07 Nov 2009

An Inconsistency in Congress’ Actions

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The virtue of the Public Choice school of economics–which basically applies standard economic analysis to political behavior, with the slight change that politicians want to maximize not profits but reelection chances, and bureaucrats want to maximize their budget and power–is that it makes sense out of the world. If you as an economist tried to understand the various policies coming out of DC, your head would explode. I think we should give people like Matt Yglesias a break. Suppose for the sake of argument that he actually believes the ideals he’s espousing, and that he actually believes Ted Kennedy et al. devoted their careers to achieving them. If that’s really how you thought the world worked, you’d go insane.

To give you my favorite illustration: Conservatives love to rant against “dumb government” because it subsidizes tobacco farmers while it taxes the heck out of cigarettes. Well that’s just crazy, right? And it’s true, no dynastic family would ever do that in their realm. (If any historians have counterexamples, I’ll send you a free copy of my Depression book if you don’t embarrass me in the comments.)

But in a political system like the U.S.’s, the policies make perfect sense. There is no single agent “government” with a set of preferences or goals; instead there are thousands of people with political pull who are interacting and need to keep up the illusion of “upholding the Constitution,” “promoting the national interest,” blah blah blah to keep the masses happy. If the politicians “saved money” but cutting out the tobacco subsidies and firing the cigarette excise tax collectors, they wouldn’t be able to pocket the money. No, they’d be out two wonderful programs that delivered them campaign contributions from farmers’ lobbies and for which the mob delivered votes in key districts (because the mob could sell more cigarettes on the black market with the outrageous tax rates).

So let’s look at the recent acts by Congress. On the same day, the greatest deliberative body (a) extended unemployment benefits and (b) extended tax credits for home buyers.

I won’t bore you with the Public Choice analysis; that’s obvious. But I want to go the other way: Suppose you had to come up with an economic theory to explain the two actions. Could you?

I say not. Obviously the average person would say, “Oh they’re helping the unemployed make ends meet, which is good, and they’re stimulating the housing market, which is good.”

But hang on a second. By extending unemployment benefits, the government is paying unsuccessful sellers to help them cope with the fact that they can’t find buyers.

So if that makes economic sense, then the way to “help the housing market” would be to give tax credits to people who have their house on the market but can’t find a willing buyer.

Just think about that for a second. Suppose the government actually said, “If you list your house with a real estate agent–and you can pick any price you want–and you don’t find a buyer, then for every 3 months that this is the case, you can write off $10,000 from your tax bill that year.”

Do you think that would be good for helping the housing market? After all, people who are behind on their mortgages and need to sell their homes could sure use that money! So why don’t the politicians stimulate the economy by doing the above?

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