I had been sympathetic to the people of California. They got stuck in the epicenter of the housing bubble. When it burst it both gave the state a more severe recession than the rest of the country and also wreaked havoc on the state budget. This set the people of the state up for a double whammy because their archaic budget process left them ill-equipped to cope with the massive budget shortfalls created by the downturn.

But, rather than trying to get serious in the face of a real crisis, the legislators in California got loopy. In March of last year the state legislature set aside $100 million for people who bought new homes. This was badly thought out policy which could perhaps be forgiven as a panic response to an economy and housing market in free fall.

But, now they have done it again.

The state legislature created two separate tax credits. One will provide up to $10,000 to first-time homebuyers. The other will provide up $10,000 to buyers of new homes. The total cost of each credit is capped at $100 million.

This one is painful in so many ways it is hard to know where to begin. First, the credit is intended to prop up house prices. Why does California want to have an unaffordable housing policy? Let's make homes too expensive for our kids to afford. What a great policy for a state that already has some of the highest priced housing in the country.

What is even more painful is that the credit will not even have this intended effect. The $100 million will be sufficient to finance the purchase of roughly10,000 homes, assuming that most buyers get near the maximum credit. Even in a depressed market, first time buyers would easily account for more than 100,000 home sales a year in California. This means that the credit is unlikely to increase total first-time purchases in California, but it is likely to move some forward to before the money for the credit runs out. (The credit is awarded on a first-come basis.)

So, if there were some special economic benefit from getting people to buy homes before June or July rather than after June or July, then this credit would be a great idea. Unfortunately, it is hard to think of why we would care which month a home was purchased in. That means that we have just given people $10,000 of taxpayers money for nothing -- great idea for a cash starved state -- we'll just lay off some teachers or cut back on child health care spending to make up the cost. The credit for new home purchases could have some small effect on demand (this market is much smaller) although it's not clear that California need more new home construction right now.

But, the really great part of the story is who gets the credit. It is only homebuyers, which means that the poorer segment of the population, who tend to be renters, lose out. That's okay, why shouldn't renters be subsidizing the housing of homebuyers? But, it's also worth noting that the credit is not refundable. It is a credit against state income tax over the next three years. So, those who don't owe $10,000 in state income tax will not be able to get the full benefit of the credit.

So, we have a regressive subsidy that is intended to raise house prices, but will likely not even have that effect. And it will cost the state $200 million. When these folks come to Washington asking for money, the pre-condition should be that the state legislature and governor stop doing drugs.