NCPA - National Center for Policy Analysis

Restoring Fiscal and Monetary Policy

February 2, 2011

It has been three years since the financial crisis flared up and the recession began.  Yet the unemployment rate is still over 9 percent -- double what it was before the recession -- and it has been stuck there for 20 consecutive months.  Why the extraordinarily high and prolonged unemployment?  Discretionary government interventions -- deviations from sound economic principles and policies -- have been largely responsible, says John B. Taylor, a professor of economics at Stanford University and a senior fellow at the Hoover Institution.

At best, actions like the stimulus and cash for clunkers had a small temporary effect that dissipated quickly, leaving a legacy of higher debt, a bloated Fed balance sheet and uncertainty -- all of which slow growth and job creation.  The best way to reduce unemployment is to restore sound fiscal and monetary policies.

  • The government should start by laying out a credible plan to reduce spending and stop the debt explosion.
  • If spending as a share of gross domestic product (GDP) can be brought to 2000 levels and held there with entitlement reforms, then the budget can be balanced without employment-retarding tax-rate increases.
  • A concrete goal should be to establish a long-term budget that the Congressional Budget Office (CBO) can credibly show would bring the debt-to-GDP ratio to 40 percent.
  • If the plan is ready for this summer's CBO long-term projections, it will give an immediate boost to economic growth and job creation as uncertainty about debt sustainability falls.

Source:  John B. Taylor, "A Two-Track Plan to Restore Growth," Wall Street Journal, January 28, 2011.

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