Housing Spending and Urban Development

Readers Question: Will an extra $20 billion per year spent on housing have the same impact on the economy as an extra $20 billion spent on interstate highways?

It depends on the state of the economy.

At the moment, 2008, one of the biggest threats to the US economy is falling house prices. Data released for last month showed a record fall in house prices. Lower house prices are undermining consumer confidence and leading to lower consumer spending. This is one of the main causes of lower economic growth.

Falling house prices are being driven by two factors

  1. Rise in mortgage defaults
  2. Excess Supply.

Building more houses at this particular time would not help, it would exacerbate the glut in house prices and cause a further fall in prices. Therefore, this could cause further problems in the economy.

If the $20 billion was spent on improving existing houses then it would be different and there would be no fall in house prices.

Another difference could be the impact on Aggregate Supply and productive capacity. If there is a lot of congestion on American roads, then spending $20 billion could help reduce congestion and reduce costs for business. This could lead to greater productivity in the economy and shift AS to the right. Spending money on housing is likely to have less impact on productivity. Although in the UK, better housing may help reduce geographical immobilities.

Higher Government spending should increase AD and lead to higher economic growth. It may also be improved by the multiplier effect which causes a bigger final increase in GDP. At the moment there is spare capacity in the economy.

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