Currently, there is a big debate on whether the government needs to tighten its belt and cut the deficit or whether government stimulus is needed in order to jump start the economy and keep things moving. I had a great discussion with a reader of the blog via email regarding my post last week titled One Step Forward, Two Steps Backward.
I think most people would agree that the government cannot spend our way out of recession into perpetuity and that it is in everyone’s best interest to cut the deficit. One of the proposals for the government to cut back has been to end the subsidization of the housing market. This could manifest in several different ways. This was my reply to the blog reader in regards to ending mortgage interest tax deductions and reducing the home loan amortization down from the standard 30 years:
“I read Professor Shiller’s proposal for curtailing the mortgage period down from thirty years and removing the government subsidies that go with it. I don’t think that is necessarily a bad idea, I just am hesitant to say it is the right fix right now.
His plan calls for a serious contraction of our economy. Considering that homeownership is thought to be the American dream, the housing industry and everything that goes with it injects a massive amount of money into our economy, and creates many jobs as well. From construction jobs and the suppliers that make the components of a home to bankers, title companies, mortgage bankers and so on, making homeownership more expensive would certainly contract our economy. Though this may be the long term fix needed to avoid future boom and bust cycles, I think implementing this now would devastate an already fragile economy.
However this may be inevitable. Look at the current austerity cuts sweeping through Europe. Almost every nation in the EU is being forced to cut back on everything. Recently, there have been calls for austerity cuts in America as well; these calls have come from economists, politicians (especially from the GOP), and also from the IMF. The IMF has recently been urging America to cut its massive deficit and one way to ensure this may be to stop government subsidies for housing such as mortgage interest tax deductions and new home buyer tax credits.
Since the credit crisis began three years ago, our government has certainly implemented Keynesian economic policy by passing the stimulus and massive bailouts. This type of economic thinking has been popular throughout past times of depression and recession, notably during the great depression through the “New Deal.” Unfortunately, this policy is not necessarily the best idea during times of stagflation, a funk of stagnant growth that may befall our economy, if it already hasn’t!
Many investors and economists worry that America may experience a decade or so of stagflation many refer to as a “lost decade,” similar to what Japan experienced from 1991-2000 when its asset price bubble popped. If this is what our economy will have to suffer through, prolonged government subsidies through a policy of Keynesian economics will not be sustainable. The hopes with the stimulus was that it would stimulate our economy back into the green, not that the government would be a never ending source of cash.
That leads to the Austrian economic criticism of Keynesian policy, arguing that prolonged government stimulus will stifle the private sector because of permanent and expanding government. The last thing we need is private sector having to compete with the an overpowering government.
I agree with you that it will lead to non existent real estate appreciation. More than likely there will also be a massive shift in spending and people will certainly need to save more and decrease credit and debt spending. It is sad to think that the economic climate may resemble post WW II as we watch our economy contract while developing nations grow at record pace. By the time these policies are implemented the BRIC nations of Brazil Russia India and China (not to mention the other burgeoning economies) will be growing at full pace. “
Government spending and austerity cuts are certainly at opposite ends of the economic spectrum; undoubtedly, a synergy of reducing the unnecessary while spending on needed improvements (read: infrastructure, such as updating our outdated air traffic control systems, bridges, power grids, etc…) will be one of the greatest and pressing economic challenges of our time.
I invite a discussion in the comments section as to what your thoughts and ideas are regarding government spending v. cuts.
Got questions? Send me an e-mail: Matt@desertedgelegal.com
DISCLAIMER:
****MATT AZARI IS NOT A LICENSED ATTORNEY. THIS BLOG IS COMPRISED OF HIS OPINIONS, OBSERVATIONS AND INTERPRETATIONS AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL ADVICE. PLEASE CONSULT WITH AN ATTORNEY BEFORE RELYING ON OR TAKING ANY ACTION BASED ON THE INFORMATION IN THIS BLOG.****
Filed Under:
Blog,
EconomyTagged:
Austerity,
Bail out,
commercial real estate crisis; commercial real estate; ticking time bomb; commercial lending,
Deficit,
Economics,
IMF,
mortgage,
stagflation,
Stimulus,
tax credit
