First Principles: Five Keys to Restoring America's Prosperity

by John Brian Taylor

Leading economist John B. Taylor’s straightforward plan to rebuild America’s economic future by returning to its founding principles. America’s economic future is uncertain. Mired in a long crippling economic slump and hamstrung by bitter partisan debate over the growing debt and the role of government, the nation faces substantial challenges, exacerbated by a dearth of vision and common sense among its leaders. Prominent Stanford economist John B. Taylor brings his steady voice of reason to the discussion with a natural solution: start with the country’s founding principles of economic and political freedom―limited government, rule of law, strong incentives, reliance on markets, a predictable policy framework―and reconstruct its economic foundation from these proven principles. Channeling his high-level experience as both a policymaker and researcher, Taylor then zeroes in on current policy issues―the budget, monetary policy, government regulation, tax reform―and lays out in simple terms bold strategies designed to place the country on sound footing in each of these areas.

Genres: Economics

240 pages, Hardcover

First published January 23, 2012

About the author

Mary and Robert Raymond Professor of Economics at Stanford University.

George P. Shultz Senior Fellow in Economics at Stanford University's Hoover Institution

Past Director of the Stanford Institute for Economic Policy Research

Reviews

[Amora · Rating 4 out of 5]

Economist John B. Taylor deals a heavy blow against Keynesian theory in this wonderful book. Using his own research and from other economists, he shows that the easy monetary policies of central banks here and in Europe contributed to the build-up of the housing bubble. He also shows that the Keynesian rebates tried by Bush and Obama did not increase growth. Instead of Keynesianism, Taylor proposes permanent tax cuts and less intervention as a way to increase growth. So far, this has been the best book against Keynesianism I’ve read.

[Josh · Rating 4 out of 5]

John Taylor, a Stanford economics professor, outlines five core economic principles that have been the core of American success in the past. The five principles: predictable policy framework, rule of law, strong incentives, reliance on markets, and clearly limited role for government have also been key to the rise in many of the emerging markets in recent years. I found Mr. Taylor's historical anecdotes to be compelling, although I would imagine there are plenty who would view his interpretation as biased by his philosophy, but that is the nature of policy prescription. You have to try to make the most persuasive case for your ideas and using historical events to support your case will always be criticized by those who view history differently. I don't know that there is really any way around that.

My own philosophy biases heavily toward human liberty and so I found Mr. Taylor's book compelling and the five principles as great guidepost to policy decisions. I have a less favorable opinion of the role of the Federal Reserve than Mr. Taylor does, but that is a difference of opinion I can live with.

[Tom Cross · Rating 5 out of 5]

Clear thinking based on first hand experience and extensive research that a free economy with limited government intervention is the key to robust economic growth and long term prosperity. Economic growth, low unemployment and stock market surged using these principles in 2016-2019 until the global pandemic hit the world.

It is very unfortunate that many policy makers and a large portion of our citizens are devoted to government intervention that guarantees equality of outcomes rather than equality of opportunity, redistributing wealth from the successful to those less successful and chasing numerous hoaxes based on biased/nonfactual data/analysis.

Reducing government intervention and regulations so business can thrive, implementing term limits for all politicians so power hungry people cannot linger in government for decades, guaranteeing equality of opportunity so the very best can excel, electing business people who focus on results not just sounding good to run our country, drastically reducing government spending and taxes, holding the media/academia accountable for unlimited/uncontrolled propaganda that continually damages our country, applying the rules of law equally to all not just those that are politically likeable and getting government out of our everyday lives are prescriptions for future wealth and prosperity.

[Richard · Rating 4 out of 5]

Very clear and about as brief as it could be without overlooking anything. It kind of sounds like the author might be auditioning for a Treasury Secretary appointment under a Romney administration. If so, he seems like a pretty good choice. If not, this remains a very useful book for the lay reader and for those in the government. Let's get our fiscal house in order. It isn't that hard. It just requires people to look at the facts, look at history, and quit putting self-interest ahead of national interest. On second thought, maybe it is that hard. Nonetheless, we the people need to keep putting our leaders' feet to the fire. And we need to quit falling for demagoguery.

[Patrick Schultheis · Rating 5 out of 5]

A short work, readable for non-economists, setting forth a prescription for America's economic woes. Very well written. The author frankly and honestly criticizes and praises politicians of both parties for their economic policies since WWII and demonstrates why the Keynesian policies of the current administration are doomed.

[Drtaxsacto · Rating 5 out of 5]

Taylor is a first rate economist and this is a first rate guide to getting the country back on its economic track. Obama would not like this book - but then his economists have not been exactly stellar.

[Oktay Yagiz · Rating 2 out of 5]

First Principles – Five Keys to Restoring America’s Prosperity
John B. Taylor

In his preface, the author says, “I stand on the shoulders of economic giants, including Milton Friedman”. Indeed, he does throughout the book, namely on the shoulders of Walter Heller, James Tobin, Kermit Gordon, and George Schultz, though much more on Friedman’s than of others. He is a true-blood follower of Friedman and of the Chicago School.

The premise of the book is that the best way to understand the problems confronting the American economy is to go back to the first principles of economic freedom upon which America was founded; and that when policymakers (and policy implementors) stick to these principles and apply them, America’s prosperity can be restored. The author's definition of economic freedom is in fact a milieu within which five principles prevail, namely, a predictable policy framework based on the rule of law with strong incentives derived from the market system with a clearly limited role of government. A relentless supporter of these five principles, and mainly of the last one, Taylor contends that those policymakers who neglect economic freedom pursue less “systematic”, more interventionist, and temporary policies rather than long-lasting reforms. (Here, let me pause to note that each time the author says “systematic”, he probably means to say “systemic”.)

The author presents a revealing narrative of the ever-repetitive and almost ever-lasting swing between the interventionist and non-interventionist policy periods in American economic history, making references to the Keynes vs Friedman schools of economic doctrine. John Taylor is a follower, a proponent, and a relentless advocate of the latter, the non-interventionist, labeling non-interventionism as “permanent, pervasive, and predictable” and the rivaling doctrine of interventionism as “temporary, targeted, and timely.” And whereby wins my mental trophy in bigoted rhetoric.

On many of his points, I fall quite apart. Some, I find needy of intellectual justification, one example of which is his quoting --without scrutiny-- unemployment statistics as evidence of the failing interventionist policies of those Keynesians. I would have liked to see an economist of his standing take unemployment statistics with a grain of salt and dwell as much on their qualitative aspect as much as their quantitative indicators.

I am as much alarmed by the national debt as Taylor seems to be (even though he understates the fact that unemployment has gotten a jump start each time the non-interventionist proponents were in the legislative majority). The American government is so deep in the dept hole that it must borrow close to 40% of what it spends with the total debt now past the critical 60% threshold, hovering past 100%. I am more alarmed, though, by Taylor's proposed solution based on some magic-wand formula based on keeping Federal taxes and spending at an average of 19.5% of the GDP over the years. This will, hopefully, freeze the national debt at its current level (as he believes). But, freezing is not melting, meaning America’s vulnerability to its creditors will remain unchanged. And Fed revenues will not remain unaffected, as he suggests. They will decline over the years in lockstep with inflation which will reduce the government's purchasing power. My remedy to start melting the Federal Debt? Progressive taxation as a “permanent, pervasive, and predictable” solution.

The author warns that the “Fed spending problem is not a revenue problem” and adds, “as some have suggested” even if we go up by 5% point for the taxpayers in the top bracket, it would increase revenues by less than 1% of GDP. This is the standard defense against progressive taxation in America, which is fallacious for two reasons, it sets government revenue against not the Fed budget but against the GDP –apples to oranges, right? Secondly, it refers just to a tax rate increase without any reference to mitigating loopholes and eliminating other forms of lucrative tax evasion as means to increase government revenue.

In defense of the “principles” the author makes a categorical statement, saying, “In any organization, a clear, well-specified goal usually results in a consistent and effective strategy for achieving that goal.” As a management/organizational consultant practicing in strategy formulation and strategic transformation, I feel obliged to correct him saying, “With due respect, Sir, please replace ‘usually results’ with ‘always requires’.”

Leaving aside my contention on several points, the author needs be lauded nevertheless for having drawn a clear-cut picture of the stark differences between a strong and intervening government with a leadership role in the economy and a weak and non-intervening government playing the role of the absentee.

[Scott · Rating 5 out of 5]

I read this as part of a fellowship where we then got to discuss Taylor's findings in a bipartisan forum with the author.

I had never studied recently developed conservative economics, but his reasons for this are far more compelling than Keynesian or other theories.

As someone who worries about regulations and has to fight them from overreach, I appreciated him explaining the benefits of predictable regulations and laws. This reinforced my strong beliefs in the rule of law and buttressed it up with economic theory. Unpredictable and new regulations weaken our economy and overall future of the United States and the world.

It is a short and succinct read and you can even get through the Federal Reserve parts easily without a background in the field.

I recommend this to anyone who is engaged in legislating or in the government.

[Trevor Carlsen · Rating 4 out of 5]

Good primer for understanding basic principles that make for sound policy.

[Jerry · Rating 3 out of 5]

Good book. Following quotes:

"The principles of economic freedom are naturally intertwined with political freedom—speech, press, assembly, religion. Excessive government interventions and economic controls will tend to constrain people's freedom to speak out or take public political positions for fear of retribution through more interventions and controls. The loss of political freedom can in turn reduce economic freedom further.
One of the most amazing things about these defining principles of economic freedom
■ predictable policy framework
■ rule of law
■ strong incentives
■ reliance on markets
■ clearly limited role for government

is that they also constitute a set of principles for economic success. Economic theory and experience show that they lead to superior economic outcomes, including strong economic growth and rising prosperity. The principles of liberty that Thomas Jefferson and the other founding fathers first delineated in the Declaration of Independence in 1776 are remarkably similar to the principles of economics that Adam Smith first heralded in the Wealth of Nations in the same year, and that remain central to economics today.
Markets, incentives, and a carefully delineated role for government are the main pillars of basic economics courses and texts, including the introductory course I've taught college students for years and my textbook Principles of Economics. In a market economy, most decisions about what to produce, how to produce it, and for whom it is produced are made by individuals, firms, and organizations interacting in markets. Prices in those markets signal what goods and services people want, and the prices create incentives to produce those goods and services. For instance, a greater demand for healthy foods increases their price and thereby gives firms the incentive to produce more healthy foods. The higher price also provides incentives to people to invent new healthier (and perhaps even tastier) foods and to create firms to sell the new products.
The higher wages paid for skilled labor offer people the incentive to become skilled, whether by staying in school or by learning on the job. As they respond to these incentives, people who become more skilled are frequently led by Adam Smith's "invisible hand to promote" the interests of society through more effective medicines, more entertaining movies, or more efficient search engines. When greater economic freedom increases opportunities to trade at home and abroad, the existing incentives expand and economic prosperity increases. Lower income tax rates increase incentives by raising the benefits (higher incomes) one gets from investing in education or a start-up business."

[Mark Geise · Rating 3 out of 5]

“First Principles” was a quick and fairly enjoyable read. John Taylor is a well-known and respected economist who very likely would have been nominated as chairman of the Federal Reserve under Mitt Romney had Romney defeated Barack Obama in the 2012 presidential race. This book lays down what Taylor believes to be the basic principles of America; he asserts that America has tended to be most prosperous when it has best adhered to these principles and that a return to past prosperity necessitates a return to these principles.

Taylor’s book focused much more on the Fed than I expected. I actually expected more typical rhetoric than is actually present in this book, though there is still plenty of rhetoric. It would have been extremely interesting to see Taylor as the Fed chairman to be able to hold up his actions to what he writes in this book. Unfortunately, we have not had the same luxury with Ben Bernanke or Janet Yellen. Neither wrote a book prior to their appointments as Fed chair outlining their prescriptions.

Taylor rightly holds up Paul Volcker as a Fed chairman to admire and emulate. He criticizes, once again rightly, the late Greenspan years and the entire Bernanke regime. Artificially low interest rates under Greenspan propped up the housing bubble that eventually popped in 2008. Bernanke then lowered interest rates even further and injected huge sums of money through rounds of quantitative easing. This, along with government bailouts like TARP, have reinflated bubbles to levels that we have never seen before. It will take a Fed chairman or chairwoman with some gumption to be willing to prick that bubble and suffer through the short-term pain and political pressures. As Taylor proclaims, political pressures on the Fed to enable excessive government spending and stimulate short-term comfort are extremely high. Most chairmen and chairwomen have not been able to resist this pressure, but we desperately need someone who will.

I tend to be more “extreme” than Taylor, but I believe what he proposes would put the United States in a better direction. Rule-based monetary and fiscal policy would be a vast improvement over current discretionary policy. I would welcome more predictable tax rates and legislation. Also, it would be prudent to relinquish more power and duties to state and local governments. I believe that it would be wise to eliminate the Fed entirely, but Taylor dismisses those types of beliefs. Furthermore, I believe that he still believes in too much centralized power. Though what he proposes would certainly represent an improvement, it is not optimal.

I would recommend this book to anyone that is looking for a reasonable, moderate-right approach to fiscal and monetary policy. Taylor’s goals would at least stabilize the spending side of the debt explosion, which I would welcome over what current trends indicate will happen in the future. If you tend to fall somewhere near me on the political spectrum, you may enjoy this as a somewhat acceptable compromise from the status quo. It is short and very easy to read, so anyone should be able to grasp Taylor’s writing. As a result, it will likely appear superficial to many readers.

[Alex MacMillan · Rating 2 out of 5]

A two-hundred page job application from the man who would've been President Romney's Federal Reserve Chairman. Taylor makes explicit not only his opinions about effective principles to govern macroeconomic policy (economic freedom and rule of law), but also his beliefs about the causes of the Great Recession and an anemic recovery (abandoning economic freedom and rule of law). His castigation of all discretionary interventions by government into the economy as totally futile is in my view somewhat simplistic, but he is generally on the mark. Certain government interventions did trigger the Crash, just not the ones Taylor pinpoints as chief culprits (see Engineering the Financial Crisis).

The book loses much of its appeal as a means to test whether Taylor stuck to his guns when actually in the hot seat. The Federal Reserve grants its leader near-Godlike powers. Unlike Ben Bernanke's lack of a definite paper trail, it would not be very difficult to determine how, why, or whether Fed Chairman Taylor abandoned earlier policy prescriptions. His writing of First Principles metaphorically embodies Odysseus' decision to tie himself to the mast in anticipation of later passing within earshot of interventionist Sirens. However, his inability to actually play God with our $70 trillion global economy, given Romney's defeat, demotes this book to a skim at best for even the already free-market inclined.

[Stanley Arthur · Rating 5 out of 5]

This is the same review for John Taylor's "Getting Off Track."
John Taylor is a Stanford University Economics professor with a very simple, transparent and non-political approach to standardizing the Federal Reserve's policies for carrying out its two mandates of controlling price stability (inflation) and maximizing employment.
The author proposed the "Taylor Rule" in 1992 and others assigned his name to it. It is basically a mathematical policy which states the Fed should set the interest rate to equal 1 1/2 times the inflation rate, plus 1/2 times the percentage amount by which the GDP differs from its long-run growth path, plus 1.
I apologize for the technical stuff. Basically the formula will incrementally increase the Fed rate when inflation in rising and incrementally decrease the Fed rate when inflation is falling. But what is important is that this is a mathematical formula that has proven correct in looking back in history and proving the counterfactual. This removes the political incentives and behind-the-curtain opaque policies to manipulate the economy for the political gain of either party.
This book and his "Getting Off Track" are both very short, easy to understand, Federal Reserve policy 101 books that will add clarity to the mystery of what the Federal Reserve has been doing and what it should have been doing.

[Lance Cahill · Rating 2 out of 5]

Some sections were better than others. Some sections were fairly yawn-worthy. For as great an academic economist John Taylor is, some of the items were discussed in a simplistic fashion. Either the discussion on reform proposals to Social Security or the discussion of rules vs discretion was probably the highlight of the book. The section on monetary policy was a good flesh out of his views but opposing views were often ignored (with the exception of Taylor acknowledging Bernanke's critique of his 'too low, too long' argument). This is important insofar as recent policy actions taken by the Fed that Taylor has labeled discretionary may be easily identified with a rule-based decision-making framework (especially since he prefers a stylized Taylor-Rule for monetary policy).

But, the book was a very easy read and well-written.

[Jim Bowers · Rating 5 out of 5]

This is a very brief and straightforward treatise on the current economic crisis, and how to best stimulate the economy. The President should read it, as should all members of Congress. Then maybe we could reach consensus on how to fix the economy. Be forewarned - solutions are Friedman based, and not Keynesian. Read, closer to Republican vs. Democrat philosophy. There are good statistics to back up what works, and what does not.

[Timm · Rating 5 out of 5]

I believe this author's suggestions have a better chance of success than what is currently being done with our economy. Now if we could only get someone in government to champion this approach.

[Patrick Salve · Rating 4 out of 5]

An excellent presentation of the point of view that the less government involvement the better off we will be. Just be aware that there are highly respected people that do not subscribe to this point of view.

[Jim · Rating 2 out of 5]

Rather shallow but interesting look at what it would take to restore our prosperity.

[Jack Raia · Rating 5 out of 5]

A must read for proponents of economic freedom. Written to reach the novice and those more sophisticated.

[James · Rating 3 out of 5]

Right wing perspective on how to America is to grow - good to contrast with Stieglitz and Krugman.