Robert Burgess
At their core, election campaigns are all about tapping into the zeitgeist of voters and then telling them what they want to hear, not necessarily what they need to hear.
So, at a time when various surveys and studies consistently show that voters are feeling overwhelmed by high prices for goods and services, Vice President Kamala Harris has predictably unveiled a highly populist economic policy agenda that promises “to lower costs for American families.” Sounds great, but it likely won’t — with two exceptions.
The problem with the bulk of her agenda is that it relies on regulating prices and dangling subsidies to help Americans cope with high costs. On the former, the campaign envisions something akin to price controls on groceries, noting that “big grocery chains that have seen production costs level off have nevertheless kept prices high and have seen their highest profits in two decades.” Food prices have soared about 21% since 2020, according to the Bureau of Labor Statistics.
This seems like a good idea until you’re reminded of the disastrous results of price controls ordered up by President Richard Nixon in August 1971 to combat inflation. The policy was popular among voters, helping him win reelection in 1972 over Democrat George McGovern, but ended up exacerbating inflation by creating shortages of goods. A better and longer lasting solution would be to foster greater competition among grocers and their suppliers, as well as to bolster supply chains and lessen regulations.
Besides the cost of food, Americans are frustrated by the high costs of housing due to the run-up in home values and the highest mortgage rates in a generation. A report from Zillow found that the income needed to comfortably afford a home has jumped 80% since 2020, exceeding the 23% increase in median income over the same period. The real estate website showed the monthly mortgage payment on a typical home has nearly doubled since January 2020, to $2,188, assuming a 10% down payment.
In response, Harris wants to provide as much as $25,000 to those buying a home for the first time. More than one million first-time buyers who have a two-year history of on-time rent payments would be eligible for the “down-payment support,” according to the campaign. This is a big expansion of a program unveiled by President Joe Biden during his State of the Union address, which proposed a $10,000 tax credit for first-time home buyers.
Again, it sounds great in theory but potentially disastrous in practice. It’s likely that the unintended effect would be making housing less affordable by pushing up prices. That’s because the real problem with the housing market right now is not so much demand but rather supply.
The median price of existing homes has risen 20% to $426,900 since the Federal Reserve started raising benchmark interest rates in March 2022. Not only that, but at around 22, the number of days a home sits on the market before being sold is down from around 30 or more in 2019 when mortgage rates were around 4%, instead of the current 6.50%, according to the National Association of Realtors. Perhaps what is most remarkable is that the realtors group says around a third of homes are still selling above asking price.
No, Americans don’t need help buying a home; they need more supply to help reduce prices by giving them wider choices. By some estimates, the U.S. is short around three million homes to satisfy demand. And yet, the inventory of homes for sale remains near record lows in data going back to the 1990s, at around 1.32 million units.
Here is where the Harris campaign gets it right. It is calling for the construction of three million new housing units over the next four years. To reach that goal, Harris wants to offer tax incentives (she didn’t say how much) to builders to construct “starter” homes.
Along with that, she wants to “cut red tape and needless bureaucracy” facing builders. “Pushing this forward also means streamlining permitting processes and reviews, including for transit-oriented and conversion development, so builders can get homes on the market sooner and bring down costs,” the campaign said in a statement.
The campaign also gets it right with its proposal to expand the child tax credit to as much as $3,600 “for middle class and the most hard-pressed working families with children” from $2,000 per dependent. Harris would also provide a tax credit of as much as $6,000 for middle-income and low-income families with children in the first year of life.
Expanded tax credits for families with children as part of the Biden administration’s American Rescue Plan Act of 2021 proved that the concept works, helping to vastly improve the financial situation of lower-income families and giving working mothers a much-needed, albeit temporary, financial cushion as they returned to work. The Census Bureau says the child poverty rate was slashed by 46% between 2020 and 2021, and the labor force participation rate among women age 25-54 rebounded to above 77% after tumbling to 73.5% during the pandemic.
Of course, nothing is free, and these programs will likely cost the government dearly at a time when there is a lot of hand wringing over the sustainability of trillion-dollar budget deficits and borrowing that has pushed the national debt to $35 trillion.
The nonpartisan Committee for a Responsible Federal Budget estimates that, all told, her plan would increase budget deficits by $1.7 trillion over a decade, and the cost would grow to $2 trillion if temporary housing policies were made permanent. But that’s a fight Harris and her running mate, Minnesota Governor Tim Walz, will confront if they win the election come November. In the meantime, it’s about telling the voters what they want to hear.
(Robert Burgess is the executive editor of Bloomberg Opinion. Previously, he was the global executive editor in charge of financial markets for Bloomberg News.)
