Summary of Principles for Economic Revival

Thursday, September 16, 2010

George P. Shultz, the Thomas W. and Susan B. Ford Distinguished Fellow; Michael J. Boskin, Hoover senior fellow; John F. Cogan, the Leonard and Shirley Ely Senior Fellow; John B. Taylor, the George P. Shultz Senior Fellow in Economics; and Allan Meltzer discuss the key principles involved in restoring prosperity to the American economy.

The authors of the article, "Principles for Economic Revival," use the example of tax rates because evidence indicates that high tax rates reduce incentive, productivity, and growth. Long-lasting policies such as permanent tax cuts work because they give the markets certainty, whereas temporary policies do not. They also used the examples of Fannie Mae and Freddie Mac to show the impact of not having any “skin in the game,” that is, putting others people’s money at risk, not your own. As Milton Friedman famously said, "Nobody spends somebody else's money as wisely as they spend their own," echoed by Terry Anderson, the John and Jean De Nault Senior Fellow at the Hoover Institution, who said, “No one washes a rental car.”

They next touched on the crippling economic policies that led to the Great Recession and its current anemic recovery. After discussing economic problems, including the federal debt, the recent health care legislation, and other stresses facing the American economy, the Hoover fellows proposed a road map to put the economy on an upward trajectory.

Shultz, Boskin, Cogan, Taylor and Meltzer advanced five principles to get the recovery on solid economic footing. First, take tax increases off the table; higher tax rates are destructive to growth and would ratify the recent spending excesses. Second, balance the federal budget by reducing spending. Third, modify Social Security and health-care entitlements to reduce future growth. Fourth, enact a moratorium on all new regulations for the next three years, with exceptions for national security and public safety. Fifth, make monetary policy less discretionary and more rule-like, per the Taylor Rule. These pro-growth policies are the surest path back to prosperity.

For the full article, see the Wall Street Journal, Opinion Section, A23; for the online version click here.