What's the Big Idea?

Saturday, November 1, 2008

With Congress considering a new spending package to get the economy moving, think tanks and lawmakers are tossing out stimulus proposals faster than their aides can pump out news releases. Here are some outside-the-Beltway ideas to supercharge the nation's economy. -- By Michael S. Rosenwald

Put America on Sale

The Thinker: Laurence J. Kotlikoff, Boston University economics professor

In Action: Kotlikoff thinks handing out stimulus checks is a bad idea. People tend to save the money, particularly with their 401(k) statements reading more like cheap horror novels. "They may think it's their last dollar, so they won't spend it," Kotlikoff said.

His answer: Lower the price of consuming. He wants state governments to suspend sales taxes, with the federal government picking up the tab. The feds, under his plan, would pay states 5 percent of the 2007 consumption amount of their residents.

"The government recoups this money by getting higher future taxes than would otherwise be the case and by preventing some longer-term recession," Kotlikoff said.

Kotlikoff noted the stream of recent layoffs around the country as well as the hiring freezes being implemented at many companies. His idea, he thinks, would save more jobs from being lost. "We have a real problem where everyone is getting bummed out and pessimistic about the future," he said.

Downsides: During debate over such a plan, people might hold off on purchases, hoping to reap the benefits of lower costs later on. Plus, some economists think we need to encourage more saving, not less, and that people hoarding stimulus cash isn't necessarily a bad thing.

A Trigger for Renegotiation

The Thinker: Luigi Zingales, University of Chicago economist

In Action: Weakness in the housing market is a major drag on the economy. Many houses are worth less than buyers paid, and many are at risk of foreclosure. But because mortgages are securitized, renegotiating their terms is difficult, and lenders can be reluctant to jigger the numbers.

Zingales's solution: Homeowners could automatically renegotiate mortgage terms when prices in their area fall more than 20 percent. Lenders must participate. They would have to reduce the face value of the mortgage by the amount houses in the area fall in value, according to an index of prices in the given Zip code.

Lenders could avoid a lot of foreclosures, and they would access some future equity. If a homeowner sells a house later at an amount above the new mortgage level, Zingales said, the lender and homeowner should split the profit.

Downsides: People not at risk of foreclosure may take advantage of the plan, which won't help lenders interested only in avoiding total wipeouts. Also, if homeowners get only 50 percent of new equity created, they have little incentive to increase the value of a home by making improvements -- they would be paying 100 percent of those costs. And people in adjacent Zip codes that barely miss eligibility for the program could be upset, causing unrest.


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