A response to "A Taxing Argument"

The following is a response to this article by Laura Tyson.

Laura Tyson accuses us of flagrantly misrepresenting Senator Hillary Clinton’s positions on mortgages in two ways. First, she dismisses our claim that Senator Clinton often discusses her policy without any mention of the fact that it applies to only to subprime mortgages. Second, Tyson faults us for not mentioning the fact that Senator Clinton's plan is “voluntary.” Tyson provides a host of press releases in which she says these points are made clear. It is probably significant that, except for the original speech in New York where the proposal was presented, Tyson does not provide links to actual speeches. We think there may be misrepresentation going on, but Senator Clinton herself is doing it. Here is the passage from the (rather long and detailed) speech she gave in SouthCarolina on January 24 that we quoted:

I want to start with a 90-day moratorium on foreclosures. If the bank is about to foreclose on your home, you should have some breathing room to restructure your mortgage. I'm calling for freezing the monthly rate on adjustable rate mortgages for at least five years or until the mortgages have been converted into loans that families can afford. If you have an adjustable mortgage that’s about to skyrocket, you'll have the chance to pay it off with affordable
payments.

Try as we might, we cannot find the words “sub-prime” or “voluntary” in that passage. Similarly, when Senator Clinton raised this issue in the Los Angeles debate* she said: “I want a moratorium on foreclosures for 90 days so we can try to work out keeping people in their homes instead of having them lose their homes, and I want to freeze interest rates for five years.” 

Clinton seems to be trying to have her cake and eat it too. For wonks like Professor Tyson (and us), who know that a mandatory freeze on all adjustable rate mortgages would create an enormous financial crisis, the policy is limited to subprime

loans and is voluntary. But these provisos are made in press releases. In debates and speeches, Senator Clinton promises to solve “your” mortgage problems.

We are happy to hear that Senator Clinton intends to limit the policy to subprime loans, and we hope to hear her speak more carefully about that in the future. So, let’s turn to the issue of whether the policy is voluntary. What does it mean to have a voluntary policy? Banks and other lenders already have significant incentives to renegotiate loans with borrowers who have some hope of paying off their loans. Foreclosures are expensive, and no one is happy about having to put houses on the market right now. But if a lender does not want to extend new terms to a specific borrower, do they face any penalties? If not, what exactly is Senator Clinton promising homeowners?

There is an interesting parallel between Senator Clinton’s proposal here and her plan for “universal” health care. For health care she calls for “mandates,” and makes a big deal of the fact that these mandates are what make her policy universal, unlike Senator Barack Obama’s plan. However, Senator Clinton rarely speaks about what the penalties are for those who do not purchase the required health insurance. Perhaps those mandates are voluntary as well?

In recent days, Senator Clinton has been saying that voters need to choose between promises and solutions. We agree.

 
Richard Thaler is a professor of economics at the Graduate School of Business, University of Chicago, and author (with Cass Sunstein) of the forthcoming book,
Nudge. Susan Woodward is an economist at Sand Hill Econometrics, and formerly served as chief economist of the U.S. Securities and Exchange Commission and U.S. Department of Housing and Urban Development.

*Correction (1/18/08): This article originally erroneously said that this debate occured in South Carolina.

By Richard Thaler and Susan Woodward