John Taylor Espouses The Republican Line on…Everything

Stanford economics professor John Taylor has had a long career both in public service and in academia. The most well known monetary policy rule, the Taylor Rule, is named after him (he came up with it). The man is a big shot in the financial world.

But over the past couple of years, he’s hewed to the Republican Party line on both monetary and fiscal policy more and more. That was never more apparent than in today’s panel hosted at the National Press Club on rejuvenating America’s economy. Former CFTC Chairperson Sheila Bair and PIMCO Head Mohamed El-Erian also took part in the discussion, which covered a wide array of topics that the panelists mostly agreed upon.

All three advocated that the Fed begin to pull back its Quantitative Easing program, with Bair arguing doing so over a longer timeframe. But Taylor was the most adamant that Fed should pull out of those policies as quick as they can.

“I see no positive effect on rates from quantitative easing,” he said. “People really need to realize that we don’t know the impact of these policies. I see them as basically negative.”

Taylor also repeatedly complained about the weak economic growth. “I’m worried this recovery will never become a real recovery,” he said. He offered similar sentiments in a recent Wall Street Journal op-ed. In response, Money Monetarist (and Republican) Scott Sumner showed the inconsistency of Taylor’s remarks:

Taylor seems to think that growth has been too slow, complaining about only 2% RGDP growth in 2012.  That suggests that easier money is needed. But he also complains about QE, claiming it didn’t help the recovery. However the stock market responded very positively to rumors of QE, not once but three times.  That suggests QE boosts growth.

Like John Taylor, I’d like to see higher interest rates.  Unlike Taylor, I explicitly favor a more expansionary monetary policy.  I favor a higher NGDP target, which would raise long term Treasury bond yields.  He seems to favor higher interest rates via a tighter monetary policy boosting short rates (the liquidity effect.)  In my view that policy would depress long term bond yields to Japanese levels, as markets (correctly) expected a replay of the US in 1937, or Japan in 2000, or Japan in 2006, or the eurozone in 2011—4 attempts to raise short rates above zero—all premature, all 4 attempts failed.  They all drove aggregate demand and risk free long term interest rates even lower.

Taylor’s prefered policy has been repeated by Republicans ad nauseam. It’s the standard GOP line. But it isn’t right and it’s a shame that Taylor is buying into it.

The discussion also touched on fiscal issues, where Taylor continued to promote Republican policies. He advocated for reducing the budget deficit through entitlement reform, revenue neutral tax reform that broadens the base and reduces the top rate and corporate tax reform. He also lamented the uncertainty of current federal policies.

“One of the things we need to face up to is the huge increase in regulatory policies,” he said.

He then called for greater predictability of government actions. I’m more sympathetic to this view-point than most liberals, but it’s still overblown. Reducing uncertainty is a good idea. It’s not a magical cure that will unlock 5% GDP growth. What would unlock 5% GDP growth is an explicit NGDP target by the Fed. I’m sure Taylor wouldn’t support such a proposal, but it would accomplish his goal of bringing about a real recovery. Unfortunately, he’s too caught up repeating Republican lines about the worries of easy money to think about effective monetary policy.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s