British Prime Minister Rishi Sunak and US President Joseph Biden are both promoting the same kind of mistake: giving people money when they should instead be working harder to expand supply.

In both cases, the mistake is being made in the housing market, a longstanding venue for counterproductive policy ideas.

Last week’s Conservative Party manifesto does have one good idea for housing, namely a pledge to build 1.6 million additional units over the next five years.

That would lower rents and home prices, and enable British businesses to expand with greater ease, since potential employees could more easily cope with high housing costs.

At the same time, it’s worth remembering that the party made a comparable pledge in 2019 and failed to deliver.

Unfortunately, the proposals do not stop there, and it is more likely - on the off chance the Tories retain power - that they would succeed with their next idea: £1bil to first-time home buyers for home purchases of less than £400,000, with the intent of enabling them to buy the homes with deposits of only 5%, a low sum for the British market.

This is reminiscent of the “Help to Buy” programme from earlier in Sunak’s term.

This policy violates the basic laws of economics. If you give people cash or credit subsidies to buy homes, the demand for housing will go up, and so will the price.

Housing will not in general become more affordable, although anyone who receives disproportionate subsidies will gain.

Society as a whole will not.

Housing policy often faces a tension between two constituencies: people who are trying to buy a home and those who already own one.

The way to help the first is to make housing more affordable by expanding supply.

The way to help the second, who are often older voters, is to make housing more valuable. If you try to satisfy both groups, you will end up with failure on both fronts.

Politically speaking, it is easier to give out money to voters than to create incentives to build more housing.

So all too often supply is restricted and demand is subsidised. The result is high prices and the stifling of any market incentives to build more housing.

Over time, even if the subsidy buys some votes early on, its value is reaped by existing homeowners.

It is not surprising that both of these ideas are being pushed before an election.

Unfortunately, the United States already was setting a bad example for the British.

Recent plans from the Biden administration called for a broadly similar approach to housing policy, namely subsidising demand.

Earlier this year, Biden called for US$10,000 tax credits for Americans buying starter homes and for those selling them.

That too will boost the demand for housing and raise prices, and thus much of the value of the subsidy will be captured by current homeowners.

The Biden plan could increase home prices further yet.

If Americans come to expect that the government will act repeatedly to prop up home prices, housing will appear to be a safer investment. Thus there will be yet another reason for demand to rise.

Like Sunak’s, Biden’s plan also calls for more construction, namely two million new or renovated affordable homes.

The problem is that in the United States, most of the obstacles to new construction come at the city, county and state levels.

The Biden plan mentions tax credits for cheaper homes, and there are efforts to jawbone local governments to allow more building.

But again, the federal government is better at handing out cash than inducing America’s decentralised political system to deregulate construction.

So if this plan were to move forward, the likely outcome - as in Britain - would be subsidised demand and stifled supply, leading to higher home prices.

Nonetheless, in the short run, these subsidies still could prove political winners.

If a politician sends voters money, they tend to like that politician, as not many people consider the fine points of inelastic supply, subsidy incidence and long-run secondary consequences when they cast their ballot.

 - Bloomberg