John Taylor's Plan To Get The Economy Moving

See A Two-Track Plan to Restore Growth: Our economic wounds are self-inflicted. Changing fiscal and monetary policies could make a difference fast from the WSJ, 1-28-11, page A19. Taylor is a professor of economics at Stanford. Here are the excerpts:

"Why the extraordinarily high and prolonged unemployment? My research shows that discretionary government interventions—deviations from sound economic principles and policies—have been largely responsible."

"We have seen an $862 billion stimulus, an increase in federal spending to 25% from 21% of GDP, and a corresponding explosion of federal debt. We have the Fed's unconventional "quantitative easings": purchases of $1.25 trillion of mortgage backed securities and $900 billion of longer-term Treasury bonds. And we have seen hundreds of new regulations in the health and financial sectors."

"The one-time stimulus payments to people did not jump-start consumption. The stimulus grants to states did not increase infrastructure spending. Cash for clunkers merely shifted consumption a few months forward. The Fed's purchases did not have a material impact on mortgage interest rates once changes in risks are taken into account. At best these actions had a small temporary effect that dissipated quickly"

"Well-known theories of consumption predict that temporary payments to households will not increase economic growth by much."

"discretionary monetary policy, as distinct from rules-based policy, leads to boom-bust cycles with ultimately higher unemployment and higher inflation. With sounder, more stable and more predictable monetary and fiscal policies in the 1980s and '90s we had long expansions and lower unemployment.

The best way to reduce unemployment is to restore sound fiscal and monetary policies."

"Three-fourths of business economists and one-half of academic economists say that easy monetary policy exacerbated the housing boom and bust that led to the financial crisis."

"The history of the past two decades shows that lower government purchases as a share of GDP are associated with lower unemployment rates. A much better way to reduce unemployment is to encourage private investment. Over the past two decades, unemployment fell when investment increased as a share of GDP."