Should we give preference to GDP increasing loans?

There’s a currently popular idea which I’ll illustrate by reference to housing, as follows. If someone gets a loan to have a house built, there is a substantial effect on GDP: bricklayers, carpenters, plumbers etc are employed. In contrast, if someone gets a loan to buy a house which ALREADY EXISTS, there is LITTLE EFFECT on GDP (apart from a few hours work for lawyers doing the legal work, surveyors etc). Ergo we should favor “GDP increasing loans”.

That idea is pushed by Positive Money and Richard Werner.

The flaw in the idea is that it assumes that stimulus can only come via more lending and that there is some sort of fixed or limited amount of money that is available for stimulus purposes, and thus we better make best use of that money if we’re to maximist GDP.

In fact there is no limit to the potential amount of stimulus money. That is, government and central bank could if they wanted, print and spend a trillion trillion trillion trillion dollars or pounds any time they want. Alternatively and as part of the latter mega bout of stimulus, government could just stop collecting tax. Households would find they had hithertoo unprecedented piles of cash and would run out and buy new houses, existing houses, holiday homes, new cars, you name it, and of course inflation would go thru the roof.

Thus I suggest we can just leave it to the market to sort out how many brand new houses as distinct from existing houses are bought.

Another element in the above “preference for GDP increasing loans” idea is that preference should be given to loans to employers as distinct from loans to buy existing houses. The argument is that employers engage in real, productive, manly, GDP increasing activities whereas loans to buy existing houses do not increase GDP by much.

The problem with that idea is that there are about twice as many bad debtors amongst employers as compared to mortgagors. Indeed, the riskiness of loans to employers is reflected in the Basel bank rules. So is a borrower (employer or non-employer) who can’t repay a loan “productive”? I suggest not. And that further reinforces the above conclusion that this can all be left to the market.

Conclusion: there is no case for any sort of bias in favor of loans which allegedly boost GDP by more than other loans.