John Taylor, tireless self-promoter of “rules-based monetary policy” (whatever that means), inventor of the legendary Taylor Rule, and very likely the next Chairman of the Federal Reserve Board if a Republican is elected President of the United States in 2016, has a history of verbal faux pas, which I have been documenting not very conscientiously for almost three years now.
Just to review my list (for which I make no claim of exhaustiveness), Professor Taylor was awarded the Hayek Prize of the Manhattan Institute in 2012 for his book First Principles: Five Keys to Restoring America’s Prosperity. The winner of the prize (a cash award of $50,000) also delivers a public Hayek Lecture in New York City to a distinguished audience consisting of wealthy and powerful and well-connected New Yorkers, drawn from the city’s financial, business, political, journalistic, and academic elites. The day before delivering his public lecture, Professor Taylor published a teaser as an op-ed in that paragon of journalistic excellence the Wall Street Journal editorial page. (This is what I had to say when it was published.)
In his teaser, Professor Taylor invoked Hayek’s Road to Serfdom and his Constitution of Liberty to explain the importance of the rule of law and its relationship to personal freedom. Certainly Hayek had a great deal to say and a lot of wisdom to impart on the subjects of the rule of law and personal freedom, but Professor Taylor, though the winner of the Hayek Prize, was obviously not interested enough to read Hayek’s chapter on monetary policy in The Constitution of Liberty; if he had he could not possibly have made the following assertions.
Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge. . . .
Rules for monetary policy do not mean that the central bank does not change the instruments of policy (interest rates or the money supply) in response to events, or provide loans in the case of a bank run. Rather they mean that they take such actions in a predictable manner.
But guess what. Hayek took a view rather different from Taylor’s in The Constitution of Liberty:
[T]he case against discretion in monetary policy is not quite the same as that against discretion in the use of the coercive powers of government. Even if the control of money is in the hands of a monopoly, its exercise does not necessarily involve coercion of private individuals. The argument against discretion in monetary policy rests on the view that monetary policy and its effects should be as predictable as possible. The validity of the argument depends, therefore, on whether we can devise an automatic mechanism which will make the effective supply of money change in a more predictable and less disturbing manner than will any discretionary measures likely to be adopted. The answer is not certain.
Now that was bad enough – quoting Hayek as an authority for a position that Hayek explicitly declined to take in the very source invoked by Professor Taylor. But that was just Professor Taylor’s teaser. Perhaps it got a bit garbled in the teasing process. So I went to the Manhattan Institute website and watched the video of the entire Hayek Lecture delivered by Professor Taylor. But things got even worse in the lecture – much worse. I mean disastrously worse. (This is what I had to say after watching the video.)
Taylor, while of course praising Hayek at length, simply displayed an appalling ignorance of Hayek’s writings and an inability to comprehend, or a carelessness so egregious that he was unable to properly read, the title — yes, the title! — of a pamphlet written by Hayek in the 1970s, when inflation was reaching the double digits in the US and much of Europe. The pamphlet, entitled Full Employment at any Price?, was an argument that the pursuit of full employment as an absolute goal, with no concern for price stability, would inevitably lead to accelerating inflation. The title was chosen to convey the idea that the pursuit of full employment was not without costs and that a temporary gain in employment at the cost of higher inflation might well not be worth it. Professor Taylor, however, could not even read the title correctly, construing the title as prescriptive, and — astonishingly — presuming that Hayek was advocating the exact policy that the pamphlet was written to confute.
Perhaps Professor Taylor was led to this mind-boggling misinterpretation by a letter from Milton Friedman, cited by Taylor, complaining about Hayek’s criticism in the pamphlet in question of Friedman’s dumb 3-perceent rule, to which criticism Friedman responded in his letter to Hayek. But Professor Taylor, unable to understand what Hayek and Friedman were arguing about, bewilderingly assumed that Friedman was criticizing Hayek’s advocacy of increasing the rate of inflation to whatever level was needed to ensure full employment, culminating in this ridiculous piece of misplaced condescension.
Well, once again, Milton Friedman, his compatriot in his cause — and it’s good to have compatriots by the way, very good to have friends in his cause. He wrote in another letter to Hayek – Hoover Archives – “I hate to see you come out, as you do here, for what I believe to be one of the most fundamental violations of the rule of law that we have, namely, discretionary activities of central bankers.”
So, hopefully, that was enough to get everybody back on track. Actually, this episode – I certainly, obviously, don’t mean to suggest, as some people might, that Hayek changed his message, which, of course, he was consistent on everywhere else.
And all of this wisdom was delivered by Professor Taylor in his Hayek Lecture upon being awarded the Hayek Prize. Well done, Professor Taylor, well done.
Then last July, in another Wall Street Journal op-ed, Professor Taylor replied to Alan Blinder’s criticism of a bill introduced by House Republicans to require the Fed to use the Taylor Rule as its method for determining what its target would be for the Federal Funds rate. The title of the op-ed was “John Taylor’s reply to Alan Blinder,” and the subtitle was “The Fed’s ad hoc departures from rule-based monetary policy has [sic!] hurt the economy.” When I pointed out the grammatical error, and wondered whether the mistake was attributable to Professor Taylor or stellar editorial writers employed by the Wall Street Journal editorial page, David Henderson, a frequent contributor to the Journal, wrote a comment to assure me that it was certainly not Professor Taylor’s mistake. I took Henderson’s word for it. (Just for the record, the mistake is still there, you can look it up.)
But now there’s this. In today’s New York Times, there is an article about how, in an earlier era, criticism of the Fed came mainly from Democrats complaining about money being too tight and interests rates too high, while now criticism comes mainly from Republicans complaining that money is too easy and interest rates too low. At the end of the article we find this statement from Professor Taylor:
Practical experience and empirical studies show that checklist-free medical care is wrought with dangers just as rules-free monetary policy is,” Mr. Taylor wrote in a recent defense of his proposal.
There he goes again. Here are five definitions of “wrought” from the online Merriam-Webster dictionary:
1: worked into shape by artistry or effort <carefully wrought essays>
2: elaborately embellished : ornamented
3: processed for use : manufactured <wrought silk>
4: beaten into shape by tools : hammered —used of metals
5: deeply stirred : excited —often used with up <gets easily wrought up over nothing>
Obviously, what Professor Taylor meant to say is that medical care is “fraught” (rhymes with “wrought”) with dangers, but some people just can’t be bothered with pesky little details like that, any more than winners of the Hayek Prize can be bothered with actually reading the works of Hayek to which they refer in their Hayek Lecture. Let’s just hope that if Professor Taylor’s ambition to become Fed Chairman is realized, he’ll be a little bit more attentive to, say, the position of decimal points than he is to the placement of question marks and to the difference in meaning between words that sound almost alike.
PS I see that the Manhattan Institute has chosen James Grant as the winner of the 2015 Hayek Prize for his book America’s Forgotten Depression. I’m sure that 2015 Hayek Lecture will be far more finely wrought grammatically and stylistically than the 2012 Hayek Lecture, but, judging from book for which the prize was awarded, I am not overly optimistic that it will make a great deal more sense than the 2012 Hayek Lecture, but that is not a very high bar to clear.
Uneasy Money 
David,
My own complaints against John Taylor rest on the asymmetry between rules based monetary policy and discretionary fiscal policy and the potential conflicts it creates (the federal debt and the servicing of it).
However, this seems a stretch:
“…Professor Taylor, though the winner of the Hayek Prize, was obviously not interested enough to read Hayek’s chapter on monetary policy in The Constitution of Liberty; if he had he could not possibly have made the following assertions…”
Even if he did read it, Taylor is not allowed to formulate his own opinions, make assertions of his own choosing? Is there some unwritten rule that economists aren’t allowed to elaborate on or even disagree with their predecessors?
From Hayek,
“The validity of the argument depends, therefore, on whether we can devise an automatic mechanism which will make the effective supply of money change in a more predictable manner.”
Presumably, Hayek concedes that a rules based monetary system would be a better economic system. Hayek’s concern seems to be either an engineering problem or a philosophical one:
1. Engineering problem – Can we devise a “computer” of sorts to automatically adjust the “effective” money supply to change in a predictable matter? That would seem simple enough for the creation of money, perhaps more difficult for the destruction of money without infringing on property rights.
2. Philosophical problem – Can we as a democratic society accept the results that a “computer” spits out when adjusting the “effective” money supply? Even if a small minority of people oppose the resulting change in money supply, that isolation from influence in monetary affairs represents a coercive force.
Isolation can be a powerful coercive force in severe instances such as imprisonment and mundane instances such as grounding a child / student who is behaving improperly. Hayek mentions that monopoly ownership of the money supply does not “necessarily involve coercion”. But I think that the automatic adjustments mentioned by Hayek present the possibility of an isolating coercive force.
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Ben Bernanke adds an objection:
http://economicsone.com
“The Fed’s rule is that we will go for a two percent inflation rate. We will go for the natural rate of unemployment. We will put equal weight on those two things. We will give you information about our projection, our interest rates. That is a rule.”
Taylor later compares Bernanke’s “rule” to the “goal” of healing a patient.
Taylor adds:
“Rather the concept that he has in mind is called constrained discretion, a term which he dubbed long ago in an effort to distinguish it from the idea of a rule for the instruments such as Milton Friedman’s which he sharply criticized…..Constrained discretion is an appealing term, and it may affect discretion in some sense, but it is not inducing or encouraging a rule as the language would have you believe.”
Another term that could be used would be results based policy rather than arbitrary policy. We can conceive of any sort of rule that we like. Some rules may have positive economic consequences, some may have negative economic consequences. Just because we have a rule does not mean that it will lead to better economic fortunes.
The Taylor rule:
R = RR* + π + 0.5(π – 2) + 0.5Y
R = Nominal Fed Funds Rate
RR* = Equilibrium Real Rate
π = Inflation Rate
Y = Output Gap expressed as a negative percentage (Presumably Gap in Real Output, not Nominal)
The Taylor rule suggests setting the nominal interest rate higher as the inflation rate rises and lower as the real output gap rises. The Taylor rule makes no suggestion when you get a combination of rising prices and rising real output gap (stagflation).
And so even if you accept that having the central bank raise the nominal interest rate will constrain inflation and even if you accept that having the central bank lower the nominal interest rate will close the real output gap, John’s rule does not address how stagflation should be addressed.
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1) for us dummies, what is the problem with “has” ?
2) one of hte major trade journals in the biotech space is GEN, Genetic Engineering & Biotechnology News; the print edition is a tabloid format.
Sony (yes, sony) recently took out a full page ad touting their new flow cytometer (an instrument that measures cell properties; they start around 20K and go up to about 200k, depending on configuration)
In the ad were at least three howlers, including “very unique”
I showed the ad to a bunch of biz people and a bunch of scientists
none of hte biz people saw a problem, even when i pointed out the errors
the scientists just rolled their eyes
(and yes, i’m criticizing someone elses grammar without proofreading this blog post)
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Frank, Of course Taylor is allowed to formulate his own opinions, but if he is quoting Hayek as an authority for his own position about monetary policy, he should take the trouble to check whether Hayek’s view is consistent with the position he himself is taking. And when Taylor invokes Hayek’s authority in the Hayek Lecture given on the occasion of Taylor’s receiving the Hayek Prize, it is simply disrespectful and embarrassing not to realize that Hayek took a different position from the one that Taylor attributes to him. There is no disrespect in disagreement; there is disrespect in not bothering to even read (or take the trouble to comprehend) what the source you are holding up as an authority actually wrote on the subject.
Ezra, The problem is that “has” is a singular form of the verb “to have,” but the subject of the verb in the quoted passage is “ad hoc departures,” which is plural. That the “ad hoc departures” were carried out by the Fed doesn’t change the subject from plural to singular.
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David,
Thanks for the reply. Having not read Hayek, does he offer insight into this statement:
“The validity of the argument depends, therefore, on whether we can devise an automatic mechanism which will make the effective supply of money change in a more predictable manner.”
Obviously computers of the modern variety were not available at the time, and so perhaps Hayek was merely stating a technological challenge – we don’t have the computing power to adjust the supply of money on a real time basis (presumably in response to real time changes in the demand for money).
Or was Hayek implying something about human nature – a tendency to reject authoritarianism? Even if we devise the automatic mechanism, will people accept the results no matter the outcome?
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Dr. Glasner,
You might be interested in what Noah Smith says about Brad DeLong in this new column:
http://www.bloombergview.com/articles/2015-04-10/how-sticky-prices-might-be-the-cause-of-recessions
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John Taylor is a nice guy and a very good economist. I fear he has become a GOP’er to the bone. (Frankly, for $50k, I also would tell Manhattan Institute whatever they wanted to hear.)
There may be a silver lining in this, however. If Taylor should become the Fed chairman with a GOP president, then expect Taylor to be far more aggressive in using the Fed to stimulate the economy.
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Mr Glasner,
Please could you elaborate about Hayek quote ?
“Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge. . . .”
According to Hayek, if I read him correctly, “in all actions” mean that government is predictable.
By December 7th 1941, Roosevelt administration had no way to know about Tarawa in 1943 or D-Day in 1944. Moreover no one (read individual) could ‘forsee’ or ‘plan individual affair’ since WWII was run by US government but also by Allied and Axis ones.
The same could be said of Apollo program or Arpanet.
I simply cannot make sense of this statment.
Ludovic Coval
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Ludovic,
“Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand…”
Those rules can be found here:
U. S. Constitution
Article 1, Section 8 – Powers of Legislature
For instance:
To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water.
To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years
http://en.wikipedia.org/wiki/Declaration_of_war_by_the_United_States#Formal
Congress declared war on Japan on Dec 8, 1941 and on Germany three days later.
I don’t believe that Hayek (or Taylor) is expecting government to have a detailed plan set in place for every possible contingency. Of course events that originate from lands / people not under U. S. rule could still affect the livelihoods of Americans, and so Congress may need to react to those events.
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Frank,
Thanks for your reply.
I understand well your point but :
“I don’t believe that Hayek (or Taylor) is expecting government to have a detailed plan set in place for every possible contingency.”
This is why Hayek’s statment is problematic as it assumes that government has to react to events affecting people in such a way that individuals can in turn adapt themselves. In case of WWII, Germany declared war upon United States hours before Congress acted. Even if Congress had not declared war, a de facto state of war would have existed with both Japan and Germany.
I took WWII as an example but a natural catastrophe like Katrina is equivalent.
How can individual ‘plan’ or ‘forsee’ when goverment actions are themselves unpredictable ?
If it is not possible (and I do not think it is) what about :
“Rather they mean that they take such actions in a predictable manner.”
Why ? Quantitative Easing is also called uncoventionnal monetary policy. It was seen (or perceived) as needed as an answer to economic situation.
A goverment whose actions would to be bound only within a constitution and/or law frame would also lose any capability to react to unpredictable events. May be this could be possible for a medieval society or a totalitarian state but hardly for a modern democratic state.
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Ludovic,
“A goverment whose actions would to be bound only within a constitution and/or law frame would also lose any capability to react to unpredictable events.”
The rules are not necessarily static.
See: http://en.wikipedia.org/wiki/Constitutional_amendment
I think the key elements missing from Hayek’s argument are time and accountability.
A government should be held accountable to it’s voting member’s wishes (not possible in a totalitarian state).
A government should give it’s voting public time to adjust to a change in the rules. Time to adjust is particularly problematic with an economy that is always moving. It’s fairly easy to change some obscure legal reference that may see a day in court once or twice a year. Much harder for economic policies that will affect the daily lives of a large swath of the population.
Hayek lists monetary policy as a possible exception because in a credit / money economy, a central bank can’t make you borrow (no direct coercion). I offer that isolation represents a coercive force.
I also think, more importantly, that the speed with which monetary policy can be implemented today (a couple strokes on a keyboard) far exceeds the speed with which most individuals can react to changes in it. A central bank could conceivably change it’s policy interest rate once every nanosecond (or even more quickly). Can you make a borrowing decision in under that time?
This is why rules base monetary policy makes sense to me:
1. Because having grown up in a credit / money economy, isolation from that would take some getting used to.
2. Because monetary policy can be implemented with a flip of a nano-switch.
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