Given the weak economy and the public’s uncertainty as to whether it will improve in the short term, it is understandable that Americans are not particularly focused on developments overseas.
Nevertheless, studying other Western countries’ policies to see if and how they might be adaptable to the American context can be highly enlightening. As we seek to fix our troubles here at home, a comparative approach to public policy should prove especially useful. Nowhere is this more the case than in the realms of housing, taxation, and monetary policy.
Much has been written on Fannie Mae’s role in precipitating the Great Recession. As a GSE (government-sponsored enterprise), Fannie had an implicit guarantee from the federal government that gave it distinct advantages in the marketplace. It thrived due to a business model largely based on privatized gains and socialized losses.
Fannie, however, is a distinctly American creature and a product of the Great Depression and the Vietnam War-era, when Congress decided to privatize it and remove it from the government’s balance sheet. By contrast, Australia, Canada, and the United Kingdom all have housing systems without government-sponsored enterprises that back mortgages. In terms of housing finance, Americans might also do well to consider the covered bond model, wherein the pool of mortgages remains on the financial institution’s balance sheet. It is encouraging to note that the Senate recently introduced legislation that would expand the comparatively nascent U.S. covered bond market.
Those critics who argue that American corporations should be paying even higher rates of taxation might be surprised to learn that the United States now vies with Japan for the highest corporate tax rates in the industrialized world. To keep America competitive, it is imperative that these taxes be reduced. The U.S., however, should not adopt a value-added tax (VAT) unless simultaneously drastically reducing personal income tax rates. Americans might want, however, to consider the benefits of having a flat tax such as Estonia’s, which led to rapid economic growth. It should also be noted that while other countries do have some forms of favorable tax treatment for homeowners, the mortgage interest deduction does not exist under the Australian, British, and Canadian tax codes.
There has been a good deal of scrutiny of the Federal Reserve’s policies and how they may have contributed to the economic downturn. Not all central banks, however, have the same mandates. In the United States, for instance, the Federal Reserve is tasked with maintaining price stability and ensuring full employment. This differs from the European Central Bank (ECB), which has price stability as its sole mandate. It is within this context that Congressman Paul Ryan (R-Wisc.) advocated discarding the Fed’s dual mandate. While this certainly would have significant drawbacks and is not likely to become policy, it is an idea that merits further serious public debate, even if solely to better understand what the Federal Reserve has been doing right.
In conclusion, our public debate about housing policy, taxation, and monetary policy would benefit from a comparative perspective. Such an approach will help us better assess what approaches might help reboot the American economy for the twenty-first century.
Photo Credit: alancleaver_2000