The law passed in February 2009 included a temporary 10 percent capped tax credit for qualified first-time home buyers that expired April 30, 2010. The program was later expanded to include repeat home buyers, and recently home buyers were given until September 2010 to complete qualified transactions.
One view of the tax credit’s effect is that it changes the timing of housing transactions — market participants rush to complete transactions before the credit expires — but has little effect on the value and quantity of homes because homes are expected to last many times longer than the tax credit does. Another view is that the market cannot do without the credit, and the housing market collapse that preceded it may well continue when it’s gone.
Although we do not yet have housing data beyond the summer of 2010, homes take time to build and housing starts can be informative about what will happen in the housing market over the next few months. A housing start is likely to be a house that will be finished in a few months, and presumably builders expect to command a high enough sales price to cover the costs on building the house.
The chart below shows seasonally adjusted single-family housing starts and completions since October 2008. Housing completions rose sharply as the deadline neared and spiked immediately after it, and for July and August were about as low as they have been in years.
Housing starts began coming down this spring, which helped set up the situation of few completions in July and August. But yesterday’s release by the Census Bureau confirmed that housing starts are not much lower than they were in the second half of 2009, when the tax credit was supposedly propping them up.
For now, it appears that, aside from this spring’s rush to meet the tax-credit deadline, the housing market after the tax credit will proceed at much the same pace it did for the time that the credit was in place.
Keynesians acknowledge that, someday, the private sector will pay taxes to finance the salaries and benefits of government employees, but this cost is said to be offset by the additional demand for goods and services produced in the private sector, which have those government employees as their customers.
Obama administration economists used this logic in January 2009 when they persuaded Congress to pass the American Recovery and Reinvestment Act, assuming a “multiplier”: that every 10 people hired under the law would create an additional six jobs. This is why they thought the law would have pushed the unemployment rate down close to 7 percent by now.
Of course, the unemployment rate is still close 10 percent. This might show that the legislation failed to stimulate the economy, or that the economy was in worse shape than the Obama administration originally thought, or both.
The Obama administration now says that employment would have fallen seven million if it weren’t for the stimulus, rather than the drop of four million that actually occurred from early 2009 to early 2010.
I don’t blame the Obama administration for underestimating the depth of the recession. But so far it has no way to derive its seven million estimate except by assuming that it had been right all along about the potency of the stimulus.
The law was admittedly a reaction to the state of the economy, but the 2010 census is a result of Article I of the United States Constitution, and thus provides an opportunity to measure effects of government hiring that might not be confounded by contemporaneous economic events.
The solid blue line in the chart below displays total payroll employment, inclusive of census workers and other government employees. The red line is employment apart from special census employment (I estimate special census employment as the difference between total federal nonpostal employment from its relatively constant amount outside the months February-July 2010).
If there were no extraordinary employment events this spring aside from the census, and, as Keynesians contend, hiring special census workers created jobs apart from the census, then the red line should have spiked like the blue one. In fact, the spike in the red line, if any, is pretty subtle.
If every 10 people hired for the census created an additional six jobs, then the only way to explain what actually happened is to contend, as shown in the dashed-blue line, that May and June had extraordinary and negative employment events that were offsetting the private sector benefits of census hiring and thereby obscuring an otherwise obvious spike in the red line.
Perhaps the stimulus benefits of public employment are both large and too subtle to be easily seen in the aggregate employment data or the private sector’s appreciation of public employment programs has been frustrated yet again by extraordinary negative events that miraculously coincide with true stimulus. Or maybe the Keynesian multiplier has been exaggerated.
The Great Depression began in 1929 and lasted too long. Stimulus advocates tell us that the government spending surge that occurred as a result of our joining the war is the primary reason the Great Depression eventually ended.
The chart below shows the civilian unemployment rate from 1929 through 1941. With the exception of the last 24 days of 1941, the United States was not at war during those years, and its real government purchases were less than a third of what they would be during the war. Yet the unemployment rate had already come down sharply by the end of this period.
It’s true that World War II had an effect on top of the recovery the United States had experienced before Pearl Harbor, but that effect is easily exaggerated. The expanded wartime capacity did not primarily come from putting the Depression unemployed back to work but by drawing into the marketplace women, teenagers and others who were not part of the Depression labor force.
Nor did wartime military spending expand the private sector. Many parts of the private sector shrank during the war precisely because the government was spending so much.
We are at war in Iraq and Afghanistan today, and who knows what might be next? It is incorrect, and deeply unfortunate, for stimulus advocates to suggest that today’s war spending of almost $200 billion a year is doing its part to prop up our nation’s private economy.
If the Iraq or Afghanistan wars ended and, say, 500,000 troops were discharged from duty, our private sector would not contract, as stimulus advocates contend. Rather, the private sector would expand to absorb the new veterans, in much the same way that the private sector expands every summer — even in a recession — to absorb more than a million teenagers who are “discharged” from school at the end of the academic year.
A shrinking government, not a growing one, helps the private sector expand.
The Congressional Budget Office has estimated that the Treasury spent about $700 billion on military operations in Iraq, and an additional $400 billion on Afghanistan, between 2003 and 2010. That total includes some — but, as noted last week, not all — of the human costs imposed on our troops because, among other things, much of the salary and benefits for our all-volunteer military has yet to be paid.
Professor Edwards has studied current and historical military conflicts and quantified Treasury expenditures on veterans’ benefits compared with direct expenditures during the war years. The chart below shows some of his findings for the seven major wars since the American Civil War.
The vertical axis in the chart measures the fraction of (at present value) Treasury expenditures on each war that provided for veterans’ benefits rather than direct expenditures. The horizontal axis measures the duration of the war, in days.
For example, the first Gulf war lasted less than 100 days, and 80 percent of Treasury expenditures on that war are expected to be in the form of veterans’ benefits (many of those veterans still have a long time to live) rather than direct costs. For the purposes of making the chart, I assumed that the Iraq and Afghanistan wars would last until June 1, 2011. To the extent that they last longer, that point should be moved to the right in the chart.
The chart suggests a negative relationship between duration of the war and the share of costs that are on veterans’ benefits. That does not mean that expected benefits fall as the war gets longer, just that expected benefits rise less with duration than the direct costs do.
The Afghanistan conflict is already our longest war and is continuing. So its costs will continue to rise, and veterans’ benefits are expected to be significant. But perhaps Iraq and Afghanistan will be on the low end in terms of the share of Treasury spending that goes to veterans’ benefits.
The Iraq war was more expensive than the expenses so far tabulated by the Congressional Budget Office. Every dollar we continue to spend on those wars will be associated about another 30 cents of future benefits to veterans.
