Mike Kueber's Blog

February 8, 2013

Sunday Book Review #98 – First Principles by John B. Taylor

Filed under: Economics,Issues,Politics — Mike Kueber @ 3:08 am
Tags: , ,

I recently blogged about Harry Stein and his book No Matter What… They Will Call This Book Racist.  In my post I noted that I had never heard of Harry Stein but found “his powers of observation and analysis of contemporary political and cultural issues are remarkable.”  Well, I feel the same way about economist John B. Taylor and his book First Principles.      

Taylor, an economics professor at Stanford, has been involved in the development of economic public policy since the Ford Administration and has also worked for Carter and both Bushes.  He loves Milton Friedman (Capitalism and Freedom) and Friedrich Hayek (The Road to Serfdom) and disagrees with Keynes and Krugman.  In First Principles, he describes five important principles of economic freedom that co-exist with America’s political freedoms (speech, press, assembly, religion):

  1. Predictable policy framework (the opposite of the uncertainty that is today’s bane);
  2. Rule of law (not of men’s discretion, which leads to crony capitalism);
  3. Strong incentives;
  4. Reliance on markets; and
  5. Clearly limited role for government.

Taylor’s research shows that when America practices these principles, a robust economy follows.  By contrast, when America deviates from these principles and attempts to intervene in the market, stagnation is sure to follow.  In the last century, the 30s, 60s, and 70s saw much market intervention and concomitant stagnation, whereas the Reagan-Clinton years saw less intervention and robust growth.  Unfortunately, Obama (and Bush-43) is returning us to increased government intervention.  According to Taylor, the revival of the Keynesian focus on aggregate demand is usually prompted by political considerations – i.e., the appearance of doing something is more saleable than urging steady, patient conduct.      

Taylor also argues against a monetary policy that attempts to do too much.  He believes monetary policy should focus keeping stable prices and that it was wrong-headed for Congress to also task the Fed with promoting maximum employment (and moderate long-term interest rates).  Maximum employment relates to fiscal policy, which should remain the province of the Congress.

Taylor has reserved a special place in hell for crony capitalism because it is contrary to all of the principles of economic freedom.  Plus, it encourages excessive risk-taking because failure will be back-stopped by government.  Dodd-Frank and ObamaCare are both examples of crony capitalism. 

A chapter on entitlements (and the associated debt) is especially informative.  Most professors and politicians can play with statistics, but Taylor’s numbers seem to be on-point, not cherry-picked to make his point.  For example:

  • Entitlements are programs in which government automatically makes payments to people who qualify.  E.g., Social Security, Medicare, Medicaid, EIC, TANF (welfare), food stamps, housing (Section 8), school lunches, and unemployment compensation. 
  • 55% of households receive some kind of entitlement, including 41% of nonretirees, and 80% of households with a single mother.  More than half of American children life in households that receive some entitlement benefits. 
  • Social security is 21% of federal spending and 5% of GDP, while Medicare and Medicaid are 24% of spending and 6% of GDP.  Thirty years from now, Social Security will be 6% of GDP, while Medicare and Medicaid will grow to 12% of GDP. 

Because one of Taylor’s principles of economic freedom is strong incentives, he obviously is concerned that America’s robust safety net has created powerful disincentive effects.  His solutions, at least as relates to the most problematic Medicare and Medicaid programs, are closely akin to Congressman Paul Ryan’s – i.e., shifting Medicare toward the free market and shifting Medicaid to the states.  He endorses these solutions not because he is a partisan, but because they more closely correspond to his five principles of economic freedom.  With respect to Social Security, he recommends adjustment to the benefits instead of increasing the taxes.  If deemed desirable, increased progressivity should be achieved by lowering the benefits to the rich or increasing the benefits to the poor.   

Although Taylor’s policy positions might seem partisan, he doesn’t present them in such a way.  Like political and cultural commentator Harry Stein, economist John B. Taylor comes across as a decent, clear-thinking person who you would want making decisions for your family, your business, or your country.

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2 Comments »

  1. If Krugman is a Keynesian he is part of an ever shrinking minority. Most economists are moving toward Austrian…

    Q

    Comment by Q — February 9, 2013 @ 2:15 pm | Reply

  2. Of course, more doesn’t mean smart.

    Q

    Comment by Q — February 9, 2013 @ 2:16 pm | Reply


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