Wednesday, June 20, 2012

On Five Keys to Restoring America's Prosperity

I finished reading John Taylor's First Principles: Five Keys to Restoring America's Prosperity and enjoyed it very much. It is very good in its analysis and policy recommendations.  The five key principles he lists are: predictable policy framework, rule of law, strong incentives, reliance on markets, and a clearly limited role for government.  In other words, a focus on economic freedom as much as possible.  They are fairly similar to the "modest proposal" I offered in one of my lectures at Acton University.  The suggestions I made included: observe federalism, let the government do what the private sector cannot, let taxes be collected to cover expenditures (making some allowance for expenditures that are truly investments), let the Fed apply a monetary rule, and let the goverment create an environment in which entrepreneur's can flourish. The latter would certainly include strong incentives and predictable policy framework.

Taylor argues that, "If people are forward-looking and adjust their behavior to new circumstances, then economic policy works best when formulated as a rule. Government's adherence to known rules allows people to have a clearer sense of what is coming, and therefore to make informed decisions about long-range plans."  To me, this is the most important statement Taylor makes in his book. It offers in a nutshell an argument for rules and against constant discretiionary behavior trying to fine-tune the economy.

Taylor offers support for his claims.  He argues that when policymakers support economic freedom, they rely on automatic stabilizers rather than Keynesan discretionary interventions, the Fed applies rules, and regulatory policy enforce known rules rather than deviate from them to help certain people.

Taylor looks at the post-war history of the U.S. to illustrate his arguments.  From the 1950s ot the late 1970s, the federal government and the Fed tended to be interventionist.  Keynesianism was the official doctrine employed in the government and monetary policy tended to waver in light of current economic conditions. Then, Paul Volker led the Fed to concentrate on price stability, arguing that unemployment wouldn't fall until stable prices were achieved. The election of Ronald Reagan brought a less interventionist approach for the executive branch as well. This approach lasted through the Clinton years, but President George W. Bush pusured more interventionist policies, and the Fed began to deviate from the rules-oriented approach it had followed. Today, interventionism abounds.

Taylor then provides chapters on how to get out of the mess we currently have. One is on debt, another on monetary rules, a third on ending crony capitalism, a fourth on entitlements, and a final on rebuilding American economic leadership. 

All-in-all, I found the book thoughtful and helpful.  It is worth taking a look at.

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