Market based solutions

[Kurt_and_Hunter]

The word "market" is somewhat tarnished because wing-nuts use it as a talisman.

But there is a world of difference between believing that markets work, doing things no independent actor can hope to accomplish, and believing that the output of a market is virtuous. (Only crazy people think that... it's just a religion erected for the rich to claim the mandate of heaven and crack on poor people.)

Market-based solutions change variables in the market-place with the expectation that those changes will, in interaction with market forces, have effects more powerful and efficient than any micro-management could hope to accomplish.

The market says houses aren't worth shit. That's the wisdom of the market and it's right. Nothing has intrinsic value, including money. A thing is only worth what you can get for it.

If the government tried to set house values directly the market would ignore it. "The government can say this house is worth 250k but they can't make be buy it." And if the government tries to renegotiate foreclosures in a case by case basis it will end up being arbitrary and inefficient. (Nothing against government--it would be just as arbitrary and inefficient in the private sector. Anything that is case-by-case lacks the predictability that drives actions in markets.)

But the government can change the REAL value of something buy kicking in REAL money in defiance of the market's judgment. (The mortgage interest deduction has been subsidizing home values as long as I've been alive.)

One market-based solution to low housing prices someone mentioned recently was a $10,000 tax credit for purchase of an existing home, but not a new home. As that played out in the marketplace it would increase the value of existing homes even if they are not sold. The fact that the government will pay someone $10,000 to buy house X makes the house more sale-able and raises the real value of it by $10,000. (Though if the tax credit was temporary and short-lived that increase in value would probably not translate into higher collateral value.)

Though the market would still do most of the work in determining value, such a sweeping solution is NOT deferential to the market's wisdom, only it's unique power to be on every case 24/7.

The market has already spoken. Houses aren't worth squat and people like new homes. (God knows why... most of them are flimsy IMHO.) Prices are sensitive to supply and demand. There are too many houses, not enough money/credit or both. (It's both.)

To reduce inventory the government could set up a government board that sets annual targets for home construction, withholds surplus building permits, raises taxes on surplus construction... that level of central management would be a big complicated and politically influenced mess.

Or you can change a variable in the market in a broad way and let the thing play out.

An existing-home sale tax credit would tend to reduce the number of new homes constructed without the government actually banning new construction. The new market reality would make new homes a somewhat worse deal. (And all this swell infrastructure spending will soak up the dislocated construction jobs.)

So there's no need to be leery of "market-based" solutions. It's a jargon thing. Any solution is actually "anti-market" since it seeks to bend reality away from what the market has already done naturally. (The very concept of a "solution" already says the market's judgment is a problem to be solved.)

[slipslidingaway]

1. Kick for later n/t