By ED GLAESER
Few philosophers have done more good than Locke and Montesquieu, whose advocacy of divided government inspired America's Founders. Our history, and the less happy past of nations without checks and balances, suggests the wisdom of John Adams's statement: "a people cannot be long free, nor ever happy, whose government is in one Assembly." Today, the Senate Republicans bear the heavy burden of providing the primary check on one-party rule in America.
For that reason, it is particularly disappointing to see Senate Minority Leader Mitch McConnell embrace "providing government-backed, 4% fixed mortgages to any credit-worthy borrower" as his alternative to the Barack Obama/Nancy Pelosi stimulus package. Our nation needs Mr. McConnell's leadership, but this idea is bad economics and not a real alternative to the vision of America offered by Democrats. It also stands at odds with all that is good in Republicanism.
This massive lending program is justified as a means of boosting housing prices. But over the past 28 years, a 100 basis point reduction in the interest rate has been associated with a 4.6% increase in housing prices. Today's mortgage rates stand at 5.35%. If Mr. McConnell's proposal dropped rates by 135 basis points, history suggests that prices would rise by 6.2%. This bump would be barely noticeable in markets like Phoenix, Ariz., where prices have fallen by more than 40%, and it would do little to stem the wave of foreclosures.
Modest price effects are likely because in many markets prices remain above long-run equilibrium levels. Places like Las Vegas, Phoenix and Miami are fortunate to have few regulations that restrict housing supply. As a result, builders provide abundant affordable housing. That ensures that prices always come back to supply costs, no matter what the interest rate.
Moreover, since lenders have recovered their sanity and are once again requiring appropriate down payments, buyers are more constrained by the need to come up with 20% of the purchase price than they are by interest rates. Today's down-payment requirements and low interest rates suggests that mortgage markets are working well and have little need for governmental "help." Has the GOP forgotten the lesson of Fannie Mae and Freddie Mac? Such help often does more harm than good.
Against modest benefits, the proposed subsidy carries enormous costs. Allowing any credit-worthy borrower to gain access to wildly subsidized lending would lead to a flood of refinancing. Today, Americans owe $10 trillion worth of housing debt and own $19 trillion worth of housing wealth. Logic suggests that a 1.35% interest-rate subsidy on $10 trillion of debt could cost taxpayers upwards of $135 billion.
Subsidizing mortgages is an idea from the New Deal, not the Republican playbook. Fannie Mae and the Federal Housing Administration were set up by liberal Democrats to encourage borrowing. Subsidizing interest rates appealed to big-government interventionists because the expense is kept off federal balance sheets, at least for a while. The true costs of Fannie and Freddie were long shrouded, despite the efforts of some Republican senators. Likewise, the full costs of subsidizing 4% mortgages will appear only over time, as the government is put on the hook for default after default.
Good Republicans would emphasize the costs and fight against programs that vastly increase the size of government in a misguided attempt to distort markets. Good Republicans embrace fiscal prudence at both the public and private levels.
We are in the ruins of a housing market made worse by subsidized lending. The government has no business egging people on to borrow as much as possible to bet on housing prices. There is plenty of room to criticize the current stimulus plan, but Republicans need to adopt Ronald Reagan or Dwight D. Eisenhower, not Harold Ickes, as their intellectual role model.
One attractive, Reagan-like alternative to the stimulus package is to focus on a temporary reduction in the payroll tax, particularly for less wealthy Americans who are most likely to spend the money quickly. Such a tax cut would give people a strong incentive to work by letting them keep more of the money they earn. It would be both libertarian and egalitarian.
A second alternative is to be like Ike and embrace public investment in human and physical capital. Republicans could distinguish themselves from their opponents by insisting that investment put national interest ahead of parochial politics. Republicans could insist on cost-benefit analysis and emphasize investments that will make it more likely that the U.S. will remain an economic leader in the world.
Our country needs a robust two-party system, and the Senate Republicans are our best chance for healthy political debate. However, when they abandon economic sense and party tradition for a mortgage plan that will be wildly expensive and ineffective, they do neither their party nor their country any good.
Mr. Glaeser is an economics professor at Harvard University and the director of the Taubman Center for State and Local Government.
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