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Home Publications Blogs Beat the Press Quick Thoughts on Taylor Versus Summers et al

Quick Thoughts on Taylor Versus Summers et al

Monday, 06 January 2014 14:46

Stanford Professor and former Bush administration economist John Taylor is taking strong exception to the secular stagnation argument being put forward by Larry Summers, Paul Krugman, and right-thinking economists everywhere. His alternative explanation for an unusually weak recovery and a decade of poor growth is excessively expansionary monetary policy and policy uncertainty due to items like the Affordable Care Act and Dodd-Frank. Both of these lines of argument are a bit hard to follow.

On the excessively expansionary monetary policy point, the usual evidence is accelerating inflation. We see the opposite over the last decade, low and falling inflation. The expansionary monetary policy has been a direct response to the weak economy over this period. Taylor seems to miss this, asserting in his paper:

"The federal funds rate was 1.0 percent in 2003 when the inflation rate was about 2.0 percent and the economy was operating pretty close to normal."

Actually the economy was far from being close to normal. It was still shedding jobs until September of 2003, almost two years after the official recession was over. The employment to population ratio at the end of 2003 was still almost 2.5 percentage points below its pre-recession level, a larger falloff than at any point in the 1990-91 downturn. It seems more than a bit of a stretch to say the economy was operating close to normal. (My explanation is that we were having trouble recovering from the collapse of the stock bubble.)

Taylor then follows Peter Wallison in blaming Fannie Mae, Freddie Mac, and the Community Re-investment Act for the housing bubble even though the worst loans were securitized by private investment banks like Goldman Sachs and Bear Stearns. The GSEs lost massive market share in the bubble years to the subprime issuers.

Then we get that Affordable Care Act and Dodd-Frank are preventing firms from investing and hiring. There is no real explanation of how this is supposed to be occurring. First off, non-residential investment is almost back to its pre-recession share of GDP, so it seems like Taylor is trying to explain a gap that does not exist. The same applies to hiring. If there were a fear of hiring then we should be seeing the length of the average workweek rising far above historic levels, as employers substitute more hours for more workers. We don't.

If the Affordable Care Act is actually discouraging hiring can we get some hint as to where to look for evidence. Presumably it would be at mid-size firms that didn't previously provide insurance but might now be forced to by employer sanctions under the ACA. Is there any evidence this is happening? Taylor certainly doesn't present any.

The same is true with Dodd-Frank. Do we see less hiring and growth in the financial sector than we would have in the absence of the new legislation? If so, Taylor does not make the case. Is it harder for non-financial firms to borrow as a result of Dodd-Frank? This is certainly not in any obvious way true.

In short, Taylor's argument is primarily one of yelling "uncertainty, ACA, Dodd-Frank bad." It may sell in some circles, but it is not a serious economic argument.

Comments (5)Add Comment
The NEW, IMPROVED Taylor Rule
written by Squeezed Turnip, January 06, 2014 5:02
New (Taylor) Rule (with apologies to Bill Maher): "All persons 1 mile high must leave the economy*. In the meantime, ignore the empirical facts against my bread-and-butter rule that has failed the economy not just once but twice in rather spectacular ways."

If Taylor wants to go this direction, he should just be done with it and embrace Fischer Black's contention that monetary policy is meaningless and should be abandoned.

* Rule number 42 ("the oldest one in the book"). http://sabian.org/alice_in_wonderland12.php
written by Matt, January 06, 2014 7:49
"Policy uncertainty": best I can tell, this has been corrupted into RW-speak for "government not literally doing whatever [the right kind of] businessmen tell it to do".

Taylor isn't practicing economics with this pitch, he's just yelling what the rubes want to hear while making sure they don't actually pay attention to whose boot is on their necks. For instance, I'd hazard that it's just exactly what Mr. Rupe (scan down the article a bit) wants to hear:


Mr. Rupe, tl;dr, is a guy who's been taking care of his disabled daughter for the last four years (since his wife died) subsisting solely on disability checks who insists Washington has "never done anything for him". Apparently feeding, clothing and housing him for the last four years counts as "nothing". Skim the article for some bonus racism from Mr. Rupe!
BB Coding Mr. Rupe
written by Ellen1910, January 06, 2014 9:05
Making Good Looking Links
written by Ellen1910, January 06, 2014 9:35
Scroll down to URL Hyperlinking.
On Econoganda and Excess Credit Growth
written by Sustainable Gains, January 07, 2014 3:23
Taylor is wrong, and I cannot stand his type of Econoganda, but that doesn't make this part of the argument against him correct:

On the excessively expansionary monetary policy point, the usual evidence is accelerating inflation. We see the opposite over the last decade, low and falling inflation.

Conflating monetary and consumer price inflation is fallacious. There has certainly been monetary inflation: just look at the price trends of stocks, bonds, and other credit-driven assets. But the lack of consumer price inflation is due to the lack of consumer wage inflation DESPITE the strong monetary inflation; consumers without increasing wages can't increase consumption without taking on debt, and once they hit debt saturation, which they have, that game also ends. With neither increasing consumer demand, nor decreasing supply, consumer prices will not go up regardless of how much monetary inflation there is.

One might ask why the raging credit inflation hasn't produced more consumer wage inflation, and that's a very fruitful line of inquiry because one finds that it gores a number of sacred cows. One aspect I believe is that due to the nearly fixed exchange rate between the U.S. Dollar and the Chinese Yuan, the two nations' credit systems are tightly linked, and the Fed's policies HAVE succeeded in producing wage inflation -- in China. That is, the equilibration between the Chinese and U.S. labor markets has not completed yet, so U.S. wage growth has been constrained while China has inflated.

As Turnip and I pointed out on the last thread on this topic, unsustainable credit growth, which is to say credit growth in excess of GDP growth, can be traced back for decades prior to 2003. The "weak economy" has appeared when unsustainable financial bubbles (stocks in 2000, mortgages in 2007) have popped. But the real problem is that the "strong economy", the boom years being used as a reference, had been goosed unsustainably. One might say that the current expansionary monetary policy has been pursued because the two previous expansionary periods led to bad outcomes. Will the third time be a charm?

P.S. Many thanks to Ellen1910 for the BB Coding link tips!

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.