The elements of Stimulus III are still being negotiated but the following items have been publicly mentioned: Another 14 weeks of unemployment insurance benefits, another year of taxpayer paid COBRA health insurance was laid off workers, extending income tax losses back five years instead of two years, another $250 check for retired people and low and moderate income workers, a $4,000 tax credit for each job created, and extending the $8,000 home purchase tax credit for a year.

Let’s add this up (my estimates): COBRA - $25 billion, $250 checks - $30 billion, tax loss carry-back - $20 billion, unemployment insurance benefit extension - $15 billion, home purchase tax credit - $12 billion, credit for job creation -$200 billion.  The grand total is $302 billion. Congress is likely to scale back the job creation credit, add some existing homeowners to the housing tax credit, add in some goodies for senior members of Congress to take back for their reelection speeches and humor Republicans with some small tax cuts.  Best guess estimate: $250 billion with $20 billion or more directly targeted at home purchases.

$20 billion for home purchase tax credits would probably split $3 billion for new homes and $17 billion for resale homes. This would cover 375,000 new home purchases.  The current forecast is for 496,000 new home purchases in 2010. If 100,000 household buy a new home because of the tax credit and would not have bought a new home without the tax credit, 2010 new home sales will be boosted to near 600,000, 20% above the current forecast and 40% above 2008 new home sales.

This would be a welcome boost to long distressed homebuilders and their suppliers next year but would largely occur by advancing 2011-2012 sales into 2010. The net 2010-12 increase in home sales directly from the extended tax credit would not likely be larger than 25,000.  Double this to include the indirect impact of the tax credit and the rest of Stimulus III.

A tax dominated stimulus plan almost pays for itself by several years later, according to current economic research.  But a spending dominated stimulus plan falls well short because much of the government directed spending does not produce sufficient income to continue the spending after the original money is gone. Stimulus III as it currently appears to be forming would contribute substantially to tax and/or inflation increases in 2011-12 and make GDP growth even more sluggish.  It is a great plan to get reelected but not good for the rest of us.

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