16 April 2013

Wrong, Perhaps

Tyler Cowen, in addressing the hypothetical problem of what would happen if everyone died at age forty, makes a blunder:

Credit would be harder to come by and the rate of home ownership would fall.  The rate of voting turnout will go down, as would the degree of wealth inequality and the amount of innovation.  Federal discretionary spending, as a percentage of the budget, would rise. [Emphasis added.]

Credit would not necessarily be harder to come by.  While banks would stop offering, say, 30-year mortgages, they wouldn’t stop offering credit with shorter repayment terms.  In keeping with this, people would be less inclined to take on long-term debt since they could only discharge it through their estate post-mortem.  My guess is that longer-term debt would dry up while shorter-term debt would increase.

As for the decreased home ownership rate, I think it’s more probable that houses would still sell at the same rate (people do need a place to live), but at lower prices.  Markets tend to seek equilibrium, so it should not be surprising if the home ownership rate remains the same.