Friday, January 11, 2008

Targetted Stimulus: Acorns Instead of Dandelion Seeds

Davie Pearlstein's list of conventional wisdom targeted stimuli for the economy sounded so sensible, that I had to summarize them here.

Instead of further cutting of interest rates by the fed, which risks stimulating the very behavior that got us into this subprime meltdown, a few economy enhancing measures. As Pearlstein says, "this ought to be an easy one . . . we know how much stimulus could provide an economic cushion."

To boost GDP by $125 billion, or 1% of GDP:
1. 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.
2. To assure the support of the states, offer money to the states by increasing the federal Medicaid match can do that.
3. To bring Republican business interests on board, throw in the tax break of accelerated depreciation, "which doesn't reduce corporate tax payments, it just delays them."
4. To address the housing downturn, two measures.
One, advance future federal housing subsidies and make them available now to state housing authorities. This would allow housing authorities to buy some of the growing inventory of unsold properties to rent out to low and moderate income families. It would help stabilize the housing market and in the long run would save money.
Two, create a new type of housing finance -- at zero cost to the government -- to prime the resumption of mortgage lending: create a debt-equity blend, whereby the bank would lend to borrowers and obtain an interest in the future appreciation of the value of the property (think mortgage plus reverse mortgage). This new idea could both increase demand and reduce foreclosures. Homeowners would pay lower premiums and the banks would have a long term interest.

As Pearlstein points out, these are neither complicated nor radical ideas; some spend new money, others shift money from the future to the present, while others cost nothing but shift returns into the future. He says these measures meet the tests of Larry Summers, former Treasury Secretary and President of Harvard and now entrepreneur, of being "timely, temporary and targeted."

I always thought the debate between Al Gore and his targetted approach to the economy and George Bush's tax cuts all around but mostly to the rich as being the difference in propagation strategy of the oak tree and the dandelion. The oak counts on lots of squirrels to carry their trophy acorns around and bury them, some to be found during winter and eaten, but some to live another day and grow into a mighty oak. The dandelion puts its faith in the winds, by creating beautiful flying umbrellas to spread around the world.

And while gardeners may say that strong but delicate dandelions have a very successful reproductive strategy, in the long run, the mighy oak provides housing for birds, squirrels, various insects and food for all of them. I always thought Gore had the better argument.