In Formula 1 racing, they talk of the “silly season” in which teams and drivers swap seats much like a game of musical chairs. In the U.S., the silly season occurs a few months before every presidential election as candidates articulate (or not) their visions for the economy. Two candidates seem to offer at the top of their economic ticket policies that attempt to garner populist votes rather than serious economic reform.

Let’s begin with a truism that apparently is no longer true. The U.S. was greatest when it had faith in global competition and exhibited an evangelical willingness to expand global free trade. Of course, there must always be caveats to unbridled free trade, for instance when one country attempts to distort a level playing field to the detriment of other nations, while some trade policies ought not be discouraged. An export subsidy may be designed to favor a domestic exporter, but, ultimately, consumers elsewhere benefit from the resulting decreased price. Only if such a subsidy is a predatory attempt to lessen competition should we take exception. 

Import tariffs are more troubling and problematic. One candidate proposes to place a 10% tariff on all imported goods. I cannot imagine an economist who does not thing such an idea is completely hair-brained and nonsensical. It will result in a spike in inflation and a tax on all consumers to the tune of about $2000 per year. The only entities who will benefit are those domestic producers who don’t have to worry about global competition. They need not innovate and their profit margins can double. The 1% who earn most of their income through passive capital gains and dividends will laugh all the way to the bank, while all the other consumers will suffer. 

That’s just in the first round. Notice I chose my words carefully. While domestic producers will benefit from the increased monopoly power such a tariff creates, producers who export will suffer. They will soon find that nations around the world will retaliate with tariffs of their own targeted against US manufacturers and producers. What China will lose in exports to the U.S. for which there are U.S. substitutes, it will gain in exports worldwide that can undercut US production penalized by retaliatory tariffs. We might call the tariff proposal the “Make China Great Again” policy. 

Of course, things can get worse over time as the free trade  principle that made America great at one time is eroded globally and new treaties that exclude America are promulgated enthusiastically. 

Nor will the profits that accrue to a handful of well-connected domestic producers promote economic growth. It is estimated that, under this policy, US debt will rise by another $5 billion under this candidate’s economic plan. That number rivals the debt increase that arose under the candidate's previous administration. 

This does not mean that only one candidate has a dysfunctional economic policy. The other candidate proposes a $25,000 grant to first time home buyers. At least this proposal is part of an economic platform that will not inflate prices and will raise incomes for middle class households, while the proposals so far from former President Trump induces inflation and results in decreased middle class buying power. While Harris' policies will only raise national debt by about $1.5 trillion, or less than a third of her opponent, I remain concerned about ineffectiveness of her housing policy.  

I am a great fan of homeownership and the creation of family wealth that can result when people have a mentality to enhance their personal living conditions. I studied urban and housing economics in graduate school and worked for the Harvard/MIT Joint Center for Housing Studies upon graduation. I’m fascinated by housing policy. and applaud increases in the rate of homeownership that has retrenched a bit since the 2000s.  Unfortunately, the candidate's demand-side proposal accomplishes little. Meanwhile, some supply-side policies can reverse the downward trend depicted in today's diagram.

The political theory is that, with $25,000 in their pocket, more people can overcome the great hurdle of having to save 20% of a home’s selling price for their down payment. This is what economists call a demand-side policy. By enhancing demand, it is argued that homeownership will increase. 

Let us ask, though, what will be the supply response? Local zoning restrictions and idiosyncratic building codes, unproductive regulation, a severe shortage of contractors and builders, and costly land and property taxes all raise the price of housing and limit its supply. 

Any economist will tell you that if the supply is fixed and demand increases, the only thing that will happen is an increase in housing prices. Young families may have $25,000 more to purchase a home, but homes quickly become $25,000 more expensive. It is not first time home buyers who benefit but rather home sellers and current homeowners. In the end, home prices ratchet up and will be even more unaffordable for young households once the provision ends.

There may be a minor trickle-up effect that induces a few more homes to be built, but such new construction is in the $400,000 or $500,000 range, at a minimum, well out of reach of most first time homebuyers. 

If we really want to help expand the housing supply, we must do so with supply policies rather than demand. While a free market system finds it unfathomable to directly subsidize builders or building materials, our hands are not tied.

In Canada, the federal government offers incentives to communities willing to relax building and zoning codes that frustrate new home construction. I could not imagine a more effective policy than a unified federal building and zoning code that remains flexible enough to recognize some local conditions and not so rigid that builders must relearn how to build for each market. Such a policy is difficult in the U.S. unless the federal government can articulate a federal interest is something so local as housing. 

As mayor, I proposed heavily taxing unused and warehoused land to encourage development, and to put foreclosed, donated, or unused public land into a land bank that could remain owned by the public, but which could be sites for hundreds of tiny homes in small communities. My vision was to take a couple of acres here and there and provide municipal sewer, water, and electricity to sites to create micro tiny home communities of a density of perhaps 50 tiny homes on a two acre lot. Landlords find it attractive to build 50 rentable apartments on a couple of acres, with the blessing of local zoning boards (except recently in Plattsburgh), but few seem willing to embrace the idea of low cost and entry level tiny homes as an alternative to rentals. 

A company in Austin, Texas is even building such modest home neighborhoods using home building robots. On the roofs of these homes we can organize a domestic Peace Corps that installs solar panels and learns an increasingly in-demand  trade in the process.

If we do these things, and combine with them some creative financing by issuing land bank financing through tax-exempt bonds, we can create equity building homes for between $100,000 and $200,000, and with mortgage payments and property taxes well less than the rents many young families pay. 

As I write these words, I can already imagine the hue and cry of opposition, from real estate developers, conventional builders, mortgage issuers, and landlords. Heck, even a county official opposed the idea of its only city demonstrating the creativity of a land bank. This is why national policies and incentives may be necessary - to overcome parochial local political interests. 

One of the primary goals of my weekly blogs is to explain economic principles to the masses. Without a little economic education, we can be seduced by trade policies borne from frustration and lack of creativity or industrial policy, or by attempting to solve supply side housing problems with demand side policies. Simplistic solutions cannot address complex economic problems. We must be more creative and we must demand more sophisticated leadership. If we don’t, I guess we get the middling and unproductive, but seductive, solutions our leaders hawk to us at this time every four years. Don’t despair, though. There are solutions, if only we can put our minds together to find solutions.