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Fixing the Economy

Fixing the Economy
    This idea might look familiar because it’s a variation on some ideas I’ve noodled on before. The idea is to goose the economy by offering a dollar-for-dollar federal tax rebate for any sort of home improvement. That would include a wide variety of economic activity: Construction, furniture, appliances, drapes, carpets, landscape, furniture, green features (e.g. solar panels), home theaters, new roofs, and lots more. Anyone with a home could find something that needs an upgrade of one sort or another.

    This idea has five benefits:

    1.       It boosts local employment rates fairly quickly. Small businesses can often hire overnight, especially when the country is running at 9% unemployment.

    2.        I’m assuming that the added economic activity would create more in taxes and reduced government spending for safety nets than it gives up in rebates. I could be wrong about that if the people who benefit most from the new jobs are also the people who don’t pay federal income taxes.  But remember that those people will be spending more money if they have it, so those dollars should eventually reach someone who pays taxes.

    3.       The stimulus would reach almost every neighborhood.

    4.       Banks would need to get involved to lend taxpayers the home improvement money until the tax rebates arrived. If the system allowed banks to receive the rebate from the government directly, there’s a low risk of default, so loans could be processed quickly and carry a low interest rate. When banks have a financial interest in a bill, it has a better chance of being pushed through Congress.

    5.       The economic activity would happen before the government pays the rebates. This is opposite the normal approach in which rebate checks are given to taxpayers first and then the government hopes the economy gets stimulated.

    Obviously you’d need experts to tweak this plan in a number of ways. The most important question is whether you’d produce enough in tax revenues and government savings on safety net programs to compensate for the tax rebates. Keep in mind that under this plan the government would also be paying for any home improvements that would have happened organically. You also need to account for the fraud that any new system creates.

    On the whole, do you think the numbers would work?

    I will stipulate that many of you believe government spending should be cut, period. And many of you believe that any new government plan is a mistake no matter what it is. I have a lot of empathy for those views. But I’m also a realist, and I wonder if there is any sort of plan that would appeal to both Republicans and Democrats.


    I’m getting these two comments a lot:

    1. It will obviously never work, and you know nothing of economics.
    2. Versions of this are already successful in Canada, Sweden, and for historical homes in the U.S.

    Some of you are forgetting the multiplier effect of economics. The carpenter who gets new work spends more money, and the retailers and service people who receive that money also pay taxes, and so on down the line.

    Remember also that some types of home improvements will increase property tax rates, depending on the local tax laws. In California, for example, adding a deck will make you pay higher property taxes each year.

    Those of you who point out the unfairness of this concept have noted that homeowners are the largest beneficiaries. But I would argue that the renter who got a job because of this plan made out better than the guy who upgraded his carpet. And keep in mind that homeowners are disproportionately high federal income tax payers to begin with. Also, any renter who also isn’t getting a new job or a good deal on home improvements from this scheme still benefits from an improved economy. And he benefits if his state gets higher property taxes from the homeowners because of the improvements.

    No stimulus plan distributes benefits equally. The way to judge the home improvement idea is to compare it to the “do nothing” option and to the next best stimulus idea. I think you would find that the fairest options are also the least likely to work.

    Cars for clunkers is a poor analogy to this plan because I doubt it had much impact on hiring, and it was temporary by design. The home improvement idea can last until inflation is a bigger problem than employment.


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