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Saturday Night Live’s Jason Sudeikis is hilarious as VP Joe Biden, taking over for President Obama in the Oval Office while the President’s out of the country, talking about “just” three issues: Afghanistan, the economy, and health care reform. The whole thing is an absolute riot (while at the same time a scarily insightful analysis), and I love the discussion of the stimulus (it’s working!), but I think my very favorite part is the health care section where Biden/Sudeikis explains how tax policy’s being used to pay for the reform.

When I play the video, it either freezes up on me or cuts off in the last few seconds, just as Sudeikis is about to say “Live from New York, It’s Saturday Night.” You can fill in the audio yourselves at that point.

I’m just back from Denver, where in the opening session on “Dealing with the Fiscal Outlook” of the National Tax Association annual conference, I had been tasked with discussing the “political economy” of the problem.  I started by saying I didn’t know where to begin; there’s such a gulf between what’s perceived as politically “smart” and what’s economically wise.  I know many of this blog’s readers think I was way too generous in my post about OMB director Peter Orszag earlier this week, when I suggested by the title of my blog post that Peter was getting “specific” on the “tough choices.”  But what I actually said was (emphasis added):

the Administration well understands the biggest (and specific) ways in which fiscal policy can affect the budget outlook over the next ten years– and it’s not health care reform (which is much more about the much longer-term outlook).

Note that I said I think the Obama Administration understands that the extension of the Bush tax cuts are the biggest policy decision affecting the ten-year budget outlook–i.e., they understand their budget adds $2 trillion to the ten-year deficit by choosing to deficit finance most of the Bush(/Obama) tax cuts.  I didn’t say they were admitting it as their Administration’s choice (rather than just the Bush Administration’s “fault”).  They’re not admitting it because their political calculus is that blaming the Bush Administration for the fiscal irresponsibility of the Bush tax cuts, while willfully continuing most of those same, still fiscally-irresponsible tax cuts beyond 2010 (to avoid having to say that taxes will come up), is a win-win strategy.  In terms of the economics, of course, it’s hypocritical.

In fact, I complained at that tax conference session that the health care reform debate well illustrates how any fiscally-responsible parts of policies that politicians are now willing to offer have a kind of gauzy, soft-focus quality to them.  Any tough choices remain vague and off to the future.  I said something like “what the politicians seem most willing to do [to reduce the deficit] are things that we least know how to do.”  Because if we don’t know how yet to do it, then we can’t spell it out very clearly now, can we?  Things like “bending the health cost curve” by as-yet-unspecified-by-that-future-commission Medicare savings.  Sounds like it could just be cutting out waste that no one values–or at least it doesn’t sound specifically like a cut to anyone’s specific Medicare benefits.  But reducing the deficit by raising taxes?  Well, we know lots of specific ways to do that to have more immediate impact (just look at CBO’s budget options that feed into Concord’s Federal Budget Challenge), so politicians couldn’t possibly propose any of them, because those would be very specific proposals that could be very clearly spelled out to people, with easily identifiable winners and losers (a la Joint Committee on Taxation or Tax Policy Center distributional tables).

In the Q and A part of our session, I was asked:  what will finally get the politicians to start doing the right thing and actually making those truly tough, fiscally-responsible policy choices (rather than merely putting off those vague, off-in-the-future choices)?  And I said that unfortunately, it will probably take the next economic crisis–the tangible evidence that our economy has reached its breaking point because of our fiscal irresponsibility, when lenders stop being so willing to keep lending to us and interest rates and inflation appear soon headed to intolerable levels.

And coincidentally, EconomistMom reader (and frequent commenter) “AMTbuff” sent me his very intriguing (and distressing) political economy thought:  that who is in charge when that crisis happens is important–in fact so important that policymakers may have the incentive to let or even spur on that crisis while the economy’s on their watch.  From AMTbuff’s email to me (which quotes Bill Gale from the video of the student summit we held in Denver last month), emphasis added:

At the Colorado fiscal summit sponsored by the Concord Coalition, Bill Gale said something (listen at the 39-minute mark of the video, also embedded in the economistmom post) that I’ve believed for some time:

Q: How much of extension of Bush Tax cuts is justified on short term economic grounds vs. longer-term, and if’s not justifiable on longer-term grounds, why not?

Bill Gale: This is the epitome of the lack of stopping digging that’s going on.  I mean the debate in the 2008 campaign was about who had the bigger tax cut, not about who was going to raise taxes and pay for the fiscal gap.  That’s not even the right debate to be having. It’s like they need to meet at the 50 yard line, and they’re each in the end zone running the opposite way.

And the stop digging point is really important. Washington isn’t even at the point where they say “OK let’s sit down and solve this.” They’re still at the point where they say “Gee, when we do sit down and solve this, everyone is going to take a hit. Therefore our goal right now is to get as much as we possibly can now in tax cuts and spending so that when the big negotiation has to happen we start from a position of lower taxes or more spending.”

So it’s a politically calculated thing that’s going on, but it’s extraordinarily dysfunctional. But don’t think that people in Washington don’t get it and don’t understand what they’re doing. In fact it’s exactly the opposite. They know exactly what they’re doing: They’re setting up their initial positions so that when that big budget summit or negotiation happens, that they can keep as much as they want.

Now I’m not defending that, I’m just telling you don’t assume that just because they look like idiots that they actually are idiots. They actually know what they’re doing.

(end of Bill Gale quote)

I think Bill is exactly right, meaning that the mission of the Concord Coalition is hopeless. There will be no grand compromise in advance of the big crisis. We’ll have to wait until the market will no longer buy Treasury debt before action occurs. Yet I fear that the problem is even more serious than Bill says. I used to believe that the party in power when the crisis hits would be outcast for decades, much as the Republicans were after the Great Depression. This may be true, but now I realize that the party in power during the crisis will be able to dictate the terms of accommodation to reality. This is crucial to the long-term trajectory of the government’s role in our lives. To a staunch partisan, this is a hill worth dying on.

If I am correct that being in power when the crisis hits is crucial, it behooves the party in power to precipitate the inevitable crisis before they lose power. Therefore enacting policies which are objectively fiscally insane might be perfectly rational.

Let me pause to let this thought sink in. I’ll repeat it: If the crisis is inevitable, why not make sure that the crisis arrives when we are in power, so that we can make the radical changes we favor, rather than letting the other guys make the radical changes that they prefer?

The preceding logic is, I believe, irrefutable. I would prefer to be wrong. Am I?  –AMTbuff

This is an amazing and terrifying political economy theory.  What do you all think of it?  Is AMTbuff onto something?

I’m still in Denver at the National Tax Association conference, but headed out before the big snow comes! I have many things to catch up on here, but no time right now. In the meantime, see if you see the disconnect between this Washington Post column by David Broder on what David Walker complains is missing from the health reform bills, and this Bloomberg report on the latest new ideas of the Administration and congressional leadership on how to pay for health care reform.  More on this and other things I’ve been thinking about at this tax conference (and other things I need to catch up on) later tonight.

The President’s budget director, Peter Orszag, was on NPR’s Morning Edition on Wednesday morning.  He talked about the really difficult fiscal policy dilemma the federal government faces right now–dealing with both an unusually severe recession and a worsening longer-term budget outlook (emphasis added):

“On the one hand, [you have] the GDP gap, the gap between how much the economy is producing and how much it could produce, and, on the other hand, these deficits,” he says.

“If we only faced one or the other, the way forward would be clearer. But balancing between the two keeps me up at night.”

Sometime around 2011 to 2013, “that’s where we’re going to start to need some transition from the extraordinary assistance that the federal government has been providing to try to jump-start the economy,” he says. “We’re working through [this], and we haven’t made final decisions on the best path to walk down from where we are now to where we need to get.”

Personally, I’d like to believe they’re mulling over the Bush tax cuts and President Obama’s campaign promises, weighing economic and political costs versus benefits.  Here’s a little hint (emphasis added):

Orszag makes no apologies for not projecting a balanced budget anytime in the near-term: “You have to remember the situation that we inherited.”

The Medicare Prescription Drug Benefit and the 2001 and 2003 tax cuts weren’t paid for, he points out. That was compounded by the reduction in tax revenue from the economic downturn, the cost of the economic stimulus and the need for increased spending on unemployment benefits and food stamps.

“So, the point being, we inherited a big hole,” Orszag says.

Sounds like not paying for the 2001 and 2003 tax cuts was a bad idea, and that the current revenue system is not keeping up with our spending needs (even ongoing, not just the temporarily high spending needs associated with stimulus).  It sounds like by 2011-13 we ought to be considering a fundamental reform of the tax system.  I’d like to suggest that “fundamental tax reform” ought to mean more than deciding which parts of the Bush tax cuts should get extended.

And as Peter points out:

“The thing about the politics of the deficit is that the deficit is unpopular, but so are many specific steps to reduce it,” Orszag says. “There are some that will decry the deficit but are unwilling to embrace anything that will actually bring it down.”

Well, I think the Administration well understands the biggest (and specific) ways in which fiscal policy can affect the budget outlook over the next ten years– and it’s not health care reform (which is much more about the much longer-term outlook).  It’s the reason, by the way, why Concord’s online budget challenge (based on CBO’s “Budget Options”) seems lopsided in favor of tax increases over entitlement cuts:  because the fiscally-irresponsible policies of the Bush Administration that the Obama Administration now blames for the awful budget outlook were lopsided on the tax-cut side.  It’s not that CBO or Concord prefers raising taxes to cutting spending.  It’s that that’s where the biggest levers are to significantly change the budget outlook anytime soon–meaning right after the economy is strong again, maybe in 2011-13, like Peter says.

More on the “bias” in Concord’s Federal Budget Challenge tomorrow.  Coincidentally, I’m back in Denver, this time for the annual meetings of the National Tax Association.

Have you ever thought you could be WAY more fiscally responsible than our politicians are?  Go ahead and test yourself on the Concord Coalition’s new online version of our “Principles and Priorities” exercise, now re-dubbed the “Federal Budget Challenge.” As was true with the old fashioned hard-copy exercise, the options you can choose among in the now-electronic version are a subset of the budget options estimated by the Congressional Budget Office.

“Principles and Priorities” has always been intended for classroom and community use, to encourage communication, collaboration, cooperation and compromise among individuals (students, citizens) who work in groups to come to agreement about a set of hard choices.  Typically the participants come away from it realizing it’s not so easy to substantially reduce the deficit without giving up some things one would rather not have to give up–that just cutting out the “waste, fraud, and abuse” doesn’t actually “cut it.”

The new online version allows website visitors to try their own individual hand at reducing the federal budget deficit, and in the process serves as a simple online yet “hands on” tutorial on fiscal responsibility.  Give it a whirl, but please try to make your policy choices honestly.  We hope to keep track of which budget options seem to get the most support from those who participate in this online “game.”  We hope that the public, the press and even some politicians will give it a try and learn where the biggest “levers” to get a grip on this huge fiscal challenge lie.

David Wessel of the Wall Street Journal already beat me to blogging on this!

UPDATE 11:20 am Tuesday:  Oh, and yes, there are still some technical glitches, and there will be revisions of both style and substance, so please let me hear from you about how you did and what you learned from doing the exercise.  Concord will appreciate any feedback you can provide as to what you do and do not like about the exercise, what was useful/helpful and what was not.  (Thanks to those who have already commented.)

The Washington Post’s Alec MacGillis asks a rather provocative question in today’s Outlook section: “Why won’t Obama give you a job?” The article challenges the Administration’s claim that “the stimulus is working” and argues that the Administration could have done or be doing better for the American public in terms of job creation:

Since taking office, the Obama administration has studiously avoided paying people to go to work, which could be accomplished by subsidizing workers’ private-sector employment or by creating new government-paid jobs…

Instead Obama’s team has taken a more indirect approach, a prudence that critics on the left say is misplaced. If you’re spending hundreds of billions of dollars on stimulus, why not do it with conviction? Engaging in more forthright job creation could invite some political pitfalls (such as those constant accusations of socialism), but is double-digit unemployment any less a political risk?

I’m no expert on the labor market, but I suspect there are two main reasons why the Obama Administration has chosen a less aggressive, more indirect route to “job creation”:

1. It’s not clear whether the federally-created jobs would be sustainable or valuable. Alec does say that the Administration “opted against direct job programs not for political reasons but because they thought such efforts would not produce long-term value.”  I think the more government gets in the business of creating jobs “out of thin air,” the less confident we can be that the jobs make “economic sense” in terms of our human resources being put to their highest and best uses as signaled by the price system (or any other social-value system where signals aren’t nearly as clear).
2. It’s not clear that just because the federal government pays for or subsidizes jobs or engages in any other policy labeled a “job creation program,” that they’re actually creating new jobs or changing employment outcomes much, versus handing out money for behavior that would have occurred anyway.  Once the federal government gives lower-level governments or private businesses money to hire workers or not fire workers, there’s no guarantee that it actually makes a difference, and it’s impossible to verify in the data.  It’s sort of on the “honor system.”  Just like the Cash for Clunkers program, at least a good chunk of the money goes to people as a pure bonus, or windfall.

So I think for both those reasons, if the goal is true job creation, there’s no reason to believe that the federal government making up new jobs or subsidizing others to make up new jobs is any more successful in creating sustainable, valuable jobs than the other ways of injecting cash and stimulating aggregate demand in the economy.  If the government simply hands out extra cash to seniors or first-time homebuyers (and even if they would have bought that first home anyway) and it translates into newly-created consumer spending almost dollar for dollar, isn’t that more likely to lead to a created or saved job than a job-creation subsidy to a company who simply uses it to reduce their net costs for the employees they were going to hire or retain anyway?

This whole issue of how to best stimulate the short-term economy is a big puzzle to me.  When I hear the press pondering the question of “how many jobs have been created or saved” as a result of the recovery and reinvestment act (aka the “stimulus” bill passed in February), I always think: “how would we know?” It’s just like a lot of economic policy: we never have a perfectly controlled experiment.  (My chemist parents would argue that that’s just one more reason why economics isn’t “real (hard) science”–it’s pseudo/soft science.)

It so happens that Alec will be live online at washingtonpost.com Monday morning at 11 am EST to discuss his article; just follow this link to participate in the discussion.

In his Forbes column this week, Bruce Bartlett explains how to set up a deficit-reduction commission who can speak the real truth and thus come up with real solutions.  Bruce’s key recommendations (emphasis added):

In my opinion, the commission should have no members of Congress at all among its members. Former politicians with no further political ambitions would be far better suited to the task. They can speak the truth in a way no sitting member can about things like putting higher taxes on the table as part of a deficit reduction package…

I believe that a deficit reduction target should be specified–$X trillion over 10 years with, say, a third coming from higher revenues, a third from entitlements and a third from discretionary spending. In particular, unless Congress commits itself in advance to raising taxes then I think the whole exercise will be for naught because that will be the toughest nut to crack.

It’s unrealistic to think that a budget commission is going to find some painless way of reducing benefits and raising taxes–taking real dollars out of people’s pockets. If Congress acknowledges this fact up front then I think there is a much better chance that the commission will be able to come up with the best ways of doing so.

And in the cover story of this week’s National Journal magazine (“The Debt Problem Is Worse Than You Think” by John Maggs), Bill Gale doesn’t seem to have much faith in President Obama’s willingness to level with the American public either.  The story’s closing paragraph (emphasis added):

Not coincidentally, 1990 to ‘92 was a time when difficult decisions on fiscal and monetary policy converged. While Congress and President George H.W. Bush were reaching a budget deal in 1990, Fed Chairman Greenspan was resisting pressure from the White House to lower interest rates. Greenspan sensed inflationary pressure in the pipeline, and he held off. The result was a recession that surely cost Bush a second term. Likewise, tougher stances on fiscal policy can have electoral consequences. Voters then were also angry that in reaching a budget deal in 1990, Bush broke his vow of no tax hikes. Gale says that Obama will similarly have to go back on his promise to protect the middle class from tax increases, if he is to have any chance of getting a handle on the deficit. “Do I expect that [soon]? No.”

I think this is one of the coolest radio interviews I’ve done (click here for the link to the podcast)–not because of anything new I said that I haven’t said a million times before, but because Marketplace’s Scott Jagow did such a great job of prompting me with the right questions and editor Paddy Hirsch did a brilliant job editing and mixing my words in with a very fitting Billy Joel accompaniment (featured above, which does NOT contain me anywhere, by the way).

Thanks guys, for this awesome introduction, too:

Chop chop

Our weekly podcast, After the Bell, is now available. This week, the White House said its goal is to cut the deficit in half by the end of Obama’s first term.

Is that possible? Scott talks to Diane Lim Rogers.

Diane is well known to the web as the woman behind the popular blog EconomistMom. And by day she’s chief economist at the Concord Coalition, a non-profit, non-partisan group that lobbies for fiscal responsibility by government. They also talk about the need for honesty with the American people.

Music includes Wilco, Blackfoot and Billy Joel. If you’d like After the Bell to download automatically each Friday, click here.

President Obama’s budget director, Peter Orszag, gave a really nice speech on the economy and fiscal policy this week.  It reinforces my belief that: (1) Peter really doesn’t view the “legacy” of the deficit-financed Bush tax cuts as a good one; (2) Peter really doesn’t want the Bush tax cuts to become the most costly item in the Obama budget (and part of Obama’s “fiscal legacy”); and (3) Peter has a secret fantasy…about backing out of President Obama’s campaign promise to not raise taxes on households with incomes below $250,000.  (Hey, he’s a budget geek; what did you expect?!)

Here are my favorite parts of Peter’s speech (emphasis added).  Note that Obama Administration officials are still very disciplined about cracking the door open on tax increases without ever uttering the phrase “tax increase.”  To the list of “factors” and “things” the Administration has been considering, we can now add “a number of proposals” and “a range of options”:

This is the responsibility that each subsequent generation of Americans must live up to – to build upon the legacy we have inherited and create an economy that is strong, vibrant, and able to sustain our nation long into the future.

All of us are keenly aware of the immediate struggles we face because of the current economic downturn.  I’m sure many of your families are facing excruciating choices that, even a few years ago, would have been unimaginable.

But what may be less appreciated is the long-term impact of this crisis – on our economy, on our fiscal situation, and on our future.

So, as we move from rescuing the economy to rebuilding it, it’s essential that we keep these long-term effects in mind – because only by addressing them can we succeed in building a new foundation for stable economic growth…

Just a few weeks ago, the Administration released the year-end statement of the federal government – a final accounting of what we took in and what we spent for fiscal year 2009, which ended in September.

The results were not a surprise, but they were still sobering: the deficit for last fiscal year was $1.4 trillion, or 10 percent of our economy.

Next year’s deficit is expected to be about the same size, and current projections show $9 trillion in deficits over the next 10 years, averaging about 5 percent of GDP.

Deficits of this size are serious – and ultimately unsustainable.

So how did we get here?

Of the $9 trillion in deficits projected over the coming decade, nearly $5 trillion comes as a result of failing to pay in the past for just two policies — the 2001 and 2003 tax cuts and the creation of a Medicare prescription drug benefit.

The cost of the tax cuts will total about $4 trillion over the next decade, including the additional interest on the debt the federal government will have to pay since the tax cuts were deficit financed…

All told, the entire $9 trillion deficit reflects the failure to pay for policies in the past and the cost of the worst economic downturn since the Great Depression and the steps we had to take to combat it.

Now, assigning blame never solves a problem, but it is important to understand that we didn’t get where we are merely as a result of bad luck.

It was the result of decisions – conscious, but unfortunate – and it will take deliberate action for us to work our way out of this situation.

And it’s critically important that we do just that…

Once health reform is passed, however:  the job of getting our nation back on a fiscally sustainable course will not be complete.  Our current projections of 4 to 5 percent of GDP in budget deficits in the out-years are well above the fiscally sustainable level of roughly 3 percent.

To bring deficits down to a sustainable range, therefore, will require more action once the economy is into a recovery.  We are currently considering a number of proposals to put our country back on firm fiscal footing, and to cut the deficit we inherited in half by the end of the President’s first term…

And, after years of failing to abide by the simple principle that you should pay for what you spend, the Administration has proposed statutory “pay-as-you-go,” or, as it’s often called, “PAYGO” legislation. PAYGO would require that any new tax cut or entitlement program be fully paid for—just as we are doing today with health reform.

In the 1990s, PAYGO’s commonsense approach encouraged the tough choices that helped transform large deficits into surpluses – and its absence over the past eight years accounts for the $5 trillion figure that I mentioned earlier.

These are all important steps to reining in waste and creating a government that uses taxpayer dollars more effectively and efficiently. But these steps alone will not fill the shortfall that we face. That is why the President and his economic team are busy working on a range of options as we prepare for the fiscal year 2011 budget to be released in February…

And as the economy recovers, we must pull together – as a nation – and make the tough decisions to put our country back on a solid fiscal foundation.

None of this will be easy.

After all, it took us years to dig ourselves into the current fiscal hole. And, it will take years for us to get out.

But I – along with the President and the rest of the Administration – all are committed to making our way – responsibly and rapidly – out of this fiscal hole.

The news tonight (to appear in Thursday’s Washington Post):

The Senate voted Wednesday to renew the government’s $8,000 tax credit for first-time home buyers through the first six months of next year as part of a broader bill designed to extend unemployment benefits.

For the first time, the tax credit program would also enable many homeowners who buy a new primary residence to receive a $6,500 refund.

The measure was attached to a bill that would provide 20 weeks of unemployment benefits in more than two dozen states with jobless rates above 8.5 percent and up to 14 weeks elsewhere. Another provision in the bill would allow businesses that had operating losses in 2008 and 2009 to seek refunds for taxes paid on profits over the past five years.

Why this legislation now?  Because despite signs that the economy as a whole, as measured by GDP, is growing again, most American households are still feeling the pain of a very weak labor market which all economists expect will be unusually slow to recover this time around.  Hence, the extension of unemployment benefits is easy to justify.

But what about the homebuyer tax credit–which in the original stimulus bill was set to expire on November 30?  Policymakers can argue that the housing market has been slow to recover as well–in large part due to the continued weakness in the labor market.  (Who feels like buying a new home when faced with so much job insecurity?)  But many economists are skeptical about whether this tax credit really “works” to give households the new incentive to go out and buy homes.  From the Post story:

Supporters of the tax credit, including the real estate industry, say it has energized home buyers and helped increase sales. But critics say the program is too expensive and has attracted mainly people who were going to buy a home anyway.

The Tax Policy Center’s Howard Gleckman recently blogged:

The early returns are coming in on the First-Time Homebuyer Tax Credit. And it appears to be a bigger boondoggle than even I thought it would be.

At a House Ways & Means Oversight subcommittee hearing today, the Internal Revenue Service inspector general reported that the IRS is auditing more than 100,000 of the roughly 1.4 million returns that included a claim for the credit. This is a staggering audit rate for an agency that usually reviews only about 1 percent of returns.

And what the agency has found is jaw-dropping. Almost 74,000 buyers claimed the credit even though they probably owned a house over the past three years (the credit is only available to those who did not own during that period). One dead give-away: More than 12,000 of this bunch claimed the residential energy credit sometime during the past three years. Another 19,000 filed for the homebuyer credit even though they had not actually gotten around to buying a house, a fairly spectacular exhibition of chutzpah. And 580 credits were claimed on behalf of children, including at least one four-year-old—obviously a budding real estate developer…

Add to all of this the estimate by Ted Gayer at Brookings that more than 85 percent of the projected 2 million people expected to claim the credit would have bought a house anyway…

Then Howard notes how this makes the homebuyer tax credit similar to the Cash for Clunkers program:  it borrows money to move forward purchases that for the most part would have occurred (just a little later) anyway.

That the tax cut or subsidy (a rebate in the Clunkers case) designed to promote a certain form of economic activity doesn’t actually encourage that activity, makes many economists consider it “a waste”–a low economic “bang for the buck” policy.   But economists perhaps have too high standards, and how high or low the “bang” is depends on how one defines the “bang.”  And thinking more broadly and less “snootily” about what this policy is supposed to do, I realize that in the context of countercyclical “stimulus” intended to boost GDP during a downturn in the economy, there are many ways in which the homebuyer tax credit–like the Cash for Clunkers program–could still have a pretty big “bang” and “succeed” in a sense, even if it doesn’t actually encourage anyone to buy a home they wouldn’t have eventually bought anyway.

I see three possible effects of the tax credit on a household who claims it:

1. The household buys exactly the same house exactly when they would have bought it anyway, so that the tax credit is like “free money”–extra cash they receive without having to change their homebuying behavior at all.
2. The household buys the same kind of house they had been planning on buying later in the year, sooner.  The cash offer gets them to change the timing of their homebuying behavior.
3. The household buys a house when they weren’t even planning on buying a house, or they buy a bigger house than they were planning on buying.  The tax credit actually gets them to increase their quantity of housing demanded, more fundamentally affecting their homebuying behavior.

Case #3 is the only one that economists might label a “success” from a microeconomic, allocation of resources perspective; it’s the only case that in the longer run increases the quantity of housing consumed in the economy.  (And anyway, from an economist’s perspective we already heavily subsidize and over-consume housing, so if the goal is efficiency in the allocation of capital and not encouraging the “socially upstanding” behavior that supposedly comes with homeownership, even case #3 represents misguided policy.)  But all three cases could be quite successful from a macroeconomic stimulus perspective–that is, in quickly (even if just temporarily) boosting aggregate demand for goods and services.  Think GDP = C + I + G + (X-M) as I did in this post from earlier this year when the “recovery and reinvestment” act passed, and recognize that even under case #1 where the tax credit is just a windfall of cash to the household, that such windfalls are often a reliable stimulus strategy as long as households spend most of those windfalls–even if not on a house but on other things.  And in case #2, that is exactly what distinguishes shorter-term policies to “stimulate” the economy from longer-term policies to encourage economic growth; in the former case, we’re merely moving forward or “smoothing” the economic activity, not permanently increasing it.  (That’s what explains and justifies the government’s deficit financing of the stimulus spending, too.)

From a stimulus perspective, it just boils down to who is getting the cash from the tax credit and will they spend most of the extra cash quickly?  Just like Cash for Clunkers didn’t necessarily permanently increase demand for automobiles but probably encouraged some car buyers to speed up their purchases and gave other car buyers extra cash to spend on other things like groceries, the homebuyer tax credit might just be another mechanism to direct cash into the economy in such a way that it gets quickly and effectively spent and translated into higher GDP.

So (snooty?) economists may choose to label the homebuyer tax credit a “waste” if it doesn’t fundamentally change homebuying behavior (or even changes it in the wrong direction), and I am certainly not apologizing for the poor quality of this policy as “housing” or “homeownership” policy.  But on the other hand in the context of macroeconomic stimulus, it is at least one way to direct “assistance” to a certain kind of household–young households buying first homes or (in this new version) just moving to a next home.  Perhaps we can think of it as steering the aid to growing families, which might partially offset the bias that the federal government tends to show toward seniors?  It’s like how I recognized that Cash for Clunkers might not create permanently higher demand for Detroit’s autos (or permanently sustain Detroit’s auto industry), yet I was still happy to reward those Americans who were at least temporarily (even if unintentionally) helping Detroit out.