Notes on the Economy 12-10-2010

Obama compromise is not the most efficient fiscal package possible

When Wall Street discovered last week that it had underestimated the strength of the economic recovery, the stock market jumped over 3%.  In contrast, when the new fiscal package was announced this week there was barely any market reaction, and rightly so.  The package is about the size of the Bush TARP plan.  But while much of TARP involved the purchase of securities that eventually appreciated and are being sold, the Obama compromise is a net addition to the budget deficit.  Hence it caused about a 1/4% rise in 10 yr. rates.  And the surprise elements of the plan – extending the Bush tax cuts for high income individuals, 2% tax cut for middle income tax payers for a year, and accelerating depreciation on business equipment for one year- -can all be expected to have a low multiplier, i.e. a small contribution to economic growth per $1 increase in the deficit.

What’s missing here again is any help for the sector that needs it most:  housing.  Press reports have it that Administration plans to ease restrictions on mortgage modifications that have unused budget for a long time.  But since it is not included in the Obama compromise it will likely apply again to small numbers of mortgages.

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