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January 28, 2009

Best Stimulus: Homebuyers' Tax Credit

By Dennis Byrne

Last October, I said that the $700 billion bailout package, known as TARP, would become the biggest flimflam ever pulled on the American public.

I was wrong. It will be overshadowed by President Barack Obama's $825 billion stimulus package as the biggest swindle ever--doing nothing more than ladling out uncounted billions to the same old government contractors, political cronies and well-lobbied special interest groups for years to come.

It will prove to be about as effective at reigniting the economy as the TARP program has been, which is to say a criminal waste of taxpayers' money for generations to come. All those repeated, but ignored, warnings that the TARP billions would disappear down a financial black hole have come true.

A Wall Street Journal analysis (subscription required) reveals that the lending at the nation's largest banks actually declined after they received $148 billion to help unfreeze the credit market. Only three of the 13 largest banks increased lending after receiving billions of dollars. It turns out that a lot of the money went, as was feared, to bank acquisitions and other financial finagling deals.

TARP supporters responded to the misuse of the funds with the usual things-would-have-been-worse-without-it drivel, an assertion that is unprovable but scary enough to make a large majority of politicians and their constituents believe that "somebody has to do something." Those people also react the same way to warnings issued by the White House and Congress: while "doing something" may not bring immediate results, we dare not risk "doing nothing"--as if doing nothing was the only alternative.

Now, with the newest stimulus plan, we are being handed the greatest, non-specific and scariest "doing something" in our nation's history. There's nothing that Obama, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid have left out of the stimulus stew. Even increased sales of contraceptives are somehow supposed to be stimulative, a double-entendre I suspect was unintended.

One could argue, as a blind man might, that throwing everything in all directions will make a lurking threat go away. Perhaps it might, with a lucky hit. A lucky hit is exactly what the Obama stimulus package is counting on. If we scatter enough money across the continent, surely some will land on the snakes that are bedeviling the economy.

What to do instead?

If government is to help solve the problem, its target must be better defined. Repeatedly, we hear that "housing" is the crux of the problem, and that to solve the economic crisis we must first fix the housing market.

This assumes, of course, that the housing market won't and can't fix itself. So far, though, we have all the essential ingredients for a housing recovery--inventories have fallen, interest rates are at historic lows and prices are continuing to decline. Moroever, the National Association of Realtors reported that existing home sales in December showed a month-to-month, seasonally adjusted jump of 6.5 percent, well above what the economic sages predicted..

But let's just say, as do the panic-stricken, that markets no longer work, and that government must intervene. All right, but is building a highway, selling more condoms and financing energy-generating windmills, the quickest, most efficient and most direct way to increase housing sales?

No, it's not. What's needed is getting prospective buyers back into the market. A direct subsidy could do that. Those who remember the seemingly forgotten Housing and Economic Recovery Act of 2008 might be saying, "We tried that and it didn't work." The act did sound good--it provided a First-time Homebuyer Tax Credit of up to $7,500. But, according to surveys conducted by NAR, the credit isn't working as well as hoped because homebuyers have to pay the tax credit back within 15 years. When first-time homebuyers hear about the repayment requirement, they lose interest, and don't buy.

Now, instead, the association and others are advocating a "non-refundable" credit, as contained in Senate Bill 253, recently introduced by Senator Johnny Isakson (R-Georgia). It would expand the tax credit to all homebuyers and the credit would not have to be repaid unless the home is resold in three years. Yes, it would be somewhat more expensive than the current credit, but its backers say the program would pay for itself in terms of a rekindled housing market, higher gross national product and increased government revenues.

It certainly would be a lot cheaper than blindly scattering $850 billion or more across the country without any clear purpose.

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