Wednesday, July 20, 2011

John Taylor nails it

Don't miss John Taylor's article in today's WSJ: "The End of the Growth Consensus." I think he summarizes quite nicely the reasons for why the economy is mired in a slow-growth recovery. It has nothing to do with partisan politics, and everything to do with policies that just don't make sense. Here's an excerpt, but please read the whole thing and pass it along:

In my view, the best way to understand the problems confronting the American economy is to go back to the basic principles upon which the country was founded—economic freedom and political freedom. With lessons learned from the century's tougher decades, including the Great Depression of the '30s and the Great Inflation of the '70s, America entered a period of unprecedented economic stability and growth in the '80s and '90s.

Economic policy in the '80s and '90s was decidedly noninterventionist, especially in comparison with the damaging wage and price controls of the '70s. Attention was paid to the principles of economic and political liberty: limited government, incentives, private markets, and a predictable rule of law. Monetary policy focused on price stability. Tax reform led to lower marginal tax rates. Regulatory reform encouraged competition and innovation. Welfare reform devolved decisions to the states. And with strong economic growth and spending restraint, the federal budget moved into balance. 
As the 21st century began, many hoped that applying these same limited-government and market-based policy principles to Social Security, education and health care would create greater opportunities and better lives for all Americans. 
But policy veered in a different direction. Public officials from both parties apparently found the limited government approach to be a disadvantage, some simply because they wanted to do more—whether to tame the business cycle, increase homeownership, or provide the elderly with better drug coverage. 
And so policy swung back in a more interventionist direction, with the federal government assuming greater powers. The result was not the intended improvement, but rather an epidemic of unintended consequences—a financial crisis, a great recession, ballooning debt and today's nonexistent recovery. 
The change in policy direction did not occur overnight. We saw increased federal intervention in the housing market beginning in the late 1990s. We saw the removal of Federal Reserve reporting and accountability requirements for money growth from the Federal Reserve Act in 2000. We saw the return of discretionary countercyclical fiscal policy in the form of tax rebate checks in 2001. We saw monetary policy moving in a more activist direction with extraordinarily low interest rates for the economic conditions in 2003-05. And, of course, interventionism reached a new peak with the massive government bailouts of Detroit and Wall Street in 2008. 
Since 2009, Washington has doubled down on its interventionist policy. The Fed has engaged in a super-loose monetary policy—including two rounds of quantitative easing, QE1 in 2009 and QE2 in 2010-11. These large-scale purchases of mortgages and Treasury debt did not bring recovery but instead created uncertainty about their impact on inflation, the dollar and the economy. On the fiscal side, we've also seen extraordinary interventions—from the large poorly-designed 2009 stimulus package to a slew of targeted programs including "cash for clunkers" and tax credits for first-time home buyers. Again, these interventions did not lead to recovery but instead created uncertainty about the impact of high deficits and an exploding national debt. 
Unfortunately, as the recent debate over the debt limit indicates, narrow political partisanship can get in the way of a solution. The historical evidence on what works and what doesn't is not partisan. The harmful interventionist policies of the 1970s were supported by Democrats and Republicans alike. So were the less interventionist polices in the 1980s and '90s. So was the recent interventionist revival, and so can be the restoration of less interventionist policy going forward.


Salmo Trutta said...

Taylor is wrong once again. The problem is exactly the opposite - too little regulation - too little intervention.

Benjamin Cole said...

John Taylor is an internationally recognized economist, and even more importantly, a nice guy. You can write an e-mail to Mr. Taylor and he will reply in friendly fashion.

That said, he is deeply partisan.

I cannot fathom, on intellectual grounds, his opposition to QE. In 2006, he authored a study absolutely gushing about the effectiveness of QE in Japan (a QE he advised the Japanese central bank to conduct).

You can find the study on his website.
“Lessons from the Recovery from the ‘Lost Decade’ in Japan: The Case of the Great Intervention and Money Injection,” Background paper for the International Conference of the Economic and Social Research Institute Cabinet Office, Government of Japan, September 2006 pdf

Japan gave up on QE shortly thereafter, and has sunk back into perma-deflation-recession. The actions of the Japanese central bank appear self-destructive, and obsessive about any rate of inflation. They seem to prefer mild deflation, even at the the loss of huge fractions of output.

If you doubt that Japan's central bank is tight, then check the exchange rate of the yen over the last 20 years. It has doubled against the dollar.

I suspect Taylor today believes Obama is a menace to our nation, and wants him to fail. Put the monetary noose around the nation's economy, and the economy will choke--and Obama may get voted out.

I am just a wag who comments on econ blogs, but I suspect Tayor is right that monetary policy should be steady.

But not right before, during or after an near-complete collapse of our financial system, and death rattles for our economy. We need Japan-style QE stimulus now, and until we have this economy roaring again.

I completely agree that we need the least amount of regulation possible, and balanced federal budgets.

I reman worried that w/o any regulation, there is always a Long-Term Capital Management, or AIG, ready to implode--and leveraged more than 100-to-one--take down our financial system with it.

The idea that young guys in front of computer screens can toss around leveraged centi-billions is something that may warrant regulation.

McKibbinUSA said...

The economic recovery was "derailed" by the myopic response of the Federal Reserve and Congress -- when the crisis began, the US embarked on efforts to save Federalism as the first priority, which meant bailing out or protecting "too big to fail" banks, automobile manufacturing, the defense industry, and government salaries -- unfortunately, those efforts ignored the problems on Main Street, including comsumption -- reality to date is that consumption has not been restored, probably because consumers have no money -- any money that was dispersed went to Federal and state workers, defense, and the automobile industry -- but nothing whatsoever has been done to put money directly into the hands of consumers -- at this point, Federalism is consuming all the nation's resources and then some -- anything left is being consumed by state workers and programs -- nothing is left for the consumer-at-large in America -- the US has become the haven for only the largest "too big to fail banks," government workers, unionized manufacturing, and the defense establishment -- public employees are a protected class, while small businesses and consumers have been "written off" in a misguided effort to save Federalism from itself...

John said...

Is spending on "defense" procurement interventionist or non-interventionist? I'd say it's highly interventionist.

Current levels, dwarf what was spent in WW2.

Kristjan Velbri said...

John Taylor was only just interviewed by Russell Roberts on EconTalk. Mr. Taylor discussed the fiscal and monetary policy during this crisis. The show runs about an hour.

John said...

Dr. Bill:
You wrote "government workers, unionized manufacturing, and the defense establishment -- public employees are a protected class"

The BLS reports 39,000 government jobs were lost in June, continuing a downward trend since the middle of 2008. Are they wrong? If so could you support your claim with some evidence?

I wonder if any of those 39,000 consider themselves a "protected class."

Benjamin Cole said...


We are spending more now on defense than when the USSR had three million men in uniform, a blue-water navy, an air force with supersonic fighters and bombers, ICBMs, a KGB, and was producing thousands of tanks, planes and warships every year.

Now, our "enemy" is a few dozen, possibly a few hundred punk terrorist.

No private sector company would respond to such a reduced need by spending more.

Only a federal agency could accomplish that.

And no, no GOP pol, and damn few Dem pols will say anything. The Department of defense pours money into key districts, and into the pockets of campaign contributors.

DoD employes 3 million directly, and another 2 million in the private sector--5 million votes, not counting families, friends, retirees etc.

DoD is a prime example of how dangerous socialism is--these employees, private contractors and their families are dependent on continued federal outlays. So they vote to tax productive people, take their money, and give it to themselves.

Salmo Trutta said...

Nixon didn't sever the link between gold & the dollar, without a question, the DOD did.

The U.S. should have learned that lesson long before it became a debtor nation & incurred a $8.4 trillion dollar current account deficit.

Also, overseas bases simultaneously increase both the federal deficit & the foreign trade deficit.

John said...


"private contractors and their families are dependent on continued federal outlays."

When a corporation sells materials or services to the federal government, is growth in the private sector of the economy, or growth in government spending at the expense of the private sector?

If General Dynamics scores a big defense contract and their stock goes up, does that represent growth in the private sector, or just a reflection of wasteful government spending? Would GD, or Raytheon, or the like be anywhere near a capitalized as they are without the government?

The government and corporations are two sides of the same coin. Or, a symbiotic organism, if you will, they feed off one another.

On a smaller scale, in the little town where I live (3,300) six businesses accept food stamps (or whatever they are called now, it's actually a debit card to buy food). I notice a lot of people use them in the checkout.

The grocery, the BP gas station, the liquor store, and three other businesses are all subsidized by Dept. of Ag.