From the Volokh Conspiracy, a very serious blawg written by very serious people with only an occasional lapse into sex obsession, comes this relatively random post about the tax deductibility of mortgages, which goes into the use of home equity loans to finance the purchase of consumables, like SUVs and vacations.  It’s this somewhat tangential point that caught my attention.

How much dumber can a social policy be than to encourage, through the tax code, individuals to risk title to their house so they can finance SUVs, cruises, and the like?

How much dumber indeed.  But blaming the tax code for its abuse by individuals is like blaming cars for being driven by drunk drivers.  I can’t help but wonder whether this fuzzy thinking belies the writer’s lack of contact with the world of people who need that SUV so badly that they will put their home on the line to get it.  So, I’m here to help.

We used to call this phenomenon “keeping up with the Joneses,” this compulsion to use material possessions to prove our standing in the game of life.  People need to prove that they’ve made it, and the need to prove it to their reference group to avoid being the laughingstock of whatever neighborhood they belong to.  There’s nothing new about this.

But there is something new about the understanding of what they are doing.  I spent many years riding the commuter train with a group of guys (and a couple of gals) who did pretty well for themselves.  They had good jobs and made good money.  Life was good.  And they had the toys to prove it.  Whatever the newest, shiniest toy, they had it.  Not only did it not occur to them that they were squandering their good fortune on baubles, but they scoffed at the notion that there could ever come a day when they would regret their choices.  The notion of the “rainy day” was foreign to them.

These weren’t children, but they were too young to remember the crash of ’87, and probably hadn’t paid enough attention in history to know anything about the crash of ’29.  As for the  dot.com crash of March 10, 2000, they had nothing invested, so nothing lost.   They actually looked pretty smart, not having thrown their money away on equities instead of the latest, greatest trinket du jour.

Life owed them whatever new car was “in”, and that was the reason why they went to work every morning.  It wasn’t that they weren’t hard working and dedicated, it was that they had no concept of durables versus consumables.  These were MTV watchers, if you’ve seen it at any point in the past 10 years.  you will know that it’s not about music videos anymore.

Let’s bottom line it: They had a ton of cool stuff and nothing of value.  But they were happy that way, and it’s hard to argue with happy.  This is the lifestyle of flash.

Cut to the issue of using home equity loans to finance the flash.  Once they lived the life of crass materiality, and liked it, the idea of reining in their consumerism was inconceivable.  It was akin to cutting off their arm, as the oversized Panarei was just as important to their well-being as their fingers. 

So when the money tightened, as it invariably does, or the cost of goodies increases, as they invariably do, the money has to come from somewhere.  The path that took it out of the house isn’t always as clear as in the Volokh post, but tapping the home equity line ultimately happens nonetheless.

To date, only two out of a group of about 20 well-intended people have been brought to the edge of despair because of their misguided choices.  I would be surprised if it ends there. 

For years, I’ve been arguing with these otherwise good people about stopping their profligate ways.  When the purchase, I would contend, at least buy things of lasting value so that someday, if necessary, you can divest yourselves and these objects will be worth something.  Hah, you fool, they would tell me.  These ARE worth something.  They are hottest/coolest/newest/shiniest things there are.  You, I was told, are an ignorant old man.  Perhaps.

You see, they have a point that I refuse to see, just as they refuse to see my point.  We will not allow them to crash and burn for their juvenile spending habits.  Society may not be willing to support them in the style to which they’ve become accustomed, but we won’t let them starve either.  I’m not suggesting that we should.  Starvation is too high a price to pay for poor consumer choices, particularly when we are bombarded with stimuli that pushes us to make these poor choices.

But why can’t public policy reward those who make sound choices?  For those who eschew the lifestyle of flash so that they can pay down their primary mortgage and live debt free, they are penalized by the loss of the only remaining personal deduction and given what in its place?  A sound night’s sleep.  Whoopdidoo!  To argue that they get to enjoy the stability of a solid financial position is to say that they got what they paid for.  While that’s fine, public policy offers incentives for the profligate and zilch for the frugal.  Something is wrong here.

Instead of home mortgage deductibility to theoretically encourage home ownership (a fallacy because the “value” is eaten up on the other end by the inflated cost of housing), why not a tax credit in proportion to the percentage of home equity to encourage owning a home while living within your means?  And if they want to spend their credit on a lifestyle of flash, that’s their business.  But then they will pay the price for their choices.  And those of us who choose not to go with flash won’t feel like we may be the fools.