Stimulus package, revisited

Today in the Wall Street Journal, Stanford University economist John Taylor explains why the first "stimulus package" didn't work, and why a new and larger one won't either. John Taylor is the author of the so-called "Taylor Rule" for fiscal policy which is cited in virtually any economic textbook you can find.

In an opinion piece called "Why permanent tax cuts are the best stimulus," Professor Taylor includes a revealing graph which shows that the stimulus package of May of this year had little or no effect on personal consumption expenditures.

Back when that "stimulus package" was passed (in February of this year) we wrote a blog post entitled "Where is the leadership?" In that post, we noted that "in the face of market turbulence and howls to 'do something' no leader arose to call for action that would really have an impact beyond shuffling dollars from one taxpayer to another in a shell game."

Yesterday, in an interview on Bloomberg (see below), former FDIC Chairman Bill Isaac repeated his call to end the mark-to-market accounting rules that have played such a role in causing the crisis in the banking system, and which continue to cause havoc:

In the interview, Mr. Isaac says that the simplest thing for the government to do would be to "simply call the Chairman of the SEC over to the White House and say 'knock it off' -- get rid of this mark-to-market accounting. You're costing the financial system hundreds of billions of dollars and the taxpayers are having to replace it."

Again, back in the first half of March, we published a post entitled "It's not worth zero, but if the market says it is . . ." in which we made the same assertion. Mark-to-market accounting is an attempt to price assets more transparently, by using the changing market price for that asset. As Mr. Isaac explains in the interview above, however, it totally ignores any fundamental analysis of the cash flows of the asset and instead uses "the market" as a shortcut for that analysis.

Respected economist Brian Wesbury made the same point in a research report yesterday, a point which he has also been making since early this year. His metaphor at the top of the second page of that two-page report explains why mark-to-market has fanned the flames of a financial industry brush fire, causing it to spread out of control to the rest of the economy.

The economic insights that are necessary to put out this problem are out there and available to Washington leaders, and they have been available since before the problem got out of control. Why they have not taken advantage of these insights is inexplicable and inexcusable.

For later posts dealing with this same subject, see also:

• "Taking stock of 2008" 12/31/2008.

• "The consumption/production distinction with regard to stimulus plans" 01/15/2009.
  

• "It's a panic, not a Great Depression" 01/21/2009.
  

• "First, do no harm" 02/02/2009.

• "Big news on mark-to-market accounting" 03/13/2009.

• "The end of 2009" 12/30/2009.

• "How your view of 2008-2009 impacts your understanding of today's big events" 02/03/2010.

• "Why can't we all just get along (on economic policy)?" 02/08/2010.

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