By Edward E. Learmer

The US politicians are devising economic stimulus measures to encourage consumers to spend more. These measures will cost taxpayers $200 billion or more. This is not money well spent. The problem is not too little consumer spending; the problem is too few home buyers.

Many argue that we do not need government intervention to bring the buyers back; we just need the market to work its magic through lower prices.

Well, not entirely. When it comes to housing, lower prices do not inevitably cause sales to rise. Why? Because lower housing prices create the expectation of still lower prices later, causing buyers to wait for a better deal. Left alone, a weak market therefore overshoots with prices too low and construction too little.

But a hot market can also overshoot with prices too high and construction too great. The Federal Reserve should control a hot housing market by raising interest rates to limit excessive price appreciation and overbuilding.

When the housing market heats up, as it did between 2002 and 2004, the last thing the Fed should offer is low interest rates. But that is what it did - now it does not matter what the rates are; not even low levels can entice buyers when house prices are declining.

The only solution is for the federal government to offer a temporary 5 percent tax rebate - up to $25,000 - for first-time home buyers.

This rebate is ideal because it would go to middle-class families who thought they were priced out of the market forever and young couples who will benefit from getting a home sooner rather than later. It does not bail out speculators. But by creating demand for homes, this rebate cushions the fall for everyone and stimulates economic growth.

Timing is important. If the rebate is offered too early, it will delay the adjustment we need to make, and push the problem into the future. If it is offered too late, we risk creating another episode of overbuilding. The right time to do the stimulus is when the adjustments have been substantial but not quite complete.

Based on what I'm seeing, a stimulus should commence in the second half of this year and be offered for about 12 months, depending on how the housing market is responding.

The really good news is that the cost for this program is minimal and would likely stimulate enough spending and growth to more than pay back the Treasury with higher revenues later.

The author is a professor of management, economics and statistics and the director of the Anderson Forecast at the University of California, Los Angeles The New York Times Syndicate

(China Daily April 15, 2008)