Australian Lefty on Politics, Governance, Science and Info Management

Sins of the Forbears

Posted by Dave Bath on 2008-10-15

While the KRudd response to unfettered greed and twisted financialism has some points with merit, such as bank deposit guarantees (however odious to lefties like me and free-market purists), and the stimulus to retirees (although not the pensioners, so Keynesian effects are suboptimal), the giveaway to homebuyers is merely fanning the flames that helped the economy overheat (and thus to the meltdown) in the first place.

The giveaway to house-buyers has many downsides: environmental, economic, and probably political.  It reeks of the Howard/Costello approach.  For the same amount of money, we could have had a much more useful stimulus, with much lower political risk.

The extra $7k bonus for newly constructed homes (on top of the $14k for first home buyers) can only contribute to urban sprawl and consequential pressure on fuel costs, infrastructure bottlenecks, and carbon emissions.  If this urban-sprawl-promoting measure was limited to high or medium density replacement of low-density housing, then the environmental damage would be minimal.

Housing affordability:
If housing prices jump more than the bonus (as they did when the Howard regime bonus came in), then housing affordability will continue to be a problem, if not worsen.  The only possible benefit of this action is political – as housing prices won’t normalize as much as is reasonable, so people will still maintain the illusion of the wealth promoted by the bubble.  If the action was meant to keep the construction industry afloat, then we’d be better off if the money was spent on infrastructure projects or building/extending kindergartens and schools.

Political risks:
KRudd understands all too well the politics of envy fostered under his predecessor Howard.  How many people won’t receive the huge bonus, will be doing it tough, and blame the government for not spreading the largesse more widely?

Fanning the flames: The housing aspects of the stimulus package are merely fanning the flames of the housing bubble and over-borrowing that caused the economic overheating (and thus the meltdown) in the first place.  This was one of the economic (and housing affordability) crimes of the Howard government.

Limited stimulus:
The takeup of the housing bonus offer depends on the willingness of punters to take on debt in nervous times, will not necessarily stimulate production (it’s mainly a bubble inflator), and will do much less than an equivalent amount of cash dispersed more widely, to those with almost no spare cash after food and rent.  Pensioners (old or young), carers of schoolchildren, and the unemployed (often desperate for new clothes and shoes suitable for job interviews) would be very grateful for much less money, and would spend it, sustaining broad employment across economic sectors.  The other problem is that by stressing "once off", there is a greater chance of people squirreling it away for the rainy days to come, and thus limiting the stimulus, rather than by improving consumer sentiment by offering a medium-term sense of security from a mix of a two-year cut in personal tax rates and a two year increase in benefits.

This is a huge opportunity squandered by the federal government, for dubious political benefit.

Still, it would be much worse if the Liberals were still in government – they’d be using "trickle-down" theory, which only really helps those who don’t need it.

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