Tonight I want to focus on the obstacles to achieving good economic policy and thus to the goals of policy, which are higher growth and a better life for all Americans—including those who are disadvantaged or in struggling middle income groups. I have called the talk “Overcoming Obstacles” to get a little alliteration, of course, but I was also thinking of the Maurice Sendak children’s book about the alphabet “Alligators All Around.” In fact that would be a good title too. And Sendak is also wrote “Where the Wild Things Are” which would be an even better title.
I’ll start with general points about overcoming obstacles and then illustrate them with issues that are currently on the agenda in Washington including fiscal and monetary policy.
There have always been obstacles to good pro-growth economic policies. The biggest obstacle in the past century has been totalitarianism as exemplified by Stalin and Mao regimes. Fortunately, throughout the history in the United States, the obstacles have been much lower. To me good economic policies are best characterized by the principles of economic freedom: people decide what to buy, what to sell, where to work, how to help others within a framework of (1) predictable government policies, based on (2) the rule of law, with an emphasis on (3) the market, which provides (4) incentives and with a (5) limited role for government. America has prospered over the years because it has adhered to these principles.
But we have had big swings back and forth in the adherence to these principles. From the late 1960s through the 1970s, policy deviated from the principles with unpredictable go-stop monetary policy, interventionist fiscal stimulus packages, and even wage and price controls. Performance was terrible with rising unemployment and inflation and falling growth. Policy adhered to the principles in the 1980s and 1990s and until recently with a much more rule-like monetary policy, an abandonment of short-term oriented fiscal policy, and limits on the federal government’s role from price determination to welfare. And the economic performance improved dramatically. Now we have deviated from the principles, and performance is again poor.
This historical experience tells us that the American economy will prosper again if it returns to good economic policy, as I describe in more detail in my book First Principles. But the obstacles to doing so are now greater than ever due to powerful countervailing forces emanating from both those on the left of center, who frequently do not agree with the principles, and from those on the right, who may agree but do not always implement them effectively.
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