TEXT OF INTERVIEW

Kai Ryssdal: So you grow up, get a good job, marry, you have a couple of kids, and buy a house. It's the American dream, right? But a lot people got in trouble chasing that last part and helped take the economy down with them. In today's installment of Taking Stock, our series of occasional conversations with people who can give us the longer view of our economic situation, Columbia University economist Edmund Phelps and American attitudes toward home ownership. Phelps says that dream of owning a house has been fueled, in large part, by the government.

EDMUND PHELPS: Democrats and Republicans have been very keen to make home ownership almost a national purpose. President Clinton got through Congress a 1997 act to force mortgage lenders to relax the conditions on loans for low-income people. And then there were tax breaks on capital gains and houses in 1998. But I have to say that it isn't just public policy. The banks, which used to have something to do with business lending, sorta of lost their expertise in that area, and they began to focus all their lending efforts on residential mortgages and other soft targets.

Ryssdal: Let me ask you this, though. Because if the government gets rid of the home-mortgage interest deduction, I for one will be extremely annoyed, and so will the 70 percent of Americans who own their own homes. I mean, it would be a sea change in the way we look at homes in this country.

PHELPS: Yes, it would be. But to me it makes a lot of sense. Because, look, this is a very funny kind of asset in which the owner of the asset gets the services of the asset -- the shelter and the comforts and so forth that the asset provides -- and at the same time, as if the owner was paying income tax on those services, the owner gets to deduct the mortgage costs.

Ryssdal: Is that a bad thing?

PHELPS: Yeah, to me that is quite crazy. There are only two logical ways to go: one is to deny mortgage-interest deductibility because no tax is being paid on the benefits, or start taxing the benefits.

Ryssdal: You're a renter, aren't you?

PHELPS: I am a renter, you caught me. But that's not why I have these positions. It just happens that I'm a renter.

Ryssdal: Well, when you live in New York City it can be tough to own, right?

PHELPS: Lots of us here in New York City are renters, yes. We're a very strange breed.

Ryssdal: Well, even though you've made peace with the idea of renting, for a lot of people it is a dirty word out there. I mean you have to make the rent every single month. You're just giving this check over to the land lord, and you're not getting anything out of it. Do me a favor and weigh the pros and cons of renting or not.

PHELPS: If you rent, that's it. You don't have to pay any interest to anybody. You don't have to pay any maintenance costs to anybody. You don't have to worry about whether the boiler is going to break down. While if you own your own home, you have a hundred aggravations. Maybe the roof will leak while you're overseas. In strict money terms, there is no reason to think there is a systematic, long-run, sustainable, durable difference between the two.

Ryssdal: Is this home-ownership obsession that we've had, has it affected the rest of our economic lives? Does it change the way we save? Does it change the way we spend in other regards?

PHELPS: Of course, while house prices were going up, that became a substitute for saving. People would refinance their homes, take the profit and spend that, hoping that prices would go up again. And then they would do the same thing and spend that. But I do think this home-ownership craze does tie in with a newfound fashion for spending rather than saving. I'm old enough to remember in the 1930s and the 1940s when thrift, frugality was considered an important virtue. In those days we all knew Benjamin Franklin's aphorism, "A penny saved is a penny earned." Today, the official doctrine seems to be that a penny spent is a penny earned.

Ryssdal: Do you think professor that there's a way to change the housing paradigm in this country? That it is the American dream, and if you have the material means, you ought to buy a house.

PHELPS: I'm hoping that the administration and other thought leaders will succeed eventually in bringing the country back to the older idea that the American dream is having a career, getting a job, and getting involved in it, and doing well. That was the core of the good life. That's what we have to get back to, and get away from this mystique that the most important thing in your life that could ever happen to you is to be a home owner.

Ryssdal: Edmund Phelps at Columbia University. Thanks so much for your time.

PHELPS: You're welcome. Good to be here.

Ryssdal: Edmund Phelps won the Nobel Prize in economics in 2006. He's the director of Columbia University's Center on Capitalism and Society.