Green Stimulus: Let's Try Again

by Dean Baker

Dean Baker suggests we should find forms of stimuli that can get the economy on a more energy-efficient path.
(Photo: Macmath)

    The last week provided new evidence the economy remains weak and the recent spate of predictions of a short mild non-recession will be proven wrong. That means it is time to get out in front of the herd of surprised economists and start talking about another stimulus package.

    The first stimulus package was focused on tax breaks. Just under $50 billion went to businesses. This was a political payoff to President Bush and his backers to avoid a veto; no one expected these tax breaks to have any immediate effect on the economy. There is a substantial body of economic research that shows such tax breaks have little impact on business investment.

    Another $100 billion was paid out to individuals in the form of $600 per person tax rebates. Based on the experience with a similar set of rebates in 2001, there was reason to hope much of this money would be spent, giving an immediate boost to the economy.

    However, there is one very important difference between the economy today and the economy in 2001, when the last rebate checks were mailed out. In 2001, house prices were rising rapidly. This meant tens of millions of homeowners were seeing the equity in their home increase, and, therefore, would feel comfortable spending their rebate check.

    We are in the opposite situation today. House prices are plummeting at double-digit rates. More than ten million homeowners already have mortgages that exceed the value of their homes, and tens of millions of others are seeing the equity accumulated over a working lifetime vanish in months.

- more -

Sphere: Related Content