The Right Stimulus, Cont.

Ed Glaeser:

One attractive, Reagan-like alternative to the stimulus package is to focus on a temporary reduction in the payroll tax, particularly for less wealthy Americans who are most likely to spend the money quickly. Such a tax cut would give people a strong incentive to work by letting them keep more of the money they earn. It would be both libertarian and egalitarian.

A second alternative is to be like Ike and embrace public investment in human and physical capital. Republicans could distinguish themselves from their opponents by insisting that investment put national interest ahead of parochial politics. Republicans could insist on cost-benefit analysis and emphasize investments that will make it more likely that the U.S. will remain an economic leader in the world.

The rest of Glaeser's piece is an argument against Mitch McConnell's mortgage-refinancing plan, reportedly developed by former Bush economic adviser and current Columbia Business School dean Glenn Hubbard. The proposal is extremely controversial and a lot of folks -- including me! -- aren't sure what to think about it. Larry Lindsey outlined a similar plan in our pages several months ago. But the refinanced mortgages in the Lindsey plan would be "full recourse" loans:

That is, if the borrower fell behind in the payments, the government could use any means necessary to get repaid. That means not only foreclosing on the house (as under current mortgages) but also collecting any remaining unpaid sums after the house was foreclosed on by garnishing the wages, bank accounts, and other assets of the borrower. Think of it as the IRS providing the loan on the same collection terms as it does on taxes, or perhaps using the powers the government now has to collect on student loans.

Not sure if that is the case with the McConnell plan.

The larger point, however, is that these refinancing plans are intended to help banks and mortgage lenders get rid of the uncertainty plaguing their balance sheets. A lot of the bad mortgages would be refinanced with an explicit government subsidy under the new plan. That might help quell the price uncertainty surrounding the mortgage-backed securities at the center of the financial crisis. In other words, regardless of the merits of his proposal, McConnell is making a good-faith effort to get to the heart of the problem. Where are the Obama administration's housing and bank-rescue plans again?

UPDATE, 9:17 a.m.: Greg Mankiw has more on the GOP mortgage plan here.