Mike Konczal reads Christina Romer, and comments:
Christina Romer on Fiscal versus Housing Policy: Romer argues for the job plan, which is centered around fiscal solutions in the fiscal circle (infrastructure, tax cuts) and doesn’t primarily include solutions in the housing circle (except for housing refinancing which is unlikely to go anywhere). Romer addresses this head-on:
WE NEED A HOUSING PLAN, NOT MORE FISCAL STIMULUS: The bubble and bust in house prices has left households burdened with too much debt. Until we deal with this problem — perhaps by providing principal relief to the 11 million households whose mortgages are larger than the current value of their homes — we’ll never get the economy going. The premise of this argument is probably true: recent evidence suggests that high debt is holding back consumer demand. But it doesn’t follow that the government needs to directly lower debt burdens to stimulate job growth. Recent research shows that government spending on infrastructure or other investments raises demand even in an economy beset by over-indebted consumers. Another effective approach is to aim tax cuts and government payments at households that would like to spend, but can’t borrow because of their debt loads (such as the poor and the unemployed).
History actually suggests that the “tackle housing first” crowd may have the direction of causation backwards. In the recovery from the Great Depression, economic growth, which raised incomes and asset prices, played a big role in lowering debt burdens. I strongly suspect that fiscal stimulus will be more cost effective at speeding deleveraging and recovery than government-paid policies aimed directly at reducing debt. We should, however, be thinking hard about whether the president’s stimulus plan is the best one for a debt-heavy economy. It may be too tilted toward broad tax cuts, when bigger increases in government investment spending and more targeted tax cuts would promote faster growth.
I tend to think there’s enough space for advancement on all three fronts…. But in general, those who think that we have a housing debt hangover problem think that running a larger fiscal deficit is a good thing…. [A]s Richard Koo puts it:
Indeed the key lesson from the Japanese experience is that fiscal support must be maintained for the entire duration of the private-sector deleveraging process…. [P]remature fiscal reform will invariably result in another meltdown, as the Japanese found out in 1997 and the Americans in 1937…
Romer adds an interesting argument to this overlap – that the best way to deal with the housing hangover is to boost wages and employment, which can be done through fiscal policy. Unemployment is well-correlated with deleveraging, foreclosures and underwater mortgages, so relief through this channel will go towards the areas most in need….
[W]hat are the arguments against this job bill again?