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We've just about reached the point where we need to add a "gate" to the AIG fat-cats story -- "bonus-gate."
With all this populist anger bubbling up around us, it's an ugly time to discuss another stimulus package. Polls show that the public is sick of bailing out the financial sector, at least, and while there remains strong support for the Obama administration's larger efforts to boost the economy through a mix of policies, including public spending and tax cuts, the unfortunate reality (at least based on my anecdotal experience) is that many people view all of the government's varied efforts as part of the same package, and many see that package as little more than a public ripoff.
And, according to a CNN poll (last link above), two out of three Americans surveyed would oppose another stimulus package if the first one doesn't kick the economy into high-gear.
That's unfortunate -- "Blue Dog" Dems and GOP dead-enders in Congress made sure that the most recent stimulus package was of a size that most economists said would fall short of what was needed to make up for American consumers' sudden lack of appetite for purchasing endless unnecessary crap shiny new consumer goods.
And now, in a new report (PDF) released today, economist Dean Baker, author of Plunder and Blunder: The Rise and Fall of the Bubble Economy, argues that an additional stimulus will indeed be necessary to pull the economy out of its doldrums. Baker calls for the injection in the form of tax credits to encourage businesses to extend insurance coverage to more employees and give their workers more time off. He also points out that trying to stabilize home prices in wildly over-inflated bubble markets is a fool's errand, and urges that efforts to rescue homeowners be focused in areas where prices are more or less in line with their historic levels.
The executive summary after the flip ...
The overwhelming majority of economists, including all those in top policymaking positions,
completely missed the growth of an $8 trillion housing bubble. Furthermore, even as the collapse of
the bubble began to push the economy into recession, policymakers repeatedly downplayed its
significance, minimizing any negative effects on the economy. As a result, the policy responses last
year were too late and far too small to have much effect countering the downturn.
This paper argues that policymakers are still underestimating the severity of the downturn.
Specifically, it argues that the unemployment rate by the end of 2009 is likely to be far higher than
the most recent projections from the Congressional Budget Office and the Federal Reserve Board.
In this context, it argues for additional stimulus1 in the neighborhood of 2-3 percent of GDP for
two years ($300 billion to $450 billion annually). It suggests two specific mechanisms for getting this
money into the economy quickly:
1) an employer tax credit of $3,000 for extending health insurance coverage to workers not
already covered by health insurance. The tax credit can include an additional $1,000 per
worker to make coverage more generous.
2) an employer tax credit of up to $2,500 per worker for increasing the amount of paid time off
per worker. This paid time off can take the form of paid family leave, paid sick days,
increased vacation, or shorter standard workweeks. This would both boost demand and lead
to more employment at every level of GDP. For example, if the average number of hours
per worker per year were reduced by just 3 percent, this would lead to 4.2 million more jobs
at the same level of GDP.
The paper also argues for a housing policy that is focused on stabilizing housing prices, but only in
markets where the bubble has deflated. To advance this goal, it should have Fannie Mae and Freddie
Mac stop buying mortgages that were used to purchase homes at bubble inflated prices. (This can be
determined by the ratio of the sale price-to-annual rent. As a national average, this ratio should not
exceed 15 to 1, although there is some regional variation.)
Because they continue to buy mortgages on homes purchased at bubble-inflated prices, Fannie Mae
and Freddie Mac are generating new losses for taxpayers, while providing no real benefit for
homeowners. Homeowners in these markets will pay more in housing costs by owning rather than
renting and still find themselves with no equity when they sell their home. By contrast, if relief was
focused on markets where the bubble has deflated, prices could be stabilized and it is likely that
taxpayers would actually profit in the long-run.
The last section points out that the frequently-discussed notion that investors will flee the dollar is
actually not to be feared at all. It is in fact necessary, since the dollar must fall to correct the
country’s huge trade imbalance. The rest of the world has more to fear from a free-falling dollar
than the United States, since a very low dollar would make U.S. goods hyper-competitive in the
world economy. As a result, other countries would have no alternative but to act to prevent the
dollar from falling too far.
Therefore, concerns about a loss of international confidence in the dollar are completely unfounded.
This should not be a basis for limiting the size of future stimulus packages.
Most economists now acknowledge that the collapse of the housing bubble is leading the country
into the worst downturn since the Great Depression. However, even as newly released economic
data consistently come in worse than expected, policymakers still do not appear to have grasped the
seriousness of the downturn. The policies that have been put forward to date are in some cases
tangential to solving the economy’s real problems and almost certainly not large enough to reverse
the economy’s slide.
The first part of this paper summarizes the evidence indicating that the recession is likely to be
worse than is generally expected and that the stimulus approved by Congress thus far will be
inadequate to boost the economy back to full employment. The second section outlines two tax
credits that would be effective forms of short-term stimulus while also providing long-term benefits
to the economy. The third section discusses the inadequacy of the Obama administration’s plans for
dealing with the housing market. The fourth part briefly explains why concerns about an investor
flight from the dollar are misplaced, and why these concerns should not be a basis for limiting the
size of future stimulus packages.
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