Suppose the government could temporarily prop up the price of clothes by 2-3 percent, would that be a good idea? The government certainly could temporarily inflate the price of clothes (a clothes buyers' tax credit might do the trick), but it's not clear that this policy would have many advocates. The situation seems different with house prices. Remarkably, no one even wants to talk about the issue. The $8,000 tax credit is equal to just under 5 percent of the median house price. This certainly was one of the factors in the recent turnaround of house prices. Is it a good policy for the government to temporarily prop up prices so that people buying now are likely to sell at lower real prices in the future? This policy transfers money from homebuyers who do not benefit from the tax credit to current homeowners who sell their house now and also the banks who hold mortgages that might otherwise not be paid off. By slowing the price adjustment process it also delays the recognition by homeowners of their actual wealth. The result is that many people are likely overestimating the wealth they will have in retirement and therefore not saving adequately.I know that reporters did not talk about this issue when we had an $8 trillion housing bubble, but that is not an excuse for not talking about it now.
--Dean Baker
