Robert Shiller On the Ownership Society

The idea of the "ownership society," which links the concepts of good citizenship to property and stock ownership, was used effectively by President Bush during the 2004 presidential campaign. It sounded right to voters then, as home prices were soaring. But you'll notice that neither candidate today is using the term. Did the Bush ideology of ownership help to push us toward the current crisis? The causality isn't quite so straightforward. The political agenda to push homeownership was itself informed by the bubble in home prices. (Article continued below...)

The two are interrelated, feeding back into each other. The current crisis has its roots as far back as the 1970s and 1980s, when there were also smaller bubbles in home prices. These run-ups led people to begin thinking more about real estate as an investment. At the same time, you had the Reagan-Thatcher political ideologies taking hold, encouraging the notion of broader ownership of stocks and property. And labor solidarity as a foundation of economic strength was waning, so people began to think more about individual investment in equities and other assets for their retirement, rather than pension plans. The stock-market boom of the 1990s further stoked this idea.

All of these trends interacted in a kind of feedback loop. The result was a change in our self-identity. We began to think of ourselves as investors. We started buying Money magazine. We listened to Suze Orman tell us that we owed it to ourselves to make smart investments for our families. Even in 2000, when the stock market collapsed, the ideological buy-in continued. We simply moved out of stocks, and deeper into property ownership. In fact, the equity downturn only served to reinforce the virtue of property ownership. I was doing surveys of individuals in 2003, when the housing boom was raging, and heard from recent home buyers who said things like this: "I was tired of putting money in the market every month and watching it disappear." "I dislike the investment community and brokers in general." "The market seems like a bad investment. Housing is at least tangible and useful."

This underscores an important point—the emotional pull of homeownership is extremely deep-seated. There is a centuries-old connection in our society between homeownership and citizenship. We've moved from a feudal society, in which those who didn't own land were almost like slaves, to one in which homeownership is linked with class elevation, as well virtuousness and good citizenship. In the New World, Americans have long believed that broad distribution of property makes for a better society. De Tocqueville wrote in "Democracy in America" in 1835 that America "stands alone" in the equality of distribution of property and that "nations are less disposed to make revolutions in proportion as personal property is augmented and distributed amongst them, and as the number of those possessing it increases." Property ownership (and later homeownership) became a kind of national destiny. There have been studies, like the one done by Edward Glaeser at Harvard University and Bruce Sacerdote at Dartmouth, which show that homeowners are in fact better citizens—they are more likely to vote in local elections or know the name of the head of the local school system.

What's ironic is that any classical economist would tell you that homeownership is actually not a great idea from an investment standpoint. You're supposed to diversify as much as possible—put your money into stocks, bonds, many different geographies—and then use the income to rent whatever you like, which allows for greater flexibility, as well as efficiencies. The popular argument that renting is throwing money down the drain is really fallacious, since if one rents one can invest the money one would have put in the home in other investments, and so offset the rent with the dividends from the investments. Moreover, instead of you tinkering with the plumbing and breaking something, a professional can do it. The lawn guy who has the right equipment can come and mow all the lawns faster and better than you individually would, and so on.

Of course, behavioral economics tells us that the emotional lure of homeownership is strong, and would be difficult to break completely, even if that were desirable. It's a goal that we bequeath to immigrants when they come to this country. I recently spoke to a group of people at Fannie Mae, and I said that I believe the work that they do actually does contribute to the generally good feelings that Americans have toward each other.

I think that what's really needed at this point in time is some restructuring of the model for homeownership. Let's allow people to continue becoming homeowners, but let's find better ways to manage the risk around these investments. Perhaps we need to reconsider some of the tax benefits of homeownership. We might also create new types of mortgages that reset depending on the ability of people to pay. We could also elevate the status of renting, by increasing the rights of renters relative to landlords.

I still think that broad home- and stock-ownership in the United States and abroad is a good thing. But limits need to be set. To the extent that an equity culture leads to entrepreneurship and investment and wealth creation, I'm for it. But I was not, for example, in favor of the Bush plan to privatize Social Security. Can you imagine what would have happened to people retiring today if that plan was in place? I like to think of capitalism as a game. We need to make sure we structure the rules of the game in such a way that we don't get injured while playing it.