Jumpstart the Economy
June 28, 2012
The best way to understand the problems confronting the American economy is to go back to the first principles of economic freedom upon which the country was founded. As these principles developed over the years, we can see periods when careful attention was paid to them and alternating periods when they were neglected, says John B. Taylor, the George P. Shultz senior fellow in economics at the Hoover Institution.
The principles include: predictable policy framework, rule of law, strong incentives, reliance on markets and a clearly limited role for government.
The importance of these rules has been stressed by a variety of thinkers and leaders in very different times. The principles of liberty that Thomas Jefferson and the other Founding Fathers first delineated in the Declaration of Independence in 1776 are remarkable similar to these mentioned here.
Many of the most esteemed economists in history have asserted that a market economy guided by a non-interventionist and predictable government is a recipe for prosperity. Adam Smith's Wealth of Nations, Friedrich Hayek's The Road to Serfdom, and Milton Friedman's Capitalism and Freedom have all emphasized these market-oriented priorities.
Two of these principles in particular are absolutely crucial for a government to follow if it will allow for prosperity and growth: the rule of law and a predictable policy framework.
- If people are forward-looking and adjust their behavior to new circumstances, then economic policy works best when formulated as a rule.
- Government's adherence to known rules allows people to have a clearer sense of what is coming, and therefore to make more informed decisions about long-range plans.
- Setting out a sensible rule and sticking to it also helps policymakers resist interest-group pressure: rather than having to consider the merits of every special-interest plea for more government support, a rule can set a standard that applies to all cases.
- Rules can also avoid overreactions to short-term blips in the economy, allow people to exercise their freedom, and enable their leaders to keep their eyes on long-term goals.
Applied to the current degree of market intervention, governments should rein in discretionary spending and opt instead for more predictable, less arbitrary forms of intervention. This allows market forces to respond to government actions more efficiently instead of being whipsawed by inconsistency.
Source: John B. Taylor, "Jumpstart the Economy!" Defining Ideas, June 6, 2012.
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