Asked for my take on John Taylor’s WSJ opinion piece today. Here was my quick reaction:
I find articles like this frustrating, because they recount a bunch of coincident occurrences and (implicitly) assume causation. “This then that (so this must have caused that, right?)” I much prefer empirical studies that try to establish causation — and fortunately there are loads of such studies on these topics. Obviously there are challenges even there, but they are way more convincing than Taylor’s narrative.
As for the content, I completely agree with the need for a simpler tax system, broader tax base and lower marginal tax rates (corporate, income, maybe capital gains too). Taylor writes as if tax complexity, permanent big government, Keynesian fiscal policy, and expansionary monetary policy all go hand in hand. That’s not right — I oppose the first two, cautiously favor the third, and strongly favor the fourth. Moreover, Taylor gives the impression that because Reagan did well in the 80s, current Republican policy is what we need now.
But in fact I find current Republicans on exactly the wrong side of some of these issues. The right way to interpret Reagan’s monetary policy is that it was smart given the circumstances — not that we should be all-contractionary-all-the-time. In the current environment, smart monetary policy is expansionary. Unlike the contraction in the 80s, which was driven by supply side forces (e.g. high oil prices), much of the current problem is insufficient demand (which explains why inflation is so low), and expansionary monetary policy helps correct that. I think Milton Friedman would agree here. But many Republicans are criticizing Bernanke’s (somewhat) expansionary monetary policy, and rather than taking advice from economists and standing up to those critics, too many Republican leaders are deferring to them. (Here’s an interesting article on Romney suggesting as much.) Gingrich says similar things, and Ron Paul, much as I love his tenacity and independence, is the worst of all of them on this point.
Upshot: yes, let’s go for simplicity and broad-based, low-marginal-rate taxes. But let’s not confuse that with contractionary short-run monetary and fiscal policy, as many current R’s seem to be doing.