Two good friends of mine, Russell Redenbaugh and James Juliano, have come up with a simple and elegant solution to the housing crisis. The basic problem we have today is falling home prices, which signal that the supply of houses exceeds the demand for them. Since the supply of new housing, as measured by housing starts, is at an all-time low and closing in on zero, there's no need to worry about fixing the supply portion of the housing market. It's demand that needs stimulating.
So he proposes to change the incentives of home buyers. He suggests offering an income tax holiday to buyers of existing homes that is tied to the purchase price of the house. The buyer of a $500,000 existing home would receive a tax holiday for, say, six months on $500,000 of income. This idea combines the power of lower income taxes with targeted relief for the troubled housing sector. Buyers would have a big incentive to buy homes because they would receive a significant boost in their after tax income, and many would likely work harder to take advantage of that. Banks would find immediate relief as housing prices stopped falling and began to increase—no more need to write down toxic mortgage paper. Homeowners on the verge of foreclosure would find relief as prices rose.
This exercise in creative problem solving highlights the necessary characteristics of effective stimulus plans. They must change incentives in order to expand the economy. We can only grow the economy if our collective work input and output increases. The best way to do that is to increase the incentives for working and investing by lowering taxes on income and capital. Unfortunately, to date the Obama administration has completely ignored this type of stimulus in favor of the discredited and illogical notion that taking money from one person and giving it to another can result in higher levels of output.