At the end of June, the House of Representatives voted to extend the $8,000 homebuyers’ tax credit, by an extraordinary margin of 409–5. The Senate approved the measure on a voice vote. At a polarized political moment, this near unanimity was noteworthy in itself. Conservative Republicans and liberal Democrats, from cities and suburbs and small towns across the country, joined together to shower a bit more taxpayer largesse on one of America’s favorite industries: real estate. But there’s a problem with this bipartisan idyll.
Though the homebuyers’ credit was sold as a stimulus measure, we have no reason to believe that it is anything other than another wealth transfer to a large and powerful industry, one with allies conveniently situated in every congressional district. Casey Mulligan of the University of Chicago has suggested that the credit had almost no economic impact. As Harvard economist Edward Glaeser observed, it did little more than create an incentive for “mindless house swapping.” It didn’t even have a meaningful impact on the behavior of first-time homebuyers — people already planning to make purchases simply moved them forward a few months. Yet this
is where we find a consensus in policymaking: We can’t agree on balancing the budget or reforming entitlements or the tax code, but we can agree to churn the housing market so that a handful of real-estate agents can make a buck on commissions while the economy crumbles.
Across the world, governments have spent vast sums on doomed industrial policies. We often hear about the occasional success of efforts in East Asia to nurture shipbuilding and automobile manufacture and electronics. But we don’t hear about the countless failures, in which cronies of the party in power receive endless subsidies and concessions, getting richer at the expense of the economy as a whole.
In the United States, our industrial policy for most of the last century has been centered on housing. Tax subsidies and the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have helped channel hundreds of billions of dollars into housing. There was a certain logic, however flawed, behind this policy. As opportunities for less-skilled workers declined, construction jobs provided a much-needed income boost to many working- and middle-class households. But like any arrangement built on government favoritism, this one was bound to fall apart. Long-term unemployment has skyrocketed in no small part because of the evaporation of construction jobs that date from the overbuilding that occurred during the bubble years.
What we need now is to turn away from this disastrous policy and find new, sustainable sources of jobs and economic growth. That will require a series of painful steps — among them, phasing out the mortgage-interest deduction and eliminating the GSEs — that will minimize the privileges housing enjoys relative to investments in other industries. By shifting resources from housing to more productive sectors, we will have higher and more sustainable growth. With trillions of dollars and the health of the economy at stake, the question isn’t whether we must do it, but whether we will do it now or wait until our economy is in even worse shape.