Correction to This Article
Steven Pearlstein's column in the Nov. 6 Economy & Business pages incorrectly referred to "uncomfortably high employment." It should have read "uncomfortably high unemployment."

A misguided tax credit for home buyers, and other political follies

By Steven Pearlstein
Friday, November 6, 2009

With the throw-the-bums-out results of this week's elections and the prospect that the unemployment rate is about to break through the 10 percent mark, politicians in Washington are desperate to show that they're doing something about jobs.

Unfortunately, what they're proposing to do is to spend a lot of money that they don't have in ways that won't work to help too many people who are neither desperate nor deserving.

Topping the list of idiotic ideas is the bipartisan push to reinflate the housing bubble by not only extending the tax credit for struggling first-time home buyers for six months but also expanding it to another "neglected corner of human misery," as the Heritage Foundation's Ron Utt so aptly put it -- affluent homeowners who want to trade their current places for something better.

This $10 billion boondoggle is nothing more than a giveaway to the real estate industrial complex and people who could afford to buy a new home anyway. Even its most prominent supporters acknowledge that of the first-timers who have already claimed the credit, only one in five wouldn't have bought a home without it, which works out to a cost per sale induced of $45,000. A more impartial estimate, by Goldman Sachs, puts the figure at $75,000. That is almost certain to go even higher once the credit is extended to existing homeowners with incomes of up to $225,000 buying houses worth as much as $800,000.

This is one of those strategies that are as nonsensical in theory as they are in practice: trying to put a floor under declining home prices by making houses more affordable. To the degree that it works, the benefits will inevitably wind up in hands of the sellers -- but not the buyers -- and not before the agents, appraisers, lenders, brokers and insurers have taken their cut.

The same bill, which passed the Senate on a 98 to 0 vote, also contained an immediate $33 billion tax break for big businesses that have lost money in the past two years. The provision allows businesses to use those recent losses to offset profits from three, four and five years ago on which they had previously paid taxes. Under existing law, the "carry-back" can only go back two years. The measure is aimed at preventing further layoffs at ailing banks, retailers, home builders, real estate developers, hotel chains, airlines and newspapers, but the more likely outcome is that it will simply delay the inevitable downsizing and consolidation of these industries now required by the smaller, post-bubble economy. The perverse effect will be to reward the companies that failed to pay down debt and squirrel away cash when times were good and, by artificially keeping them alive, punish the competitors that did.

It is disappointing enough that President Obama and his team of crackerjack economic advisers have not had the wisdom or courage to oppose what any first-year graduate student would recognize as truly lousy policy. But perhaps that's because the Panderer in Chief is himself knee deep in stimulus hokum of his own with his proposal to shower Social Security recipients with a $250 cost-of-living increase this year even though their cost of living has actually declined. At a cost of $14 billion in borrowed money, it's a grossly inefficient way to stimulate the economy, create jobs or even boost consumer confidence.

As Julia Isaacs of the Brookings Institution points out in a new study, the federal government already spends $7 on the elderly for every $1 it spends on children, with intergenerational transfers threatening to gobble up every tax dollar the government collects and ultimately bankrupt the country. At a time when 15 million workers are underemployed, the budget deficit is at record levels, teachers are being laid off, after-school programs are being eliminated and state support of higher education is declining, borrowing $14 billion more to send $250 checks to every senior, regardless of income, is as economically indefensible as it is politically cynical, and downright immoral besides.

As difficult as it is for voters and politicians to accept, government cannot -- and does not -- control our market economy. To give you a rough idea, it would be a huge accomplishment, and take a huge amount of money, for the government to stimulate the creation of a million jobs, let alone 2 million. Even that, however, would be but a fraction of the nearly 7.5 million jobs that have been lost so far in this recession.

The truth is that robust growth and job creation will happen only once we've completed the painful and disruptive process of deleveraging, restructuring and rebalancing the economy so that we consume less than we produce, and put something away for the future. The government can, and has, taken steps to smooth that process and make sure that it does not spin out of control, while providing some support for those who have lost the most. But unless we reinflate the credit bubble and the bubble economy that it spawned -- a big mistake -- there is no way to avoid an extended period of uncomfortably slow growth with uncomfortably high unemployment as a large, complex, dynamic market economy heals itself.

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