Yesterday at the Round Table on This Week with George Stephanopoulos, Nobel-prize winning economist Paul Krugman offered an interesting analysis of President-elect Obama's prospective stimulus plan that is based on an assumed $600 Billion of federal spending on public works and infrastructure improvements: It won't work.
Of course George Will was quick to dismiss the Professor's analysis, but Dr. Krugman's point seemed highly perspicacious.
President-elect Obama has been saying for months that the economy needs a stimulus that is timely, temporary and targeted. Also, given the enormity of the crisis in the economy, the stimulus must be orders of magnitude higher than previously anticipated.
Obama's infrastructure stimulus is predicated on "shovel-ready" projects that can begin immediately to create jobs and income. But Professor Krugman argued that only approximately $100 Billion of "shovel-ready" projects are actually available based on his analysis of the data.
The dilemma, he said, is that the Federal government simply can't spend money fast enough on infrastructure to provide the necessary stimulus for the economy. While George Will scoffed at this idea, he offered no refutation.
Meanwhile, on 60 Minutes, Scott Pelley reported on a second wave of foreclosures in housing that will hit the market over the next two years and will be even bigger than the "subprime" tsunami.
Apparently, banks were also writing "Alt-A" and "Option ARM" mortgages that were just as risky as the "subprimes" they had written earlier. Now, those "Alt-A" and "Option ARM" mortgages are just starting to default and will reach the same peaks as the "subprimes" in the next two years with even more devastating results. We are talking about another 2 Million foreclosures.
Of course, if the massive inventory glut of houses on the market were cleared out so that house values could rise, then many of these foreclosures could be avoided by refinancing or sales by the owners. But as long as foreclosures cause house prices to fall, refinancing is not practical.
Since infrastructure spending stimulus will not be sufficient, why not a temporary income tax deduction commencing 1/1/09 targeted at the purchase of a house or condo? For example, 25% of the purchase price could be deducted from 2008 or 2009 taxable income for a house purchase made in 2009.
Giving potential buyers a large enough incentive to buy a house now instead of hoarding their money could reverse the economic downturn and create millions of jobs.