Another Butterfly Effect?

Recently, a post on the SUU Macroblog expressed the viewpoint that the stimulus package ultimately failed to generate the same return as the amount initially spent. In the same vein, this article from the Associated Press details the failure of Obama's recent repeat buyer credit program to stimulate sales in the sluggish housing market. Unlike the "Cash for Clunkers" program which artificially inflated sales before sharply falling (the "Butterfly Effect"), the repeat buyer credit program hasn't stimulated sales at all. The program was designed to ease the purchase of a new home by current homeowners. However, this time, the failure wasn't the program, just the timing. The severe winter weather and the fact that a third of homeowners are still underwater on their mortgages have effectively negated the chance of many homes being purchased this season. It remains to be seen whether the program can actually revive the housing market or if it turns out to be just another quick fix.

1 comment:

Dr. Tufte said...

I don't think "butterfly effect" means what you think it does.

This policy is dumbfounding - it's worse than cash-for-clunkers.

In cash-for-clunkers, for better or worse, they destroyed the old car that you traded in. Thus, there would be a net change in both the used car market (a supply shift to the left) and the new car market (a demand shift to the right). Those shifts will raise prices in both markets.

In this policy, there is no plan to destroy the existing home. So, if the current homeowner shifts into a new home, the net effect on demand and supply of existing homes is zero. In finance, this is known as churn, and is regarded as one of the unethical things done by brokers. If, instead, the homeowner buys a new home, the supply of existing homes will shift to the right (depressing prices), while the demand for new homes will also shift right (increasing prices). This will tend to help builders at the expense of homeowners. Politically that might be useful, but it's hard to see how playing favorites like that is macroeconomically useful.