Time for a second stimulus?

If at first you don't succeed, spend, spend again

Published October 6, 2009 3:27PM (EDT)

Call it the the stimulus that dare not be named. Bloomberg reports that the Obama administration is considering "a mix of spending programs and tax cuts to respond to widening job losses that would amount to an additional economic stimulus without carrying that label."

On the table: A boost in transportation spending, extension of unemployment benefits, and a continuation of the first-time homebuyer tax credit. The New York Times adds in a possible $3,000 tax credit to businesses for new hires, and a proposal to "allow more businesses to deduct their net operating losses going back five years instead of the usual two."

An extension of unemployment benefits and other safety net provisions seems assured, though everything on the table will obviously require that the government borrow even more money than it already is doing. Which could mean that inflation lurks in the future.

Or does it? What if the effect of extending some of the spending initiatives is actually deflationary? Consider, for example, that $8,000 first-time homebuyer tax credit. The Times calls it "popular." Maybe it is with first-time homebuyers, but economists aren't too crazy about it.

Calculated Risk has been especially critical. A week ago, C.R. called the homebuyer credit "inefficient and poorly targeted, costing taxpayers about $43,000 for each additional home sold." That's a pretty awful cost-benefit analysis.

C.R. also surmises that most of the new homebuyers were former renters.

The rental vacancy rate was already at a record 10.6 percent in Q2 2009. Some quick math suggests the tax credit will push the national vacancy rate above 11 percent soon.

And that means even more pressure on rents (rents are already falling). This is good news for renters, but this will also lead to more apartment defaults, higher default rates for apartment CMBS [commercial real estate mortgage backed securities], and more losses for small and regional banks.

Falling rents, in turn, will exert significant deflationary pressure on the economy.

So what do we learn today from the economic indicator front? Again, Calculated Risk passes along the news, courtesy of Reuters:

The U.S. apartment vacancy rate rose to 7.8 percent in the third quarter, its highest since 1986 ... according to Reis ...

"It makes me wonder whether the avalanche is on its way for office and retail (real estate) unless things change really quickly and really drastically," Victor Calanog, Reis director of research, said.

I know that's just what I wanted to hear this morning: Another avalanche might be on the way.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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