Keywords: Politics, economics, Keynesianism

Title: First Principles: Five Keys To Restoring America's Prosperity

Author: John B. Taylor

Publisher: WW Norton

ISBN: 978-0393073393


John B Taylor is an economist who has successfully straddled the world of academia and policy engagement. Tipped as a potential Nobel prize-winner, Taylor also served directly in the father and son Bush administrations, as well as being a member of the Council of Economic Advisors during the Ford and Carter Administrations. This insider experience, coupled with his solid research work makes him an interesting and savvy commentator on current US economic policy. In an age of quantitative easing, multi-billion dollar bail-outs and economies that refuse to bounce back from depression, what does he have to say? The good news is that Taylor lays out an economic strategy based on simple and transparent principles that are in accordance with historical record and based on accepted theories. The bad news is that his policies are nothing like those being pursued by the Obama administration.

In this slim little book Taylor sets out to do two things. First, and most obviously, he sets out a series of five direct policy objectives to restore vigour to the languishing US economy (and by extension suggest that these policies would work in the even more sickly Euro zone). However, he also sets out to show that government policies do not emerge out of thin air, and that economic theory, and the economists who propagate them, have a key role to play in setting the agenda.

For those who think that economics needs to be obscure and mathematically complex, Taylor's little book is remarkably easy to read and understand. He supports this arguments with the judicious use of facts and figures, but by focusing on very simple economic principles he ensures that he effectively target the lay reader rather than the specialist. Like Thomas Sowell, he concentrates on basic economics without being simplistic or condescending. And like Sowell, his argument is essentially a libertarian one - there is more faith in the market mechanism than there is in the omniscience of the big state.

Taylor makes the point that his policy prescriptions are independent of nominal party politics. Big state Republicans are as much to blame for the state of things as Democrats - belief in economic freedom does not always follow party lines. The second chapter of the book, entitled 'Who Gets Us In and Out of These Messes' makes for particularly interesting reading. He describes the rising tide of free market economics, particularly influenced by Hayek and Friedman, being displaced in recent decades by more statist ideas, influenced by Samuelson, Krugman and others. This change in the climate of economic ideas has made itself felt in the policy sphere where the last few US administrations have taken an increasingly hands-on approach to the economy, leading ultimately to the present Obama administration's damaging policies.

In terms of specific policy prescriptions, probably the key one is to reduce the scope of government discretion by switching to more of a rules based policy. Where policy is down to government discretion you increase uncertainty (and therefore increase risk and hence reduce investment), and also increase the scope for cronyism. Crony capitalism is not capitalism, it's big business cosying up to governments to the mutual benefit of both to the cost of everyone else. In contrast to government discretion, Taylor recommends the implementation of rules based policies, which are transparent, can be factored into risk assessments and are therefore less likely to lead to cronyism.

Other areas that Taylor looks at include health care reform, ways to handle the explosion of entitlements (pensions, social security etc) and more. In all cases he recommends very specific policy interventions rather than on simplistic reliance on intentions or emotive rhetoric. He also largely keeps to interventions that are in line with reducing the role of the state and strengthening the scope of economic freedom.

At a time when Keynesianism seems to be triumphant in theory but is producing dire outcomes in practice, Taylor's book is essential reading for those looking for a real alternative to crony capitalism and it's failed policies.

Contents © London Book Review 2012. Published Jun 27 2012