We are entering what has traditionally been known as the dog days of summer. It is a time for relaxing and trying to beat the heat in much of the country. Prior to the political conventions, it should be a time when the candidates can relax in anticipation of a bruising couple of months before the presidential elections in November. However, this year is different.
The president is generally laying low and letting his latest batch of “feel good” commercials do his bidding. His opponent Governor Romney’s remarks seem to have made waves at the Olympics in London, while at home he continues to resist demands for the release of more of his tax returns. His most controversial comments were saved for the Palestinian people, as he alluded to their culture as an impediment to progress. Whether his comments were misguided in light of Israeli-imposed economic sanctions is a matter of conjecture.
What we found most telling was the following statement made by Mr. Romney: “…I will point out that the choices a society makes have a profound impact on the economy and the vitality of that society.” While it is always more gratifying to examine the flaws of others, it may be instructive to look inward to see if we can validate Mr. Romney’s observation. Specifically, we will examine the choices that our government has made and how those choices have impacted the vitality of our society.
Our government seems to believe that we are incapable of knowing a good thing when we see it. They think we need help, and they are ready to provide it via the tax code. Our neighbors to the north feel no such compulsion to usher their citizens into the promised land. For example, in Canada, home mortgage interest is not a deductible expense on income tax returns. Hence, it should be no surprise that half of all Canadian homeowners have no mortgage. The incentive is to take on as little debt as possible, and to pay it off as soon as possible.
In the U.S. the picture is quite different. We are incentivized to put down as little as possible on the purchase of a home. We are encouraged to buy as much home as we can possibly qualify for since the mortgage is tax deductible. People who may be debt-averse and want to pay down their mortgage are discouraged to do so since their income tax bill will likely rise. By the way, the tax code also makes it inviting to purchase a second home, as the interest is also deductible on that.
The subprime mortgage fiasco of 2007-2009 was the latest manifestation of Congress’ attempt to shape culture by picking winners and losers. As a capitalistic society, we seem to have a perverse aversion to allowing the markets to do what they do best, which is to most efficiently allocate resources.
This latest bubble is about as vivid an illustration as you will see that a culture built on debt is inherently unstable, and in the end, unsustainable. Our nation’s prosperity after World War II was built on savings, not debt. Much of the economic growth we have experienced over the past few decades has been an illusion fueled by debt.
As we listen to the polemics of our candidates, be aware of the culture their policies advocate. As Mr. Romney said “…the choices a society makes have a profound impact on the economy and the vitality of a society.”