The Inflation in Housing

July 24, 1950

The direct cause of inflation is an increase in the supply of money and credit. When more money competes for the same supply of goods, prices are forced up. Today we have three times as much money and credit in this country as in 1939.

A Federal budget deficit is directly inflationary only to the extent that it is financed by the creation of more money and credit. On the other hand, government-agency loans to foreign countries or to private corporations and individuals at home are inflationary—even if they do not appear as part of the conventional bookkeeping budget deficit—to the extent that the loans are not covered out of current taxation. These government-agency loans, in brief, are part of a concealed government deficit.

All government expenditures go in the first instance to specific people and industries. The total inflation today, therefore, may be said to be caused by four major specific inflations: the armament inflation, the farm inflation, the export inflation, and the housing inflation.

They all have one thing in common. Regardless of the original purpose for which any of these programs was started, they have all created a special vested economic interest in their own continuance on the present scale. Thus the foreign-aid program was started to “put Europe on its feet”; but it is now argued that it must be continued to keep our artificially inflated export trade boom from collapsing.

The outstanding case is housing. There would have been a huge private housing boom today even without “government aid.” But the government decided to give the boom continuous shots in the arm. The result has been to skyrocket costs out of all proportion to the increase achieved in production. As Marriner S. Eccles, governor of the Federal Reserve Board, pointed out on March 15, the government has turned to “the creation of new money to finance construction at a time when activity is already fully utilizing available supplies of material and labor.”

In articles in The New York Times of July 9, 10, and 11, Paul P. Kennedy ably summarized the major inflationary devices to which the Federal government has resorted to keep the housing boom at a peak. These include everything from high mortgages at low interest rates to direct subsidies. Under the 1950 National Housing Act “the builder, on pure speculation, may receive a construction loan of 85 percent. This loan is insured up to 95 percent of his price when he finds a government-insured purchaser. Thus the extreme limit of his speculation becomes 5 percent on a product in which the gross profit can go several times higher.”

Once this kind of inflationary boom is established, the politicians don’t dare let go. They now express the fear that “any appreciable slowing up of building now would have a telling effect on the entire economy.”

The present government-financed housing boom, in short, is a perfect illustration of the political naïveté of all the “compensated budget” and “compensatory economy” theories. Well-meaning proponents of these theories now protest that what they proposed was government deficits, pump-priming, or housing programs only in bad times, not in booms. But they reckoned without the politicians, who must be entrusted with such programs. Office holders want to stay in office. They are enthusiastic for any proposal that gives them the credit for starting a boom, but never for one that makes them take the responsibility for stopping it. No matter how dangerous the inflation they have started becomes, they keep it whipped up for fear of the consequences of letting it sag. But this only increases the danger and havoc of a subsequent bust.

The “compensated economy” doctrine, because it rests on merely mechanical reasoning, has inherent economic weaknesses too. But because it overlooks the psychology and interest of the politicians, the irony is that the doctrine seems likely to end in practice either in increasing the violence of business fluctuations, or in driving us toward rigid government controls to prevent this.