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.

Bolster Fannie and Freddie

The Thinker: Carl Goldsmith, chief investment officer of Berkeley Capital Management

In Action: Goldsmith said he is "fuming" that the government has spent billions of dollars trying to avoid foreclosures but has not managed to encourage home purchases. "We are failing to address the demand deficiency," he said. "There are many, many potential buyers out there, but they are afraid. Therefore it is important that we initiate some programs to bring the demand curve up."

A full nationalization of Fannie and Freddie -- going beyond the $200 billion the government has invested in them -- is among Goldsmith's ideas. Doing so would let them borrow at the same rates as the U.S. Treasury, helping set mortgage rates at pretty much whatever level could boost sales -- say 4 percent. Employing this strategy for a year could get momentum going for a housing recovery, Goldsmith said.

Downsides: Nationalization could have negative consequences for the federal balance sheet. The government would need to take on about $5 trillion of mortgage-backed securities, most likely damaging its credit rating. Goldsmith acknowledges this flaw but says: "It's a matter of semantics. When push comes to shove, who is going to back up those loans, anyway? The feds. We all know that."

Social Security Income for All

The Thinker: Dimitri Papadimitriou, president of the Levy Economics Institute of Bard College

In Action: Papadimitriou also wants to encourage growth through consumer spending. By suspending worker Social Security contributions, he said, the government would effectively boost employees' take-home pay and pump billions of dollars each week into the economy. Workers, he said, would feel like they had a better handle on their household budgets, helping boost confidence in the economy. Consumers could spend money on products or services but also pay down debt.

"When you increase take-home pay, it really gives people the opportunity to spend," Papadimitriou said. Under his plan, contributions to Social Security wouldn't pause; they would just come from the federal government's coffers. Companies would continue making contributions.

Downsides: Over six months, the plan could cost hundreds of billions of dollars. Even the perception of a shortfall in Social Security coffers could prove politically untenable. Also, there is no way to know whether people will spend the money responsibly. And many economists, again, think encouraging people to spend rather than save is harmful over the long haul. What if someone pays off his credit card using the extra money, only to then fill it up again?