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Monday, April 14, 2008

Ed Leamer: "The Only Solution" to the Housing Problem

Ed Leamer says there's only one solution to the housing crisis, use a tax cut to stimulate demand, a tax cut that has the potential to magically pay for itself:

Home Buyers Needed, by Edward E. Leamer, Commentary, NY Times: Our politicians are devising economic stimulus measures to encourage consumers to spend more. These measures will cost taxpayers $200 billion or more. This is not money well spent. The problem is not too little consumer spending; the problem is too few home buyers.

Many argue that we don’t need government intervention to bring the buyers back; we just need the market to work its magic through lower prices.

Well, not entirely. When it comes to housing, lower prices don’t inevitably cause sales to rise. Why? Because lower housing prices create the expectation of still lower prices later, causing buyers to wait for a better deal. Left alone, a weak market therefore overshoots with prices too low and construction too little. ...

The only solution is for the federal government to offer a temporary 5 percent tax rebate — up to $25,000 — for first-time home buyers. ...

Timing is important. ... Based on what I’m seeing, a stimulus should commence in the second half of this year and be offered for about 12 months, depending on how the housing market is responding.

The really good news is that the cost for this program is minimal and would likely stimulate enough spending and growth to more than pay back the Treasury with higher revenues later.

    Posted by on Monday, April 14, 2008 at 12:15 AM in Economics, Housing, Taxes | Permalink  TrackBack (0)  Comments (22)

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