I received a great invitation this morning by blogger & journalist Peter Viles, who runs the L.A. Land blog for the Los Angeles Times' website (and which I understand has become the hottest blog for that paper).
Thank you, Peter, for the opportunity! For those of you not familiar with Peter's blog, it's quickly become one of my daily must-reads for stories I might otherwise miss and from which I now frequently quote.
From Peter's intro:
This blog has been teeing off on the proposed tax break for homebuilders, and this morning I gave the blog over to Daniel Gross' rant that the tax break is "perverse" and "absurd.I thought it only fair to invite someone from the other side of the debate to weigh in. That said, here is guest blogger Patrick Duffy, who blogs at HousingChronicles.com.
Click here for the post at LALand.
It'll be very interesting to see what kind of comments (and tomato-throwing) I get. I may also re-print some of the more odious comments over the next day or two.
Here's the post in full, but I'd suggest checking in first with LALand so you get the entire back story first:
While I can understand and sympathize with bloggers, readers and journalists such as Daniel Gross who remain adamantly opposed to any alleged special treatment of homebuilders at potential taxpayer expense, such emotionally wrought arguments conveniently ignore both rational discourse and historical precedent.
Firstly, the argument that all builders overbuilt to simply assuage their own greed is simply inaccurate (some did, most didn’t). In fact, according to Paul Emrath at the NAHB, most builders were trying to meet an artificial demand created by speculators who were lying to sales agents, lying on sales contracts and lying on mortgage applications. No matter how many safeguards they put in place to clamp down on speculative activity – borne out of a similar scenario in the late 1980s when flipping houses in between phases became a new sport – speculators knew that builders weren’t really in the business to enforce such contractual provisions, so they took the risk anyway. And other than a few lonely voices in the blogosphere, the conventional wisdom at cocktail parties was that such activity was a sure-fire way to build long-term wealth. Lesson learned: never trust people drunk on either alcohol or their own supposed genius.
Secondly, if we simply had speculators leaving the scene and dumping their existing inventory onto the market, we wouldn’t be seeing the 60% reduction in building activity that we have today. It’s because of the issues with the credit market that non-speculators can’t sell their homes either, which is a serious handicap in a country that was built on freedom of movement in between job opportunities.
Thirdly, even before the Fed-supported Bear Stearns buyout, this country had a long-standing policy of propping up industries when the risks to the economy outweigh those clucking on about ‘moral hazards,’ which seems a specious argument considering the chronic epidemic of morally questionable behavior of Wall Street, pop culture and U.S. politics in general. Remember September 2001, when Congress approved $15 billion in aid to the airlines? Or the $3.6 billion for Long Term Capital Management in 1998, the $4.5 the FDIC provided for Continental Illinois in 1984 or the $1.5 billion in loan guarantees for Chrysler in 1980? Where was the outrage then? Although there was plenty of outrage accompanying the $124 billion bail-out of S&Ls during 1986-1995, the potential consequences of doing nothing were far more serious.
Fourthly, in his piece “A Tax Break for Bubble Heads” in the online Slate magazine, Daniel Gross’ opinionated rantings run a bit loose with the facts. By only considering the financial strength of large builders such as Lennar or Pulte, he completely dismisses the fates of the tens of thousands of builders and remodelers who can’t, as he says, ‘look to the capital markets first’ and can’t ‘dilute the shareholders, not the taxpayers.’ In fact, according to the most recent Builder 100 ranking in 2006, nearly three-quarters of homes sold that year were not built by big public builders, but a variety of small and large private companies, to whom the capital markets are now largely closed. Today you see multi-generational homebuilders closing their doors not due to greed, but due to market forces beyond their control. At risk? Nearly five million jobs or 3.5% of the U.S. workforce related to residential construction, filled by people who had no say in how the large public builders ran their businesses. From his comfortable writer’s perch, however, Mr. Gross would simply label that ‘market capitalism.’ I wonder if he repeated that same phrase to the group of long-time Newsweek writers recently forced to take a buyout and leave?
Finally, this tax break oriented towards homebuilders is in theory available to any company facing current financial losses after years of profits, and had been done before as part of an economic stimulus package enacted by Congress in March 2002 to address fall-out from the attacks of 9/11/01, giving innocent companies – such as the country’s 155,000 building industry suppliers and the 58,000 homebuilders not in the top 10 – some much-needed breathing room to stick around for the eventual rebound. In fact, perhaps Mr. Gross should take a hiatus from his writing duties and work for that fictitious builder of affordable housing he cites in Wichita. Such an experience would likely help him start shooting from his brain instead of his hip.
1. Even if they weren't greedy, that's not the question. Firms that make bad business decisions aren't entitled to ex post protection because they had good motives.
2. See 1
3. This is the crux of his argument and really all it amounts to is two wrongs make a right. He offers no evidence for why "the risks to the economy outweigh those clucking on about 'moral hazards.'" It's simply assumed: circular argument at its worst. All large homebuilders do is reduce the building cost for new homes. They employ very few people directly, and they don't generate many jobs. The people they contract with to actually do the building will be out of work with or without these tax breaks because there is simply an oversupply and lack of demand for their services. If these companies go bankrupt, when demand for new construction homes returns, people would simply have to pay a slightly greater price for them, or in the very unlikely event demand were to return anytime soon to 2002-2005 levels new companies of exactly the same sort could be formed--and hopefully the new ones could do a better job managing the risks of the business. Same goes for the everyman worker he is disengenously pitching as the beneficiary here. Times were good for many people the last few years and now they're not. If they didn't spend recklessly they should have been able to save some money to get through times. If anything, this is a much better argument for extending unemployment benefits to all, than just giving a break to home builders.
4. Yes, we all feel for these people but see 1 again and see 4. Industries go belly up from lack of demand. It happens.
5. In theory yes, Congress could extend it to any company, but they're not, and why is that? Could it be because of the concentrated interest of the builders lobby, disproportionate to their size and importance in the overall economy? Many people have gotten fired this year, and would surely love to get a break against past income from the years when they had a job, but only homebuilders are getting it. Why? Because they have a lobby.
It's good to have an open exchanged on this, but it's still total dreck anyway you slice it.