I have another rant planned, but I want to wrap up this series before my train of thought gets permanently derailed, so the next post will have to wait for the weekend (or perhaps later; I'm headed out of town with my lovely wife for some R&R and a little wine-tasting in Hermann, MO).
************
Let me describe for you exactly how I think the first-time homebuyers' tax credit and cash-for-clunkers were hatched.
In a smoke-filled room in Washington, a bunch of pols were pounding the table and saying, "We have GOT to end this recession - and NOW!" "But how?" they asked. Then they trooped in some hack economist like like the ones you see them troop out to testify before them when they need somebody to tell them what they want to hear. We'll call him Dr. Z.
Dr. Z said, "First, you're not going to salvage the first or second quarter - the first is pretty much cooked, and the second is going to be really ugly. So focus on trying to make it look like the recession's over by the third quarter. Then, maybe people will go nuts on holiday shopping and the fourth won't be so bad either."
"Again, HOW?" asked the Congressmen.
"Well, the consumer is pretty much out of the picture on his own, and you can't replace 70% of the US economy with government spending, especially with the current and projected deficits. But you could give the consumer a fat incentive to buy stuff."
"It would take a lot of stuff being bought to bring this economy out of the tank," said the Congressmen. "You're not going to make up for the decline in consumption with chicken noodle soup from Aldi and toilet paper from Wal-Mart."
"Well, then focus on big-ticket items - the bigger, the better, since consumption is measured in dollar terms," said Dr. Z.
"Like houses?" said the Congressmen. "Sure," said Dr. Z, "offer a tax break for first-time homebuyers, and say that it's going to sunset shortly after the quarter ends. Don't make it too obvious - require that they close on the homes by the end of November. That way, given the 60 days it typically takes to close on a house, they'll rush to buy in September, before the third quarter ends. That may get you something on the order of, oh I don't know, a 9.4% increase in existing home sales in September - just in time to filter into the third quarter GDP numbers."
"Brilliant!" said the Congressmen. "But surely there's more we can do - we want a big GDP number for the third quarter."
"Well," said Dr. Z, "you could offer an incentive to buy new cars. Make it big, and make it only in the third quarter, to boost GDP on a one-time basis. Again, don't make it obvious - do it in July and August, don't have it expire at quarter-end. Tie it to making America 'greener,' and you'll garner broader support when it comes to a vote."
One Congressman had an aide who had actually gotten a degree in economics and understood the topic, and he whispered in the boss' ear. The Congressman piped up: "Wait a minute - won't this just front-load demand? You're not going to get people to buy houses or cars in this economy that otherwise wouldn't have within a few months or quarters, right?"
"So what?" acknowledged Dr. Z. "The objective is to boost the third quarter's GDP, to make it positive so you can declare an end to the recession."
The aide whispered to his boss again, who spoke up once more: "But the definition of the end of a recession is two consecutive quarters of positive GDP growth, not just one."
Again, Dr. Z replied, "So what? Most of the American public is too dumb to know that. And if their government tells them something, they tend to believe it. So don't ask the National Bureau of Economic Research, which officially declares the beginning and ending points of recessions, whether we're out of the woods yet. Have the Commerce Department declare the recession is over the day the third quarter GDP report is released. Then people will gain confidence and start spending again."
The aide whispered once more, and once more his boss regurgitated what he'd heard. "Are you sure?" the Congressman asked. "After front-loaded demand dissipates, won't there be a 'hangover,' with consumption dropping, and maybe negative GDP in the fourth quarter?"
"Maybe," said Dr. Z, "but that's why you have to be ready to extend the homebuyers' credit and maybe enact a second auto stimulus. You can say, 'Sure it's expensive, but look how well the first one worked, and we can't afford to let the economy double-dip.' Plus, that'll be in fiscal 2010, so it won't affect this year's budget, and by the time the new one's rolled out whatever you spend will already have to be in it, because it'll already be spent."
And thus we have the recipe for an even larger deficit. The beauty part is that Congress did just that - extend and expand the homebuyers' tax credit, that is - and they even added an extension of unemployment benefits, something I've been predicted since early summer would be done after fiscal 2009 ended. (By the way, ever notice that if you lose your job in a good economy, you're screwed, but if it happens in a recession, you can pretty much stay on unemployment as long as you want? Shouldn't that be the time we're providing an incentive for people to beat the bushes all the harder and get back to work?)
The price tag for this largess is $24 billion, automatically added to next year's budget - and deficit. But not factored into the deficit projections the administration made earlier this calendar year.
Ah well, what's another measly $24 bil in a world of trillion-dollar deficits? By the way again, next week we'll see the budget shortfall for the first month of fiscal 2010. It's expected to be $150 billion, for just the one month. Remember 2008, when the deficit hit a new record - of just about four times that amount? Remember how the left was howling about it? What kind of noise are they making now?
Wait, I hear them ... "Chirp, chirp ..." Nope. My bad. Just crickets.
Friday, November 6, 2009
Thursday, November 5, 2009
Rant for a Friend - Intermission
I interrupt this rant to bring you a rant on a totally different topic - sorry, but the switching system on the tracks upon which my train of thought runs tends to work that way. Besides, I read something this morning that made my blood boil. I'll return to the promised stream of consciousness tomorrow.
I've often railed against the talking heads on Bubblevison (CNBC) and the headline writers at Bloomberg News, with their rose-colored slant on the real state of things economic. But I got a doozy from the latter this morning.
Bloomberg was reporting on this morning's release of third quarter productivity and unit labor costs data. For the uninitiated, productivity is worker output per hour worked, in the aggregate, and unit labor costs reflect the input cost of labor into a unit of output.
Quite simply, when companies engage in a prolonged bout of job-cutting in an economic downturn - especially a lengthy and deep one - they're attempting to do the same amount of work with fewer workers. More accurately, though, they're not doing the same amount of work; demand is down, thus so is production. Early in the job-cutting phase, which tends to respond to the decline in demand, productivity will fall, as the job cuts have not yet caught up with the output decline. Later in the cycle, that situation will reverse, and up goes productivity.
Thus it should come as no surprise that productivity in the third quarter rose at the highest pace in six years. Let's make no mistake as to why this happened: hours worked fell at the sharpest year-over-year pace in the six-decade history of the data. Some companies even ramped up production in the third quarter; namely, the automakers, in response to the cash-for-clunkers-stimulated demand. But they didn't add workers to do it. So see? Productivity - output per worker hour - gained.
So this is all well and good. But Bloomberg chose to end its story with the following paragraph:
"In the 1990s, former Fed Chairman Alan Greenspan was one of the first to recognize productivity was accelerating because of the increased use of computers and the Internet, and that the improvement would contain inflation even as the economy gained strength and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999."
Now, hold on just a doggone minute. Let's break this down.
Productivity indeed gained in 1992. Why? In the aftermath of the '90-91 recession, companies cut jobs and entered the classic "do more with less" mode. As a result, productivity year-over-year rose to exactly where it is now in the first quarter of 1992, well into the cycle of job-cutting.
But productivity then tanked, dipping into negativity territory by the end of 1993, as companies overshot expected demand and hired too many workers, effectively doing less with more. Too often, that's what companies do. Productivity then rose modestly in 1994 before once again diping into negative territory in 1Q05.
After that, we did indeed see gains in the late '90s, though we never did reach the level where we are now, or where we were in the aftermath of the early '90s recession - until mid-2000, when the stock market had peaked and we were headed into a downturn again. And once again, the primary culprit was job-cutting, not technology.
Now, Greenspan did indeed espouse the theory that productivity gains were systemic and resulted from technological advances, and that productivity would therefore naturally contain inflation, allowing easy monetary policy.
Big deal. At one point in human history, we universally accepted the theory that the world was flat. That didn't make it good science.
Greenspan's view of productivity turned out to be his Great Undoing. He did indeed mistakenly believe that his theory allowed the Fed to keep interest rates too low, too long. That, of course, led to the dot-com bubble. In its aftermath, he once again kept rates too low, too long. And that, of course, led to the housing bubble.
Well, Alan Greenspan is no longer Fed Chairman. But at the conclusion of yesterday's FOMC meeting, the Bernanke Fed reiterated its pledge to keep rates as low as possible, as long as possible, in spite of the belief of some that the economy is picking up steam.
Undoubtedly, that is due in part to the Fed's realization, deep down, in spite of all the "green shoots" talk, that we are far from out of the woods.
But part of it is also due to the fact that this Fed is even more dovish on inflation than it was under Greenspan.
The Aussie central bank has acknowledged that it must, in addition to the traditional dual policy mandate of promoting full employment and fighting inflation, focus some effort on avoiding the inflation of asset bubbles, which, as we've seen, can be catastrophic. They get it. And to that end, they have raised interest rates twice in the last two months as evidence appeared that the economy Down Under was gaining strength. They chose to err on the conservative side, risking the politically unpopular outcome of cutting off growth too quickly in favor of avoiding the greater economic risk of inflating another asset bubble.
And the World Bank and the IMF have recently warned that bubbles could very well be forming, especially in Asia, where growth is taking hold faster than in other parts of the world. Indeed, the day China recently opened its new Nasdaq-like stock exchange, prices doubled. That smells like a bubble to me - I wish I could short an index on it.
But our central bank - too inextricably tied to the political winds - is not going to be proactive. Which leads us to a rule of thumb far more useful than Mr. Greenspan's flawed one:
"Those who fail to learn from past mistakes are doomed to repeat them."
I've often railed against the talking heads on Bubblevison (CNBC) and the headline writers at Bloomberg News, with their rose-colored slant on the real state of things economic. But I got a doozy from the latter this morning.
Bloomberg was reporting on this morning's release of third quarter productivity and unit labor costs data. For the uninitiated, productivity is worker output per hour worked, in the aggregate, and unit labor costs reflect the input cost of labor into a unit of output.
Quite simply, when companies engage in a prolonged bout of job-cutting in an economic downturn - especially a lengthy and deep one - they're attempting to do the same amount of work with fewer workers. More accurately, though, they're not doing the same amount of work; demand is down, thus so is production. Early in the job-cutting phase, which tends to respond to the decline in demand, productivity will fall, as the job cuts have not yet caught up with the output decline. Later in the cycle, that situation will reverse, and up goes productivity.
Thus it should come as no surprise that productivity in the third quarter rose at the highest pace in six years. Let's make no mistake as to why this happened: hours worked fell at the sharpest year-over-year pace in the six-decade history of the data. Some companies even ramped up production in the third quarter; namely, the automakers, in response to the cash-for-clunkers-stimulated demand. But they didn't add workers to do it. So see? Productivity - output per worker hour - gained.
So this is all well and good. But Bloomberg chose to end its story with the following paragraph:
"In the 1990s, former Fed Chairman Alan Greenspan was one of the first to recognize productivity was accelerating because of the increased use of computers and the Internet, and that the improvement would contain inflation even as the economy gained strength and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999."
Now, hold on just a doggone minute. Let's break this down.
Productivity indeed gained in 1992. Why? In the aftermath of the '90-91 recession, companies cut jobs and entered the classic "do more with less" mode. As a result, productivity year-over-year rose to exactly where it is now in the first quarter of 1992, well into the cycle of job-cutting.
But productivity then tanked, dipping into negativity territory by the end of 1993, as companies overshot expected demand and hired too many workers, effectively doing less with more. Too often, that's what companies do. Productivity then rose modestly in 1994 before once again diping into negative territory in 1Q05.
After that, we did indeed see gains in the late '90s, though we never did reach the level where we are now, or where we were in the aftermath of the early '90s recession - until mid-2000, when the stock market had peaked and we were headed into a downturn again. And once again, the primary culprit was job-cutting, not technology.
Now, Greenspan did indeed espouse the theory that productivity gains were systemic and resulted from technological advances, and that productivity would therefore naturally contain inflation, allowing easy monetary policy.
Big deal. At one point in human history, we universally accepted the theory that the world was flat. That didn't make it good science.
Greenspan's view of productivity turned out to be his Great Undoing. He did indeed mistakenly believe that his theory allowed the Fed to keep interest rates too low, too long. That, of course, led to the dot-com bubble. In its aftermath, he once again kept rates too low, too long. And that, of course, led to the housing bubble.
Well, Alan Greenspan is no longer Fed Chairman. But at the conclusion of yesterday's FOMC meeting, the Bernanke Fed reiterated its pledge to keep rates as low as possible, as long as possible, in spite of the belief of some that the economy is picking up steam.
Undoubtedly, that is due in part to the Fed's realization, deep down, in spite of all the "green shoots" talk, that we are far from out of the woods.
But part of it is also due to the fact that this Fed is even more dovish on inflation than it was under Greenspan.
The Aussie central bank has acknowledged that it must, in addition to the traditional dual policy mandate of promoting full employment and fighting inflation, focus some effort on avoiding the inflation of asset bubbles, which, as we've seen, can be catastrophic. They get it. And to that end, they have raised interest rates twice in the last two months as evidence appeared that the economy Down Under was gaining strength. They chose to err on the conservative side, risking the politically unpopular outcome of cutting off growth too quickly in favor of avoiding the greater economic risk of inflating another asset bubble.
And the World Bank and the IMF have recently warned that bubbles could very well be forming, especially in Asia, where growth is taking hold faster than in other parts of the world. Indeed, the day China recently opened its new Nasdaq-like stock exchange, prices doubled. That smells like a bubble to me - I wish I could short an index on it.
But our central bank - too inextricably tied to the political winds - is not going to be proactive. Which leads us to a rule of thumb far more useful than Mr. Greenspan's flawed one:
"Those who fail to learn from past mistakes are doomed to repeat them."
Wednesday, November 4, 2009
Rant for a Friend, Pt. III
I didn't get around to posting yesterday - it was my lovely wife's birthday, so we went out and stimulated the economy last night.
Up today: the AIG bailout. This'll be a short one.
At the time the government took control of too-big-to-fail AIG, the company was negotiating to pay its credit default swap (CDS) counterparties at as little as 40 cents on the dollar.
The government takes over, and the New York Fed - whose president at the time was one Timothy Geithner - directs AIG to pay its CDS obligations at par.
Incremental cost to the US taxpayer: $13 billion. Not a particularly outsized number in these days of trillion-dollar deficits. But it is 0.1% of GDP, if that's important (and, as we'll discuss tomorrow, it certainly is to those in Washington).
And the guy who presided over this brilliant trading decision - what's he doing now?
Oh yeah, he runs the US Treasury. Awesome.
What's more, the CEO of Goldman Sachs was the chairman of the board of the New York Fed at the time, and the CEO of JPMorgan Chase was on the board as well.
Who were AIG's counterparties, who received 100 cents on the dollar instead of the 40 cents they were going to get before the takeover?
Among them were Goldman Sachs and JPMorgan Chase.
But wait, it gets better - when Bloomberg broke this story, they asked for a comment from a Treasury official. He said something to the effect that if AIG hadn't paid these counterparties at 100 cents on the dollar, the counterparties themselves would have suffered financially.
So in effect, this was another bailout to those banks. I guess that's one way to get around the TARP limits.
************
Tomorrow, I'll present my little scenario describing just how the cash-for-clunkers and homebuyers' tax incentives came to be, particularly in terms of their timing.
Up today: the AIG bailout. This'll be a short one.
At the time the government took control of too-big-to-fail AIG, the company was negotiating to pay its credit default swap (CDS) counterparties at as little as 40 cents on the dollar.
The government takes over, and the New York Fed - whose president at the time was one Timothy Geithner - directs AIG to pay its CDS obligations at par.
Incremental cost to the US taxpayer: $13 billion. Not a particularly outsized number in these days of trillion-dollar deficits. But it is 0.1% of GDP, if that's important (and, as we'll discuss tomorrow, it certainly is to those in Washington).
And the guy who presided over this brilliant trading decision - what's he doing now?
Oh yeah, he runs the US Treasury. Awesome.
What's more, the CEO of Goldman Sachs was the chairman of the board of the New York Fed at the time, and the CEO of JPMorgan Chase was on the board as well.
Who were AIG's counterparties, who received 100 cents on the dollar instead of the 40 cents they were going to get before the takeover?
Among them were Goldman Sachs and JPMorgan Chase.
But wait, it gets better - when Bloomberg broke this story, they asked for a comment from a Treasury official. He said something to the effect that if AIG hadn't paid these counterparties at 100 cents on the dollar, the counterparties themselves would have suffered financially.
So in effect, this was another bailout to those banks. I guess that's one way to get around the TARP limits.
************
Tomorrow, I'll present my little scenario describing just how the cash-for-clunkers and homebuyers' tax incentives came to be, particularly in terms of their timing.
Monday, November 2, 2009
Rant For A Friend, Part II
Today's topic is the cash-for-clunkers incentive.
A total of 690,000 cars were sold under the CFC program. But Edmund's reported that only 125,000 cars were sold under the program that would not have been sold anyway (more on that later). So given the total cost to the taxpayer, that works out to an expense of $24,000 per sale, counting only those sales that wouldn't have taken place anyway.
That's a pretty steep price to pay for a one-time boost to consumption, and therefore GDP. But what does Congress care - it isn't their money, after all.
We did get a boost to GDP; third quarter output rose 3.5%, but absent the effect of the incentive, which ended in August, the gain was about half that. So what will happen in the fourth quarter?
Well, consider that total vehicle sales in the US averaged 16.35 million units (annualized) during 2006 and 2007, when the economy was still relatively unscathed. Then, sales dropped from an annualized pace of about 16 million units at year-end 2007 to just over 10 million by the end of 2008.
This year, the sales pace by month (annualized) for total vehicle sales in the US has trended as follows:
January: 9.57 million
February: 9.11 million (the lowest since 1981)
March: 9.86 million
April: 9.32 million
May: 9.92 million
June: 9.68 million
July (when CFC kicked in): 11.25 million
August (also a CFC month): 14.09 million
September (post-CFC): 9.20 million (second-lowest since 1981)
Get it? The problem with these incentives - as with the first-time homebuyers' tax credit - is that they tend to just front-load existing demand. People who were planning to buy a car (or house) within the next, say, six months, will just buy a little earlier than they otherwise planned to, cashing in on the incentive. So in terms of actually stimulating demand, these one-time stimuli do very little. And in terms of sales that otherwise wouldn't have taken place, that makes the price tag dear.
Besides boosting GDP, it's also worth noting that the US government owns chunks of GM and Chrysler, so spending more tax dollars to boost sales appears to help improve the return on that investment, though it's really simply robbing Peter to pay Peter.
On the docket tomorrow is the AIG bailout.
A total of 690,000 cars were sold under the CFC program. But Edmund's reported that only 125,000 cars were sold under the program that would not have been sold anyway (more on that later). So given the total cost to the taxpayer, that works out to an expense of $24,000 per sale, counting only those sales that wouldn't have taken place anyway.
That's a pretty steep price to pay for a one-time boost to consumption, and therefore GDP. But what does Congress care - it isn't their money, after all.
We did get a boost to GDP; third quarter output rose 3.5%, but absent the effect of the incentive, which ended in August, the gain was about half that. So what will happen in the fourth quarter?
Well, consider that total vehicle sales in the US averaged 16.35 million units (annualized) during 2006 and 2007, when the economy was still relatively unscathed. Then, sales dropped from an annualized pace of about 16 million units at year-end 2007 to just over 10 million by the end of 2008.
This year, the sales pace by month (annualized) for total vehicle sales in the US has trended as follows:
January: 9.57 million
February: 9.11 million (the lowest since 1981)
March: 9.86 million
April: 9.32 million
May: 9.92 million
June: 9.68 million
July (when CFC kicked in): 11.25 million
August (also a CFC month): 14.09 million
September (post-CFC): 9.20 million (second-lowest since 1981)
Get it? The problem with these incentives - as with the first-time homebuyers' tax credit - is that they tend to just front-load existing demand. People who were planning to buy a car (or house) within the next, say, six months, will just buy a little earlier than they otherwise planned to, cashing in on the incentive. So in terms of actually stimulating demand, these one-time stimuli do very little. And in terms of sales that otherwise wouldn't have taken place, that makes the price tag dear.
Besides boosting GDP, it's also worth noting that the US government owns chunks of GM and Chrysler, so spending more tax dollars to boost sales appears to help improve the return on that investment, though it's really simply robbing Peter to pay Peter.
On the docket tomorrow is the AIG bailout.
Sunday, November 1, 2009
Rant For A Friend
Okay, very long time, no blog. I've been busy, with work stuff; writing, performing and rehearsing music; and visiting my daughter in college on fall football weekends. But I'm having lunch this week with a friend who's a follower of this blog, so for him, a rant.
And boy, is there ample material. Today's topic is bailout mania. Oh, I've ranted about bailouts before. But now we get to see some of the aftermath. And what we see is very rant-worthy indeed. Actually, for the long-read-challenged, I'll break it down into a series, covering one bailout a day until I'm done.
At the series' conclusion, I'll present a little scenario that will explain just what the real purpose of all these bailouts was. (I know, I'm a tease.)
************
First up: the first-time homebuyers' tax credit. Rolled out shortly after President Obama was sworn in, it provided a credit of up to $8,000 for people buying a home who hadn't owned one in the previous three years; had incomes no greater than $75k single or $150k married; and closed on the purchase by November 30.
How did it go? Well, as with most stimulus - including the others I'll discuss today - we don't really know. How many people bought a house that otherwise wouldn't have? (Answer: gee, when unemployment is at a 26-year high and you fear you might lose your job, do you take on a mortgage payment because of an $8,000 tax credit?)
As with cash-for-clunkers, it did probably front-load some demand; September's existing home sales jumped 9.4%, a sizeable increase, and that was probably a last-gasp move by buyers to get in before the incentive expired. But September new home sales were unexpectedly weak, meaning buyers were focused on the low end of the housing market.
(The incentive is more likely to affect existing home sales than new home sales for two reasons. First, existing homes are typically lower-priced than the new market, and that's the market where people who need a tax incentive to afford a home tend to concentrate. Second, with all the foreclosures out there, existing homes in foreclosure are a huge bargain relative to new construction, as the banks that own them are slashing prices to get them off the books.)
What we do know is that the housing industry - builders, realtors, etc. - have been lobbying Congress to extend the credit, using fear-mongering (something politicians can relate to): "If the incentive expires, people will stop buying houses, and the recovery will sputter" ... (Those last two things are going to happen anyway, but that's a topic for another day.)
As is typically the case when a special interest group has their hand out - with the other hand surreptitiously slipping cash into Congress' collective pocket - Congress has apparently acquiesced.
They're not only extending the program, but expanding it. The credit stands, with a new final date of April 30, 2010 - but that's just the date by which the contract has to be signed. Closing doesn't have to take place until June 30. And the income limits have been raised, to $125k for single filers, $225k married. (Wait - in the original version, the married income limit was double the single limit. Yet another instance of the tax code screwing married people.)
In addition, a credit of up to $6,500 will be available for people trading up, who already own a home, as long as the home they're selling has been their primary residence for at least five years.
Now, as I said, we don't really know how effective this thing has been in moving real estate. But we do know what a Treasury Department watchdog uncovered from auditing returns claiming the credit in the initial go-round:
19,000 filers claimed the credit for homes they hadn't yet purchased.
74,000 filers claimed credits totaling $500 million for homes they already owned.
And 580 filers claimed $4 million in credits, said filers all being under the age of 18.
One of them was four years old. Probably Tim Geithner's kid.
Now, I don't fault these people one bit. First, if Geithner et al can cheat on their taxes and be rewarded with cabinet posts, anybody should be able to do it. Second, people are sick of being responsible, not buying more house than they can afford, making sure they understand their mortgage terms, paying their bills on time, then seeing their tax dollars go to bail out other people. So why not get yours, however you have to get it? It's understandable.
I'm thinking about each of my three dogs filing returns for 2009 and claiming the credit. Even though I'm the only one around here who ever sleeps in the doghouse.
So, we have widespread fraud and abuse of a bailout, and what does Congress do (they learned of the watchdog's findings before they began deliberations on whether to extend the program)? Not only do they extend it, they expand it. Awesome.
And the deficits keep rising, folks.
************
Up tomorrow: Cash-for-Clunkers.
And boy, is there ample material. Today's topic is bailout mania. Oh, I've ranted about bailouts before. But now we get to see some of the aftermath. And what we see is very rant-worthy indeed. Actually, for the long-read-challenged, I'll break it down into a series, covering one bailout a day until I'm done.
At the series' conclusion, I'll present a little scenario that will explain just what the real purpose of all these bailouts was. (I know, I'm a tease.)
************
First up: the first-time homebuyers' tax credit. Rolled out shortly after President Obama was sworn in, it provided a credit of up to $8,000 for people buying a home who hadn't owned one in the previous three years; had incomes no greater than $75k single or $150k married; and closed on the purchase by November 30.
How did it go? Well, as with most stimulus - including the others I'll discuss today - we don't really know. How many people bought a house that otherwise wouldn't have? (Answer: gee, when unemployment is at a 26-year high and you fear you might lose your job, do you take on a mortgage payment because of an $8,000 tax credit?)
As with cash-for-clunkers, it did probably front-load some demand; September's existing home sales jumped 9.4%, a sizeable increase, and that was probably a last-gasp move by buyers to get in before the incentive expired. But September new home sales were unexpectedly weak, meaning buyers were focused on the low end of the housing market.
(The incentive is more likely to affect existing home sales than new home sales for two reasons. First, existing homes are typically lower-priced than the new market, and that's the market where people who need a tax incentive to afford a home tend to concentrate. Second, with all the foreclosures out there, existing homes in foreclosure are a huge bargain relative to new construction, as the banks that own them are slashing prices to get them off the books.)
What we do know is that the housing industry - builders, realtors, etc. - have been lobbying Congress to extend the credit, using fear-mongering (something politicians can relate to): "If the incentive expires, people will stop buying houses, and the recovery will sputter" ... (Those last two things are going to happen anyway, but that's a topic for another day.)
As is typically the case when a special interest group has their hand out - with the other hand surreptitiously slipping cash into Congress' collective pocket - Congress has apparently acquiesced.
They're not only extending the program, but expanding it. The credit stands, with a new final date of April 30, 2010 - but that's just the date by which the contract has to be signed. Closing doesn't have to take place until June 30. And the income limits have been raised, to $125k for single filers, $225k married. (Wait - in the original version, the married income limit was double the single limit. Yet another instance of the tax code screwing married people.)
In addition, a credit of up to $6,500 will be available for people trading up, who already own a home, as long as the home they're selling has been their primary residence for at least five years.
Now, as I said, we don't really know how effective this thing has been in moving real estate. But we do know what a Treasury Department watchdog uncovered from auditing returns claiming the credit in the initial go-round:
19,000 filers claimed the credit for homes they hadn't yet purchased.
74,000 filers claimed credits totaling $500 million for homes they already owned.
And 580 filers claimed $4 million in credits, said filers all being under the age of 18.
One of them was four years old. Probably Tim Geithner's kid.
Now, I don't fault these people one bit. First, if Geithner et al can cheat on their taxes and be rewarded with cabinet posts, anybody should be able to do it. Second, people are sick of being responsible, not buying more house than they can afford, making sure they understand their mortgage terms, paying their bills on time, then seeing their tax dollars go to bail out other people. So why not get yours, however you have to get it? It's understandable.
I'm thinking about each of my three dogs filing returns for 2009 and claiming the credit. Even though I'm the only one around here who ever sleeps in the doghouse.
So, we have widespread fraud and abuse of a bailout, and what does Congress do (they learned of the watchdog's findings before they began deliberations on whether to extend the program)? Not only do they extend it, they expand it. Awesome.
And the deficits keep rising, folks.
************
Up tomorrow: Cash-for-Clunkers.
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