Stimulate the Economy, Don't Play Politics With It

By Steven Pearlstein
Wednesday, January 9, 2008

You'd think that if politicians were skilled at anything, it would be at reading election returns.

But you'd never know it from the way President Bush and congressional leaders led off the debate on a short-term economic stimulus package this week, completely ignoring the unmistakable message from Iowa and New Hampshire that people are fed up with the poisonous partisanship coming out of Washington.

The president started it off with a speech in Chicago in which, after acknowledging that there is too much partisanship in the capital, he argued that the best way to keep the economy humming was to extend his tax cuts. Not only is this a non-starter with the Democratic Congress, but there isn't a credible economist who would argue that extending tax cuts set to expire in 2010 will do much to help the economy in 2008.

As if on cue, House Speaker Nancy Pelosi (D-Calif.) responded to Bush's partisan nonsense with some of her own. After declaring her willingness to "work in a bipartisan way with the president to stimulate the economy," she blasted Bush for policies that have "failed millions of working families," and then proceeded to tick off a laundry list of Democratic proposals from consumer safety to international competitiveness that have nothing to do with an economic stimulus package.

Not to be outdone, House Republican leader John Boehner of Ohio, the Attila the Hun of partisan warfare, issued his own news release criticizing the Democratic "tax-and-spend agenda." Never mind that Democrats don't even know what they'll propose.

Meanwhile, at that very moment, Barack Obama was bringing another crowd to its feet in Salem, N.H., by talking about the risk of electing the "same old people" who say "the same old things, over and over . . . hoping that the next time the results will somehow be different."

Does anyone want to connect the dots here?

Look, folks, this ought to be an easy one. Almost everyone agrees that recession is likely and a modest amount of fiscal stimulus could provide an economic cushion. It won't prevent a recession, but fiscal stimulus could be an insurance policy against the economy spiraling out of control. And it could take some of the pressure off the Federal Reserve to lower interest rates, which could stoke inflation, prompt a run on the dollar and reinflate the credit bubble that got us into this mess.

From experience, we know how much stimulus is needed -- about $125 billion, or 1 percent of GDP. And we know what programs can quickly deliver the biggest bang for the buck: extend unemployment benefits by 6 months, temporarily increase food stamp allotments and offer a flat, one-time payroll tax rebate to workers with household incomes below $100,000.

To broaden the political support for the package, you'd probably want to include money for the states, so they don't have to raise taxes or cut payrolls in the face of declining tax revenues. Budget experts agree that increasing the federal Medicaid match is a quick and efficient way to do that.

To win support of Republican business interests, it will almost certainly be necessary to throw in some tax breaks. The least objectionable is acceleration of depreciation, which doesn't reduce corporate tax payments, just delays them.

Since the housing downturn is heavily implicated in this recession, there are two other elements I'd add to the package.

One would involve borrowing from future federal housing subsidies and making them available this year to state housing authorities. With prices low and going lower, and so much unsold inventory on the market, this would be the perfect time for housing authorities to buy condos and townhouses and rent them to eligible lower- and moderate-income families. In the long run, the government would save money; in the short-run, it would help stabilize the housing market.

The other idea would be for the government to jump-start the creation of a new type of housing finance instrument that would be a blend of debt and equity and could be used both to spur demand for housing and avoid foreclosures.

Andrew Caplin, an economist at New York University, has been refining this idea for more than a decade. In simple terms, these "shared-equity mortgages" would offer homeowners the opportunity to lower their monthly interest and principal payments in exchange for sharing any long-term appreciation in the value of the house. The two parts of the instrument -- the traditional mortgage and the shared-equity component -- could be separated by the originator and each sold separately into financial markets.

This would be a particularly useful instrument for lenders and homeowners looking for a way to avoid foreclosures through workouts and refinancings -- a form of debt-for-equity swap. It could also be used to expand the pool of potential home buyers in a way that doesn't repeat past mistakes of lowering underwriting standards or put people into homes and mortgages they can't afford.

Introducing this new instrument wouldn't cost a dime. All it would require is a few minor changes in the tax code and a federal preemption of some states' lending laws. Fannie Mae and Freddie Mac would probably have to step in and jump-start the market for the new "shared equity" instruments, at least until there is enough experience with them to attract private underwriters into the market. To do that, the housing finance giants would need special legislative authorization.

There's nothing particularly radical or complicated about any of these ideas. A few involve spending new money, others involve shifting money from the future to the present, while others don't cost anything. But taken together, they wouldn't increase the long-term budget deficit. And all meet the test laid down by former Treasury secretary Larry Summers of being "timely, temporary and targeted."

So can anyone explain to me why our top elected leaders think that they're better off calling each other names and pushing proposals they know can't be enacted, rather than sitting down and hammering out a similar program that could be acted on when Congress returns next week and signed by the president when he arrives at the Capitol later for the State of the Union address?

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