Econ. 101

by Jerry O’Driscoll

The AP reports today that sales of existing homes plunged 27 percent, despite the lowest mortgage interest rates in history.  How could this happen?

Part of the Obama stimulus package was a tax credit for homeowners who purchased homes within a stated time frame.  The credit has now expired.  Economic theory predicted the program would be a failure on its own terms and it was.

Housing is a durable good and the stimulus in effect was a one-time income transfer program. What does economics tell us that individuals do with transitory additions to income? They save most of it.  Because of the way this particular program was structured, the saved in the form of a durable good, that is, housing.  

The Macroeconomic Knowledge Problem

by Mario Rizzo

 

The Keynesian world view is leading to increasing stridency and dogmatism about economic stimulus. There used to be a joke that you can teach a parrot economics – all it needs to say is “supply and demand.” Now we can say that it is even easier to teach a parrot the policy prescription to prevent or cure a major recession: all it needs to say is “stimulus.” Most of the attention thus far has been on fiscal policy and the gathering of ideas on how to spend federal money. (For example, see the New Yorkers’ wish list.)  

 

The new Obama Administration, like the Bush Administration, has signaled that another part of the stimulus program is to put pressure upon banks that received TARP funds to stop worrying about their balance sheets and get out there and lend. (Query: To whom, for what purposes and at what interest rates?)

 

So how is this stimulus supposed to work?