Bubble Heads
Wesbury, Brian S.
"Bubble Heads" BY BRIAN S. WESBURY with a Republican in the White House, the mainstream press will always find something wrong with the economy. Remember the 1980s? Who can forget the daily...
...After hyper-ventilating about a bubble in stock prices and pooh-poohing the New Economy, The New York Times, Business Week, Fortune, even the news pages of The Wall Street journal are complaining about a growth rate that would have been cheered two decades ago...
...First of all, if easy credit were artificially inflating housing activity, then housing sales per capita would rise...
...In 1992, despite the addition of 1.1 mil-lion new jobs and a 4-percent real GDP growth rate, the press attacked Bush I and painted a bleak picture of economic activity...
...In the past four years—and despite lower interest rates—the ratio has fallen to 3.3 times income...
...During the past 12 months, that rate has been 31.6 homes per 10,000 citizens...
...Today, the economy is in much better shape than most people believe...
...And the data are clear...
...Demandsiders automatically start psycho-analyzing the consumer—this is where the "bubble" diagnosis originates...
...Or that corporate malfeasance has stirred up a political hornet's nest that threatens future investment decisions...
...What liberal-minded reporter wants to report that...
...Or that the recovery got underway in the fourth quarter as the Bush tax cut started to take effect...
...Facts are not always the end of the story...
...Even more amazingly, during the recession year of 2001, sales of existing homes hit a record of nearly 5.3 million units...
...And building codes are much more cumbersome...
...But in 2001, with a recession well along, new home sales rose 3.1 percent and existing home sales were up 2.6 percent...
...Who can forget the daily barrage of headlines when the Gipper lived at 1600 Pennsylvania Avenue...
...Demand-side logic and the current political environment are what drive the talking heads, which is why they're almost always wrong (at least about economics...
...But not only is the economy growing again, areas like the housing market are inarguably booming...
...Where's the bubble...
...Once again, where's the beef...
...Between 1987 and 1995, the ratio was 3.4 times income...
...they typically have central air, multiple cable and phone connections, better insulation, three-car garages...
...Never mind, by the way, that it's wartime, or that the 9/11 attacks were unprecedented...
...The impact was immediate...
...But believe it or not, denying the importance of taxes is just one of the errors made by the housing bubble heads...
...At current trends, both new and existing home sales will set all-time records this year...
...They assume that just because housing is so strong, it must be the latest outburst of irrational exuberance...
...And in that latter search, an answer can be found...
...No matter that the recession had already begun when Bush II took office...
...The experts touched on everything—interest rates, income gains and the low level of unemployment—everything, that is, except the beneficial tax treatment of housing...
...In 1999, before the Fed Brian S. Wesbury is chief economist at Griffin, Kubik, Stephens & Thompson, a Chicago-based investment bank...
...After all, the Federal Reserve started a controlled burn in 1999 to burst a perceived bubble in stock prices and ended up burning down the entire economy...
...1* We Have Returned...
...Consumers respond to incentives, the data are clear...
...Constructing a P/E ratio for housing—by dividing median new single-family home prices by median family income—is easy...
...But this was still a huge change from the previous law, whose main tax-relief features were profit rollover and a one-time $125,000 exclusion for those over 55 years of age...
...Why look at data...
...During the three years prior to the passage of the 1997 law, existing home sales were averaging 4 mil-lion units annually...
...And way back in 1977 and 1978, the sales pace was actually higher, 37 per 10,000...
...Houses today are bigger...
...If taxes were given their due for keeping the housing market strong, then tax cuts would clearly be beneficial...
...Combined with the ability to deduct mortgage interest payments, this new tax law made housing the least taxed of all investments...
...It's also worth remembering that a house in 2002 is not the same thing as a house in 1977...
...Those are wet blankets on economic activity, and a hesitant consumer or business leader should not surprise anyone...
...If it's good, it must be bad, seems to be the theory...
...However, a look at some simple statistics suggests that these analysts are just plain wrong...
...And what do we read in the mainstream press...
...The same thing is happening this year...
...Nonetheless, a string of recent roundtable discussions with prominent economists, on both CNBC and the PBS NewsHour, managed to entirely ignore taxes when analyzing the housing market...
...To qualify, the home must have been a primary residence for at least twoyears...
...These stories—which mysteriously went on hold during the Clinton years—have been regular features of both Bush administrations...
...All the talk of a "bubble" in housing provides one more lesson in the importance of ignoring conventional wisdom...
...In theory, the price of those bigger, better houses should rise faster than inflation...
...residents...
...Let's look at the evidence...
...You can bet your house on it...
...Nor were they asked about it...
...Or that real GDP growth has averaged a 3-percent annual rate over the past three quarters...
...THE NEW SPECTATOR NOW UNDER OLD MANAGEMENT...
...Way back in August 1997, President Clinton signed the Taxpayer Relief Act, which exempted from taxation up to $500,000 in profits from the sale of a home (for a couple, or $250,000 for a single taxpayer...
...Instead, every weak number is highlighted, talk of a "double-dip recession" is ubiquitous, and the gap between rich and poor is back from its eight-year sabbatical...
...There was the "budget deficit," the "trade deficit," the "rising income gap," the growing "gap between rich and poor"—an onslaught of front-page stories designed to pound voters into believing that good times were bad...
...20 THE AMERICAN SPECTATOR • SEPTEMBER/OCTOBER 2002 started seriously hiking rates, 32 new homes were sold per 10,000 U.S...
...This supported Bill Clinton's mantra that it was the "worst economy in 50 years"—as demonstrably big a whopper as the man ever told...
...But the fact that incomes have kept pace is yet more evidence that no bubble exists...
...Between , 1977 and 1985, median home prices averaged 3.1 times family income...
...A bubble in the housing market...
...Instead of ignoring data, they do not even look at it...
...Lord save us if policymakers buy into the bubble theory of housing and do something to try to "fix" it...
...It's not for nothing that most economists and the press ignore the tax changes...
...At the same time, while housing prices have risen faster than inflation, so have incomes...
...Supply-siders, on the other hand, wonder what policy change induced a shift in behavior...
...One Year $39 Call 1400-524-3469 SEPTEMBER/OCTOBER 2002 • THE AMERICAN SPECTATOR 21...
...Housing always (and I mean always) takes a hit during recessions...
...Extraordinary...
...BUBBLE HEADS BY BRIAN S. WESBURY ith a Republican in the White House, the mainstream press will always find something wrong with the economy...
...In the first 12 months after the law's passage, existing home sales hit 4.6 million units...
...To be fair, the housing market has defied gravity...
...If housing is so strong, it must be the latest outburst of irrational exuberance...
...Whenever a new pattern emerges in the economy, supplysiders and demand-siders analyze the situation differently...
Vol. 35 • September 2002 • No. 5
