City Journal Autumn 2014

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John B. Taylor
The Road to Recovery « Back to Story

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To: John Taylor

Left unsaid is that many, if not most, academic economists support the dismal economic "initiatives" implemented by Obama's economic team.
Who were/are they? Well, oh, that's right, economists from Harvard, U.Chicago, U.Cal.Berkeley, etc., as well as Krugman, Blinder (both of Princeton, one a Nobel Winner) and many other "mainstream" economists. Of course, Bernanke is a Princeton professor as well.
And, as an aside, the absolutely destructive, job killing policies of FDRs "New Deal" were spear-headed by Columbia U academic economists.

Frankly, Mr. Taylor, despite the "sophisticated" mathematical and statistical underpinnings that characterize academic economics today - in their effort to show that they are more of a "science," from Keynes through Samuelson till present, what economists consider solid economic "theories," are in fact unprovable and unproven assertions and hypotheses not amenable to any sort of controlled experiment.
In NO field of (a real) science or in any engineering discipline, is a hypothesis or theory - no matter the intellectual horsepower of the originator or its mathematical complexity - accepted as VALID until CONTROLLED experiments have been conducted to verify (or not) the hypothesis, and more importantly, before subjecting human lives and their livelihoods to practical applications of said theory.
This simply does not happen in economics at all. If, say, "Keynes showed... " or "Keynes.... said" then, well, it is simply accepted as a economic fact.
And if application of his theory produces results OPPOSITE of what is intended, then the usual excuses emerge; "well, the stimulus was not large/long/small/short enough - take your pick, and then the conservative vs liberal economists begin to disagree.
The validity of the theory is NEVER questioned.
Why do they disagree?
Because in any field of intellectual inquiry where controlled experiments are not possible, what is paramount is the dialectics. No one can PROVE that the other side is wrong, all one can do is try to show why your side is correct. Each side can bring to bear their reasonable sounding points of view, but no hard core evidence exists to DISPROVE a line of argument.

I believe your point of view happens to be the correct one because Keynesian stimuli have rarely if ever produced the desired results. (I believe I am correct on this, and if so, why do economists still suggest Keynesian stimulus programs?).

But frankly, today's economic "science" is a total joke, a fraud, a pseudo-science that when applied to the real world has led to the debasement of the currency, destruction of livelihoods, jobs and families, greater and more frequent economic dislocations, and now, the greatest indebtedness in world history of a nation - the USA.
Yes, I am sure this latter point can be soundly shown to be a non-starter by many economists. I bet they can even provide a mathematical "proof" that the size of the debt does not matter.
Sure.

But never mind, the economic geniuses that produce and urge the implementation of their bogus, unprovable, destructive garbage return to their tenured positions in academia - good pay and benefits and speaking fees of course - and suffer none the worse. After all, they are too busy figuring out which economist is to receive next years Nobel Prize in economic "science."

I urge all readers to see on YouTube Richard Feynman's (a Nobel Prize winning physicist) description of the required tests/steps before a theory - any theory - is accepted as valid and true. (You will note that economists do not, nor can they do this at all).

Ironically, it was Richard Feynman that originated the notion of a "cargo cult science" (look it up folks). I do not know if had economics in mind when he developed this concept, but is sure fits perfectly.

The sooner folks ignore totally economists, the better off we all will be. They are simply dangerous.

excellent and lucid analysis and commentary.
Will the policy makers in the USA and Eurozone listen ?
Taylor for Federal Reserve Chairman.
What a load of crap. There were so many false declarative causations in the second paragraph, that its hard to trust that the author may attempt at some point put forth a coherent, albeit challenging hypothesis. To fault fiscal/monetary stimulus measures during downturns, and ignore identical spending used during upturns shows selective and disruptive use of the good work put into econometric models. To so thouroughly put at odds "free markets" and "government" so that their interests never align is indeed a misrepresentation of Adam Smith's view of the two interests, for it is government that guarantees free markets through regulation, oversight of monopolies, and sheparding economies through downturns.
R.S Lerner: the inability to eliminate all rouge behavior is no reason to abandon a free market, any more than the ability to avoid bad marriages justifies eliminating your selection of a mate for one selected for you by your Betters at the local wife selection bureau. The failure of the media to report things properly. to trivialize things, is not a basis for government control. Your obsession that somewhere, somehow someone will cheat and "get ahead" is like the far right's bad dream that someone, somewhere is having a good time doing fun things they don't approve of. Hint: the middle ages are over: we don't need another Pope.
The greatness of Hayek's thinking is in the explanation of why people who should know better do the wrong thing. It is the choice of people who rise to the top, likely to do doers and interventionists rather than thinkers with a broad vision. However, even Hayek could not foresee a president who is inherently inimical to the principles of the country he was elected to lead.
Excellent commentary...
The real problem is getting the average person (aka voter) to understand these concepts. If one were to take a poll as to how many voters really understood economic principles (not only Friedrich Hayek but Henry Hazlitt and other like-minded individuals), one would find that very few people know anything at all about economic principles. For one thing, most economic explanations are usually lengthy and most voters are too lazy to read anything longer than the amount of words found on a highway billboard.
How well democracy, rule of law, limited government, etc., work in a country, or whether these things are at all feasible in a country, depends very much on the nature of the people.

Importing and/or letting ourselves be invaded by millions of uneducated third-worlders is not going to make America more prosperous and harmonious, particularly if the children of those uneducated third-worlders tend to adopt underclass behavior patterns. Quite the contrary. Heather Mac Donald has written several frightening articles about our mushrooming Hispanic underclass.

Demography is destiny. Look to Latin America for a vision of America's future. I suspect that Mr. Taylor's prescriptions will be a hard sell to America's future electorate.
Do you believe that economic freedom is allowing business enterprises of all kinds to cheat and rob the public, Examples are too numerous to mention, (Libor, PFG,MFG, mortgage scams, etc.) How do you propose we reign in these rogue enterprises and really have a "free" market economy?
People are reluctant to read books that test their assumptions but everyone should ask their local library to order a copy of Professor Taylor's "First Principles". It makes a very strong case that reduced regulation, lowering taxes, consistent monetary policy and controlling debt have historically been the best antidote to recessions. If enough people read the book, the discussion may turn from superficial slogans of the left to a substantive analysis of what history shows to work.
Benedict and Isenman: No, you can't tar Hayek or free enterprise with those things.

Hayek did not endorse using federally insured banks--public money--to underwrite risky schemes of a private enterprise as in the housing boom. Or using the same federally guaranteed funds to score political points by mandating risky loans to sketchy people in marginal neighborhoods. "Fair, non-discriminatory lending" and all that.

Those politically inspired schemes would be anathema to Hayek, and to Friedman.

The "too big to fail" state of affairs arose from politically inspired efforts to "rescue" outfits like Chrysler, Penn Central and various regional banks in the 70's and 80's. The normal penalty for incompetence and unseemly greed would have been collapse--and it would have doused Chrysler and been a wake up call for GM, but it never happened. So foolish bondholders continued to lend to GM, enabling its efforts; greedy bankers in 2006 had the credit of the US behind them. Everyone believes that once you get large enough, no matter how incompetent, you will be rescued. That's politics not Hayek.

Had it not been for political tampering, wayward banks and companies would fail on a smaller scale, providing needed correctives for all incompetents who are now encouraged instead to grow fat on the credit of taxpayers.

The fact that Pinochet adopted Hayek to remedy the damage done by posturing fraud Allende, does not mean we should eschew him anymore than we should reject indoor plumbing because Goering used hot and cold running water.

Hayek also stressed that if there has to be any "golden rule" guiding public policy decisions, it should be to choose to err on the side of increasing the scope of fair competition in the future for whatever general or specific commodity or service is under consideration at the time.

Policy choices are like personal buying and selling decisions in at least one way - they are made at specific points in time based on opportunities to act and information available to presumably rational players at that point in time. The difference is that the regulator or central planner has the power of the sovereign to change the ground rules (the cost and hence the price) under which said commodity must be produced for the foreseeable future and that what is perceived to be rational to a purchaser of that commodity today are cast in stone for all future purchasers.

One need only look at the structural stratightjacket and eternal high costs built into the over-regulated and underperforming public education system to see the consequences of violating the rule of always regulating and negotiating on behalf of the public with an eye towards increasing competition. There are today too many similar situations to count, and every one is a similar drag on real freedom, progress and prosperity.

One of the changes that took place in 1999 was a repeal of Glass-Steagall, the rule that banks and investment houses remain separate.
That is, banks could not do risky investments that could jeopardize their financial holdings.
Also, at nearly the same time, credit standards were relaxed so that much riskier mortgages and financial instruments became allowed. Finally, the rating agencies looked the other way. Everyone in those industries made money until the bubble burst.
I tend to think it would be a wise move to reinstitute some kind of Glass-Steagall/Paul Volcker Rule that worked so well for so many years. It helped to keep banks from becoming "too big too fail". We cannot afford another big bank bailout as I think you mentioned.
In the end nothing will work if people are not trustworthy and honest in both their personal lives, business lives and with the willingness
to (as you put it) "help others".
You appear to be confused: Hayek's acolytes sent the money to the top and crashed the economy sending the country down the road to serfdom.
If Hayek's well-documented chumminess with Pinochet and Salazar is any guide, Hayek much preferred the rule of law as set down by dictators over the rule of law of democratic electorates.
Hits the nail squarely on the head! Too bad economic wisdom is in such short supply these days...
The essay is thoughtful and accurate in detail. I am a fan of Hayak and Friedman.
Both economists understood how the market functioned to give maximum and responsible freedom to individuals who make their choices, not choices dictated by some distant bureaucrat or political figure.
Political figures, as we have, and throw in the Wall Street crowd and its running buddies in Washington and the promoters of crony "capitalism," are driven by personality disorders that qualify them for the 1% of the population that ought to be watched carefully for signs of significant mental disturbance.
They should not be trusted with public office or corporate leadership, as they are men [and women] who lack a conscience.
In spite of the havoc wrought by the toxic and fraud of the mortgages that were cleverly package and exploded in America and in Europe in 2007, the axis of evil in Washington and its Wall Street ATM Club are still not inclinded to admit they were involved and essentially thieves.
Unless we discover some healthy minded leadership for government and also for banks and Wall Street and business, the boat of personal freedom and liberty will sink, as it is listing even now.
The article was well written and well received but you forget one important thing: in order to achieve
everything you point out you must have intelligent
leaders; those that have the benefits of the majority in mind.
We have never had them...and when we did, they were ostracized, left behind and forgotten.