The Death of a Stupid Stimulus

If you want to take advantage of the first-time homebuyers tax credit, run. Today is the last day the government will pay you to buy a house.

Since 2008, some $12.6 billion in credits have been shelled out to homebuyers. This program was supposed to end last Fall, but was extended until today based on the notion that it was providing a key pillar of support to the humbled housing market.

Which, frankly, is mildly true at best. Don't shed a tear for the loss of this program, Fools. The finance blog Calculated Risk put it best when writing, "This [credit] is obviously bad economics, but it must be good politics."

Since day one, there's been fairly widespread agreement from financial and economic experts that the housing credit would do little good. I'm not one to blanketly swear off all stimulus on the grounds that Uncle Sam can only break things. There have been well-thought-out forms of stimulus over the past two years. The housing credit just wasn't one of them. Here are five reasons why.

1. It was grossly expensive
Around 1.8 million buyers received the housing credit. Yet you'd be wrong to assume that this means 1.8 million extra sales were stimulated. Many of these buyers would have bought homes anyways, with or without the credit.

The housing website Zillow.com ran a survey last fall and found that only 18% of buyers who might receive the credit called it their "primary influence" for buying a home. Nearly a third said it would have no influence at all.

Running these numbers against estimated home sales, Zillow calculated that the cost per sale that would not have occurred without the credit could be $44,444. Using updated home sales information, Calculated Risk concluded that the cost to taxpayers per additional sale might exceed $100,000. At any rate, we paid a lot of people a lot of money to do something they'd have been happy to do for free.

2. It was terribly inequitable
The credit was universal throughout the nation: Qualified buyers could receive up to $8,000. Problem is, $8,000 has different meanings in different markets. If you're buying an $80,000 rambler in Wahoo Nebraska, $8,000 is a big deal. If you're shopping for even a shoebox in Manhattan, $8,000 is practically meaningless. Plus, many regions that were wrecked by the housing collapse, and hence in need the most stimulus, were places like Los Angeles, San Francisco, and Miami that have high nominal prices to begin with. Where the stimulus was needed the most, it was largely irrelevant.

Also, when you provide an $8,000 credit, buyers will be willing to pay $8,000 more than they would without it. So come tomorrow, there will be legions of buyers willing to pay $8,000 less than they would today. That hurts sellers, not buyers.

3. For many borrowers, it was dangerous
Plenty of buyers were able to use the credit as a down payment. This is especially true for those who borrowed from the Federal Housing Administration (FHA), which is happy to extend credit with just a sliver of a down payment. Last May, FHA chief Shaun Donovan said, "We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a down payment."

Again: good politics, bad economics. What this does is creates homeowners who have none of their own skin in the game, have very little equity, and are buying homes at artificially inflated prices. If this sounds familiar, it's exactly what we had from 2003-2007. And that didn't end well.

4. In some ways, it perpetuated the problem
If the goal was to prop up home prices, then the housing credit almost certainly worked. But if the goal was to create a healthier housing market, it may have made the problem worse.

Home prices nationwide have stabilized in recent months, and are rising in many markets. This might seem like welcomed news, but it isn't if stimulus measures like the housing credit stabilized prices at an artificially high level.

That's because falling prices aren't the problem; they're the symptom of a bigger problem, which is excess housing inventory. Yet if we look at housing inventory numbers, it's hard to say that we've really cleaned out the boom-years excess:

Source: U.S. Census Bureau





























Source: U.S. Census Bureau

As this shows, inventory levels have come back to earth since peaking last year. But current levels are historically average -- not below average, where you'd see excess supply being removed from the market. I'm not claiming to know exactly where the market's true equilibrium is, but that supply hasn't even dropped below its historic average suggests that prices should have fallen more than they have.

5. It didn't boost the economy in an efficient way
Stimulus can be awesome if what you're investing in has a specific long-term utility. Building highways is a good example. The stimulus puts people to work, and after the economy recovers, you've got a road to show for it that will enhance productivity.

Housing credits are a different animal, particularly if the homes purchased with the credits are preexisting units. Existing homes are simply shuffled around between owners. All that comes from this are transaction costs and a few extra bucks in the old owners' pockets -- both of which yield a low "multiplier" in economic parlance. It should come as little surprise, then, that some of the biggest supporters of this program were real estate agents. Megahomebuilders like Beazer Homes (NYSE: BZH  ) and DR Horton (NYSE: DHI  ) also got a boost from buyers who used the credit to contract new homes. But it's right to question whether stimulating the construction of new homes is the right thing to do during a time when the problem is that there are too may homes out there.

Better luck next time
There's little doubt that housing is healthier today than it was even a year ago. We've made giant strides toward normalcy. In the end though, I think history will look back on the housing credit program as an impediment, not driver, of this recovery.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


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  • Report this Comment On April 30, 2010, at 2:43 PM, Sadalmelik wrote:

    I don't happen to agree with all the stimulus money that has been squirted all over the economy, but I'm not foolish (little F) enough to pass up the opportunity to take advantage of the situation. If you have lived conservatively through the boom times and saved some cash, this past 18 months has been the time to buy. I changed to geothermal heat, insulated, and took advantage of any tax-saving measures I could. It's too darn bad I didn't need a new car, but I am seriously considering a larger freezer while there is an appliance rebate. My daughter will be able to get $8000 stimulus money from signing a contract today on a home that will appraise higher than the short sale price. Sweet. Foolish (capital F) readers with a lick of sense will live their life opposite the trends; live conservatively when your friends are living it up, and buy when prices drop and everybody else is shutting their wallets. Be prepared to take on opportunities when they arise. Buy stocks when others run to their caves, and sell when they are all shouting about the next great investment trend. It is easier said than done, but you can't take advantage of these kinds of time-limited opportunities unless you spend time preparing in advance.

  • Report this Comment On April 30, 2010, at 2:56 PM, 123gates wrote:

    I will respectfully disagree with this article and will be joining the side of Sadalmelik. Many people got themselves into trouble during the "boom" times and don't have the money to take advantage of the opportunities that are so readily available today. I bought my first house in May 2008 and took advantage of that 8,000 dollar tax credit. I took that 8,000 and paid off all my debt and for the next year saved everything I could. In March 2010 I bought my second house with 20% down. I rented it two weeks later and have just received my second months rent from my tenant. I have already began looking for my third house in which I will again be putting 20% down. Just because not all Americans are smart enough to take advantage of a good thing or know what to do with 8,000 dollars when it is given to them doesn't make the single stimulus bill that will change the rest of my life a bad idea.

  • Report this Comment On April 30, 2010, at 3:03 PM, TMFHousel wrote:

    123gates,

    But the house you bought was $8,000 more expensive than it would have been without the credit. Credits drive prices up. It was the guy you bought the house from, not you, who really benefited.

  • Report this Comment On April 30, 2010, at 3:08 PM, militauro wrote:

    Good article, but I would argue some of the points made by the author. I am one of the homebuyers that took advantage of this credit and there are a few flaws on the article.

    For one, it was nearly impossible to use the credit toward the down payment. Several lenders weren't even accepting this and not once did I come across one that did. On top of not accepting this, the tax credit toward a down payment became available late in the game anyway. I would also argue that even in places like Los Angeles (which is where I live), $8,000 IS A LOT of cash to receive on a home. I'm not sure how much you guys make to say that it's meaningless, but it was a nice chunk of change for me.

    My last point is that it would stimulate in other ways. I did have intentions to buy a place anyway, but the tax credit accelerated the process. What I ended up doing with my tax credit was making much needed changes to the home I purchased. This meant changing the floor (small business stimulus), changing my floor (home depot stimulus), buying several items for the bathroom kitchen (toss in companies from bed bath & beyond to jcpenney), and even purchased a couple TV's (best buy stimulus). Again, it might not stimulate the way you would think but it was definitely stimulus.

  • Report this Comment On April 30, 2010, at 3:15 PM, TMFHousel wrote:

    TyrantBone,

    The FHA, which has a 22% market share of the mortgage market, allowed borrowers to use the credit as a down payment. It certainly wasn't all lenders, but 22% isn't insignificant.

    Again, you may have used the cash for other purposes, but the house you bought was more expensive than it would have been without the credit. So even though you received a check, the mortgage on your property is higher than it would otherwise be. Really, then, you mortgaged the home improvements you mention. That isn't neccesarily a bad thing, but this program was hardly the free money people make it out to be.

  • Report this Comment On April 30, 2010, at 3:33 PM, militauro wrote:

    Hi TMFHousel,

    I did my loan with Fannie Mae and asked about the program. Either the person I spoke to there was not trained or they just didn't have it available. When I asked, she said it would come with my tax return and I could not use it toward the down payment.

    Home prices are hard to gauge. I can't help but feel your comment about the home price being higher anyway is too general. If home prices stay the same once the stimulus is gone, won't that mean it really had no impact on home prices? Weren't home prices still falling while the stimulus was in place? I'm not quite sure I understand how the $8,000 was baked into the price when it continued to decline. I guess we can see what happens the next few months without the stimulus.

    Myself and several others successfully underbid the property we ended up purchasing. I see where your coming from I just don't see these two tied together.

  • Report this Comment On April 30, 2010, at 4:23 PM, 123gates wrote:

    TMFHousel,

    You may be right in assuming that prices are a bit higher today then they would have been if the tax credit was not around but I purchased my rental property for 25,000 when it has been valued at 80,000 and the current property I am looking at now was once valued at 130,000 and is now going for 24,900. So to say that I could have purchased the home for 17,000 with out the credit I feel is a bit aggressive. I guess we will never really know though. Also without the credit I may still be in debt today and not have been able to purchase my rental property because even though I was making large payments on my debt interest rates plus fees would have drawn out my repayment process.

  • Report this Comment On April 30, 2010, at 4:58 PM, TMFHousel wrote:

    TyrantBone,

    Prices can still be falling and higher than they would have been without the credit. Let's say, hypothetically, that with no credit a house falls from $200,000 to $150,000, but with the credit it falls from $200,000 to $158,000. The price drops, but it's still higher than it otherwise would be. As for home prices not falling after today -- well, that's to be seen. Also, Fannie Mae is different than the FHA.

    123gates,

    I must say: Your story of buying a property for $25,000 and getting an $8,000 credit is interesting. The credit was for 10% of the home's value or $8,000, *which ever is less.* So if you bought the house for $25,000, the most you should have received was $2,500.

    Per the IRS: "The credit is 10 percent of the purchase price of the home, with a maximum available credit of $7,500 ($8,000 if you purchased your home in 2009 or early 2010)."

  • Report this Comment On April 30, 2010, at 4:58 PM, TMFHousel wrote:

  • Report this Comment On April 30, 2010, at 5:48 PM, 123gates wrote:

    I did not get the tax credit for my rental property as that was the second house I purchased and the credit was not available to me. I purchased my home for 80,000 and received the tax credit on that which I used to pay off my debt thus allowing me to save and purchase my first rental property and my soon to be second rental property. I do agree that my primary residents may have been cheaper (75,000) had the tax credit not been in place but it would have been a trade off I would not be willing to make as it helped me take the steps necessary to achieve financial freedom.

  • Report this Comment On April 30, 2010, at 5:52 PM, 123gates wrote:

    To clear things up I have purchased two houses one is my primary residents and that was purchased for 80,000. I do agree that may have been a bit cheaper (75,000) had the tax credit not been in place or had I waited for the bottom of the recession however it would have been a trade off I would not have been willing to make as the tax credit helped me pay off my debt and thus take the first steps toward financial freedom.

  • Report this Comment On April 30, 2010, at 6:05 PM, TMFHousel wrote:

    Ah, ok. That makes sense. So then to go back to your example:

    "the current property I am looking at now was once valued at 130,000 and is now going for 24,900. So to say that I could have purchased the home for 17,000 with out the credit I feel is a bit aggressive."

    That does seem aggressive, but it'd also be impossible under the housing credit rules. The $25k house might be $22k without the credit, which sounds more realistic.

  • Report this Comment On May 01, 2010, at 1:22 AM, louie68 wrote:

    You forgot the biggest item FRAUD! The first time around it was estimated that 70,000 people received the tax credit illegally. Times $8,000, that is roughly half a billion dollars. How about turning the 16,000 IRS agent Obama wants to hire to track down those desperate criminals who don't buy health insurance, and turn them loose on these thieves?

  • Report this Comment On May 01, 2010, at 11:09 AM, TMFTypeoh wrote:

    Thank goodness that stupid credit is gone!

    2010 will be a very interesting year for the housing market. I personally think that May sales will be down (yawn), people will freak out, and the market will fall (espeically banks & home builders).

    This coming fall/winter will be the real test. If the jobs market is not back to "normal", (or at least showing serious signs of gains), then relutant sellers may finally throw in the towell and drop their home prices to reflect the actual economic conditions.

    Housing needs to bottom. No recoever can truly take place until this happens. 10% nationwide housing prices fall (minimum) to clear the inventory.

    Not lets just hope the government doesn't do anything stupid like re-instate the tax credit.

  • Report this Comment On May 01, 2010, at 1:33 PM, FutureMonkey wrote:

    Wait, I thought tax breaks that go directly to tax payers and consumers were good for the economy during recession, or did I miss something from econ 101?

    Targeted tax credits are designed to (1) influence behavior for both individuals and businesses and (2) inject cash into the consumer or business market to be spent and recirculated.

    Nobody expected this specific program to save the real estate market or double the number of FHB that would otherwise be renters, but certainly did influence decision making greatly. The Zillow survey showed this clearly. 18% of FBH citing it as a primary reason for buying! Are you kidding me? That is an incredible influence on the overall housing market in both relative and absolute numbers. One in five wouldn't have bought a house if not for the credit! I'd say 20% fewer home sales would have been devestating for an already devestated segment. Only 35% of FBH said the tax-credit had no influence on their decision; doesn't that mean that 2 in 3 people were positively influenced to purchase a home instead of renting?

    How many people site mortgage interest deduction as the "primary reason" for home ownership? If it is more than 18% I'd be shocked, yet I don't see you calling for repeal of mortgage interest deduction. I'm sure that little line in the tax code "shelled out" a lot more $12.6B in 2010

    Point 5 is just silly. Of course the stimulus money returned efficient benefit. Direct to consumer cash is spent and recirculated rapidly, fueling the engine of a consumer based economy. Does Beazer Homes benefit dollar for dollar, nope but local, state tax revenue and other businesses certainly did.

    In California existing home sales are critical for state revenue as the Prop 13 property tax level is reset at the new sales price. So an existing home that has been had a level tax for 20 years at a 1990 sale record level of $125,000 that is bought in 2010 at $625,000 would yield a 500% increase in yearly property tax for the community for the same plot of land. Clearly more a substantial benefit great than " transaction costs and a few extra bucks in the old owners' pockets." I'm sure the employees in the credit market, real estate agents, and title agencies would be more than happy to explain how their livelihood depends on friction created by sale of exhisting homes as well as new homes.

    1.8 Million households benefited directly from the credit, and that benefit is multiplied by every person that did business with those households or made money from the friction on the sale. Forgive me if I don't cry if the CEO of DH Horton wasn't one of them.

  • Report this Comment On May 01, 2010, at 1:49 PM, ChrisBern wrote:

    Good article. I've noticed that most of the disagreeing comments here are from people who took advantage of the tax credit. I don't blame anyone for taking the gov't up on the $8k offer, but that doesn't mean it was a good deal for the general taxpayer or for the overall economy, which was the author's point. Pork spending is quite good for the recipient of the pork, after all.

    Again, well-written article, and I'm glad to see this particular stimulus end.

  • Report this Comment On May 01, 2010, at 1:55 PM, ChrisBern wrote:

    @FutureMonkey-- you said, "I thought tax breaks that go directly to tax payers and consumers were good for the economy during recession, or did I miss something from econ 101?"

    Hopefully in your Econ 101 they also discussed "redistribution of wealth". That's what this stimulus was, and it's what most government programs are if you break them down.

    So who were the winners and losers of this particular redistribution of wealth? The winners were primarily the 1.8M who took the tax credit, the realtors who saw more home sales occur (and thus more commissions in their pockets), and the sellers of those 1.8M homes. So maybe 4-5 million people "won".

    The losers were primarily the other 100M or so American taxpayers who don't fall into the above categories, because they get to split the $12B expense of the bill.

    It was a redistribution of wealth from people who already own homes or who don't want to own homes, to about 1.5% of the population.

  • Report this Comment On May 01, 2010, at 6:30 PM, TMFHousel wrote:

    FutureMonkey,

    1) "Wait, I thought tax breaks that go directly to tax payers and consumers were good for the economy during recession, or did I miss something from econ 101?"

    It's a very politically popular but economically inefficient way to stimulate demand because consumers know it's only a one-time shot, and hence it doesn't stimulate spending on a large scale. They're more prone to save it. Most studies show that only 20%-50% of one-time rebates are spent within the first year. As for the econ 101 lesson that pertains to this, it's called the "permanent income theory."

    2) "How many people site mortgage interest deduction as the "primary reason" for home ownership? If it is more than 18% I'd be shocked, yet I don't see you calling for repeal of mortgage interest deduction."

    Speak for yourself. I've called for its repeal several times.

    http://www.fool.com/investing/general/2010/01/05/3-housing-t...

    3) "Point 5 is just silly. Of course the stimulus money returned efficient benefit. Direct to consumer cash is spent and recirculated rapidly, fueling the engine of a consumer based economy.

    See point #1.

    -Morgan

  • Report this Comment On May 02, 2010, at 2:17 PM, smokedsalmoned wrote:

    Give A Man Big Gov't & Regret It

    .

    If you give a man a fish, he eats for a day. Economically, isn't that exactly what our welfare State as well as our State sponsored bail out schemes do. People from the Great Depression suffered but the individuals from that generation learned life lessons that haunt and benefit them and us to this day. When you hit a bump in the road and suffer the consequences you learn lessons that last a lifetime.

    .

    Beyond economics, the current hand out mentality also works its ill in our schools. If we push students through school, removing discipline, as well as rigorous academia, then we have taught our children nothing and cruelly sent them out in the world to face people who truly know how to "fish".

    .

    If you give a man big government, you are giving them a dependency that we will all regret.

  • Report this Comment On May 02, 2010, at 2:22 PM, smokedsalmoned wrote:

    Illegal Immigration = Breaking & Entering

    If an illegal alien is to be free from prosecution for illegally crossing My nation’s border, is he to be free from all other prosecution in the name of protecting illegal immigration? Can they enter my house to stay or take what they want? Isn’t that the same thing? Where will the madness stop?

    Put another way, Americas environmental resources are not unlimited, do we really want to live in a country with 4 or 6 or 800,000,000 people?

    Why is the Obama Administration and Democrats in Congress hell bent on not sending back illegal's or fighting harder to keep them out in the first place?

  • Report this Comment On May 02, 2010, at 2:24 PM, smokedsalmoned wrote:

    Failed Stimulus Promise

    Just 10 days before taking office, Obama's top economic advisers released a report predicting unemployment would remain at 8 percent of below through this year if an economic stimulus plan won congressional approval and Obama sold that promise to us all. The stimulus has apparently failed, given that unemployment has reached 10% so now we have two interesting messages coming from The White House since the failure became apparent in late 09.

    First, Joe Biden candidly and honestly admitted "We misread how bad the economy was". Joe was admitting they were wrong and the Stimulus had not worked.

    Second, President Obama quickly went into spin mode and claimed that the Stimulus had been intended as a 2 year plan from the beginning. President Obama, knowing that recessions last an average of 18 months, has moved the goal line in hopes of guaranteeing success.

    The key promise of the Stimulus has not been met. The stimulus has failed.

    Americans are now beginning to see that The Administrations prognostications on Cap & Trade and Healthcare should also be questioned.

  • Report this Comment On May 02, 2010, at 2:26 PM, smokedsalmoned wrote:

    Stimulus Jobs Don't Add Up

    The Government tells us that the Stimulus bill saved 650,000 jobs. When unemployment has risen since the stimulus was implemented one wonders how you count a job as saved. Even economists can't seem to agree on that. Apparently the press has decided to simply look at the federally reported numbers and investigate them a bit and no surprise, they got some shocking surprises.

    The Chicago Breaking News Center, powered by The Chicago Tribune, and UPI.com reporting for USA Today reported the following on 11/3/09:

    - North Chicago school district got $4,700,000 in funds and the report says it saved 473 teachers jobs, but the district only employs 290 teachers.

    - Wilmette Public School District 39 showe it used its funds to save 166 jobs but when asked Superintendant Ray Lechners said the # should be zero.

    - Dolton-Riverdale School District 148, said funds saved 382 full time teaching jobs, but that's 142 more than the district actually has.

    - Kankakee School District 111, showed 665 full-time jobs saved but top school officials when questioned said they only employ a total of 600 full and part time workers.

    - The manager of a public housing project in Blooming Grove, Texas reported a gain of 450 jobs based on $26,174 in stimulus funds for maintance projects. That highly efficient! However, an inquiry found that he had hired six workers, including fiver roofers and one inspector.

    - The Plymouth, Conn., Police Department reported a gain of 108 jobs with a grant of just $15,355. Thats $142.17 per job!

    These discrepenies reported by the above entities are based on just a few examples being researched. The Citizens of this country should demand an investigation of the stimulus funds expenditures. If those calculating the numbers committed the fraud then they should be held to account for it. If those who reported the numbers have ripped off the money they should be punished.

  • Report this Comment On May 03, 2010, at 12:12 AM, ETFsRule wrote:

    "Running these numbers against estimated home sales, Zillow calculated that the cost per sale that would not have occurred without the credit could be $44,444."

    Well, it depends on how you conceptualize the idea of "cost". Let's say the government borrows a billion dollars from other countries. And at the same time, the gov't hands out a billion dollars, to American citizens, as parts of various stimulus programs. Did this "cost" America a billion dollars? Or, should the true cost be considered as merely the interest payments that we will ultimately pay on this billion dollars of debt, minus any economic advantages that were gained through these programs (in terms of hastening our economic recovery, etc)?

    "Stimulus can be awesome if what you're investing in has a specific long-term utility. Building highways is a good example. The stimulus puts people to work, and after the economy recovers, you've got a road to show for it that will enhance productivity.

    Housing credits are a different animal, particularly if the homes purchased with the credits are preexisting units. Existing homes are simply shuffled around between owners. All that comes from this are transaction costs and a few extra bucks in the old owners' pockets..."

    Ok, you want to talk about "utility".

    Well, what about home owners who cannot afford to make their payments? This is really what the housing crisis is all about. If we just say, "screw these people", then what will happen is, they will lose their homes, and as a result those homes will just sit there, vacant and unused. That represents a lot of wasted utility. We have already built these homes, and we are supposed to let them sit there, empty?

    That's absurd, especially from someone claiming to understand the concept of "utility". You even showed in your posted graph, the fact that there has been a tremendous decline in home inventories since the housing credit went into effect. So... explain to me again how your position makes any sense???

  • Report this Comment On May 03, 2010, at 1:22 AM, FutureMonkey wrote:

    Morgan wrote "It's a very politically popular but economically inefficient way to stimulate demand because consumers know it's only a one-time shot, and hence it doesn't stimulate spending on a large scale. They're more prone to save it. Most studies show that only 20%-50% of one-time rebates are spent within the first year. As for the econ 101 lesson that pertains to this, it's called the "permanent income theory.":

    Exactly the point, Friedman's permanent economic theory assumes consumption behavior is based on real wealth and longterm expectations, smoothing out consumption from high and low short term fluctuations in income (didn't say eliminated change in consumption - said smoothed out). Reading further down, Freidman also concluded that lower than average income individuals tend to have higher than average spending tendencies and higher than average income individuals tend to have lower than average spending tendencies. Since first time home buyers tend to have lower than average income, a tax credit targeting first time home buyers would have a proportionally larger impact on consumption than a one time tax credit targeting higher income individuals.

    Temporary tax credits are kind of like a retail business holding a sale to clear inventory and get customers through the doors. The purpose of a temporary tax credit is to influence short term behavior NOT long term behavior. Get consumers to buy NOW not later, even if it is something they would do later. That is exactly the point of short term stimulus.

    If we were to accept your hypothesis, one would have to assume that all those retailers are fools for holding a "this weekend only" sale or "limited time" special offers. Clearly these one-shot events must provide no benefit to the business owner because they don't influence long term behavior. Except business keep doing it....gee I wonder why? Because knowing that there is an expiration date on the benefit does influence consumer behavior.

    Furthermore, if I was to accept your premise that targeted temporary tax credits provide little benefit to the economy during a recession, then I would have to assume that a one-shot tax increase on first time home buyers wouldn't hurt the real estate market or the broader economy? Followed to it's logical conclusion we should raise taxes on consumers during a recession or at least it wouldn't make a difference if we did. I mean according to the article temporary tax credits don't help, therefore temporary tax increases shouldn't hurt. After all, if transitory fluctuations in individual cash flow has minimal significant impact of spending on a large scale, why not raise taxes temporarily?

    But that isn't what your saying is it? Or maybe it is, but I'm not sure many would follow you if you advocated raising taxes on the American home buyer in 2008-2010 as sound macroeconomic theory.

    While this may not apply to TMFHounsel, since I haven't read his opinion about tax increases, but I am very tired of the WSJ-Murdoch-Coulter-Limbaugh Tea Party talking points that complain ad nauseum about tax breaks (ahem, I mean wealth redistribution - giggle-snort) not having an real impact but at the same time stoking fear the devastating effects of imaginary tax increases by the tax bogeyman.

  • Report this Comment On May 03, 2010, at 10:16 AM, TMFHousel wrote:

    FutureMonkey,

    I never doubted that short-term tax cuts are designed to spur short-term spending, or that they do so to a certain amount. But it's done *in an efficient manner*. As I wrote, most studies show only 20%-50% of rebates are spent within the first year. Other types of more efficient stimulus -- I gave the example of highway construction -- spend every dime of proposed funds upfront.

    How about this: You find me a reputable economist that believes the 2008 tax rebates under Bush and the first-time homebuyers credit were an efficient use of funds, and we'll go from there.

  • Report this Comment On May 05, 2010, at 11:26 AM, FutureMonkey wrote:

    Morgan.

    The title was "stupid stimulus" and the tone of the article was that inefficient = failure or at a minimum a bad policy choice. My point is that it is easy to complain about inefficiency and critize $12.8B program out of context with broader economic issues. It's not like the FTHB credit was the only thing being done or even anybody's first choice to stabilize the downward spiral towards economic depression. I believe that the 12.8B tax credit was in addition to...not inplace of highway construction, changes in monetary policy, and injecting liquidity and incentivizing creditors, etc.

    The problem was how to control a rapidly deflating real estate bubble - let the air out slowly instead of having it burst to disasterous consequences. When the first choice of monetary policy (i.e. pushing interest rates down to zero and injecting liquidity to lenders) failed to stem the downward spiral, private sector spending contracted further (payroll and cap ex reduction), the credit market tightened further rather than stepping up, the government is left will relatively few tools put the brakes on the death spiral in real estate. The real estate problem was clearly impacting the broader economy, so stabilization of the real estate market was clearly part of the response to the recession. Stabilization is the point of having a government economic policy in a free market. Two tools after the first choice options failed to stem the tide were government purchase (i.e. your example of highway construction) and government stimulus (short term tax policy change).

    While the multiplyer for direct govenment purchase is higher; Direct government purchase doesn't seem like a reasonable option for the specific problem of the spiralling real estate market. Direct buying of homes from of new or existing inventory from Beazer or DH Horton would have been decidedly unpalatable; I mean how many of us would want our federal government buying and owning empty homes. That leaves the option of stimulus - i.e use temporary tax credits to incentivize private purchase of new and existing inventory.

    While the FTHB credit may not be the most efficient use of 12.8B when compared with other programs in the broader plan, it was neither stupid nor a failure; it was necessary. We could argue about the size of the program and efficiency, but I'm guessing that whether it was size was $12.8 million or $128B or the multiplyer was 0.4 or 1.6, you'd find plenty of monday morning quarterbacking among the economists that didn't actually have any skin in the game.

    As for economists that did have skin in the game, Austan Goolsbee for example, I'd say he'd agree with me.

  • Report this Comment On May 07, 2010, at 11:30 AM, jrj90620 wrote:

    Seems like some people who took advantage think it was a good program.What a surprise.

  • Report this Comment On May 08, 2010, at 6:44 PM, gnorton100 wrote:

    All of the bailouts and stimulus plans in the last 4 years have been a waste.

    Money was thrown at anyone that asked for it, as long as they didn't come in a private company jet on their second begging trip.

    The best stimulus plan could have been written in 1 sentence:

    Each citizen or legal alien that PAID US TAXES in 2008, either directly or through tax deductions from their pay, will receive a check for $5,000.

    $5,000 per tax payer calculated to just under $7.1 Billion.

    This is less than any ONE of the bailout packages that the taxpayers will be paying for over the next 30 years or so.

    There were and are ONLY 3 choices for the money.

    -1 Spend it on something they didn't need (new stuff).

    -2 Spend it on something they did need (overdue bills).

    -3 Save it.

    Any of these 3 options result in:

    - businesses have cash flow.

    - various levels of the economy are stimulated.

    - taxes are gathered.

    - the banking industry gets money, remains solvent and does NOT need a bailout.

    What a wonderful idea.

    Let the American public stimulate the economy instead of giving the money to businesses WITHOUT any requirements of how to use it.

    And then wonder why the businesses hoarded the money and asked for more.

    Or wonder why some businesses did stupid things like:

    - AIG spending $144,000 for 2 days playtime for about 100 executives with bailout money.

    - AIG and others paying bonuses with bailout money.

    I sent this idea to the Whitehouse and to over a dozen politicians.

    You guessed it, I got no answer.

    When I sent it in, I knew this idea would had no chance.

    Not in the town where the politicians are paid for with multi millions in campaign contributions by big money and big business.

    Big business wanted its payback for the contributions and they got it.

  • Report this Comment On May 09, 2010, at 2:04 AM, hopefulnotstupid wrote:

    Unfortunately, not many people get that doing what is in the best interest for the common good is ultimately the best choice for all to benefit. Everyone just decides if it is a good thing or a bad thing based solely on if they personally benefited. How sad!

    I find it interesting that most people that are not happy with Obama now when they voted for him are just unhappy that they are still unemployed or lost their job or nobody sent them a check! As long as my neighbor is made to pay for it, and I don't, I am all for it mentality! Who cares about the overall majority having to pay so that they could get the credit or that they personally benefited. Unfortunately my friend, when you have the opportunity to make money from this, you are the one that will be paying for it also. Higher taxes, less choices, less freedom, and it could cost you your job in the long run. Oh my goodness, we didn't think of that did we????

    So enjoy your short term gain, because you or your children will also have to pay it back one way or the other. Sorry nobody told you that or you never thought it would happen.

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