Even 'Scrooges' See Need For Obama's Fiscal Stimulus Plan
12 Januar 2009 - 9:58PM
Dow Jones News
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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