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The Silliest Form of Stimulus: Homebuyer's Tax Credit by a Mile

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Dean Baker
TPM Café, October 17, 2009

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To liven up the fall debates, Congress decided to have a contest for the silliest way to stimulate the economy. It doesn't look to be much of a contest. The homebuyers tax credit looks sure to be a big winner.

In the most extreme version of this boondoggle, the government will give a $15,000 handout to anyone who buys a home. That one really runs right to the top of the silliness meter. It's not clear why we want people to buy homes. If the intent is to boost the housing market, this one falls short, since the vast majority of homebuyers will also be sellers, so their purchase does not on net boost demand.

The tax credit does create wonderful opportunities for gaming. I can "sell" my house to my brother and vice-versa, and we both get to pocket $15,000 (enough to buy health insurance for 5 kids for a year) at the taxpayers' expense.

But Congress may not be persuaded to get this silly even on Halloween, so they may settle for extending the first-time buyers tax credit. The current credit expires at the end of November.

As a beneficiary of this handout, I appreciate the money, but I find it hard to justify as an economist. Why should the government hand me $8,000 because I bought a home? (What would Joe the Plumber say?) As a form of stimulus, the tax credit doesn't measure up very well.

The National Association of Realtors estimates that only 340,000 of the 2 million beneficiaries of the credit purchased homes they would not have bought otherwise. This means that taxpayers spent almost $50,000 for every additional home bought as a result of this benefit. With the median home costing $170,000, if we assume realtor fees, moving costs, and other expenses are equal to 20 percent of the purchase price, this would come to $34,000 of economic activity generated for every $50,000 we gave away through the credit.

But even this overstates the benefit of the credit. Most of the 340,000 people who bought a home because of the credit didn't just decide to buy a home because the government was giving them $8,000. The vast majority of the people walking away with $8,000 checks would have bought a home in 2010 or 2011; they just moved forward their purchase because of the credit.

This could still be good policy if we thought the economy was going to be back near full employment in 2010 or 2011. But there is no way the economy will have recovered in the next 2 years. The Congressional Budget Office projects that unemployment will average 10.2 percent in 2010 and 9.1 percent in 2011. We've effectively shelled out $15 billion dollars (the estimated cost of this year's credit) to make unemployment somewhat worse in these years, so that it will be slightly better in 2009. That doesn't sound too smart.

While there is not much of a story that the credit has directly boosted the economy, its backers claim that a side benefit is that the credit has boosted house prices. There is some logic here: the credit is a bit less than 5 percent of the median house price, so it is reasonable to believe that it has helped to raise house prices.

The only problem in that story is that it is not clear why we would want to boost house prices. Suppose we could snap our fingers and make everyone's house price double or even triple. That would be great news for the people who owned a home. Many could sell their homes and start renting and just live off their equity. Of course the one-third of the population that does not own homes would be less than thrilled about the fact that homes prices had doubled or tripled.

Imagine a policy that handed $200,000 in cash to everyone over the age of 40. That is more or less equivalent to a world in which home prices double.

The reality of course is that home prices are falling back to their trend levels after being inflated by a huge bubble for most of the decade. It is not clear why we would want the government to slow this process. That means that new homebuyers can expect to lose money when they sell their home at a lower price in the years after the credit has expired. That's a smart thing to do to our young people.

There would be logic to directing a tax credit to markets where the bubble has deflated so far that prices are overshooting on the downside. This would be places like Las Vegas and Phoenix where prices are already below their pre-bubble level. But logic and the homebuyers' tax credit never get in the same room.

That is why the homebuyers tax credit wins the award for silliest form of stimulus in 2009. There was a proposal for giving an $8,000 tax credit to the next 2 million people who purchase a pizza, but that one did not even come close for silliness. So let's give a big hand to the folks who developed the homebuyers' tax credit.

Then we should ask what happened to all those conservatives who are supposed to oppose handouts like this and the liberals who are supposed to care about fairness? Not in this Congress.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.