Why the new $6,500 homebuyer tax credit is wrong

Such government largess for the housing industry misdirects US savings away from investments into globally competitive businesses.

from the November 6, 2009 edition

Congress and President Obama keep throwing money at the housing industry, hoping its revival will also revive the economy. The industry itself pines for the halcyon days of McMansions on every block and home prices that never fall.

The latest example of this government largess: the extension and expansion of a tax credit for home buyers – $8,000 for first-time buyers and $6,500 for those living in homes at least five years – in a bill signed by the president Friday.

And that money from the US Treasury comes on top of the expensive bailout of Fannie Mae and Freddie Mac, more subsidies for the Federal Housing Administration, and the Federal Reserve's purchase of nearly $700 billion of mortgage-backed securities.

US lawmakers still won't recognize that a policy of loose credit for shaky home buyers since the 1990s created the housing bubble that finally went pop, leading to the 2008 Wall Street meltdown. (A lobby of real estate agents, homebuilders, and mortgage sellers keeps the subsidy gravy train flowing.)

But Congress needs to stop directing capital into an industry that does little to make America competitive in world trade and instead channel the nation's savings into industries with long-lasting, high-paying jobs.

Take a cue from postwar Japan. It directed capital into export firms like Toyota and constrained financing for homes. Jobs were plentiful while house sizes were small. By 1979, a visiting European official remarked that Japan was a nation of "workaholics living in rabbit hutches."

Japan may have gone overboard with an industrial policy that curbed consumer choices. But it did become the world's second-largest economy, one that didn't overinvest in residential real estate and still focuses on manufacturing jobs. (China has become a faithful student of Japan's model of directed development.)

US manufacturing, once the world leader, has shrunk to 12 percent of the economy and 8.7 percent of all jobs. Congress has begun to direct billions of dollars into the "green" energy industry, hoping to make it a major global competitor and a sustainable job creator. But in addition, Americans need more incentives to put savings into investments that support a range of export manufacturers in cutting-edge fields.

Homeownership has its value as a stabilizer for society. But its days as a nest egg and a source of credit may be over.

The US must put its eggs into world-class factories, not real estate.