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Why is it that the people that we elect to office just don’t get it?
It seems like a brilliant plan: Let’s reward people who buy homes1 with money back if they buy in a specific time period—that’ll lower the cost of buying a house now, so more people will buy houses, and that’ll boost the economy.
Except it’s foolish on two levels.
Where Are You Getting that Money?
So, where are you getting that money? Well, it’s going to come from taxes which will be okay, since this is artificially propping up the economy. However, it’s not taxes today—it’s taxes next year and the years to come. And that’s all predicated on the hope that things will get better.
You see, tax money is not money in hand, it’s money that is anticipated to be in hand. It depends on whether the government can collect the money that comes its way because people having jobs pay taxes. But if there’s a downturn (which is what we’re currently in), there’s less money coming in via taxes. And if they raise taxes to get more money, they may actually end up with less.
This is the trap that is borrowing. It works the same way for the government as it does for your home checkbook2. If government takes out a loan, it does so assuming that it will have sufficient funds to pay back the loan with interest. The problem comes into play when something unforeseen happens to the borrower
- In the case of a person or family, a lost job or an emergency could make it difficult or impossible to make the payments.
- In the case of the government, tax dollars come in only on activity, and if activity is reduced, so is amount of taxes.
In the case of the government, no one likes to cut spending—as people get too used to services that it provides. But like that extra car or Netflix subscription, if you can’t make the payments something has to go.
What Happens When the Tax Credit Is Gone?
The MSM3 is describing what happened in May to the housing market as buyer pickiness. That’s far from the truth. Tax credits in many taxpayer’s minds is like free money. So, many that were in the market for a house in April made sure to get a contact by April 30. This means that there was, necessarily, going to be a downturn in May.
I saw that with the sale of my house. I put my house up on the market two weeks before the deadline in April, and I had eight groups of people through. I had one group the first week in May, and it took me until the middle of June to get another group through. Four weeks without anyone wanting to come look.
While these ideas of propping up sectors of the economy seem interesting and sound good on the surface, all they are doing is rewarding people that were going to spend money anyway and rewarding them with money that the government doesn’t have and that we’re going to pay back with interest.
It’s like what’s happening with my house—I’m selling, but I’m selling at a loss because I want to relocate. It’s not advisable unless there is a big advantage to do it. The government thinks that the big advantage is that the economy will pick up. But that has yet to be seen.
