First Principles: Five Keys to Restoring America’s Prosperity. John B. Taylor. W.W. Norton & Company 2012, pp. 235, $24.95 Unless something dramatic happens in the Persian Gulf, this year’s presidential election could very well hinge on the unemployment rate in November 2012. While January’s unemployment numbers had to have been somewhat encouraging for the White [...]
First Principles: Five Keys to Restoring America’s Prosperity. John B. Taylor. W.W. Norton & Company 2012, pp. 235, $24.95
Unless something dramatic happens in the Persian Gulf, this year’s presidential election could very well hinge on the unemployment rate in November 2012. While January’s unemployment numbers had to have been somewhat encouraging for the White House, a recent poll nevertheless revealed that only a mere thirty-six percent of Americans say President Obama is doing a good or an excellent job handling the economy. Many Americans, particularly those who understand the extent of our debt crisis, continue to be wary about this country’s economic outlook.
In First Principles: Five Keys to Restoring America’s Prosperity, John B. Taylor (Stanford University) presents his strategy to restore American economic greatness. According to the author, our current economic problems stem from its getting away from the basics of what made America great. “The premise of [First Principles],” writes Taylor, “is that the best way to understand the problems confronting the American economy is to go back to the first principles of economic freedom upon which the country was founded.” The author defines economic freedom as meaning the freedom to decide what to produce, consume, buy and sell, and how to help others. He enumerates what he considers to be the defining principles of economic freedom as: a predictable policy framework; the rule of law; strong incentives; a reliance on markets; and a clearly limited role for government.
Influenced by libertarian economists Milton Friedman and F.A. Hayek, Taylor emphasizes the importance of policy predictability and the rule of law. “Government’s adherence to known rules,” Taylor contends, “allows people to have a clearer sense of what is coming, and therefore to make more informed decisions about long-range plans.” Indeed, many of President Obama’s critics have complained that the current administration has created an uncertain business climate, making it very difficult for businesses and industry to plan for the future. When one hears echoes of capital sitting on the sidelines, this almost certainly is what is being referenced.
America’s adherence to the principles of economic freedom, suggests Taylor, has been stronger and weaker at different moments in our nation’s history. Policy shifts back and forth between interventionism and an appreciation for limited government. This occurs, “remarkably” according to Taylor, “nearly simultaneously for fiscal policy, regulatory policy, and tax policy.” Whereas the latter half of the 1960s into the 1970s was a time of increased interventionism, the Reagan-Bush-Clinton years were a more an era of economic freedom. This period is generally known as the Great Moderation. The George W. Bush-Obama era, on the other hand, has been a bipartisan era of increased interventionism. Following the financial crisis of 2008, the federal government has been increasingly interventionist with quantitative easing, health care regulations, and the Dodd-Frank financial reform legislation.
Taylor, who most recently served in the George W. Bush Administration, rightly acknowledges that members of both parties have veered away from an adherence to economic freedom. His assessment of how differing chairmen of the Federal Reserve performed deserves particular attention. Paul Volcker, best known for quelling rising inflation during the early years of the Reagan Administration, is presented as someone who intuitively understood the importance of economic freedom. Volcker’s near-singular focus on combatting inflation stands in stark contrast to Ben Bernanke’s monetary activism. With regard to the best-known Fed chairman, Taylor presents Alan Greenspan as someone who, in 2003-2005, purposefully moved away from the previous decades’ predictable rules-based monetary policy.
The author devotes individual chapters to the looming debt crisis, crony capitalism, and entitlement reform. Given his expertise in monetary policy, Taylor’s chapter on the Federal Reserve merits particular attention. In 1992, the author proposed the eponymous Taylor rule, a policy benchmark designed to aid the Federal Reserve in setting interest rates to achieve price stability. Unlike those who want to ‘end the Fed,’ Taylor wants to reform the nation’s central bank. He advocates that the Federal Reserve “focus on long-run price stability within a clear framework of economic stability,” and that it report its strategy and be accountable for deviating from it. Indeed, Taylor suggests that the Federal Reserve’s sole focus should be price stability, rather than its current dual mandate of price stability and maximum employment. He has at least one supporter in Congress. In late 2011, Representative Paul Ryan (R-WI) proposed a similar course of action in a Wall Street Journal op-ed.
In terms of policy, Taylor is largely correct. In my opinion, interventionism has largely not worked in the ways in which its advocates have intended. A commitment to predictability and the rule of law are extremely important for sustaining a democratic polity with a free market system. Where Taylor is less correct, however, is in his analysis of American economic history. Although the United States was partially founded on the principle of limited government, the nation at the time of the founding was largely agrarian and not as committed to economic freedom as we might initially imagine. Fearing the power of finance on our political system, many debated the wisdom of a central bank. Most significantly, slavery, an economic system in which people were considered property, would continue to grow and thrive until the Civil War and Reconstruction. It was not until after the largely industrial North defeated the Confederacy that free market capitalism and a commitment to the rule of law for all people became the country’s dominant economic and political ideologies.
In conclusion, First Principles is a thought-provoking work that deserves a wide audience. Even those readers who will disagree with the author’s analysis will find much to appreciate in this recent contribution to the ongoing debate about America’s economic woes.
Jon Lewis (c) 2012