housing, the U.S. had far exceeded its cumulative housing goals as of fiscal 1973. Even after the record production declines of fiscal 1974-75, the nation is only modestly below its cumulative target as of fiscal 1975. However, it is clear as of fiscal 1976 that in the next three years (1976-78) total housing production will be far below the nation's 1970 housing goals. This failure to realize our nation's housing goals will take place despite the fact that federal spending is expected to continue to expand to 22% of GNP.

Federal tax expenditures grew rapidly during the late 1960s and early 1970s. Although this form of federal expenditure has decreased in importance in some areas, it has increased in its importance to housing. During the relative instability of the early 1970s, housing tax expenditures have stabilized housing. Federal credit programs have grown significantly during the last decade (19651974). When the size of the federal deficits of the 1970s is taken into account, it is clear that the federal government has been requiring an even larger proportion of the funds available to U.S. credit markets. These trends are projected to continue as federal credit needs reflect increasing deficits in 1976. Federal credit programs for housing have been a large part of this expansion. Although these programs have increased housing stability by providing subsidized mortgage funds, they have done so at the expense of private intermediaries which is evidenced by the artificial downward pressure on mortgage rates and by the increasing usurpation of the mortgage market by federal agencies. This harmful impact on private intermediaries has a destabilizing effect on housing as private lender uncertainty increases.

The increasing size of federal spending, federal deficits, federal tax expenditures and their changes in composition reveals the increasing tendency of the federal government toward immediate consumption and away from the savings-investment area. This orientation implies the possibility of a capital shortage in the 1980s with obvious related difficulties for housing. Even if a capital shortage is not realized, this orientation in itself has the potential for creating continuing housing instability.

THE FEDERAL BUDGET

Perhaps the easiest of economic laws to substantiate is Wagner's "law." This simply asserts that there is an inherent tendency on the part of government to increase in size and importance. The growth of federal, state and local government in the United States during the past half-century provides empirical proof that this tendency does exist.2

In 1929, government revenues totaled $11.3 billion while by 1974 they were $455.0 billion. This represents a 40-fold increase over a period of 45 years with government revenues increasing from a rate of less than $1 billion a month to nearly $1.3 billion a day. The growth of government expenditures has been similar to that of revenues. Between 1929 and 1974 government expenditures

1. Adolf Wagner was a noted German theorist of the 19th Century. See James M. Buchanan, The Public Finances, e.g. rev. ed. (Homewood, Ill.: Richard D. Irwin, Inc., 1965), p. 50.

2. Although measuring problems are significant when government activity is being discussed, simple budget data substantiates Wagner's law; see Buchanan, The Public Finances, pp. 30-32.

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Real Estate Issues, Fall 1976

increased 45-fold from $10.3 billion to $460.9 billion. This represents an expenditure increase from $28 million a day in 1929 to $1.3 billion a day in 1974. Clearly all forms of spending have increased over this span of 45 years. The nation's gross national product experienced nearly a 14-fold increase going from $103.1 billion in 1929 to $1,397 billion in 1974. Real growth of the government sector then is not revealed by revenue and expenditure trends alone. We can envision the real growth of government, however, if we consider the percentages of the nation's total product (GNP) consumed by government. In 1929, government spent 10% of the nation's total product-$1 out of every $10. By 1974, government was spending 33% of GNP or $1 out of every $3— more than a threefold increase in real government size.

Between 1929 and 1974, federal expenditures alone grew from $2.6 billion to $299 billion-a 115-fold increase. This represents better than a fivefold expansion of federal claims on the nation's total product-from 3% of GNP in 1929 to 21% in 1974.3

FISCAL POLICY

The growth of government influences housing in many ways. One way housing is affected is through the nation's overall fiscal policy. The relationship between government spending and taxation-the existence of federal budget surpluses and deficits-is usually referred to as fiscal. The overall objective of fiscal policy is to eliminate the gap between aggregate demand and non-inflationary, full employment level of output. The two basic targets of fiscal policy are then price stability and maximum production. Fiscal policy cannot, however, be reviewed in isolation, but must be discussed in the context of overall stabilization policy which rightfully includes monetary policy. Presumably we can have the same overall production with an equally tight fiscal policy and an easier monetary policy or the reverse within some limit. The choice depends primarily on the formulation of our many subsidiary economic goals or targets which are presumably affected differently by the fiscal-monetary mix.

These subsidiary economic goals are at the nexus of the housing debate in so far as it relates to choosing the "appropriate" fiscal-monetary policy mix. It is generally conceded by economists that the policy mix does influence the composition of our economy's output. Housing clearly represents a subsidiary goal that may well be affected.

Although a number of recommendations have been made regarding the role of fiscal policy in meeting our housing goals, unanimity has not been achieved. As one reviews the literature, however, there does seem to be a general concensus of opinion over several issues related to the question of how the fiscalmonetary policy mix influences or should influence the economy and housing expenditures. The major differences occur in the weight given by various

3. Total government expenditures as a percentage of GNP differs from the sum of state and local expenditures/GNP plus federal expenditures/GNP. This is the result of programs such as federal revenue sharing which create double counting problems.

4. Policy: The Eclectic Economist Views the Controversy, ed. James J. Diamond (Chicago: DePaul University, 1971), pp. 51-74; Gardner Ackley, "Fiscal Policy and Housing," Housing

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analysts to the overall importance of these influences. General points of agreement or propositions include the following:

Proposition #1:

The primary goal of monetary and fiscal policy is to produce full employment output with price stability. Housing, while an important subsidiary goal, must be considered only as a secondary concern together with a number of other subsidiary goals such as: 1) the level of interest rates; 2) possible dislocations within the financial system; 3) balance of payments; and 4) effects of stabilization policy on the long-run growth rate of supply in the economy.

Proposition #2

The short-run effects of fiscal policy on the nation's output and employment are generally agreed to be quick and significant. Irrespective of the economic doctrine of the economist, a sharp acceleration or deceleration of government spending are assumed to have fairly strong short-term effects of aggregate demand. Monetariests concede this point, but hold that rises in government spending financed by taxes or sales on bonds to the private sector will eventually "crowd-out" private spending by nearly an equal amount over the long-run.

Proposition #3

The composition of federal spending is assumed to have long-run effects on the rate of supply capacity growth in the economy. That is to say, a fiscal policy that re-allocates resources away from current consumption to investment will alter the long-run growth rate of potential output. Also, fiscal policy can alter the long-run supply of housing by direct expenditures on new housing, rehabilitation, resources going into housing and manpower training.

Proposition #4:

Housing as a credit intensive durable good, is likely to be more adversely affected by a fiscal-monetary policy mix which puts its primary restraining responsibility on monetary policy as opposed to fiscal policy. That is to say, if we have the choice between two fiscal-monetary policy mixes, both of which are assumed to create the same overall aggregate level of demand and similar inflation rate, the policy mix which calls for the more restrictive monetary policy and less restrictive fiscal policy will be the most detrimental to the housing market.

Proposition #5:

Fiscal policy can do little by itself to promote housing goals, but must be coordinated with monetary policy to produce the desired outcome. The objective must be to select a total gross national product-employment target which is consistent with some level of acceptable inflation, then select

and Mortgage Policy, Federal Reserve Bank of Boston, Conferences Services No. 4 (October 1970), pp. 9-40; Arnold Harberger, David J. Ott, and James S. Duesenberry, “Discussions"; Leonell C. Andersen, "A Monetarist View of Demand Management: The United States Experience," Review 53, Federal Reserve Bank of St. Louis (September 1971).

Real Estate Issues, Fall 1976

the appropriate combination of monetary and fiscal policy which will achieve the overall output and prime objectives but which also comes closest to achieving the required amount of housing.

IMPACT

Assuming general agreement with the above propositions, we might choose to review the extent to which fiscal policy during the last several decades has favorably or adversely impacted the housing markets. Such an evaluation is difficult for several reasons. First is the problem of the potential lack of coordination between fiscal and monetary policy. Clearly, a particular fiscal policy must be considered inappropriate if it resulted in undesirable outputemployment, price, and housing outcomes and such a policy was determined with "perfect knowledge" of the monetary policy actually to be carried out. Unfortunately, fiscal policy can hardly be faulted for an undesirable outcome which occurred because the monetary policy pursued was unexpected or inappropriate. Nor can fiscal policy be criticized for bad forecasting of the outcome of any given policy. Finally, fiscal policy cannot be blamed for adverse housing conditions which are the natural consequence of the pursuit of more important primary or subsidiary goals.

These difficulties make it impossible for us to place blame, but they do not stop us from evaluating policy solely from the more narrow point of view of how the policies pursued affect housing output. In other words, while we might accept the notion that fiscal policy is blameless, we need not reject the temptation to evaluate the policies pursued for the narrow viewpoint of what would have been in the best interest of housing.

This presents another problem, however. Should the fiscal policy chosen be evaluated under the assumption of "full knowledge" of the monetary policy that was pursued? Or conversely, should monetary policy be evaluated under the assumption of full knowledge of the fiscal policy that was pursued? This chicken and egg problem is not easily solved even though most analysts assume monetary policy can be adjusted more quickly than fiscal policy. Nor is the problem of determining what the primary overall output, employment and inflation goals are for any given year. This latter problem is particularly important since housing, as a subsidiary goal, must be considered subservient to these other primary goals.

Given these problems, it is clear that any approach taken to the question of how fiscal policy affects housing must suffer from the criticisms of subjectivity and unrealistic assumptions.

Our approach will be to determine the extent to which fiscal policy has historically tended to foster favorable or unfavorable conditions for the housing market. From the above propositions, particularly propositions #4 and #5, there is general agreement that when fiscal policy assumes too great a stimulative role when expansionary policies are called for in relation to monetary policy, or similarly, where monetary policy assumes too great a restrictive role when deflationary policies are called for as compared to fiscal policy, that housing will suffer adversely. Our effort will be to determine the incidence of these occurrences during the last several decades.

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One way of measuring fiscal impact in a full employment framework is the "high" or "full employment budget." The high employment budget is a method of estimating the total revenues and expenditures of government under the assumptions of full employment and some estimate of potential long-run growth in output. Although there are many estimation, weighing, and timing problems associated with its computation, the budget does provide a useful indicator of the direction of discretionary fiscal action by isolating the effect of fiscal policy from the influences of changes in the level of economic activity on the budget data.

From the above discussion, it would appear that fiscal policy could be detrimental to housing under the following conditions:

1) If fiscal policy is stimulative when full employment is approaching or present then there is a tendency for such a fiscal policy to force monetary policy to burden too great a responsibility for slowing the growth in aggregate demand. Such a policy would be detrimental to housing since monetary policy works through the credit markets which is particularly burdensome to the housing sector.

2) If fiscal policy is too stimulative during a period of recession, then monetary policy is unable to ease commensurately as much as if a more balanced fiscal-monetary mix was employed. Such a policy will have a relatively smaller stimulative effect on housing than on other less credit intensive sectors of the economy.

3) If fiscal policy is too restrictive during a period of recession or excess unused capacity, then monetary policy may be forced to be overly stimulative, leading to excessive rises in homebuilding.

4) If fiscal policy is too restrictive during a period of fully utilized capacity, then monetary policy may result in relatively too much in resources being devoted to housing.

The occurrence of these four policy mixes during the last several decades is surprisingly evenly distributed, although through time there is not an equally random occurrence.

The following assumptions are made in analyzing the impact of fiscal-monetary policy mix on housing.

Assumption #1:

It will be assumed first that during periods when the wholesale price index is rising at, near, or above a 5% rate and unemployment is less than or equal to 5% that stabilization policy will be aimed at deflating aggregate demand. Assumption #2:

It will be assumed that during periods when unemployment is in excess of 5% and when prices are declining or stable that stabilization policy will be aimed at expanding aggregate demand.

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5. James R. McCabe, "The Full Employment Budget: A Guide for Fiscal Policy," Monthly Review, Federal Reserve Bank of Richmond (May 1972).

Real Estate Issues, Fall 1976