Our Ballpark and $3 billion extrapolations

In a Miami Today article, Michael Lewis argues that Miami-Dade Convention Development [MDCD] taxes would be better spent on upgrading existing convention facilities than being applied towards a ballpark for a MLB team. He does so under a splashy headline, ‘Building ballpark could cost county $3 billion every year.’ Given the fanfare, I was surprised that he put forth such an unsubstantiated main argument–uninterrupted investment in convention facilities are required to maintain tourism.

Some of the facts Mr. Lewis’ produces–amount of revenues derived from MDCD taxes–to make his case are mistaken. Mr Lewis is a well-respected commentator in Miami, I have no doubt it was an honest mistake, and I will show you exactly how it happened. But herein lies the beauty and utility of blogs. In a time not so long ago and not very far away, only a handful of individuals would have had access to the kind of information needed to refute a published commentator. Even then, the challenge of getting acknowledged still remained. No more.

Case in point, I read the article and wanted to dig a little deeper into his arguments. So I googled ‘Miami-Dade Convention Development Taxes 2007″ and the first 2 hits were relevant. The first one seems right, but the figures don’t match the ones quoted in the article. I try the second one, which did match the article. Which was right? Easy, the second one, the one Lewis quoted, is based on year-to-date figures [thru August] for comparison purposes. An honest mistake which really didn’t impact the argument, but still a nice reminder of the watchdog role over the media blogs can legitimately play.

I’ll cut through a lot of hokey baseball analogies–‘stadium deal is the equivalent of trading the Phillies’ starting lineup for Marlins’ mascot’–and list the arguments made by Lewis:

  1. Given the contracting economy, no time to use scarce tax revenues for MLB stadium.
  2. Economic benefits of a new stadium are exaggerated.
  3. Using the taxes for improving convention facilities is a better buy. Basing his arguments on statistics provided by the Greater Miami Convention & Visitors Bureau, he notes that the average visitor stayed 5.85 days and spent $245 daily, for a total outlay of $1,430. He then speculates that if visitors could be increased by 100,000 that would lead to $1,430,000 in additional monies spent. He further speculates that ‘spending multiples’ could double [actually closer to 210%, but we get it, he’s going for the nice round number] the economic impact of the 100,000 increase in visitors, giving him the big and round $3 Billion dollar amount he splashes on his headline.

Wow, this is going to be fun. First, let’s do some numbers:

  • If the average visitor spent $1,430 and they were taxed at a rate of 3%, then the average visitor paid $43 in MDCD Taxes.
  • Just to fill out our example, since there was $47.250 million in tax revenues in 2007, that would mean that the number of ‘average’ visitors would have totaled approximated 1.1 million in 2007.

A brief response to each point:

  1. Lewis disingenuously ignores the fact that the stadium is in fact part of a larger project–Megaplan–which includes infrastructure improvements, especially in downtown Miami. It is exactly those type of projects which governments should be engaged in during the current recession. The timing turned out to be very useful.
  2. I would not dispute his point that the economic benefits of a [any] sports franchise are exaggerated in terms of actual employment or taxes generated. But that’s the equivalent of a fan of the New York Cosmos in the 1970’s complaining about the signing of Pele, based on the fact that he was clearly past his prime. The fan would have been missing the point about what Pele would do for the entire league in terms of exposure. The fact that he actually played well was gravy.
  3. I applaud Mr Lewis’ restraint. He could have indicated that if the $3 BILLION were denied to the county for 100 years, the ballpark would cost us $300 BILLION!!! As Shakespeare once dryly never noted, you doth extrapolate too much sir!

Let me not be too coy, Lewis is full of it on point #3 and I’ll point out why. But first, here’s my main point for the stadium in terms of our community–leaving aside my selfish desires as a sports degenerate to continue having a hometown team. From reading Lewis’ article or other criticisms of the ballpark plans which focus on what the monies could be used for–important to note that they are specifically designated for ‘tourist-related facilities’–do you ever get the sense that those people understand why people visit South Florida?

I don’t. From Lewis’ article, you would think that there was a direct correlation between additional spending on convention centers and tourists. To paraphrase Malcolm Gladwell, convention facilities are like intelligence, beyond a certain competent threshold, the marginal utility of the benefits decrease significantly.

A lot of money is spent on advertising to promote tourism. No matter how good the ad campaign, they can’t approach what we get when–for example this past Sunday’s Dolphin’s game–announcers gush over the weather as a particularly beautiful image of our town fills the screen. I was going to say you can’t buy that kind of exposure, but we can. But it’s a front-end buy. The exposure ad buy is the ballpark. The Dolphins, Heat, Hurricanes and Marlins give us the kind of exposure that makes competing tourist markets teal with envy and inserts a subliminal bomb inside of head of tourists which goes off when they approach travel agents or log into Expedia. As such, we can not disentangle the overall lure of Miami from the aura of being a major league city, one of less than 30 nationwide.

You know how many people hear sports scores every day. The kind of people who want to get away to fun places on vacation. The kind of people who call up their organizations and say, ‘I don’t give a bleep about how nice the San Antonio convention facilities are, if you schedule this year’s convention somewhere other than Vegas or South Beach, I’m sure my kid’s gonna have a recital that weekend.’ Nobody stares off in the middle of the day fantasizing about upgraded convention facilities. The idea that a city with a tourism based economy should sacrifice the opportunity to have a MLB team because it’s other tourist facilities would rather not share tax revenues [shocking I know], seems to be short-sighted in the extreme.

Getting back to the horrors which will occur if we don’t spend another year’s worth of MDCD taxes on non-ballpark tourist facilities. A few questions which Mr Lewis fails to address in his article; Hasn’t money already been flowing into the those very facilities year in and year out? Why weren’t those upgrades noted made last year or the year before, or the year before that? Can the logic of ‘spending multiples’ be brought into a budget line item? Is there an identifiable or finite amount of spending required for ‘state of the art’ convention facilities? What studies or examples did Mr Lewis rely upon to believe that an additional year of undiluted MDCD tax revenues spent on existing convention facilities would cause tourism to increase by 10%?

Ballpark critics would do well to come with better arguments, lest they resemble Aesop’s [not Hee-Seop’s] classic tale.

Article referenced copied in full at end of post.

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Building ballpark could cost county $3 billion every year

By Michael Lewis

Stadium talks between governments and the Florida Marlins are in extra innings. Contract deadlines have passed. Now dealings come up against a recession unanticipated during ballpark euphoria.

When tax revenue seemed endless, using a half billion dollars to help a team owner boost profits was rationalized as the price for keeping us Major League. But now, with taxes constricted and needs soaring, governments must exercise greater care with scarce resources.

Key criteria must be how spending can add jobs, buttress the economy and prepare us to overcome the doldrums. Under such criteria, baseball ranks dead last.

Set aside a deal Miami and Miami-Dade County have outlined with the Marlins that’s equivalent to trading the world champion Philadelphia Phillies’ starting lineup for Billy, the Marlins’ mascot.

The only defense of this well-documented giveaway is to claim it would give the community a huge economic boost even while it enriches Jeffrey Loria and his unnamed Marlins partners.

Unfortunately, it wouldn’t give any such jolt. Worse, it would rob us of alternate uses of funds to leverage our way out of the economic vice that’s squeezing us.

Baseball fans love trade talk and statistics. They’ll debate recent Marlins trades of two stars for a man with exactly 169 Major League at bats, a .240 batting average and no home runs, and their closing pitcher for a low-level minor leaguer who weighs 275 pounds. Net gain to the Marlins: dumping three large salaries and adding about $8 million to the bottom line.

Similarly, tradeoffs and statistics dominate the economics of community resources.

Building a stadium for $515 million, garages for $94 million to $156 million (depending on whom you believe) and infrastructure at untold costs (because nobody has totaled them) could yield four short-run public benefits.

One: construction jobs. They are vital, but any construction spending would create them. Costs per job would be similar.

Two: stadium jobs. They are also real, but they’re just shifted. They guy selling you a hot dog at Dolphin Stadium would either move to the new ballpark or lose his role to some new vendor. Shifting jobs is no gain.

Three: sales of tickets, advertising, sponsorships, concessions, parking and more. All those benefits would flow to Jeffrey Loria and Co. But again, the ones the Marlins don’t get today would just shift from the account of H. Wayne Huizenga, Dolphin Stadium owner. Shifting dollars is no gain.

Benefit Four is all a stadium could really boast: luring cash-spending visitors. That’s the only rationale for using Convention Development Tax receipts for the stadium and garages, because those funds by law must be used to spur visitor spending.

So it is in luring visitors that we’ll play the tradeoff and statistical game that baseball fans like me love. And those Convention Development Taxes could be spent far, far more effectively to boost our economy than by building a ballpark.

Convention Development Taxes here last year generated $33.6 million, all earmarked to aid the visitor industry. It is through bonding future collections that the county and city would generate cash for a stadium and garages.

Because this area has been booming, governments have relied on those taxes expanding forever. Last year collections were up 9.3%, the year before 8.9% and before that 17.9% following 18.1%.

But days of straight-up growth may not last. The first eight months of 2008 collections rose just 2% — and that was before the economy crumbled. We can’t bet on bigger forever, even with a Sept. 1 projection of 43 tax-generating hotels with 9,975 rooms scheduled to open in Miami-Dade.

Suppose that instead of baseball those taxes were traded to the visitor industry, where they belong. For just one example, put some into expanding and upgrading the Miami Beach Convention Center and suddenly we get a far bigger bang for far fewer bucks.

Like a stadium, hundreds of thousands of area residents use that center every year. But unlike a stadium, it also has a broad reach elsewhere.

That convention center competes nationally for meetings that attract both businesses and consumers. To compete in the future, however, it needs a ballroom that could serve banquets, better parking and high-tech electronic and audio-visual capabilities. A study soon will detail those needs.

Orlando and other communities have captured the biggest meetings. But, combined with Miami-Dade’s other advantages, an upgraded center still could lure hundreds of thousands more visitors a year. That’s statistically a far better use of the taxes than baseball.

By the numbers: The Marlins this year averaged 16,888 ticket sales a game (far fewer actually attended). That’s lowest in baseball by more than 3,000.

The Marlins play 81 games here a year. At most 1% of all Major League Baseball fans visit an area primarily to see a game, so the Marlins lured at most 13,689 out-of-town visitors this year. Compare that with Art Basel at the convention center, which in just three days next month will draw 10,000.

Even if the Marlins were to get the 37,000-seat stadium they seek, however, and even if they could sell every seat instead of the 45.9% they do now (worst in baseball), they’d lure just 29,970 out-of-town visitors a year.

Meetings and conventions, however, now attract hundreds of thousands a year more than that, and they face no ceiling other than community capacity. Adding 9,975 hotel rooms plus filling all present rooms would add far more. Hotels in Miami Beach, where 40.9% of all visitors stay, used only 76.9% of capacity in 2007, so growth can be huge. With billions invested in the new hotels, they deserve community support from a convention center enhancement.

The Greater Miami Convention & Visitors Bureau lent staffing last year to 421 meetings and conventions that had 243,000 attendees — and, unlike baseball, which lasts six months, they came here year-round.

That doesn’t include the large meetings that didn’t need bureau aid. Think of 8,500 people due in January at the Jewelers International Showcase, or 20,000 from around the hemisphere in February for the Printing Association of Florida, or 5,000 in April for the International and American Association of Dental Research. The list runs on.

With better facilities, we’d lure far more conventions bringing big spenders. Without upgrades, we could lose some of what we have.

And those meetings are vital to every county resident. Last year, according to the convention bureau, an average overnight visitor spent $244.54 daily, stayed 5.85 days and spent $1,430.56 while here, not including air fare. And he or she didn’t come alone: parties averaged 2.09 persons.

Add 100,000 visitors annually at an upgraded convention center and we add $1.43 billion in outside spending in restaurants, hotels, taxis, stores and more. Most workers in those industries live in Miami, Hialeah and throughout this county, so visitor spending in Miami Beach benefits all.

And each visitor dollar multiplies as it’s spent again, perhaps doubling. So we could easily add $3 billion a year spending impact by upgrading our convention center — or lose $3 billion of current impact by building a ballpark instead.

We could get that $3 billion annual bang for our buck for a $100 million one-time upgrade. Who’d want to trade that impact for spending half a billion dollars on a stadium to add just 16,000 out-of-town baseball fans per year?

These are days for smart spending to target economic growth. A ballpark just shifts dollars from H. Wayne Huizenga to Jeffrey Loria. A convention center upgrade brings billions a year to our community. The choice is obvious. A stadium strikes out.
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T. S. Eliot and the Miami Marlins parking garage

T. S. Eliot never once wrote:

This is the way the Megaplan ends
Not with a parking garage but with aluminum car ports
[lacking permits naturally]
in every Little Havana front yard.

There are three things worth highlighting from yesterday’s Miami Herald articlewhich reported the remaining obstacles to the Megaplan’s approval.

  1. The idea that Norman Braman needs any sort of ‘prompting’ to file a lawsuit or motions in Judge Cohen’s courtroom would only be believable in a ‘stalkers’ support group. Being Braman’s attorney in these matters reminds me of the joke about why Dermatologists have a great job; their patients never really get better or die.
  2. Read between the lines on the commissioners concerns. The compromise is there for the taking. A scaled back garage plan, along with an increased Marlins commitment should produce the ‘self-sustaining’ numbers which everyone wants to see. While not spelled out in the Herald article, Miami Today reported on why the estimates would vary–different scales of the project.
  3. Should governments invest or be concerned about deficits during a recession? Recent Nobel prize winning economist, Paul Krugman, the most influential economist on the left, weighs in:

And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. The usual argument against public works as economic stimulus is that they take too long: by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn’t needed. Well, that argument has no force now, since the chances that this slump will be over anytime soon are virtually nil. So let’s get those projects rolling.

… The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit.

A prominent economist on the right, and a McCain advisor, Martin Feldstein concurs:

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 that delayed the spending until a recovery was well underway. 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 counter-cyclical spending.

I think there are many good reasons for our community to build a facility that will ensure that we keep our MLB team, but the economics argument was always the weakest link. However, the recession we are in, or about to enter into, has effectively shifted that debate. There is now broad agreement that major public works projects are exactly what national and local governments should be pursuing during the recession.

If the stadium finally does get done, much experienced GOP grief counselors are available for Mr. Braman.

All articles referenced are copied in full at end of post.

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Miami, Miami-Dade to again vote on Marlins stadium
BY CHARLES RABIN AND MICHAEL VASQUEZ

In a near echo from this time last year, Miami and
Miami-Dade commissioners are expected to take rapid-fire votes between Thanksgiving and Christmas to cement the future of a new Little Havana baseball stadium for the Florida Marlins.

Last December — after secretive negotiations — city and county commissioners voted separately, but on the same day, to lay the foundation to extend two Community Redevelopment Agencies, a move that would create enough money to help build a series of downtown projects, including a ballpark.

Now, those same political bodies are expected to meet once more, this time to approve a slate of final contracts for the long-sought new stadium.

Like the earlier approval, the final votes are sure to spur controversy. Now, much of the debate may center on the cost of a new parking garage to rise near the park.

The December vote date isn’t locked in yet, but County Manager George Burgess said he expects commissioners to see the contracts in the next few weeks and vote by early December.

Proponents considered last year’s votes, pushed heavily by Miami Mayor Manny Diaz and Miami-Dade County Mayor Carlos Alvarez, sound and decisive public policy. The Marlins viewed it as the savior to their franchise in South Florida, freeing them from continuing to play in a football stadium with no roof and little concession revenue.

”As long as everyone knows where we are, and what we do, and where the money goes, that’s important to me,” said County Commissioner Rebeca Sosa.

Critics called last year’s approvals a bid to stifle public discourse on a $3 billion public works investment, as the public was given little notice before the holiday 2007 votes. That perception led the project’s chief critic, auto magnate Norman Braman, to file suit in a bid to quash the stadium.

BRAMAN’S LAWSUIT

Braman’s suit has so far failed in court, but he is trying to jump-start the legal debate once more — over the parking garage — as the final votes near approval.

”Of course they don’t want public input, they never did,” said Braman, reached Monday in New York.

Braman’s suit contended that the $3 billion financing plan that would help build a tunnel, a park, and by extension the ballpark, was illegal and that spending almost $400 million in taxpayer money on a private enterprise didn’t serve a so-called “paramount public purpose.”

He’s been defeated on the first six of his seven counts, with Miami-Dade Circuit Court Judge Jeri Beth Cohen waiting for the state Supreme Court to rule on a similar Escambia County case before issuing a final opinion likely to quash his case altogether.

Braman added a new wrinkle to his lawsuit last week after Miami city commissioners, in a public meeting last month, weighed whether to move forward on a 6,000-space, $94 million parking garage the city is obligated to build near the new stadium.

The semi-independent Miami Parking Authority and a city-hired consultant estimated the garage’s cost would be considerably higher — and the MPA’s analysis said the city could lose hundreds of millions of dollars in the deal over the 30-year lifetime of the contract.

That prompted Braman to file a motion for a hearing before Cohen, where he will argue that the city withheld the information during the discovery phase of this summer’s trial.

”It undermines the argument,” said Braman attorney Bob Martinez, noting that the judge, at trial, said the garage helped support local government’s case “because it provided the city an economic benefit.”

Cohen is waiting for responses from the city and county before setting a hearing date.

But last week, Miami Parking Authority Chief Executive Art Noriega backed off his agency’s projections, saying they’re over a year old and the plans have since changed.

The city, county and Marlins want to build a $515 million, 37,000-seat, retractable-roof stadium, with 60 suites, to be ready for play Opening Day 2011. To do that, ground must be broken soon.

The Marlins are contributing $120 million of the stadium’s cost and repaying another $35 million loan in “rent payments.”

As for the garage, Miami City Manager Pete Hernandez denied hiding information and said estimates from the parking authority and consultant Jones Lang LaSalle were too high.

”We’re not doing a Merrick Park garage,” Hernandez said, alluding to a high-end retail mall in Coral Gables. “It’s a garage for a baseball stadium.”

Commissioners will decide if it’s more financially feasible for the city to run the garage or to hire a private firm.

Earlier this year the parking authority estimated the garage’s cost at $150 million, and determined the city would lose more than $8 million a year running it, with profits going to the ball club.

The Baseball Stadium Agreement that the city and county commission agreed to calls for the team to purchase 5,750 of the garage’s 6,000 spaces for between $10 and $12 for each of the team’s 81 homes games during the regular season.

The Marlins say that means the team assumes the risk — which is true — but it also assumes any profit made for selling any parking space for more than those amounts would revert to the ball club.

Still, when city commissioners learned of the parking authority and consulting analyses a few weeks back, it set off alarms.

Commission chairman Joe Sanchez, whose district includes the Little Havana stadium site, said ”there’s no way” he could support a garage with annual losses footed by taxpayers.

And Commissioner Marc Sarnoff said to get his vote, “it’s got to be a self-sustaining parking garage.”

Noriega, the parking authority chief executive, said he could not say if the city would lose money running the garage. ”I couldn’t answer that question without guessing, and I don’t want to guess,” he said.

Before ground can be broken, city and county commissioners must approve management, construction, assurance and nonrelocation contracts. The city must also approve the parking garage agreement.

OTHER ISSUES

Other issues could affect the upcoming votes: A super majority, or nine of the 13 county commissioners, must accept the management and construction contracts because the Marlins did not go out to bid before hiring contractors.

And, with the economy in flux and credit markets nearly frozen, the question is: Do commissioners have the will to spend almost $1 billion of taxpayer money to help revitalize downtown in the larger public works project?

Commissioner Carlos Gimenez said he was ”absolutely” concerned about the economy. ”I want to see the numbers on how they expect to pay this off in the future,” he said.

Mayors Alvarez and Diaz counter that the public works projects, including the stadium, would spur much-needed investment and create jobs.
——————————————————————
October 17, 2008
Op-Ed Columnist
Let’s Get Fiscal
By PAUL KRUGMAN

The Dow is surging! No, it’s plunging! No, it’s surging! No, it’s …

Nevermind. While the manic-depressive stock market is dominating the headlines, the more important story is the grim news coming in about the real economy. It’s now clear that rescuing the banks is just the beginning: the nonfinancial economy is also in desperate need of help.

And to provide that help, we’re going to have to put some prejudices aside. It’s politically fashionable to rant against government spending and demand fiscal responsibility. But right now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold.

Before I get there, let’s talk about the economic situation.

Just this week, we learned that retail sales have fallen off a cliff, and so has industrial production. Unemployment claims are at steep-recession levels, and the Philadelphia Fed’s manufacturing index is falling at the fastest pace in almost 20 years. All signs point to an economic slump that will be nasty, brutish — and long.

How nasty? The unemployment rate is already above 6 percent (and broader measures of underemployment are in double digits). It’s now virtually certain that the unemployment rate will go above 7 percent, and quite possibly above 8 percent, making this the worst recession in a quarter-century.

And how long? It could be very long indeed.

Think about what happened in the last recession, which followed the bursting of the late-1990s technology bubble. On the surface, the policy response to that recession looks like a success story. Although there were widespread fears that the United States would experience a Japanese-style “lost decade,” that didn’t happen: the Federal Reserve was able to engineer a recovery from that recession by cutting interest rates.

But the truth is that we were looking Japanese for quite a while: the Fed had a hard time getting traction. Despite repeated interest rate cuts, which eventually brought the federal funds rate down to just 1 percent, the unemployment rate just kept on rising; it was more than two years before the job picture started to improve. And when a convincing recovery finally did come, it was only because Alan Greenspan had managed to replace the technology bubble with a housing bubble.

Now the housing bubble has burst in turn, leaving the financial landscape strewn with wreckage. Even if the ongoing efforts to rescue the banking system and unfreeze the credit markets work — and while it’s early days yet, the initial results have been disappointing — it’s hard to see housing making a comeback any time soon. And if there’s another bubble waiting to happen, it’s not obvious. So the Fed will find it even harder to get traction this time.

In other words, there’s not much Ben Bernanke can do for the economy. He can and should cut interest rates even more — but nobody expects this to do more than provide a slight economic boost.

On the other hand, there’s a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages (but not at face value, as John McCain has proposed) and restructure the terms to help families stay in their homes.

And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. The usual argument against public works as economic stimulus is that they take too long: by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn’t needed. Well, that argument has no force now, since the chances that this slump will be over anytime soon are virtually nil. So let’s get those projects rolling.

Will the next administration do what’s needed to deal with the economic slump? Not if Mr. McCain pulls off an upset. What we need right now is more government spending — but when Mr. McCain was asked in one of the debates how he would deal with the economic crisis, he answered: “Well, the first thing we have to do is get spending under control.”

If Barack Obama becomes president, he won’t have the same knee-jerk opposition to spending. But he will face a chorus of inside-the-Beltway types telling him that he has to be responsible, that the big deficits the government will run next year if it does the right thing are unacceptable.

He should ignore that chorus. The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit.
——————————————————————————
The Washington Post

Thursday, October 30, 2008; Page A23

The Stimulus Plan We Need Now
The President-Elect Won’t Have to Wait Till January to Act
By Martin Feldstein

(PDF Version)

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 without waiting to be sworn in as president. 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, which hangs over the financial markets, and the decline in aggregate spending, which could cause a deep and prolonged recession.

Home prices have already fallen about 25 percent from their peak in 2006, and experts say they 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. Further declines from the current level would increase the number of homeowners whose mortgages exceed the value of their homes, creating a strong incentive to default. Defaults and the resulting foreclosures would put more homes on the market, driving down prices even more.

And this fear of a deep drop in home prices depresses the value of mortgage-backed securities, contributing to the difficulty that banks are having raising funds and to their reluctance to make loans.

Although home prices must get back to pre-bubble levels, Congress should enact policies to reduce defaults that could drive prices down much further. Direct help to the 12 million homeowners who already have negative equity in their homes could help to stop foreclosures. But it is important for Congress to go further and stop declining prices from pushing a large portion of the other 37 million homeowners with mortgages into negative equity, which could tempt them to default. The mortgage replacement loan plan that I suggested on this page in June, essentially a congressionally enacted mortgage “firewall” to prevent prices from dropping too far, is one possible way to do that.

Falling home prices have already reduced homeowner wealth by about $3 trillion; the stock market decline has cut wealth by an additional $8 trillion. This reduced household wealth is causing consumers to cut spending, leading to lower employment, lower incomes and, therefore, further cuts in consumer spending.

Other components of aggregate demand are also falling. The decline in consumer spending will lead to less business investment in plants and equipment. And the recession in Europe and Japan will further reduce our net exports.

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 rebates that Congress enacted this spring failed to stimulate consumer spending: More than 80 percent of tax rebate dollars were saved or used to pay down existing debt.

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 that delayed the spending until a recovery was well underway. 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 to revive the economy. 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 developing a mechanism for identifying and funding spending 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. Any plan to finance this spending by raising taxes, even if postponed, as Sen. Barack Obama has suggested, would hurt the recovery by causing affected taxpayers to cut their spending now.

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. It is important that such legislation be enacted as quickly as possible.

The writer, an economics professor at Harvard University and an adviser to the McCain campaign, is president emeritus of the National Bureau of Economic Research.
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