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Economics for the Long Run, by John B. Taylor

Economics for the Long Run, by John B. Taylor

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Published by Hoover Institution
Appeared in the Wall Street Journal January 25, 2012.
Appeared in the Wall Street Journal January 25, 2012.

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Published by: Hoover Institution on Jan 25, 2012
Copyright:Attribution Non-commercial


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   w   a    l    l   s   t   r   e   e   t    j   o   u   r   n   a    l   o   p    i   n    i   o   n
Hoover Institution
Stanford University
by John B. TaylorJanuary 25, 2012As this election year begins, a lot o people are wondering what we can do to restoreAmerica’s prosperity and create more jobs. Republican presidential candidates are oeringtheir ideas, and at his State o the Union message on Tuesday President Obama presentedhis. I believe the undamental answer is simple: Government policies must adhere moreclosely to the principles o economic reedom upon which the country was ounded.At their most basic level, these principles are that amilies, individuals and entrepreneursmust be ree to decide what to produce, what to consume, what to buy and sell, and howto help others. Their decisions are to be made within a predictable government policyramework based on the rule o law, with strong incentives derived rom the marketsystem, and with a clearly limited role or government. The history o American economic policy displays major movements between moreand less economic reedom, more and less emphasis on rulesbased policy in scal andmonetary aairs, more and less expansive roles or government, more and less relianceon markets and incentives. Each o these swings has had enormous consequences. Takentogether, they make or a historical proving ground to determine which policy direction isbetter or restoring prosperity.A big move toward more interventionist policies started in the mid1960s, ater moreactivist Keynesian economists came to town in the Kennedy and Johnson administrations,and it lasted through the 1970s in the Nixon, Ford and Carter administrations. We sawshortterm stimulus packages, temporary tax rebates or surcharges, gostop monetarypolicy with inationary overexpansion ollowed by severe contraction, wageandpriceguidelines and controls. The eventual result was high unemployment, high ination andslow economic growth. This was ollowed by a shit toward more predictable policies and a more limited role orgovernment starting in the Reagan administration and largely continuing into the GeorgeH.W. Bush and Clinton administrations. The result was lower unemployment and highereconomic growth with long expansions and ew recessions.More recently—beginning during the George W. Bush administration but really takingwings in the current Obama administration—policy has returned toward more and moregovernment intervention, with results we are all experiencing.A WALL STREET JOURNAL OP-ED
Economics for the Long Run
 John B. Taylor 
Economics or the Long Run
2 Hoover Institution
Stanord University
How to move the country back toward the policies that sustain economic reedomand prosperity? To start, much can be learned rom the stories o the politicians andeconomic ofcials who got us in and out o these messes, and remembering that thecast is bipartisan. Most pertinent to our current predicament is the story o how wegot out o the economic mess o the late 1970s.It’s difcult to recall now the seriousness o the U.S. economic slump at that time.Unemployment was high and persistent. Ination had increased past the creepingstage to a trot. Condence in U.S. economic leadership was plunging at home andabroad. That changed when Ronald Reagan became president in 1981. Temporary, shortterm Keynesian actions and interventions were out. Stable, permanent policy was in.Reagan proposed and Congress passed critical longterm reorms, especially acrosstheboard tax rate reductions. The president was a rm believer in economic reedom, an avid reader and ollowero economists like Milton Friedman and Friedrich Hayek. Between the time heailed to unseat President Gerald Ford in the 1976 Republican primaries and hisannouncement to run again in 1980, Reagan gave innumerable radio addressesputting orth his principles. He used downhome stories o economic reedomthat he could tell in three minutes or less. There were no ghost writers—he wrotehis stories in long hand on lined yellow paper as he traveled around the country. The ailed policies o the 1970s made Reagan’s case appealing across the politicalspectrum. He based his winning election campaign on these principles.Reagan appointed a large number o economic ofcials who also were rmlycommitted to moving away rom interventionist policies. No members o the originalCouncil o Economic Advisers under Reagan had come rom the Keynesian school o thought, and most o them during the Reagan administrations were inuenced byMilton Friedman.In addition, the president appointed a group o outside economic advisers—originally including George Shultz, Milton Friedman, Alan Greenspan, ArthurLaer, William Simon and Thomas Sowell—who helped him and others in theadministration implement policies to move the country toward economic reedomand then stay the course.As an example o Reagan’s rm commitment to principle, consider monetary policy.When he became president, Federal Reserve Chairman Paul Volcker, a Democratappointed by President Carter, was determined to reduce ination and end the gostop interventions o the 1970s. That meant temporarily high interest rates, whichcontract the economy. One might have expected Reagan to pressure the Fed to

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"Government policies must adhere more closely to the principles of economic freedom upon which the country was founded.”
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