On The Housing Market as a Driver of Stimulus: There was a New York Times editorial today calling for providing relief to the housing market through aggressive policy:
Tens of millions of Americans are being crushed by the overhang of mortgage debt. And Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans…. The administration needs better ideas. It can start by working with Fannie Mae and Freddie Mac, the government-run mortgage companies, to aggressively reduce the principal balances on underwater loans and to make refinancing easier for underwater borrowers. If the president championed aggressive action, and Fannie and Freddie, which back most new mortgages, also made it clear to banks that they expect principal reductions, the banks would feel considerable pressure to go along…. Reducing principal is a better solution than lowering interest rates, because it reduces payments and restores equity. Bankers resist, because it could force them to recognize losses they would prefer to delay. The administration has resisted, in part because principal reductions are seen as rewarding reckless borrowers…
This reflects a lot of other analysis, including New Bottom Line’s recent report “Win-Win Solution” that calls for principle writedowns to create a million jobs.
Jonathan Cohn wrote about how any new stimulus that is proposed needs to be focused on three things: size, speed and smarts. Jared Bernstein’s FAST stimulus program is an example of this. I think getting the housing and foreclosure markets under control is a good idea in and of itself; an added benefit is that it’ll help with the recovery…. Let’s stick with the simpler one of mass refinancing of underwater mortgages; we’ll come back to principal write-downs in future posts, but they apply even more to all three categories. For size, Columbia Stern NYU economics professor Chris Mayer argues that getting homeowners who are underwater to refinance into record-low rates “Fannie Mae and Freddie Mac could face a one-time loss of $40 billion to $60 billion because the new HARP loans would pay lower interest rates, Mayer said. The cost would be offset by fewer defaults and it would put $50 billion to $70 billion a year in homeowners’ pockets, he said.” (Here’s an FAQ he wrote on this.) That’s a fair amount of money for stimulus – not enough to get us where we need to go, but definitely something.
Even better, once the can is kicked speed is going to be relatively quick. There’s no environmental review to conduct or long-delay in actually getting this into motion; underwater consumers who want to knock a few hundred dollars off their mortgages are well-incentivized to initiate, carry out and make sure this gets completed themselves. It outsources much of the bureaucratic requirements to those consumers who stand to benefit. Also it is well targeted to help the economy where it is hurting the most. There is a direct correlation between the amount of underwater mortgages and unemployment (and the relationship holds for states with deeply underwater mortgages and unemployment)…
Size, Speed, And Smarts: Three Essential Ingredients Of A New Jobs Program: President Obama’s plan to give a major economic speech after Labor Day means that, finally, Washington is going to have a serious conversation about creating jobs. And it can't come a moment too soon…. [T]he best policy conversations start with what we should do, not with what we can (or can’t) do…. [H]ere are three essential elements of a successful jobs agenda….
Size. This one can be said very simply. The jobs program should be big…. Mark Zandi… suggests that gross domestic product will grow at an annualized rate of near 2 percent this year and 3 percent next year…. Okun’s Law tells us that in order to reduce the unemployment rate by 1 percentage point, GDP needs to grow 2 percent faster than trend for a year…. Over the next two years, GDP is projected to be between $15 and 16 trillion annually. Do the math, as [Jeff] Liebman suggests, and you're getting to the neighborhood of $400 billion a year…. Liebman was from from the only economist talking in those terms…. Here's Dartmouth’s Andrew Samwick, who was a presidential adviser during the early years of the Bush Administration, via e-mail:
It really depends on what you spend it on. If you are going to do things that are temporary and don't change people's long-term expectations, then you will need to pump in more money. If instead you do things like spend $250 billion a year for four years, and spend it on closing our public infrastructure gap, then households and businesses will likely make complementary investments -- because the public investments raise the returns to the private investments…
Speed: The economy needs help. And it needs help now…. But when it comes to putting people back to work right away, infrastructure programs, in particular, can be slow. The whole point of the infrastructure bank, for example, is to subject every proposal to rigorous cost-benefit analysis. That takes time. One way around this problem is to change some of the rules for public works – and, as Gary Burtless of Brookings explains, applying some lessons the federal government learned after the 1994 Northridge earthquake in Southern California:
The feds learned a bitter lesson from San Francisco’s very slow spending of federal aid dollars after the World Series earthquake a few years earlier. Wanting to avoid a repetition of that fiasco, the federal gov’t told CA and L.A. that the U.S. earthquake relief dollars had to be spent within a specified period. It worked. L.A. repaired its wrecked freeways much faster than the Bay area fixed its wrecked highways and bridges…
Jared Bernstein, who also served in the Obama Administration and now works at the Center on Budget and Policy Priorities, continues to talk up the “FAST” proposal that would finance a burst of school repair and renovation projects around the country…. Of course, that also strengthens the case for other kinds of interventions that have quick effects. Extending unemployment insurance is one obvious policy initiative that satisfies this criteria, as Burtless points out:
Helping the long-term unemployed through direct transfers (unemployment benefits, generously subsidized health insurance) is sensible policy from the perspective of its anti-recession effects (the target population will spend the money faster than you or I) and from a humanitarian viewpoint.
It’s also a strong argument for direct assistance to local and state governments, which could use the cash immediately to plug budget holes – and stop laying off workers, the way they are doing now.
Smarts. Yes, I was trying for three “S”s, just to make this post a little more memorable. But it’s also a good principle. And I mean smart in the sense of fiscally smart. Deficits aren’t a problem right now, notwithstanding what so many politicians and pundits have been saying. But they will be a problem in the future. That’s an argument for offsetting economic boosters with spending cuts and/or revenue increases in the future. Fortunately that is easy to do…. But there’s another way to make these proposals smart: To make them expire when economic conditions improve. In an ideal world, extra unemployment insurance and aid to the states would act as truly “automatic” stabilizers, to borrow the economics lingo. In other words, they would start when the economy in bad shape and end when the economy has recovered, no longer requiring separate acts of Congress as each new emergency arises. An easy way to do that is to link their duration explicitly to an economic indicator – and say, for example, that one or the other or both would end when unemployment declines below a reasonable threshold of 7 percent.
So there you have it. The ideal jobs package would inject hundreds of billions of dollars into the economy as quickly as possible – but in a way that paid for itself over the long run and, ideally, diminished automatically once a strong recovery is under way. The administration could do a portion of this on its own, whether by using Fannie Mae to help distressed homeowners or getting China to help U.S. exports by revaluing its currency. The Fed could obviously lend a hand, maybe a big hand, as well. But to meet these criteria, Congress would have to take some action.
FAST!: I recently suggested a national infrastructure program to repair, insulate, and green the nation’s public schools. As described here, this is a “dialable” concept that could go from meeting the maintenance backlog to more ambitious retrofits and technology upgrades. Now I’ve even got a name for it, Fix America’s Schools Today, or FAST. I think it’s a smart way to get a lot of people who really need jobs back to work, fix a critical part of our institutional infrastructure, save energy costs, provide kids with a better, healthier learning environment, and do so in way that everyone can see and feel good about each morning when they drop their kids at school…