[Pen-l] another mainstream view

["Jim Devine" <jdevine03@xxxxxxxxx>]

[this seems inadequate, though it's based on an econometric model. It
ignores the financial freeze. Also, given the excessive debts that
consumers have now, giving a tax break to new home-buyers doesn't seem
to be enough. Krugman's Kolumn (on the same page) also ignores
consumer indebtedness.]

The New York Times /April 14, 2008

Op-Ed Contributor
Home Buyers Needed

By EDWARD E. LEAMER

OUR politicians are devising economic stimulus measures to encourage
consumers to spend more. These measures will cost taxpayers $200
billion or more. This is not money well spent. The problem is not too
little consumer spending; the problem is too few home buyers.

Many argue that we don't need government intervention to bring the
buyers back; we just need the market to work its magic through lower
prices.

Well, not entirely. When it comes to housing, lower prices don't
inevitably cause sales to rise. Why? Because lower housing prices
create the expectation of still lower prices later, causing buyers to
wait for a better deal. Left alone, a weak market therefore overshoots
with prices too low and construction too little.

But a hot market can also overshoot with prices too high and
construction too great. The Federal Reserve should control a hot
housing market by raising interest rates to limit excessive price
appreciation and overbuilding. When the housing market heats up, as it
did between 2002 and 2004, the last thing the Fed should offer is low
interest rates. But that's what it did — now it doesn't matter what
the rates are; not even low levels can entice buyers when house prices
are declining.

The only solution is for the federal government to offer a temporary 5
percent tax rebate — up to $25,000 — for first-time home buyers.

This rebate is ideal because it would go to middle-class families who
thought they were priced out of the market forever and young couples
who will benefit from getting a home sooner rather than later. It
doesn't bail out speculators. But by creating demand for homes, this
rebate cushions the fall for everyone and stimulates economic growth.

Timing is important. If the rebate is offered too early, it will delay
the adjustment we need to make, and push the problem into the future.
If it's offered too late, we risk creating another episode of
overbuilding. The right time to do the stimulus is when the
adjustments have been substantial but not quite complete.

Based on what I'm seeing, a stimulus should commence in the second
half of this year and be offered for about 12 months, depending on how
the housing market is responding.

The really good news is that the cost for this program is minimal and
would likely stimulate enough spending and growth to more than pay
back the Treasury with higher revenues later.

Edward E. Leamer is a professor of management, economics and
statistics and the director of the Anderson Forecast at the University
of California, Los Angeles.

Copyright 2008 The New York Times Company
-- 
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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