Before I write this post, I will admit I have not read in detail the plan in front of Congress. Part of this is my cynicism. I know I will not like any sort of plan that comes out of Washington because it will be filled with special interest or policies that have no real chance of doing what they meant to do. If they do happen to have a positive effect, it will be almost completely by accident. Worse, it will put our government even further debt. Debt that will eventually be paid by you and me.
The plan, as far as I can tell, revolves around two main goals. Create new jobs and stabilize the housing market. Most of the plan seems to revolve around these key points
- Give tax breaks to individuals to encourage spending
- Business tax cuts for capital investments
- Increase the tax credit for home buyers
Let us forget for a second I think it is a completely idiotic thing to try and stabilize the housing market. The best thing to do would be to let housing find its natural equilibrium and we would get to the true price of housing sooner rather than later. Why people think high housing prices, higher than is justified given national income levels, is a good thing is beyond me. But nothing in the plan that I can see actually will do what the government hopes to accomplish.
The housing problem is almost intractable. You cannot, over the long haul, create artificial demand for an asset. That is all the government will do if it tries to prop up housing prices. But lets just say they really want to do this. Rather than just give money in the form of a tax credit, they should make the long term value of owning a home very attractive. They could do all sorts of things with the tax code to encourage the long term viability of owning your home. They could make it such that anyone who buys a home to live in over the next two or three years could write off DOUBLE the interest that they pay on the mortgage. While it sounds radical, and it is, it would certainly spur demand for housing.
Any who on earth would you try to create jobs by giving individuals tax cuts and business tax cuts for investment. Rather than that, why not do this. For any business who increases their workforce over the next two years, they can write off certain percentage of that employee’s salary based on how large they actually increase their workforce. This would be a tremendous incentive for companies and would directly address the issue of employment. Why try to be cute with the plan? Why not just get to the heart of the matter and create a direct incentive for the behavior you want to see? Want more jobs? Make it very attractive for companies to hire more workers.
Why does every plan that comes out of Washington looks and smells the same? It’s simple: self-breeding. I am going to use a classic political slogan to elaborate my point, “More of the same!” Even though most people have only heard of this slogan for presidential candidates, I fear it hits home at levels of the government. Don’t get me wrong, the mentality of hiring people who think alike occurs in the private sector too. However, there’s more incentive for the private sector to introduce new blood. Why? To stay alive and be competitive. On the flip side, the government cannot go out of business. Their metric of success is status quo, keep everything as is. Why not? Many government positions are for good for life (unless you commit treason or a felony). And for those positions that are for specific terms, again the goal is not so much achievement but lack of failure. So I am not surprised when the housing crisis hit that the government reacted that way it did. They want to go back to the way things were before the crisis, so naturally they went back to their bag of old tricks that have yielded the same results in the past.