A Walk Down Memory Lane with John Taylor

John Taylor has had a long and distinguished career both as an academic economist and as a government official and policy-maker.  He is justly admired for his contributions as an economist and well-liked by his colleagues and peers as a human being.  So it gives me no pleasure to aim criticism in his direction.  But it was pretty disturbing to read Professor Taylor’s op-ed piece (“A Slow-Growth America Can’t Lead the World”) in today’s Wall Street Journal, a piece devoid of even the slightest attempt to make a reasoned argument rather than assemble a hodge podge of superficial bromides about the magic of the market and the importance of fiscal discipline and sound monetary policies.  It is almost surprising that Taylor failed to mention motherhood, apple pie, and American flag while he was at.  Even more disturbing, Taylor proceeds, with no hint of embarrassment, to trash the half-hearted attempts by the Federal Reserve to use monetary policy to promote recovery even though the Fed’s policies are similar to, though much less aggressive than, the “quantitative easing” that he applauded the Japanese government and the Bank of Japan for adopting from 2002 to 2004 to extricate Japan from a decade-long period of deflation and slow growth starting in the early 1990s.

Taylor begins by attacking President Obama’s policies, strongly suggesting that those policies are responsible for the weak economic recovery.

At the most recent [G-20] meeting a year ago in Seoul, the G-20 rejected [President Obama’s] pleas for a deficit-increasing Keynesian stimulus and instead urged credible budget-deficit reduction and a return to sound fiscal policy.  And on that trip he had to defend the activist monetary policy of the Federal Reserve against widespread criticism that its easy money was damaging to emerging-market countries, causing volatile capital flows and inflationary pressures.

With a weak recovery – retarded by new health-care legislation and financial regulations, an exploding debt, and threats of higher taxes – the U.S. is in no position to lead as it has in the past.

Taylor then invidiously compares Obama’s failure in Seoul with the good old days after World War II when America called the shots.

By contrast, in the years after World War II, the U.S. led the world in promoting economic growth through reliance on the market and the incentives it provides, the rule of law, limited government, and more predictable fiscal and monetary policy.

This tendentious characterization of post-war economic policy overlooks the many sectors of the US economy then subject to strict regulation of prices and other aspects of their business operations, the powerful position of labor unions, and top marginal income tax rates as high as 92%, falling to 70% only after the Kennedy tax cuts were enacted in 1964.  High marginal tax rates and powerful labor unions were the norm in all developed countries in the 1950s and 1960s, so economic reality was far from the free-market utopia one might have imagined based on the comic-book picture offered by Taylor.  But that comic-book picture inspires Taylor to draw the following grand geopolitical lesson from the history of the last 65 years. 

As the U.S. has moved away from the principles of economic freedom – instead promoting short-term fiscal and monetary interventionism with more federal government regulations – its leadership has declined.  Some, even in the U.S., may cheer the decline, but it is not good for the world or the U.S.

Warming to his area of special expertise, monetary policy, Taylor continues by expounding on the evils of “monetary interventionism”

In the case of monetary policy . . . decisions on interest rates by foreign central banks are influenced by interest-rate decisions at the Federal Reserve because of the large size of the U.S. economy.  If the Fed holds its interest rate too low for too long, then central banks in other countries will have to hold rates low too, creating inflation risks.  If they resist, capital flows into their countries seeking higher seeking higher yields, thereby jacking up the value of their currencies and the prices of their exports.

But Professor Taylor has not always taken such a negative view of “monetary interventionism.”  In 2006, he wrote a background paper for the International Conference of the Economic and Social Research Institute Cabinet Office of the Government of Japan (September 14, 2006) entitled (I swear) “Lessons from the Recovery from the “Lost Decade” in Japan:  The Case of the Great Intervention and Money Injection.”

Describing his involvement in 2001, while Under-Secretary of the Treasury for International Affairs in the Bush Administration, in the formulation and execution of Japanese monetary policy, Taylor writes:

[I]n March 2001, the Bank of Japan announced that it would follow the new type of monetary policy, which it called “quantitative easing” and under which it would pump up the money supply in Japan until deflation ended.  I was ecstatic when I heard this announcement.  Since 1994 I had been an adviser to the Bank of Japan, a position I had to resign from when I joined the Bush Administration and I had recommended many times that the Bank of Japan focus on increasing the money supply as a means to end their deflation, and many other economists had recommended the same thing.

Now it’s true that inflation in the US as measured by the CPI has been running in the 3-4% range over the past year, but average inflation over the past 3 years has averaged only about 1% and expected inflation over a two-year time horizon has been consistently below 2% for the last year.  So the recent rise in inflation seems to be a transitory phenomenon while GDP growth remains very slow and unemployment very high.  With inflation, after a short blip, again falling and expected to remain very low for years, it is not at all clear that our situation is much different from the situation in Japan in 2001.  Yet Taylor wrote in 2006 that he had been ecstatic when he heard that the Bank of Japan “would pump up the money supply in Japan until deflation ended,” while now protesting his unqualified opposition to a not entirely dissimilar, though certainly less aggressive, policy by the Federal Reserve.

Taylor goes on to describe how the Japanese exited from their “monetary intervention.”

During the fall and winter evidence of a sustainable recovery in Japan mounted, and I thought that the sooner the recovery became clear, the soon Japan could exit from its intervention.  On December 5, 2003, I gave a speech in New York asserting that Japan was on the road to recovery.  It was still a little risky to declare victory that early, but fortunately I was right and the economy had indeed turned the corner.  Michael Phillips of the Wall Street Journal  wrote a piece entitled “U.S. Sees Reason to be Optimistic on Japan Growth” on the morning of my talk saying:  “The Bush Administration believes the Japanese economy may finally have turned the corner after more than a decade of little or no growth.  In a speech to be delivered today, the Treasury Department’s top international official, John Taylor, will credit the Koizumi government’s market changes and the Bank of Japan’s accommodating monetary policy for giving impetus to the country’s laggard economy. . . The upbeat comments from the Undersecretary of the Treasury for International Affairs represent a sharp shift in Washington’s long pessimistic view of Japan’s fortunes.”

In today’s Journal, however, the possibility that “monetary intervention” could give “impetus the [U.S]’s lagging economy” seems never even to have crossed Professor Taylor’s mind.

Some countries . . . are complaining that the Fed is exporting inflation with its near-zero interest rate and massive purchases of long-term government debt. . . And when global inflation picks up, as it has started to do in many emerging markets, it feeds back into more inflation in the U.S. through higher prices of globally traded commodities.  With unemployment already high, the result would be stagflation – slow growth, high inflation, steady unemployment – as we saw in the 1970s.

I guess we are just supposed to forget, along with Professor Taylor, about “accommodating monetary policy giving impetus to the country’s laggard economy.”  Oh my what a difference four or five years make.  Things do change, don’t they?

HT:  Benjamin Cole

22 Responses to “A Walk Down Memory Lane with John Taylor”


  1. 1 Marcus Nunes November 1, 2011 at 3:06 pm

    David. All true and also that JT is a very nice person. I know that first-hand. Unfortunately he has a name-sake rule and all his efforts are directed to preserve it!

  2. 2 Marcus Nunes November 1, 2011 at 3:24 pm

    Call it a coincidence. Just after scribbling the comment above I got an email alert from Cato that there was “new research”. The fall issue of the Cato Journal is devoted to MP.:
    http://www.cato.org/pubs/journal/?utm_source=Cato+Institute+Emails&utm_campaign=5533882e79-R_A_October11_1_2011&utm_medium=email&mc_cid=5533882e79&mc_eid=a57a0b4626
    The lead article is by John Taylor. In the conclusion we read:
    …This proposal would limit the Fed’s discretion by requiring that it establish and report on a policy rule for the federal funds rate. For example, if the Fed decides to use the Taylor Rule, it would meet reporting requirement number (1) of the proposed law by reporting that its systematic interest rate adjustment is 1.5 percent for each percent change in inflation and 0.5 percent for each percent difference between real GDP and potential GDP; then a fixed adjustment of 1 would be needed to achieve an inflation goal of 2 percent.

    David, there´s also an article by your “friend” Malpass!

  3. 3 MG November 1, 2011 at 3:55 pm

    I lay slightly better than 50-50 odds that Taylor’s attitude towards monetary interventionism will change again, some time after 11/6/2012.

  4. 4 Will November 1, 2011 at 10:02 pm

    I believe the word for this is “chutzpah.” I am glad that David took the time not only to call out Taylor’s, um, inconsistency on monetary intervention, but also to point out the faults in his rhetoric about the post-war era.

    I suspect that MG above is on to something. The fact that Taylor himself is willing to be so partisan is really a let-down. I’ve been steaming at Milton Friedman for several years now for not surviving longer; I figured he would have the credibility to convince Fed critics to settle down. Taylor’s editorial makes me wonder if Friedman might not have found some new reason to pull a U-turn too.

  5. 5 Becky Hargrove November 2, 2011 at 3:54 am

    David, if you haven’t seen it already, Taylor’s “counter-rebuttal” is up on his blog this morning.

  6. 6 damanoid November 2, 2011 at 6:50 am

    “In a long rebuttal to my criticism in today’s Wall Street Journal article, David Glasner argues that I mischaracterized America when I wrote that it was a leader in economic freedom following World War II, when it helped Japan and Europe recover and helped create the GATT and other international financial institutions. It is certainly true that American economic policy was not perfect with its regulations and high marginal tax rates, but comparatively speaking the American model was a far cry from what was being set up in the large areas of the world which were not free either economically or politically.”

    Wow, that’s pretty impressive. Even I, an idiot who knows absolutely nothing about economics, can recognize that bait-and-switch.

    ‘Did I say postwar America was better off and more economically free? Oh no, you misunderstand; I didn’t mean compared to NOW, I meant compared to other parts of the world back THEN. Of course, postwar America was still much worse off than it is today. what with its high taxes and regulations and what not. I see now that I may have accidentally implied America was better off then than it is now, but I assure you that the opposite is the case. To sum up: postwar America, though an international leader at the time, was nonetheless a hellhole of regulation and high taxes; and only by continuing to reverse those policies can America ever hope to regain its international leadership status.’

    John B. Taylor take note: poor people can see through your bullshit. If America ever does regain its postwar status, it will be because you were no longer in the way.

  7. 7 David Pearson November 2, 2011 at 7:14 am

    David,
    “…the recent rise in inflation seems to be a transitory phenomenon… ”

    It would be useful to have a marker. Here we are in late 2011 and the U.S. and Europe still have 3%+ inflation rates. In emerging markets, inflation is higher and shows little sign of deceleration. The question is, how much longer before 3%+ inflation stops being “transitory”?

  8. 8 Becky Hargrove November 2, 2011 at 7:52 am

    Apparently this graph is making the rounds on Facebook in a not so good way:
    http://blog.mises.org/18927/capitalism-has-failed

  9. 9 Barry November 2, 2011 at 11:28 am

    “I lay slightly better than 50-50 odds that Taylor’s attitude towards monetary interventionism will change again, some time after 11/6/2012.”

    I’m not taking your bet. Taylor will, like Mankiw and a number of other, ah, ‘flexible’ economists, will change their tune.

    I just add that Taylor is clearly simply wh*ring here; any respect he might have earned has been long since forfeited.

  10. 10 Barry November 2, 2011 at 11:31 am

    “Taylor’s editorial makes me wonder if Friedman might not have found some new reason to pull a U-turn too.”

    There have been two major lessons about the economic profession in the last decade:

    1) Right-wing economists have been willing to dance to an increasingly insane GOP piper’s tune.
    2) When the evidence contradicts their theories, they’ll BS and double-down on their theories.

  11. 11 Barry November 2, 2011 at 11:36 am

    I have a social law that is the most pure and perfect law of human behavior ever discovered:

    The right always, without exception, can not call out liberals on anything unless they’re doing it at least 10x as much (or is planning to, at the next opportunity). There are no exceptions.

    In this case, aside from their lie about ‘socialism’, the part they’re claiming liberals are ignoring happens to be a time of much higher government regulation and tax rates on the rich. Not to mention much lower income and wealth inequality.

  12. 12 MG November 2, 2011 at 1:21 pm

    It’s actually a bet on whether Obama is re-elected. The probability that Taylor will change his position, in the event of a Republican winning, is about 1.

  13. 13 Benjamin Cole November 2, 2011 at 4:30 pm

    A hat-tip! I am red-faced.

    Taylor is a deeply, deeply partisan commentator. I suspect if Bush jr were president and started another war, Taylor would be all for aggressive monetary expansionism. Indeed, the US dollar was lower in 2008 than now—was Taylor calling for tighter money while Bush jr, was in office?

    Taylor is a nice guy, and obviously very smart.

  14. 14 David Glasner November 2, 2011 at 6:42 pm

    Marcus, I only met Taylor once over 25 years ago at a seminar, so I have no first-hand knowledge, but people who know him seem to like him a lot. Thanks for the heads-up about the Cato Journal.

    MG and Barry, Well, things can change, can’t they?

    Will, Anna Schwartz, God bless her, is still with us, and she, I am sorry to say, has also gone over to the other side. The world is full of surprises.

    Barry, I disagree with her, but there is no question in my mind that Anna Schwartz believes whatever she says. So you have to leave open the possibility that at least some of these people are sincere in what they profess to believe.

    Becky, Thanks for the heads up about Taylor.

    damanoid, Sometimes I agree with Taylor, am I in jeopardy?

    David, Not as long as expected inflation is well below actual inflation.

    Becky II, What do you mean by “not such a good way?”

    Barry, I think both sides have their issues.

    Benjamin, Well you deserved it, you flagged his position on quantitative easing in Japan for us.

  15. 15 Becky Hargrove November 3, 2011 at 5:23 pm

    I thought I had seen the same graph several weeks earlier, and that the recent dip was far more pronounced than the others, something I just told Karl Smith on his blog a few minutes ago…only I can’t remember where I spotted the first one now. The insinuation on the link seemed to be that some people in the present were overreacting to the usual ups and downs of the economy, which of course I don’t believe to be true.

  16. 16 Becky Hargrove November 3, 2011 at 6:36 pm

    Just wanted you to know that Karl Smith (Modeled Behavior) posted a link and provided some more graphs to help clear up my confusion.

  17. 17 Barry November 9, 2011 at 6:43 am

    David,

    When people ‘change their minds’ *despite* the evidence, in favor of political associations, the burden of proof is on them.

    “Barry, I think both sides have their issues.”

    Simple question – which side has been more correct?

    Benjamin: “Taylor is a nice guy, and obviously very smart.”

    IMHO (and I’m being harsh), ‘nice guy’ is what people say when the subject is obviously not honest, and probably doing evil things. And in economics the required phrase is ‘very smart’ (e.g., Larry Summers).
    What I find interesting is that we have a guy who’s described as ‘very smart’, but who seems to have an odd knack for being wrong.

  18. 18 David Glasner November 9, 2011 at 10:31 pm

    Barry, If you have been following this blog, I think you will find that I have been criticizing arguments or assertions coming from the right more than I have arguments or assertions from the left. That doesn’t prove much because I probably read more of what the right is writing than the left. I am not happy with either side.

    Becky, Thanks.


  1. 1 Economist's View: "A Walk Down Memory Lane with John Taylor" Trackback on November 1, 2011 at 3:50 pm
  2. 2 Link roundup « Negative Interest Trackback on November 1, 2011 at 5:27 pm
  3. 3 Policy Rules Are Not Rules, They Are Policies « Uneasy Money Trackback on December 6, 2011 at 2:55 pm
  4. 4 More On Economic Freedom and Monetary Policy | Economics One Trackback on July 11, 2013 at 4:10 pm

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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