John Taylor on economic growth

John Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University, and the George P. Shultz Senior Fellow in Economics at Stanford University’s Hoover Institution. During George W. Bush’s first term, he served as the Under Secretary of the Treasury for International Affairs. Taylor is perhaps best known for developing the Taylor Rule, a recommendation about how nominal interest rates should be determined that became a rough summary of how central banks actually do set them.

Clark Judge attended a recent talk by Taylor. At Richocet, Judge has posted the following notes from that talk. Here they are:

The Challenge:
– The great challenge in economic policy today is overcoming obstacles to growth.
– How can governments promote growth?
– Simple: Predictable policies regarding taxes, spending, regulation and money; rule of law; deference to markets and the incentives that markets provide; limited government.
– Over the last forty year the nation has gone through big economic policy swings.
– In the 1970’s it failed on all the rules, and economic performance was horrible.
– In the 1980s and 1990s, from the Reagan tax cuts to the Fed’s rules-based monetary policy to the Clinton welfare reforms, it adhered to the rules for growth, and we had steady, widely shared growth. This is a period that economists have come to call the Great Moderation, because when downturns came they were shallow and short-lived.
– Now the nation has reversed course: the stimulus programs, the explosive growth of monetary aggregates and the capricious regulatory intrusions are exactly the opposite of what the rules for growth would tell us to do.
– The result: the obstacles to growth are worse than ever, and there is blame on both left and right.

The Left:
– The Left is in the grip of a destructive mania to regulate entrepreneurs and is pushing for increasing government intervention in both the fiscal and monetary spheres.
– Every Economics 101 student learns how critical the rule of law is to economic growth, but in numerous ways we are undermining rule of law.
– The consequences? As an example, parts of California are suffering unemployment as high as 27 percent.
– In the 1970s the Council of Economic Advisors said that the natural rate of unemployment was4.0-4.9 percent. Now people are OK with much higher rates.
– We hear as an excuse that deep recessions bring slow recoveries. In the post-World War II period, the opposite has been true. Fast recoveries follow deep downturns.

The Right:
– On the Right, we are not talking enough about how and why pro-growth policies are good for the middle class.
– Lower taxes etc. are the ways to reduce unemployment and poverty. Even China is moving to reduce taxation for just that reason. But we don’t make the case.
– The GOP is not speaking broadly enough in terms of the range of policies. It shouldn’t just be talking about taxes. It should also be arguing for a return to normal budgeting.
– If Congressional Republicans cave in on the Sequester, things will get much worse.

A comparable talk by a leading leftist economist would, I suspect, have focused on “demand,” a word that doesn’t appear in Judge’s notes from Taylor’s talk. But Taylor’s talk relates to demand because the pro-growth policies he discusses would produce non-artificial demand that would spur real economic growth.


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