Talk About Perverse Incentives
By Bryan Caplan
I hope I’m misunderstanding Ed Glaeser, but I don’t think I am:
Since the rich should not be subsidized, the transfer payments should be means tested and limited to families earning less than $75,000 per year. There should also be income checks to make sure that applicants did not misrepresent their income on their loan application. In one sample of 1,000 loans that relied on stated rather than documented income, more than one-half of all loan applicants overstated their incomes by more than 50 percent.
I guess Glaeser might mean that people who lied about their income should not get help. But the most natural reading of this passage is that if someone lied about his income to get a loan, we need to make sure that his lie does not disqualify him from a bailout by putting him over the income maximum.
This would make a nice Monty Python sketch:
Guy Behind in His Mortgage Payments: I’d like to apply for a transfer payment to cushion the foreclosure.
Glaeser: Sorry, your loan application says your income is $90,000. Only people who earn $75,000 or less qualify.
GBHMP: Right, but my actual income is only $60,000. Here’s my proof. [Hands Glaesar his pay stubs]
Glaeser: Oh, so you lied to get the loan?
GBHMP: Through my teeth!
Glaeser: Hmm, do you think that could partly explain why you can’t make your mortgage payments?
GBHMP: Anything’s possible.
Glaeser: Well, you’re in luck! As a member of the deserving middle class, the state of Massachusetts has you covered.
GBHMP: [big grin]
Glaeser: NOW DON’T DO IT AGAIN!
GBHMP: [smirking] Wouldn’t dream of it, professor!
Here’s my admittedly less humorous plan for the “lending mess”: People come to terms with the holders of their mortgages, or lose their homes.
That’s what the contracts say.
That’s what should be done.
Update: Ed says that I was misunderstanding him – see the comments for details.
Come on Bryan– guess something reasonable. I accept that my editor may have made the sentence confusing– but I certainly meant that people who lied on their applications should not get aid.
Sorry, Ed, hope there are no hard feelings. 🙂