How The Home Buyer Tax Credit Inflated The GDP Number

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Is the economy really recovering or was today’s GDP number just a sign of an economy on government life support?

Ideally, we’d want a recovery led by genuine business activity. But a huge portion of today’s GDP number looks like it was a product of government intervention into the economy.

Our chart of the day shows how the government’s cash for clunkers program added 1.66 percentage points to the GDP, boosting it from a pathetic 1.89% gain to 3.5%. Add to that at least a portion of the huge gain in residential spending activity. This number jumped a seasonally adjusted 23.4% and was responsible for more than a half-per cent to GDP.

How much of that was due to the home buyer tax credit? The National Association of Realtors says that nearly half of the jump in home sales this year was directly attributable to the tax credit. So we probably need to shave at least another 0.25% off GDP.

Now it is good news that these government programs are working. Gains from government intervention are real gains. People building cars subsized by the government are still building cars. And people who sold homes to first time buyers really do get paid for their homes. Just because it is a subsidy doesn’t mean it isn’t real.

But the gains are just not necessarily signs of a healthy economy.


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