Getting Macroeconomic Policy Back On Track

Stanford economics professor John Taylor has an excellent article on this topic, here, in the Federal Reserve Bank of St. Louis Review. Professor Taylor is a highly-respected economist, writing in a Federal Reserve System publication, so it would be hard to argue that his analysis is outside the mainstream, or the writing of some fringe radical critic whose ideas don’t deserve a hearing.

With regard to monetary policy, Taylor argues that the Fed has held interest rates too low for too long, and it also did so after 2001, contributing to the housing bubble and current financial downturn. He also criticizes the Fed for doing too much fine-tuning, rather than pursuing a policy designed to control inflation and stabilize the economy. We’d be better off if the Fed would take Taylor’s advice, in addition to publishing his article.

With regard to fiscal policy he gives a nice summary paragraph: “For fiscal policy, this means avoiding further debt-increasing and wasteful discretionary stimulus packages, which do little to stimulate GDP. Ten years ago there was a near consensus that such programs were ineffective. Fiscal policy should focus on reducing the deficit and the growth of the debt-to-GDP ratio. Reforming existing entitlement programs to hold their growth down and limiting the creation of additional entitlement programs are essential.”

If you are interested in economic policy matters, and especially monetary policy, the article has lots of facts and sound, easy-to-follow, policy arguments. This critique of recent macroeconomic policy isn’t published by some wacko fringe group; it’s a publication of the Federal Reserve System. (Hmm... Even as I’m putting up this post, I’m re-thinking that last sentence...)

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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