Clowns (ICP)

The IMF’s Finance and Development has paired me on “secular stagnation” with John Taylor.

When they told me that I would be paired with John Taylor, I protested: As I see it, sometime in the early 2000s John Taylor ceased being an economist and became a politician. Hence, I thought, he was likely to have very little of value to say to professional economists–to those of us who are trying to use the tools of economics to understand the world.

And I see that I was right: I do not think Taylor’s piece has any value at all to professional economists.

Let me take especial note of five passages in Taylor’s piece: passages that, in my view, a professional economist simply could not write:

The fact that central banks have chosen low policy rates since the crisis casts doubt on the notion that the equilibrium real interest rate just happened to be low. Indeed, in recent months, long-term interest rates have increased with expectations of normalization of monetary policy…

People did not just change their expectations with respect to the chances of “normalization” of interest rates. To say that they did is a politician’s and not a professional economist’s statement. Long-term interest rates increased with the shifting expectations of Trump deficits and the belief that an inflation targeting Fed to respond.

And claiming that central banks feely “chose” low policy rates… Central banks were impelled and compelled by what they saw and see as very strong evidence of a low equilibrium real interest rate. A professional economist would not say that their “choice” of such low rates casts doubt on the notion of a low equilibrium real rate. A professional economist would say that low policy rates reflect central banks’ judgment that the equilibrium real rate was low–and that the failure of inflation to accelerate with low policy rates affirms the correctness of that judgment.

As bad is:

Low policy interest rates set by monetary authorities, such as the US Federal Reserve, before the financial crisis were associated with a boom characterized by rising inflation and declining unemployment—not by the slack economic conditions and high unemployment of secular stagnation…

Again, this is not something that a professional economist would say. Core inflation was 2.8% on the eve of the 2001 recession and 2.4% on the eve of the 2008 recession. A professional economist simply cannot say that the course of inflation over that business cycle is in any way evidence that policy interest rates over the cycle were in any Wicksellian sense “too low”. A professional economist simply can not say that the course of employment over that business cycle is in any way evidence of an unsustainable boom:

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This third is, I think, worst of all:

The evidence runs contrary to the view that the equilibrium real interest rate—that is, the real rate of return required to keep the economy’s output equal to potential output—was low prior to the crisis…

If inflation stable over the cycle and subpar employment performance with very low real policy rates is not “evidence… [for] the view that the equilibrium real interest rate… was low prior to the crisis”, what could possibly be evidence for that view?

Professional economists like John Williams who estimate r* find a 1.25%-point decline in it from the late 1980s to 2007–and then another 1.25%-point decline in the crisis.

Cursor and Whatever happened to secular stagnation

But perhaps Taylor’s most political statement of all is:

During the 1980s and 1990s, tax reform, regulatory reform, monetary reform, and budget reform proved successful at boosting productivity growth in the United States…

“Tax reform”–for the Republicans who are Taylor’s main audience, “tax reform” means the 1981 Reagan tax cut. But productivity growth did not rise until after 1995. That is a very long fuse indeed to run a claim from policy cause to economic effect.

“Regulatory reform”–Anne Gorsuch’s actions as EPA head giving a pass to lead polluters in 1981-2 was particularly unfortunate given what we have learned since about lead and human cognition. Again, the timing does not work, and is hidden by Taylor’s artful reference “during the 1980s and the 1990s”. Again, productivity growth did not rise until after 1995. That is a very long fuse indeed to run a claim from policy cause to economic effect.

“Monetary reform”–that was Paul Volcker’s accession to the Fed Chairship in 1979. But, once again, productivity growth did not rise until after 1995. And, once again, is a very long fuse indeed to run a claim from policy cause to economic effect.

Tax “reform”, regulatory “reform”, and monetary “reform” were not obviously helpful “during the 1980s and 1990s”. The big pushes come at the start of the 1980s. The productivity boom comes more than a decade and a half later.

Only with “budget reform” is there a case that a professional economist might make. “Budget Reform” is, in this context, the 1993 Clinton administration Reconciliation Bill—the bill that undid a lot of what Taylor’s employers and allies had done in the previous fifteen years. There are possible and plausibly strong links for a professional economist to draw between the adoption of not-insane and sustainable U.S. fiscal policies in 1993 and the post-1995 productivity boom propelled by the leading high-tech sector. How strong are these links? That is uncertain.

But “during the 1980s and 1990s, tax reform, regulatory reform, monetary reform, and budget reform proved successful at boosting productivity growth in the United States” is not a statement a professional economist could or would make.

Last:

The recent US election has raised the chances for tax, regulatory, monetary, and perhaps even budget reform…

Are any words necessary?

Finance and Development, I think, made a bad mistake in choosing Taylor for this role. Taylor’s is a political document. It is written for political purposes. If fall the readers of Finance and Development understand that–and do not take it as an attempt to analyze the economy–no harm will be done. But not all readers will. Some will think they are supposed to learn something about the economy from it. They will be misled thereby.