Good Ideas to Save the Economy Can Have Unintended Consequences

BY Paul Solman  December 9, 2010 at 12:33 PM EST

Paul Solman answers questions from NewsHour viewers and web users on business and economic news most days on his Making Sen$e page. Here’s Thursday’s query:

Name: Fred Damato

Making Sense

Question: Would this work to jump start the economy? Give all citizens (with incomes up to $250,000) the option to withdraw some or all of their retirement savings tax free if they pay all cash for a primary or secondary home, or rent to someone who lost their home.

Retirees and those near retirement have suffered significant losses to their savings thanks to Wall Street greed. Tax-free withdrawals for home purchases would make up for some of these losses, put a bottom on home prices, reduce foreclosures, increase consumer confidence and spending, provide state and local governments with much needed real estate taxes, and provide construction, consumer product and other employment without costing the taxpayer a dime. Putting America back to work and in homes (not tent cities) without outsourcing!

Paul Solman: The problem with simple solutions, no matter how well-meaning, is that they tend to have complex ramifications. Not always, mind you, but more often than not.


So let’s consider yours. I would be able to withdraw $120,000 from my 401k, tax-free according to your plan, and use it to buy the Cape Coral home of, say, golf pro Jason Welch, whom we featured last spring getting ready to move out. Then I’d rent the house back to Welch so his family could stay put. (I actually had this thought after shooting the interview with him, using my own after-tax savings.)

Let’s take a quick look at the advantages of your idea. The bank servicing his mortgage wasn’t even getting $115,000 in a short sale when last we looked, so the bank would benefit, as would Welch and his family. So too his neighborhood, rife with foreclosures. Not to mention the benefit to the housing market as a whole, now that buyers like me would be coming out of the woodwork. Net result? Your solution would appear to be win-win-win-win, and I’m probably forgetting a win or two.

Now let’s take a slightly longer look. I’d have taken a good chunk of the savings for my wife and my retirement and sunk it into a home that could go DOWN in value. That’s true of ANY investment, I suppose. But right now I’m invested in Treasury Inflation-Protected Securities. They seem a whole lot safer than an empty house in Florida.

And what if, God forbid, Jason loses his job or is sidelined with golf toe (or whatever extremity hobbles you when you’re a golf pro)? That is, what if he can no longer pay the rent? Or, worse still, suppose housing prices continue to fall and he can rent (or even buy) a similar property for less?

There are few certainties in economics, but besides ‘there is no free lunch,’ I’d put ‘the law of unintended consequences’ high on the list.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions _Follow Paul on Twitter._