finally has to own up to its own inadequacies, it will also have to contend with an enraged public that was promised Nirvana but delivered anything but.

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I could talk about all that. But I won't. Going into an in-depth conversation about those topics requires sober thought, seriousness, and rational thought. However, politicians clearly have no such capability.

If this “homes for newlywed couples” is the best idea that NPAD lawmakers can come up with, I don't think that Saenuri lawmakers could possibly ask for a more loyal opposition as the Saenuri Party will be guaranteed to win one election after another, not because the Saenuri Party is wise or prudent, but only because it is a little less stupid than the NPAD Party.

Gods help us all.


  1. Just my observation and the little that I know about average salary and 4 newlywed friends going through the home buying process lowering the National Housing Fund's interest rates should be a positive thing.

    Only in Korean have I seen 20 somethings take out loans for an apartment....

    1. Admittedly, I only mentioned the National Housing Fund in passing, but there are a few more reasons why lowering that interest rate is not such a good idea (to be truthful, I find the very existence of the National Housing Fund questionable).

      The most obvious reason is that it is the government’s attempt to stimulate the national economy by encouraging corporations and households to take out loans, which is the same rationale that got the United States economy into the housing bubble crisis of 2008. And considering that household debt is nearing US$1 trillion, any attempt to lower the NHF's interest rates will exacerbate the situation, Though it was a different type of debt at the time, current household debts are almost (if not in parity) with corporate debt that existed before the 1997 economic crash.

      Also, the NHF's annual variable rate is currently quite low. It's hovering somewhere a little over 3%, I think, which is similar to the interest rates in banks. If the NHF's funds are significantly lowered, the government would go into direct competition with banks for loan customers. Banks will lose customers, which the government doesn't want, but that is what is going to happen anyway. Best case scenario, it will merely shift economic growth, and not lead to actual changes. But experience dictates that increasing government encroachment into the private sector rarely ever has neutral results.

      As for young Koreans taking out loans for an apartment, I have many friends who have taken out loans to buy homes as well. So it is not a uniquely Korean problem. The real problem is that they have to pay so much damned money for it. The reasons for that, however, is a different matter.

    2. Oh, and thanks for commenting, Maja.

  2. The problem is structural. The demand is endless; there are too many people chasing after the same few houses. This has nothing to do with market politics. it's just demand. There are potential solutions.

    Ideally, distorting the market through subsidies will just shift the burden around; subsidies to the poor to buy houses, or new couples, will ultimately lead to housing being even more expensive. Rent controls result in no new rental units being built, so old ones command much higher prices; subsidy money has to come from somewhere, and the likely sources will just drive up housing prices even higher, thus perpetuating the problem.

    the issue is the attempt to control the market. All such attempts result in worsening whatever problem you have, even if you ease it in the short term. This is true across the board, for all market manipulations. It's true for borrowing money that can't be repaid: as the state borrows, the interest costs are passed on, making balancing budgets even less likely, thus compounding the problem (literally).

    One solution that some libertarian economists have played with is this. it has damaging market effects, but it has the least effect on the market. it's not ideal, but in Seoul's case, it might help and do the minimum of harm.

    Provide disincentives for individuals to hold more than one (or two) primary residences. In other words - tax rental units.

    if the goal is home ownership, make it possible to own more than one house but hit rental owners hard.

    For market clarity, it might be easier to simple ban owning a second home. The market will adjust, with clear expectations, and prices will plummet. After a brutal period of adjusment, when fortunes have been decimated, more people will own homes but fortunes will have been lost as real-estate empires crumble.

    We want to play Robin Hood? Do it this way. Create an open market with clear rules that aren't arbitrary, and make a level playing field for stealing the wealth of the wealthy. Smash them with the market. It's brutal, but if you're going to be a market socialist, be a market socialist that appreciates markets.

  3. No need to subsidize anything. That defies the market. Instead, if we want to play "smart socialist", we jigger the market to do things on its own.

    This has the effect of seeming to be fair: It forces those who own more than one place to sell them, so the government can't be captured into setting prices or scale; it's fair (in a sense), in that it affects all homeowners equally; it slams banks and the bubble of real estate evenly; and it leaves the market alone to function on its own without micromanagement.

    You just tax away all income plus some for second homes. It's simple: You set the tax rate for owning a second home of any kind at 100$ of whatever income it generates, plus add on regular local taxes. Wealthy families can subsidize the State through this method if they want, but the upshot will be a dumping of tends of thousands of housing units on the market.

    This is the way to do it if you want to do market socialism. Go hard-core, or go not at all. Tinkering just makes the problem worse.

    In Canada, we havae socialized medicine. But the predictable negative effects of this are somewhat (not completely) mitigated by employing the market. There's a single-payer system, which is the government, which sets rates. As usual, this is capturable my medical interests and there are perverse funding incentives which undermine the system and can't really be scripted out.

    But within the system, doctors and hospitals are free to do whatever they want. They're largely unregulated. There are no requirements to work in small towns, you can see however many patients you like (given a flat fee for service rate, this is what happens - doctors load up on patients), and it functions like a marketplace. This makes it far more efficient than salaried-doctor positions as in the UK's NHS or in mainland Europe.

    However, this use of the market only partly compensates for the inefficiencies of monopoly. But if you're going to be a socialist, you might as well use the tools available.

  4. The problem is that this socialist tinkering just exaggerates the problems inherent in the system. It's a cure that deals with symptoms, but makes the disease worse. If we're going to debate potential solutions, we need to debate potential cures for the disease.

    The goal is mass private home ownership. Then work towards that goal. Government subsidies are unsustainable; the relief system becomes a parasite on a productive system.

    If you want to change this in a meaningful way and believe in the goal, why not put your money where your mouth is and use market forces to get what you want? No government subsidies; no unsustainable programs; no public debt; ongoing solution to problem works itself out.

    the problem is that this requires thought and nuance. It requires not caring about what the wealthy think, but working for the public good. It requires hitting chaebols and the rich where it counts; it requires moral courage and the ability to do things like hit banks and say: "You like free markets. It's free. With one stipulation. You're good at surviving - survive."

    I'm not in favour of such a solution, but this has the merit of actually possibly having the desired effect while minimizing blowback on the future of the economy. Of course, in the short term, huge fortunes will be lost, and the all-sacred real estate market will take a pounding like never before.

    But the elites of this country have one huge weakness. They're rent-seeking. They don't invest. They seek rents. Korea is peculiar in the developed world for having an elite that doesn't seek to make its money work smart or hard: there's little to no innovation here.

    The primary goal of most moneyed elites here and aspiring elites is to acquire a revenue stream and then sit back and do nothing. They seek rents, whether in investments, the stock market, or company ownership. The real estate markets here function like hopelessly tanked pyramid schemes as a result. The bifurcation in ownership is the result, along with the disenfranchising of the general population. It's a cultural thing not found in many economic models: Due to the specific nature and contingent history of the Korean economic boom, people put their faith in real estate. Upshot: It's not a real real estate market. It's massively distorted by demand that's not rational, but culturally-based.

  5. This betrayal of the economy by elites is not imaginary. It's a real psychological problem.

    On this basis, alone, I would endorse a program as I outlined here. The idea is to smash the real estate market that makes ownership possible only for those who already own extensive properties. You do this through the one method available:

    The price system.

    This is how to be a smart socialist. Subsidies are useless.

    I'm not a socialist, but were I to advance a socialist position, and I actually wanted it to more-or-less work, this is what I'd do: Set up markets with specific conditions and then let people sort it out.

    Canada gets a more or less working system that has nobody paying for stuff directly. It works better than most socialized systems in some ways, only inasmuch as the market is allowed to function within the system. That's what makes it partly sustainable. This is complicated by the doctor's union - the medical associations - which then negotiate sweet funding and fee structures, etc. - but any system can be captured.

    The bonus of the model I suggested is that there's nothing to capture.

    That's the trick with progressive socialism. You need to relax micromanagement. don't create systems that can be captured. Set market conditions and let people sort it out.

    This is what always kills managed systems. Micromanaging and central planning are useless. Humans respond to individual freedom. A real innovation on the Left would be the adoption of a progressive libertarianism.

    Central-planning socialists and subsidy socialists share a lot of the same flaws as managed capitalist systems, like in the US now. The controlling institutions they use can be captured by specific interests. These obliterate any gains made by the system and created entrenched interest classes. This is why the US icreasingly looks like the old Soviet Union. THe goal of a progressive socialist position should be to reduce, with the goal of eliminating, regulatory bodies.

    If the left adopted an intelligent free market position, it might actually achieve its stated goals.

    Neither the right nor the left really understand the raw, reformatory power of markets. And the principal tool of markets is the price system.

    >> this works for schools, and would radically improve them; even if they were publicly funded, with no monopoly manager, they would radically improve; prices could be properly set; costs controlled; results expected. The issue is always control. A completely free education non-system would be best, but if you're committed to a socialist alternative, I've never understood why the raw power of markets has not been put into use. Instead, there's this obsession with top-down micromanagement that just kills the entire enterprise.

    1. As usual Craig, we seem to be on the same page. Well done, sir.