Why Are We Throwing Good Money After Bad?

We now know that the cash-for-clunkers program cost the U.S. taxpayer about $24,000 for every new car bought.

Does that sound like a good deal to you?

I'm not sure how much the new home purchase tax credit is costing the taxpayer but it surely runs into the billions.

Thanks to incentives like it, the U.S. housing market has stabilized for the past three months and politicians want to increase the length of the tax credit.

Here are some reasons from the Washington Post why this is a bad idea:

The main argument for the tax credit is that it stimulates the economy and stabilizes the housing market. Seen purely as a stimulus, the tax credit is highly inefficient. The National Association of Realtors claims that the credit created 350,000 new sales; the Calculated Risk blog calculates that this means the government is paying $43,000 for every extra house sold (since most sales would have happened anyway). According to the Wall Street Journal, Goldman Sachs estimates 200,000 new sales, implying a cost of $80,000 per marginal sale.

Even at a price of $43,000, what are we getting? Given that these are first-time home buyers, and given the glut of homes on the market, most of these are financial transactions where a house changes hands in exchange for cash (and additional transaction costs). The $43,000 is not being invested; it isn't buying anything for the public, like a new road. It's just cash going into people's pockets.