The free home loan scheme

Matt Nolan at TVHE draws our attention to idea that the government could be putting forward an interest-free loans for first-home buyers scheme. As Matt notes

Now, this is essentially a transfer from everyone (taxpayers) to first home buyers and the people they are selling to. In such a situation I have to ask why? It certainly doesn’t seem fair to take money from people and give it to first home buyers and the section of the property market they are involved in [...]

The government says it is to “encourage building” - if this is the case, then why this scheme? Why not a direct subsidy to home builders.

And he is right on both points. It is a transfer from taxpayers to first home buyers and that a direct subsidy would achieve the same end, if this really is an end worth achieving.

But a further problem with the idea is that it is an example of the point made by Mario Rizzo over at the ThinkMarkets blog that I blogged on yesterday. While the government may be able to create employment via such a scheme we have to ask what will the scheme do to resource allocation? Such spending is counterproductive in the medium to long term. The scheme seems unsustainable (once the stimulus stops) since it is not consistent with the preferences of consumers-savers-investors. Will we get a whole pile of resources moving into housing which would be better used in some other area of the economy but which are in housing only because of the government loan scheme. What happens to the housing sector when those resources do get reallocated to other areas of the economy. Is the government just inducing a boom and bust cycle in the housing sector? The government is not acting as a super-entrepreneur who is trying to determine the efficient and sustainable direction of resources, it spends according to economically irrelevant criteria of job creation. This is short-termism at its worst. Doing something, anything, for the sake of being seen to be doing something.

Ideas that may look good at the macro level don't look so good at the micro.