U.S. government porkfare is no way to end this recession

No one would dispute the idea that people respond to incentives: A temporary, one-time tax credit brings demand forward.

But it will take an increasingly large tax credit to get the same bang for the buck, according to Andy Laperriere, a managing director at the ISI Group in Washington.

Using estimates from the National Association of Realtors on the number of home sales that were borrowed from the future, Laperriere calculates that home sales will drop 11.5 percent next year even with an extension of the US$8,000 tax credit. That's better than the 29 percent decline he predicts if the credit expires, but the sign is still negative.

Expanding the eligibility beyond first-time homebuyers — no toddlers allowed — would alleviate some of the decline, Laperriere says.

Between the spending on houses and cars, the third quarter won't look too shabby. The problem is that all these government actions designed to create a short-term economic boost have long-term implications.

For example, not all spending is created equal. Investment in the future, whether it's the government improving roads or the private sector building a plant, is a plus for future growth.

“If increased government spending on retiree health care comes at the expense of business spending on capital equipment and R&D, then the productivity of the current labor force and long-run growth rate will be adversely affected,” says Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago in his October economic outlook.

That's one reason there's a secular shadow hanging over the upbeat cyclical indicators, starting with the Index of Leading Economic Indicators itself. The LEI bottomed in March before soaring in the last six months. The six-month annualized change of 11.8 is heralding a rebound, as is the spread between the federal funds rate and 10-year Treasury note yield — the leadingest of the 10 leading indicators, according to the Conference Board, the keeper of the LEI.

The spread was even steeper in the early 1990s, another period when an impaired banking system depressed the monetary transmission mechanism. Until banks stop hoarding excess reserves and start lending — they're buying Treasuries but not making many loans — the spread is an incentive waiting to happen.

Like all incentives, this one will work in time. I'm just worried it will run smack into some disincentives elsewhere.

Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.

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