In a symposium on NationalJournal.com's "Economy Experts" blog, Desmond Lachman and Allan H. Meltzer respond to the following questions: What is your favorite idea for economic stimulus that is not getting the attention it should? How do you assess the Obama approach, as reported? Is his idea of a two-year tax credit for most workers sound, considering the failure of the 2008 rebate to stimulate spending?

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Resident Fellow  Desmond Lachman

Listening to the present fiscal stimulus debate, one cannot help get the feeling that the United States is going down Japan's well-trodden path in the 1990s. For rather than addressing the root causes of the present U.S. economic malaise, the incoming Administration seems to be looking for a quick fix for the U.S. economy with a large fiscal stimulus package to the exclusion of policies to address the U.S. economy's present fundamental weaknesses.

There are two key issues that are not being currently addressed by the incoming administration, which would seem to be essential for laying the groundwork for a sustainable economic recovery. First, the financial system has to be restored to normality with a view to getting credit flowing again. Second, as Marty Feldstein never tires of reminding us, a floor has to be set underneath the housing market. Japan's experience during its lost decade in the 1990s should be a powerful reminder to us that large fiscal stimulus alone will not be sufficient to restore sustainable growth if the financial system remains dysfunctional and if asset prices keep falling.

The crying need for a coherent financial market strategy is vividly illustrated by the virtual lack of results from financial policy measures to date. Despite the literally hundreds of billions of dollars in liquidity injections by the Federal Reserve, and despite the disbursement of almost $300 billion under the TARP program, the U.S. financial system today is practically as dysfunctional as it has been at any time over the past eighteen months. The banks are not lending, the securitization process has all but dried up, and the spreads that even the best rated of corporations are paying have widened to onerous levels.

One has to hope that amongst the very first priorities of the new U.S. administration will be a radical rethinking of the TARP program in an effort to restore the U.S. financial system to a semblance of normality. For in the absence of a normally functioning financial system that makes credit more readily available, efforts to revive the economy through fiscal stimulus and unorthodox monetary policy measures will prove to be short-lived.

In rethinking the TARP, the new administration would do well to take a close look at the successful Swedish bank support program of the early 1990s, which quickly restored the Swedish banking system to normality. In contrast to the Japanese approach, that program made the vital distinction between solvent and insolvent financial institutions. It also used a "good bank"/ "bad bank" approach to rehabilitate insolvent institutions so that they could quickly resume lending.

Desmond Lachman is a resident fellow at AEI.

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Visiting Scholar Allan H. Meltzer

The biggest failing is that policy has addressed future mortgage defaults by reducing mortgage rates. A more effective program would address the low demand for housing by offering an incentive to buy up some of the existing unsold houses. I propose a tax credit for anyone that makes a down payment on an existing unsold house in 2009.

Congressman David Dreier introduced legislation based on this proposal. Increasing the demand for unsold houses would slow or end the fall in house prices reducing future defaults. Also, it would improve the mortgage market by giving a more certain value to the underlying houses.

Economists learned long ago that temporary tax reduction has little effect. Permanent reductions have larger effects.

Allan H. Meltzer is a visiting scholar at AEI.