The U.S. economic outlook is so bleak that economists who typically oppose fiscal stimulus plans now support President-elect Barack Obama's call for massive federal spending to offset a deepening recession.

Obama has urged Congress to quickly approve legislation providing up to $800 billion in spending and tax cuts over two years, saying rapid action is needed to jump-start an ailing economy.

"Even we Scrooges can see some need for discretionary fiscal stimulus," said Alan Viard, a resident scholar at the American Enterprise Institute and former senior economist at the Federal Reserve Bank of Dallas. "It's hard to say nothing should be done."

Viard, who also has worked for the U.S. Treasury Department's Office of Tax Analysis and the Council of Economic Advisers, said he typically opposes fiscal stimulus measures because it takes Congress too long to approve them and for their impact to be felt. But in a panel discussion at the AEI on Monday, Viard said quicker alternatives to spur the economy, such as easing monetary policy, have already been pushed about as far as possible and to little effect.

"Clearly, you've got to do something," agreed Brookings Institution senior fellow Martin Baily, who also took part in the panel discussion. Baily, who chaired the White House Council of Economic Advisers during the Clinton administration, said fiscal stimulus is appropriate given the "lousy" state of the U.S. economy, with unemployment rising and a recession underway.

Economists don't agree on which fiscal stimulus measures would be best, though. Some favor tax cuts or rebates, and like Obama's plan to lower payroll taxes temporarily. Baily estimates that would give individuals about $10 extra per week, which they're likely to spend, not save.

Nicholas Souleles, a finance professor at the University of Pennsylvania's Wharton School, said economists still don't have data on the effect of a 2008 tax rebate that returned $600 to individual taxpayers. But his analysis of 2001 rebates found households spent nearly 40%, or about $180, in the following quarter and nearly 70% after six months. Households with low incomes or high debt loads were quicker to spend the extra cash from 2001 rebates, disposing of about 76% in a single quarter, Souleles added. He figures cash-strapped consumers might spend tax rebates just as fast this year, unless pessimism about the economy causes them to sock the money away, precluding much stimulus effect.

Accelerating government spending on infrastructure projects and extending tax breaks for corporate operating losses are other options. Viard favors both, provided Congress includes funds to maintain existing infrastructure and avoids wasteful spending that builds "a bridge to nowhere."

Others want the Obama administration to take bold steps to lower mortgage payments for homeowners, reasoning the overall economy won't recover until the housing market rebounds.

One plan floated last year by Columbia University Business School professors R. Glenn Hubbard and Christopher Mayer would have the U.S. Treasury Department step into the U.S. mortgage market, bringing interest rates on 30-year home loans down as low at 4%.

Mayer predicts the plan would spur millions to buy homes or refinance existing mortgages, saving $175 billion per year, about $425 a month for each home owner. Mayer said Monday that the Treasury probably would have to issue "a couple trillion" in new debt and use the proceeds to buy home mortgages, taking advantage of a nearly 3% gap between the 30-year borrowing costs for the U.S. and U.S. homeowners, a gap that is typically closer to 1.6%.

The plan would create an alternative to Fannie Mae (FNM) and Freddie Mac (FRE), the flailing federally-sponsored home-mortgage finance firms, and Mayer said it makes more sense to issue long-term U.S. Treasury debt to support long-term home mortgages than have the Federal Reserve do so with short-term funds. The Fed has pledged to buy upward of $500 billion of mortgage-backed securities in an effort to support the battered U.S. housing market.

Mayer urged the Obama administration to weigh in publicly on the idea very soon, noting that when word of the idea leaked out in December, it caused many potential home buyers and borrowers to retreat in hopes of borrowing at lower rates. He said a clear signal one way or another would be helpful.

A legislative plan recently endorsed by Citigroup Inc. (C) that would permit bankruptcy-court modifications to mortgage loans, including the purchase price, "would be a real catastrophe," Mayer added. He warned that the number of homeowners who are current on mortgage payments might tumble if Congress clears the way for court-ordered "cram downs" that reduce the value of a loan to the property's value.

-By Judith Burns, Dow Jones Newswires; 202-862-6692; Judith.Burns@dowjones.com

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