Extending Home Buying Credit Would be a Mistake

The $8,000 tax credit for first time home buyers is about to expire and there is a push in Congress to extend it. Simon Johnson and James Kwak in the Washington Post remind us of just how bad an idea this is:

The main argument for the tax credit is that it stimulates the economy and stabilizes the housing market. Seen purely as a stimulus, the tax credit is highly inefficient. The National Association of Realtors claims that the credit created 350,000 new sales; the Calculated Risk blog calculates that this means the government is paying $43,000 for every extra house sold

What some would call "stabilizing" home prices really just means keeping them at an artificially high level, but this simply can't go on forever:

This would be just the latest chapter in a long history of government policies to boost housing prices -- the mortgage interest tax deduction, the capital gains exclusion on houses, the extension of the mortgage interest tax deduction to second houses, etc. Each of these policies pushes up prices just once; if you want to keep pushing up housing prices, you have to keep adding sweeteners.

This credit, the Cash For Clunkers program, the talk of a VAT with a delayed start all of these are touted as solutions to our economic woes. The reality is that these are nothing more than short term gimmicks whose distorting effects delay, but don't eliminate, the necessary adjustments to the economy. Most likely making those adjustments more painful in the process.