The quick growth, according to real estate data firm Clear Capital, was driven largely by sales that involved the $8,000 tax credit for first-time homebuyers. Many of the places where sale prices grew most are less-expensive Midwestern markets where $8,000 has a bigger impact.

This stimulus is artificial, and it will end as soon as the state and federal governments stop propping up housing prices with programs like this one.

Owning a home is suitable for those who can afford the investment commitment and associated risks. Nudging people into homes that they can’t afford has overwhelmingly negative consequences and could prolong the housing crisis or provoke another one.

Because this tax credit keeps housing prices artificially high, it defeats its ostensible intended purpose of nudging people into owning homes. As I have discussed previously, the rate of homeownership tends to remain constant over time in Saint Louis and elsewhere, despite the government’s nudging. Although this tax credit gives an individual the ability to make a larger down payment on a house, he or she will incur tens of thousands of dollars in additional debt by purchasing a house that is overpriced.

Furthermore, this tax credit program largely shifts transactions from the future to the present, instead of inciting new transactions to occur. Many of these beneficiaries would have purchased a home independent of the tax credit. This program is similar to sales tax holidays and last year’s cash for clunkers program in this regard.

Given that encouraging homeownership is such bad policy, why does government extend and introduce new programs? In an article in The Atlantic, Megan McArdle provides an answer (link via Audrey Spalding):

[P]oliticians want to help poor people with capital formation, and homeownership is the way that the American middle class has traditionally gone about capital formation.

Too bad that real estate is not a good investment!

The post Home Sweet Home? appeared first on Show-Me Institute.

The author of the editorial states:

[W]hen [Department of Natural Resources officials] noticed that the recycling requirement seemed to be slowing the program, they bumped up the amount of the rebates. The one for dishwashers, for instance, rose from $75 to $125.

Just like “Cash for Clunkers” did, the rebate program distorts the market to nudge individuals to buy appliances that are government-approved, not those appliances that they would have otherwise purchased. The fact that people were slow to buy these appliances despite these increased marginal incentives demonstrates that there is little market demand for them.

By providing a subsidy to individuals to incite them to buy something they otherwise consider to be too costly, rebate programs create dead-weight loss and therefore destroy wealth in the economy. (Targeted tax credit programs do this, too.)

From the article:

The program lasted longer than expected, partly because the state didn’t go overboard — as a few other states did — in offering generous rebates for energy-efficient appliances.

Exactly how much rebate should the state give in order to “go overboard?” What is the socially optimal level of energy-efficient appliances in the economy? I don’t know what this level is, and our friends in Jeff City don’t know, either. The problem is that no one has access to perfect information. It would be beneficial if the state government stayed out of the market and instead let Missouri residents determine this level for themselves through spontaneous order.

To date, Missouri has made good use of federal stimulus dollars to help families use energy more efficiently and produce a cleaner environment.

Is this quantifiably true? Statements like these are impossible to refute because they include no facts. It is quite possible that the intended environmental impact is negated through the construction of the program. I wish that supporters of programs like these would provide specific facts about their environmental outcomes, so I could perhaps dispute them by offering a more complete set of facts.

Furthermore, even if this rebate program did provide environmental benefits, the state should weigh those benefits against the marginal cost of the program.

The boost in business for appliance dealers is an extra benefit.

This boost is both artificial and temporary, and it will end when the rebate program ends. When the government stops funneling other people’s money to the appliance dealers, this “boost” will disappear. In fact, appliance dealers will likely see fewer sales in the immediate future because the transactions that would have otherwise occurred were pushed into the present.

Furthermore, although this policy may help a small group (appliance dealers) in the short term, it will hurt a much larger group: taxpayers. The $4 million that is transferred via rebates isn’t found money; every cent of it comes from the pockets of taxpayers. When this money is devoted to rebates, taxpayers can’t spend it in the private sector on goods and services that they desire more and would have otherwise bought had they been allowed to keep it.

The post Robbing Peter to Buy Paul an Energy-Efficient Washing Machine appeared first on Show-Me Institute.

Beginning Monday, the state will offer $5.6 million in rebates to Missouri residents who buy energy-efficient clothes washers, dishwashers, furnaces, air conditioners and heat pumps.

That’s not all. The state from April 19 to 25 won’t collect its 4.225-percent sales tax on those products, plus energy-efficient refrigerators and freezers.

Contributors to Show-Me Daily have written extensively about how programs like Missouri’s green tax holiday and last year’s Cash for Clunkers program are ineffective. These are examples of government programs that provide an incentive to consumers (i.e., a rebate) to buy certain items (e.g., an appliance or a car) in an attempt to incite economic activity and change individual behavior (which will ostensibly help preserve the environment). The following is a digest of these arguments. If any Show-Me Daily readers know of additional disadvantages to these programs, please add to this post in the comments.

1. Instead of creating new economic activity, programs that offer rebates on products like appliances and cars only distort the market.

In a previous post, Charis Fischer explained that these transactions would have occurred anyway in the future, independent of a rebate in the present:

Using tax dollars to help people buy more energy-efficient machines is likely an inefficient use of funds, because purchases of these machines will become much more common within the next few years anyway, as older machines start to die. The fact that people can save money on energy costs by upgrading their appliances is already a significant incentive.

2. The intended environmental impact is negated through the construction of the program.

The subsidy incentivizes the destruction of operational appliances and the construction of new appliances to replace them. It could also be possible that having an appliance that is more fuel-efficient would encourage a person to wash more dishes and laundry than he did before. Justin Hauke posted previously that, unless each Missouri resident buys a new appliances that week, the Green Tax Holiday would have no impact on overall energy usage in the state.

3. The money that is spent in rebates could be devoted to other programs.

Caitlin Hartsell explained in an earlier post how programs like Missouri’s Green Tax Holiday and Cash for Clunkers illustrate Bastat’s broken window fallacy.

[W]hen the government uses taxpayer money to stimulate one part of the economy, this comes at the expense of those other economic sectors that will no longer benefit from some measure of either consumer spending or invested savings.

4. This cements the idea that individuals should look to the government for approval of which products and services to buy and how to behave, which should not be the role of government.

Sarah Brodsky pointed out that, by eliminating state sales tax on only those appliances that have the Energy Star designation, the government favors certain products and behaviors over others.

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Some argue that this shift is the type of “stimulus” that the economy needs; after all, the money for this program was allocated from last year’s stimulus package. But will the effect of this program be worth the $300 million in taxpayer money that is being spent to finance it? I know “million” doesn’t sound like a big number anymore, with all of the billions and trillions being thrown around lately, but $300 million is still a lot of money — other people’s money. Using tax dollars to help people buy more energy-efficient machines is likely an inefficient use of funds, because purchases of these machines will become much more common within the next few years anyway, as older machines start to die. The fact that people can save money on energy costs by upgrading their appliances is already a significant incentive.

Each state has its own program, and Missouri has allotted $5.6 million in federal funding. The program will start on April 19 to coincide with the annual Show-Me Green sales tax holiday. If the funding only lasts for one day, which is likely given that Iowa’s $2.7 million ran out by 3 p.m. on the first day, no sales tax revenue would be generated. So, what genuine benefit will this expenditure have for our state? It will not add to the net state wealth, but is instead a mere transfer. Any benefit to appliance retailers will likely be very short-lived, and any arguable benefit to the state economy will be small at best. And, all the while, taxpayers will be able to watch their hard-earned money disappear down the drain into another ill-advised government program.

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On the other side of the issue is Clayton resident Stan Braude, a biology professor at Washington University.

Braude said after the meeting that he hoped the city would encourage more residents to have a few hens in their backyards.

What would Clayton have to do to increase hen ownership? I’m imagining a chicken incentive program, reminiscent of Cash for Clunkers — or, alternatively, a fresh eggs buyback program.

I hope Clayton avoids both regulation and encouragement, and instead allows people to make decisions about chickens for themselves. If anyone can’t stand to live in a city that permits chicken raising, they can always move out to Chesterfield.

The post A House Is a Man’s Castle, Fortress, and Barnyard appeared first on Show-Me Institute.

A cause for worry is that the program is growing more specific with this latest incarnation. The rebates will apply only to models of the government’s choice. Cash for Clunkers gave out free money right and left; Cash for Appliances will be targeted, with politicians picking winners.

The post Cash for Clunkers Refuses to Go Away appeared first on Show-Me Institute.

In some ways, the idea behind Cash for Clunkers was similar to the rationale for sales tax holidays. Both are intended to spur economic activity by giving consumers an incentive to spend on targeted items. Instead, each diverts spending from better uses, without generating new wealth.

To learn more about Cash for Clunkers, check out the entire post by Chris Edwards. For a mathematical analysis of the program’s effect on carbon emissions, see Matthew Kahn‘s August 12 post.

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President Barack Obama said in an interview Thursday that the program has been “successful beyond anybody’s imagination” but dealers were overwhelmed by the response of consumers.

Giving out free money (or paying above the market rate, which amounts to the same thing) is a wildly popular policy. No one should be surprised by consumers’ robust response to the opportunity to get something (cash) for nothing (a clunker, by the program’s own admission).

It’s strange to call a program “successful” when it did little more than squander wealth — and so quickly that even Washington politicians realized it couldn’t continue.

Although Cash for Clunkers will drive into the sunset on Monday, the idea lives on in a multitude of other policies that offer attractive payment in exchange for ubiquitous antiques. Like gun buybacks, for example.

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According to a New York Times article:

Dealers estimated that they sold a quarter-million cars with the rebate money.

And the Transportation Department reported that the average gas mileage of the vehicles being bought was significantly higher than required to qualify for a rebate of $3,500 to $4,500. Of 120,000 rebate applications processed so far, the department said the average gas mileage of cars being bought was 28.3 miles per gallon, for S.U.V.’s, 21.9 miles per gallon, and for trucks, 16.3 miles per gallon.

Are these numbers worth $1 billion in taxpayer subsidy? Probably not. Are they worth the proposed additional funding of $2 billion? Definitely not. These mileage differences are pretty small. The environmental impact is negligible, especially considering that the subsidy leads to a perfectly good car being destroyed and new cars built to replace them. In a CNN article, Harvard economist Jeffrey A. Miron discussed the program’s unintended consequences, pointing out that trading in for more fuel-efficient cars might actually encourage more driving.

The other argument, that the subsidy stimulates the economy by aiding the auto industry, is an example of Frédéric Bastiat’s “broken window” fallacy, which can be explained by a short illustration: A boy broke a baker’s window, and the townspeople said, “Ah, but think of the business the glassmaker will get! It’s good for the economy.” So the baker spent $50 to buy a new pane of glass, which stimulates the glass industry. Had he not done that, though, he would have used that money to buy something else — a new suit from the tailor, perhaps — and he would still have had his window. Real economic growth doesn’t come from an artificial restriction of options, by prompting somebody to spend money on a window rather than on a suit. Similarly, when the government uses taxpayer money to stimulate one part of the economy, this comes at the expense of those other economic sectors that will no longer benefit from some measure of either consumer spending or invested savings. Tax cuts are a more effective way to drive economic growth and job creation.

At any rate, encouraging people to trade in a paid-off car to take on debt for a new car is a bad idea, as economic commentator Peter Schiff mentioned in a recent article:

The recently passed “cash for clunkers” program (currently on-hold, as it ran out of funding in one week) is a perfect example of how government policy can make the economy worse. By incentivizing Americans to destroy fully paid-for cars so they can go deeper into debt buying brand new ones, the government weakens an already crippled economy. The last thing we want to do is subsidize Americans to go deeper into debt by buying more stuff. Don’t they realize that is precisely the behavior that got us into this mess?

This program bears a remarkable resemblance to many ill-fated home subsidy programs, in which people were encouraged to purchase houses they could not afford. Overall, Cash for Clunkers is a wasteful and expensive program that does not need a further subsidy. Missourians would be better served with corporate tax breaks that would help create new jobs instead of artificially aiding the auto industry.

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