The cost of this program is unknown but is probably upwards of $10 billion. It will be triple the cost of the initial program since it lasts longer, occurs when home sales are cyclically higher and is available to twice as many households.  The cost estimates assume that the 8-10% incidence of fraud in the initial program occurs in the extended program as well. Do not bet against this plan being extended beyond April. $8,000 checks for doing what most people were going to do anyway are very popular.

Congress may have finally realized that any plan to jump staring an economic recovery requires three elements. First, spend the money as fast as possible. Home construction spending will get a boost even before the President signs the legislation and three to four months the tax credit checks are mailed.  Second, eliminate upfront bureaucratic processes and approvals which drain off some of the funds and cause spending delays.  Most of the items in the stimulus plan included a 3-5% cut for federal bureaucrats.  And nearly eight months after the stimulus plan was enacted, a large share of the funds is still trapped in bureaucratic delays. Third, improve the incentives for future spending.  This clearly does it.  Contrast this with many of the items in the stimulus plan which did not change the price of future purchases and in some cases raised future prices.

This extension is cheaper and more a more effective stimulus than the Stimulus III proposal which now appears unlikely to be pursued.  However, it is not the most effective stimulus plan. If Congress wanted to get the maximum rise in added money (government plus private) spent for housing, it would have restricted the credit to new home buyers with a minimum income of $200,000.  The addition to GDP from selling a new home – which has to be replaced in inventory – is 15-20 times higher than the addition from selling an existing home which is only the real estate commission and a year later some remodeling spending. Each tax credit given to high income households yields a $500,000-600,000 purchases compared to an approximately $200,000 purchase the way Congress is setting the eligibility requirement. The tax credit plan is a compromise between stimulating the economy and flattening the income distribution.

» View all comments (0 total comments)

Post Your Own Comments 

» Not a member? Register now to become one. Otherwise, login to post your comments on this article.

11/20 - Let’s stop counting stimulus jobs

11/19 - New municipal bond program boosts public construction

11/18 - October housing starts plunge as tax credit expires

11/18 - Exports will sustain US recovery but export mix will change

11/17 - Washington eyes takeover of commercial construction and real estate lending

» Back to Jim's Blog