02/01/10 Baltimore, Maryland – America’s president proposes a tax credit to businesses that take on new employees. We never met a tax cut we didn’t like. This one is no exception. It lowers the cost of labor, making it easier to hire and pay people. So far, so good.
But is Mr. Obama proposing to cut government spending also? Not really. He’s pretending that the feds can have their cake and eat it too…that they can forgo the income given up by the tax credit…and yet, still spend it.
How is that possible? It’s not. It’s the feds’ old shell game. It won’t do the economy any good because the resources represented by the tax credit can’t be in two places at once. They can’t be available to the employers and be available to the government too.
But 10% unemployment tells us that wages are too high. They should fall – along with stock prices and housing prices. But it’s hard to cut wages. That’s the real secret to the Keynesian’s fiscal stimulus. Government spending causes inflation…which lowers wages surreptitiously.
Everybody likes fiscal stimulus. Economists like it because it makes them look like they know what they are doing. Politicians like it because it makes it look like they are doing something to help the masses. And the masses like it because they believe them! Finally, even employers like it because it reduces real wage costs.
Trouble is, inflation doesn’t work very well in a real depression. The Fed increases the monetary base. Congress showers boondoggles over the nation. But the money moves likes molasses.
The median price of an existing house sold in 2008 was $196,600. In 2009, the price fell to just over $170,000. But this seems to have brought out the buyers. At $170,000, reports Floyd Norris in the NYT, the housing market corrected all the way back to 1997, adjusted for inflation. Twelve years’ worth of real pricing gains have been wiped out.
But when people realized they could buy at ’97 prices, they stepped up to the plate; 4.6 million houses changed hands last year – 5% more than the year before.
The real problems were in the new housing sector. Only 373,000 new houses were sold last year – fewer than in any year since 1963. Prices sank, but not quite as much as in the used house market.
New houses, of course, are not the subject of foreclosures. You can’t foreclose a mortgage that hasn’t been written yet. This permitted the housing industry to control sales and prices – at least to some extent. While foreclosed houses flooded the used-house market and drove down prices, builders must have held back inventory waiting for better prices.
What will happen in 2010? Most likely, the inventory of unsold houses…along with the ‘hidden inventory’ of houses that owners would like to sell…will probably continue to hold prices down. One way or another, the average house has to go down to a level where the average owners can afford it. Where that level is, we don’t exactly know, but it’s probably lower than today’s prices. Remember, millions of homeowners are underwater. Some of them will drown. Others will get out through the windows…leaving the house to sink, along with the housing market.
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Great plan to stimulate business and jobs and once again BB shoots it down into gloominess. Give it break!
Housing is affordable now. Prices are stabilizing here and we are starting to see signs of rising prices in many markets. Seems to me like everything is getting on track nicely!
When and where did prices hit 1997 levels? From what I can see, it seems like we are down to 2003, at least here in LA that’s what it is.
Harry you don’t know what you are talking about. Housing prices are not going up in any markets. I live in one of the few areas reporting house prices are going up markets……….it’s a lie.
The tax credit offered by the government allowed the low priced homes to increase their sale price to just under the tax credit. The higher priced homes have stagnated and dropped 20k and more. Most seller are sitting it out hoping for better times……dumb move. New construction here is stopped, except for a few specs that some dumb builders are hoping for a sucker to buy. Of course what else is a home builder to do, that’s all they know? Retrain to flip burgers?
Bill, you sound like a crony capitalist crook with the opening statement. Giving tax credits for favored behavior is just as bad as providing tax revenue for favored behavior. It is unethical and anti-free market. If you are really so concerned about the money supply and inflation the last thing you should be appauding is another increase in the deficit. It reminds me of Justinian’s attempt to repopulate Rome by providing a government handout for people to move back into the city. It just doesn’t work.
It’s all like, “Between a rock and a hard place”!
(I liked your phrase: “….getting out of the windows before the house sinks!”)
I live in a “foothill” community in CA and some houses, built on spec have been on the market for more than two years…and these are nice houses……..
Our communities are being crushed by lower tax revenues that are just now filtering down to libraries, schools, mental health care and all the other life necessities the unemployed and low wage workers suffer….
Housing is not affordable and prices have NOT corrected. They’re being held aloft by Government stimulus at far beyond 3X median income levels, still out of reach for would-be buyers who don’t feel like having to jump ship in three years when they find themselves underwater.