Home Alone: Update on the Homestead Act

Everyone knows that housing was the epicenter of the previous recession and that it is the biggest drag on the recovery. President Barack Obama wants to help by allowing homeowners to refinance their mortgages at record low interest rates even if the values of their homes have fallen below the amounts they owe.

The majority of the FOMC wants to help too. That’s why they voted to implement Operation Twist at their meeting on September 20-21, despite the objections of three cold-hearted dissenters. Last week and early this week, three of the do-gooders on the FOMC said they are ready to do more good and are considering a third round of quantitative easing that would include purchasing mortgage-backed securities again.

I don’t understand why no one in Washington is pushing for more targeted policies that would simply reduce the huge overhang of unsold homes. Doing so would take the downward pressure off of home prices. Actually, it should boost home prices by convincing would-be homebuyers to stop waiting for better deals and jump in and buy a house.

That’s the objective of the Homestead Act that Carl Goldsmith and I proposed this past summer. It would provide a matching down payment subsidy of up to $20,000 for anyone purchasing a home as their principal residence for two million houses. It would provide tax-free rental income for 10 years to anyone who purchases a house to rent for another one million houses. That would eliminate the current overhang of unsold homes completely.

Carl and I reached out to various political leaders in Washington on both sides of the aisle. Congressman Gary Ackerman liked the idea well enough to instruct his staff to work on a bill. The problem is that our plan would lower the corporate tax rate on repatriated earnings to 10%, using the proceeds to pay for the subsidy. The Congressional Budget Office scores these tax revenues as though they will be raised at the 35% tax rate even though such a high rate has been a major obstacle for such repatriation. So, we’ve hit a road block, though we are still pushing for the plan as best we can.

China

In my opinion, China’s success of the past three decades is mostly attributable to the exploitation of Chinese workers. That’s right, the world’s largest communist country has been exploiting its workers! There are an estimated 120 million migrant workers in China. These are not people from other countries. They were all born in China, mostly in rural villages. Yet, they are restricted from living and working freely in their own country.

Many of them have no siblings because their parents were limited by the one-child population control policy instituted during 1978. When they were teenagers, they swarmed out of the impoverished rural areas to the urban centers on the east coast of China, finding jobs in the booming export manufacturing industries.

These migrant workers provided the cheap (exploited) labor that transformed China into the world’s top manufacturer and exporter. Their pay was low, and they received few, if any benefits. They were second-class citizens subjected to the household registration system known as the “hukou,” which defines where people are officially registered to live and whether they are considered urban or rural residents. The distinction is crucial, because rural migrant workers who move to cities to work in factories and on construction sites are not eligible for many social benefits, including education for their children.

Many migrant workers are now young adults, who are very unhappy about their status and their standard of living. They are starting to demand better treatment. The government responded at the beginning of the year by raising the minimum wages by 15%-20%, and by promising that the next Five Year Plan will focus on improving the lives of Chinese workers. The resulting jump in labor costs has been exacerbated by a shortage of young exploitable new entrants into the labor force as a result of the one-child policy.

Higher nominal wages and rising labor costs have pushed the CPI up by 6.1% y/y through September, led by a 13.4% increase in food prices and a 12.3% increase in fuel prices. Anecdotal evidence suggests that inflation may actually be higher than shown by the official data. That explains why monetary and credit authorities have been tapping on the brakes since early last year. M2 (in yuan) rose 13.1% y/y through September, the slowest since May 2001. Bank loans are up 14.3%, the slowest since November 2008.

Small firms are getting squeezed by rising labor costs and much tougher credit conditions. They are being forced out of business. The authorities are scrambling to provide credit to them, fearing that rising unemployment along with erosion in the purchasing power of recently raised wages will exacerbate social unrest. No wonder that the Chinese stock market is down 15.7% ytd, among the worst performing in the world.