Feldstein: Avoiding a "Deep and Prolonged Recession"

Marty Feldstein says it's time to dampen the downward movement in housing prices to prevent overshooting the bottom, and to use government spending, including spending on infrastructure, to try to avoid a deepening recession:

The Stimulus Plan We Need Now, by Martin Feldstein, Washington Post: Further legislation to deal with the economic crisis should not wait until the new president takes office. Fortunately, the president-elect will be a senator and can propose legislation... Immediately after Nov. 4, the winner could, and should, take the lead in the legislative process.

The economy faces two separate problems: the downward spiral of home prices ... and the decline in aggregate spending, which could cause a deep and prolonged recession.

Home prices ... must fall an additional 10 to 15 percent to get back to pre-bubble levels. But they could fall much further than that as a result of mortgage defaults and foreclosures. ... Congress should enact policies to reduce defaults that could drive prices down much further. ... The mortgage replacement loan plan that I suggested on this page in June ... is one possible way to do that. ...

With the Fed's benchmark interest rate down to 1 percent, there is no scope for an easier monetary policy to stop the downward spiral in aggregate demand. Another round of one-time tax rebates won't do the job. ...

The only way to prevent a deepening recession will be a temporary program of increased government spending. Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags... But while past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending.

A fiscal package of $100 billion is not likely to be large enough... The fall in household wealth resulting from the collapse of the stock market and the decline of home prices may cut aggregate spending by $300 billion a year or more.

The president-elect should focus on ... initiatives that can occur quickly and that would otherwise not be done. While it would be good if some of the increased spending also contributed to long-term productivity, the key is to stimulate demand. ...

The increased government spending should include not only money for infrastructure such as bridges and roads but also for a wide range of equipment. Rebuilding some of the military capacity that has been depleted by the wars in Iraq and Afghanistan could be done relatively quickly and should be part of the overall package.

Although the economy is facing severe challenges, the president-elect can turn the situation around by introducing legislation to deal with the downward spiral in home prices and with the declining level of aggregate demand ... as quickly as possible.

Since I've made many of the same points, it would be hard to disagree with the overall message. One thing though, the military will get its share one way or the other, so I'd rather see the increased spending directed elsewhere. Things, for example, "that would otherwise not be done."

Update: GDP falls in third quarter:

The Commerce Department reported this morning that consumers sharply cut their spending this summer, causing the United States economy to shrink at annual rate of 0.3 percent. By almost all accounts, the economy is now in recession.

The last quarter in which consumers reduced their spending came in 1991. ... Personal consumption fell at an annual rate of 3.1 percent in the third quarter of this year, its biggest drop since 1980, when the economy was in a deep recession. ...