Tuesday, March 25, 2014

Bibi's Obamacare-style Boondoggle





Bibi's Obamacare-style Boondoggle



     Real estate price inflation is probably the number one domestic issue in Israel and Israeli politicians are all obsessed with "doing something" about it.  The problem is that in politics,  the passion for "doing something" begets boondoggles of the order of magnitude of Obamacare.  Not a single Israeli politician understands housing economics and not a single one has any clue as to how to cope with housing inflation.


   Now Yair Lapid and Netanyahu himself have proposed two companion confused and clueless "programs" for "fixing" the housing market.  These programs are so awful that the Chief Economist of the Ministry of Finance resigned in protest, and the programs have been condemned by the Bank of Israel and other people who have studied freshman economics.


    Basically Lapid's program calls for a massive subsidization of housing in the form of exemption for new housing from the Value Added Tax for selected new buyers (second-hand housing is already exempt).   When everything in the country is subject to the Value Added Tax except housing, this amounts to a massive subsidy for housing.   Subsidizing housing drives up demand for it and causes prices to rise.


     Under Lapid's program, qualified "new buyers," meaning young couples who have served in the military or national service, would be entitled to the exemption.   There is nothing wrong with conferring large preferences upon those who have served the country, but this housing subsidy program will simply drive housing prices much higher.   (The Radical Left is already whining that it discriminates against Arabs.  Actually, it would discriminate against those Arabs who do NOT do military or national service.  But in spite of that, it is still a mind numbingly stupid program!)   The proposal also invites endless litigation by people seeking to be recognized as "new buyers" for purposes of the law.  It is hard to imagine a more effective program to drive housing inflation higher.


    Netanyahu's companion proposal is even stupider.  Having pretended for decades that he is a free marketer, Netanyahu wants to impose a regimen of all-encompassing price controls on the market, to be called "target prices."   He wants to provide subsidized land allotments to contractors who agree to sell housing units at less than full market prices to consumers.  But guess what - the true price of housing is not affected one iota by this economic camouflage.  Market clearing prices of housing are not affected whatsoever by this.  Providing land at less than market prices to contractors is the most incredibly ignorant idea one could come up with for reducing housing prices.  


   Both programs would involve massive expansion in the governmental bureaucracy that would oversee them and would end up in endless litigation and distortion of markets.  Both proposals are so unworkable that history books are likely to compare these career ending programs by Netanyahu and Lapid to the career ending Obamacare, which may yet drive the Democrat Party into oblivion.






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