The Crisis: A Failure or a Vindication of Economics?
John Taylor:In my view, the financial crisis does not provide any evidence of a failure of modern economics. Rather the crisis vindicates the theory. Why do I say this? Because the research I have done shows that the crisis was caused by a deviation of policy from the type of policy recommended by modern economics. It was an interventionist deviation from the type of systematic policy that was responsible for the remarkably good economic performance in the two decades before the crisis. Economists call this earlier period the Long Boom or the Great Moderation because of the remarkably long expansions and short shallow recessions. In other words, we have convincing evidence that interventionist government policies have done harm. The crisis did not occur because economic theory went wrong. It occurred because policy went wrong, because policy makers stopped paying attention to the economics.
By the way, Taylor has
just started blogging.
(HT Russ Roberts)
John Taylor:
1 comment:
...the research I have done shows that the crisis was caused by a deviation of policy from the type of policy recommended by modern economics....
This is a lot like the communists saying that Communism would have worked if Mao, Stalin, Tito, Castro, etc., only applied it properly as if there were one pure version that would work. The real world seems much more complicated because there is no monolithic policy type recommended by modern economics. No matter how we slice and dice it, the Keynesian and Monetarist approaches failed miserably because they could not see the crisis coming. Sadly, nobody paid attention to the Austrian School, which saw the problem and explained why a massive correction would be inevitable. Even more sadly, the meddling after the crisis has pushed the correction further in the future and has ensured that it will be far worse.
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