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principles of economic and political freedom is necessary to make this country successful again. this is about 40 minutes. >> good afternoon, ladies and gentlemen. i am ed fidler, president of the heritage foundation on behalf of my colleagues and the board of trustees and the staff that they heard a tradition is a great pleasure to welcome all of you to her letterman auditorium today for a very special presentation on an important vote. as it happens, i've used exactly that same intranet at least twice before financial reorganization in the middle east or whether it is on the causes of the recent shall we

say on python as on wall street and in the u.s. economy. john is always a man of great insight and great erudition and reminding us of how we got where we are and how we can get out of it. and that i guess is what is so special about this book, "first principles." because what john does is talk about how we get back to where we should be and there is no one better equipped to do that. professor john taylor, phd princeton, devoted successive number of years i think i finally retired the trophy as the most popular undergraduate professor at stanford university. the church feels fellow at the hoover institution, former undersecretary of the treasury, former member of economic advisers, the man who knows the

washington policy seen, even as he knows theoretical and practical economics. it's a very great pleasure to welcome professor john b. taylor back to the heritage foundation. john. [applause] >> thank you so much, ed. thank you free leadership at the heritage foundation and for inviting me to come here and talk about "first principles," which is something the heritage foundation has emphasized so much. the underlying team of the book as i will describe in a minute is economic freedom and one of the problems we struggle with in the united states is we are deviated from the sprint boatswain again the heritage foundation has been at the forefront of making sure people know what economic freedom is about what the index. let me start a little bit with the current state of the economy because one of the reasons for writing this book is i think we have a problem with our economy.

they just want to go over that. so we are now in a recovery from a deep recession. or actually two and half years into the recovery, 10 quarters. it is these people talk about, things get a little better. but the truth is the recovery has been pretty bad from the start. the way i think about that, explain not just to compare this recovery from the most recent recovery we had from a very deep recession and that recession ended in 1982. so if you look at the 10 quarters two and half years following that recession, look at that recovery and compare with us, the differences are just quite amazing. in this recovery the average growth rate has been 2.4% and that includes the most recent data in the fourth quarter of last year. the recovery in the 80s in the same 10 quarters, two nephews the growth rate was 5.9%.

5.9 versus 2.4. so there's no wonder unemployment remains high. more importantly if you look at the amount of jobs created in this recovery, it really pales in comparison to the early recovery. a fraction of the working age population now is actually lower than it was at the bottom of this recession at the beginning of this strong job growth we have in the early 80s. so there's explanations that people put out for this. one is weird to you every gene. people have to adjust from the hide that level and said they are saving more, consuming less. but that does not fit the facts when you compare the early 80s recovery. in fact, the early 80s, 83, 84, 85 is almost 10% in this recovery is still 3% or 4%.

so it is not as if people are saving more now than they did then. you can look at other special fact is that most of them don't really hold up. so what i've concluded from this comparison in many other comparison but the problem is economic policy and economic policy itself is the main problem that is holding her groove back and keeping jobs are being created at the rate we've seen in the past. for me the best way to explain this is just to go back to first principles of economics and the founding of our poor example by examination of her bags and our policies that this is the most plausible explanation for why the economy is not growing as it should read. for first principles to me are the principles of economic freedom. i describe economic freedom pretty succinctly that the people have economic freedom to

buy what they want, so if they want, to work where they want, to how your into how people in the way that they see best. but they did this and this is the american vision in my view, within a framework that framework involves a project of a set of policies, monetary policy, fiscal policy, regulatory policy, saturday. number two is adherence to the rule of law, which we too often forget. number three reliance on markets, number four, incentives that largely come from reliance on markets and number five, well-defined and limited rule for government. and when he looked at those principles, i think you can see that the united states and the founding has done very well. that's why so many people came to america and are still coming to benefit from the opportunities that those freedoms created economic freedoms create.

but there's also been absent flows from. surrey pay more attention, adhere more to does and where we hear less of those. but i try to do in the book is really go through somewhat more recent history than the whole history of the united states but the last 50 years and look at these absent flows. and i see some pretty remarkable changes. so from the mid-60s to the 70s was largely a period where we tended to deviate from those principles. policy was less predict bull and i will explain that a few minutes. in performance of course was not very good in the 1970s. double-digit unemployment, double-digit interest rates. and then we moved to eat. starting in the late 70s, early 80s quite frankly we revert back to these principles. there is more appearance to more predictable policies, the rule of law unless intervention in the economy.

and outlasted taking three. if economists call great moderation. a long boom with mild recessions and strong productivity growth by the mid-1990s. and then now we are in this. but if you look at the way policy is cannot did and it's not clear when exactly we changed. it wasn't just in this current administration come of this administration has doubled down. we moved to less predictable policies, fiscal policy we have stimulus package, monetary policy, not reliance on rule so much. so you go down the list that i have nec quite an amazing contrast. if you think of those three periods, a poor performance in the 70s, good performance 80s and 90s until recently and obviously a terrible performance now. so for me, it's necessary not just to sort of say these events, principles, but also to

look a little bit about how these movements have been. i put in the chapter to who gets us in and out of these methods. what really goes on i think is very important. i spent time in policy and sometimes people the best of intentions don't quite get it and of course sometimes there's people who don't care if much of a principles. if you look at the historical. you can see that. very briefly, this movement towards the deviation from the principles really began in the mid-60s and in 1962, i call it the keynesians came to town and in 1962 it is a beautifully written report from a very persuasive, arguing we need to move to more interventionist fiscal policy, monetary policy for guidelines for the whole economy. so that was advocating that we didn't need to be so concerned with these principles of economic freedom as i find them

here. remarkably 1962 another book was written. capitalism and freedom by milton friedman. it argued exactly the opposite approach. less interventionist policy more or less america's and of course going away from wage and price guidelines, et cetera. please do so the contrast they are, the powers that year won the on the interventionist side. there's an election to richard nixon came in. he espouse these principles in the election i was advised, but he ended up not following the principles he imposed wage and price freeze and controls in the economy exactly the opposite of what we think is important. he urged the federal reserve to be more extensiona, less disciplined and was apparently successful in that. and of course fiscal policy became and remained activists.

so that's why say so much much of what actually happened is followed by president ford who tried to make some changes but ultimately stayed with the temporary tax rebate that the sample then carter whose philosophy was really not so much in the direction of moving back from interventions, but encourage them. so in fact we saw stimulus packages. first-time homebuyers, ideas and things like that. and then they switched more towards the economic freedom than the president reagan who ran on the principles and challenged in 1976 on those principles. he brought in people like milton friedman again and george shultz and many people who supported what he was trying to do. we moved away from those policies. no stimulus packages anymore. more of a steady aceto- permanent reduction in tax rates. paul volcker at the federal reserve tried to move and get

away from these monetary policies. pointer by president carter, but encourage dramatically by president reagan. i think for the most part to make this long story short as possible for the most part that kind of approach continued by president bush 41, president clinton would have the state of the union address with david that government being over and welcome the welfare reform bill, which evolved responsibility to the states in an enormous change in the middle of the role of the federal government. more recently we switched back i don't know exactly where to mark the states. we did a temporary rebate in 2001 and had a stimulus package in early 2008. a very interventionist policy by the federal reserve in this. and of course now we have had an enormous number of interventions

the first time the home buyer cash for clunkers temporary extensions of the payroll tax, exactly the things we seem to not work very well in the past. said based on evidence and a little bit of the ideas of how these things have been, by looking at and decisions, it's important to do that, sometimes difficult, but it is important. you can learn a lot about what we should do going forward. so just to wrap up this idea of applying the basic principles, but they just go through very quickly what we do now because the principles are one thing, but when you actually apply them is a completely different thing. so i think in terms of the debt which is exploding and i had some terse and the book illustrates this. this is no joke. obviously we need to get the deficit under control and i outline the plan but all you need to do is very simple and bring spending to the share of gdp back to where it was in

2007. that shouldn't be so hard. they should be alert enough. that's 19.5% of gdp by the way. could be better but that is a reasonable thing where we could move ahead. if you do that you can balance the budget without increasing taxes and therefore the opportunity for tax reform. just think of it that way. very simple. keep spinning us to share gdp back where it was before the recession and the crisis. on the federal reserve think it is necessary to have a more rules-based policy policy policy with paul volcker and the fraction of alan greenspan's term and more recently we have had all these interventions at the quantitative easing. so i think the most important thing is to ask you to go back to a more in single mandate, dual mandate that should consider a wide range of goals was put in a 1977 at the height of all this interventionist v. let's take it out of three from the federal reserve act that

way. they'll have the benefit of reducing unemployment in my view. and then there is also a goal of restoring reporting requirements that were removed to monetary growth rates. they are not to report that explicitly anymore. so going back to requirement the federal reserve reported strategy for entries in grace and congress shouldn't dictate what the strategy is of course. they should be able to describe what it is. entitlements, number three very important here. the simple idea is just to simply keep the growth of entitlements from expanding the share of gdp. that really shouldn't be so hard if people understand what that's about. social security programs are expected to expand for beneficiary in real terms am i just keep the growth from expanding in real terms than you do at that entitlement program. an very similar thing with

respect to medicare. control the growth relative to gdp. there is a plan that i think does that. all right could afford. he's getting more support for that and it uses the market, uses the market system and individual choice of economic freedom. another idea is president obama has put forth controlling the growth of medicare but it does it with a centralized group of people to make decisions at the federal level that didn't work so well. so as you go to the current problems and apply principles, it seems to me you see a way through this mess to get the economy moving more strongly he can. the world is different than it was 10, 20, or do you go. when you apply principles of problems are different, but the same idea, the same approach will work among us with this book makes very clear based on history, based on simple things that people should recognize

this on their own experiences are based on their knowledge of american history. applying these as i've suggested by the way cheaper seat. thank you very much. happy to answer any questions you might have. [applause] >> right up front here. get the money. >> in your review of comparing current -- [inaudible] word is the issue of debt ridden, this defense belongs in the housing bubble credit card debt and of course the government to end james buchanan's observation that apparently politicians are a force for dust under pressure to expand it more than they are

going to tax. we know what they have to do. how do we get them to do it? they had a new inflation in the johnson poverty war is a much more serious recovery at us about the credit that we seek an end. where does that fit into your equation? >> first of all, getting into this mess i think was because of too much debt, but it was encouraged by government policy and in my book i focused a lot on the period from 2003, 2004, she doesn't fight for the federal reserve took interest rates quite low compared to the policies they followed in the 80s and 90s and i believe that was the fact there in excesses of mortgages, very low teaser rates to get people to adjusted rate mortgages and a search for yield at its peak for

people to come higher risks in more deaths and other aspects of policy. fannie mae and freddie mac are actively up on the list. so there were these dead issues, but a large extent are encouraged by policy. you're right there is no question there's this great incentive for politicians to spend more than a half. so that is wasting this book points out, look, some politicians are in a different direction and things are better as a result of that. moreover maybe constraints like the balanced budget amendment that do have a constraint on policymakers. it is a way to enforce some of these principles and get away from the day-to-day actions. but i have to say looking at the history and for that matter being involved in policy in the long this. i'm talking to people who are there lakeshore scholz, there is no question that the people themselves make a huge difference and the courage and

concern about the country in a broader sense. so we emphasize that a lot because the voters need to look at candidates from that perspective as well and fine people that are not only committed to the principles which make so much sense, but also have the ability and courage to go on with them despite all the pressure that you're going to get when you come to washington. [inaudible]

[inaudible] >> i talk a lot about that of the book and i think what you want to talk about is the history of the individuals and how much they paid attention to print >> i talk a lot about that of the book and i think once you want to talk about is the history of the individuals and how much they paid attention to print and quite frankly one of the most remarkable stories here is ronald reagan because you want to talk about is the history of the individuals and how much they paid attention to print and quite frankly one of the most remarkable stories here is ronald reagan because he again challenged the sitting president who is more moderate. after he lost the challenge county did these radio addresses where he would write down in his own hand the importance of these principles of economic freedom and give examples of families and business to an obviously they committed. he also chose people to advise him. george milton and tom sold, art laffer were there all the time and clearly committed to these

ideas. he could also look at appointments when he became president. the appointments are very much people along these lines. and so they didn't waver. for the most part there's always pressure it wasn't perfect. he also pointed a group of outside advisors, committee chair to george shultz before he became secretary of state and so that group was enabled him to stay on course a little bit because within the administration all sorts of other things have been. so that's the kind of thing you look for a new value and it keeps people on track once you get into washington, but also i think having the print pulls at the beginning as important as well. so those are obviously different people are different in different characteristics. but that is one example you can want to. you go with others in the other direction. question here.

>> thank you for being here, professor. i was wondering, do you think the wage and price control could be viewed as a success from the standpoint of process of elimination? >> the media something so terrible they don't do it again? >> just a general idea of tinkering. could we look to that always? >> you do learn from history if you don't forget the history. the price control was so bad. if you go back to economist it's amazing a lot of economists didn't object to that when it was announced. but of course very soon afterwards they started to say it is a terrible idea because they saw the immense difficulties of deciding which kind of food would be subject and whether this would not be subject to the controls was a real mess. but i would say in would say inheriting this bring us back to

our current circumstances a little bit. i learned by the end of the 70s and many economists learned but these temporary fiscal action at the temporary tax cut, temporary stimulus package is all but those didn't work. i worked in the council of economic advisors for president ford and he went ahead and did one of these temporary rebates. but it didn't work. and in fact been the last economic report of his presidency, it said they didn't work. he said don't do this again very explicitly. i'm in the carter years were more experienced. lo and behold here we are and we do all these things again. and again many economists supported this -- supported these things. i didn't, but many did. that is what history is so important. if we just a little more attention to what actually have and don't forget, we could go on way to preventing these things.

that is a lot easier said than done especially based on what has happened the last few years. >> i suspect you're preaching to a very sympathetic audience in this building, but on the public policy argument that continues to air, there at least a couple of big challenges to the approach that you've described. one of course is g, maybe big government intervention is government might actually work. how do you explain china for instance? and another is, for example, prominent in this administration is the distribution is argument. free markets don't distribute very fairly. there has to be a good way to dispose of those. >> in the case of china, what i have always thought is china 30 years ago moved in the direction of the principles that america has just passed. it basically moved away from the

central planning kind of roche and encouraged more economic freedom. it's got a lot of questions on other kinds of freedom and for that matter they're still huge questions about the rule of law in china and then they come back. but compared to where they were was a tremendous move in the right direction and the success should convince anybody you don't want to go back and the other direction. it's also from the point of america's leadership we are still there espousing these principles because china could very well move in another direction or encourage others and if we are not out there with the strong economy that is shown to work as it has in the past so much that i think the world as a whole will suffer from a loss if you like of american leadership here. so this is an issue not just for the united states, but also for the world. on income distribution, there is a lot of debate about what

causes income distribution to move. i think your eye would see the education issues are to be one of the most central to get straight. we are disappointed in leading down a large segment of our population especially in providing a poor education. education is provided by government. so what is the problem there? it seems to me we are going back to these principles that it here and try to rely more on individual choice and incentives that you'll be able to improve this distribution of income problem. in fact so often the causes of dispersions occur because people are too closely associated with government. they get what they want and so breaking that down through less regulation seems to me is the way to go at it. so maybe it is not so intuitive to people in a good arguments on the other side. that seems to me we do have to

think about income distribution and opportunity that the way to do it is i think in these principles and we have deviated and things have worked out at all. >> thank you for being here. terry miller from the heritage foundation. could you comment a little bit. you commented extensively on the importance of political leadership in the political process in making this work on but we also are seeing much in market discipline in our economy right now. we haven't had major currency movements for the u.s. dollar. we haven't had high interest rate. the market is permitting the government to continue this massive incursion of debt that we've got. it seems as if maybe we've done some things that if we can

market discipline for our economy as well, i wonder if you can just comment on that. >> well, i think we have reduced market discipline to some extent. i think the federal reserve has pumped up so much liquidity in the economy that they are reducing the role of the market. that is very evident in the money markets because they are basically holding the interest rate essentially to zero and they pledged to hold it there for a number of years. so that is not the market working to determine the interest rate. it has to be fixed because we need to have a market determining the interest rates, especially in the short-term, but even now interfered with the long end of the market. so i think investors are beginning to worry about that. of course in the meantime there's a lot of benefits that come from the financial year from the policy. largely encouraged by the

financial side appeared on the other hand the low interest rate uncertain of the parts of the financial side or who are objecting to it. maybe it will sort of us out. i think there is another issue of market discipline here that is of concern to me and that is the so called today to fill program where we saw them at speeds up the bailouts beginning with her stern command is not gone away. if anything it wears us large institutions are even more so biggest pair on train her to see how the government wouldn't build them out again. i don't think the dodd-frank legislation did that. it basically created the rule for the fdic to going to intervene. i don't really see the fdic able to do that with large firms will probably look a lot again if they get into trouble. and that of course unfair because they get the extra advantages of relying on the fact the government will come and rescue them and in the

meantime, the enormous number of regulations coming out of the dodd-frank bill arafat and the smaller institutions and they don't have the ability to fight them off as much. i think one huge improvement here and i've argued for this is that we have a reform of our bankruptcy code so it would be possible for even large financial institutions to go through bankruptcy process without the fear of chaotic effect, markets were showing a lot of work. that is actually discussed in some detail in the book and its live in that direction now so we don't have to do to bail out is lot of examples where the markets are not pervading the incentives they could put all of them are due to things the government is doing to interfere with the market operation.

one in the back i guess. one more here, yeah. >> thank you, john. thank you for being here. jd foster foundation. he opened up monetary policy slickedit restrain myself. the fed under chairman pataki has rewritten the book on monetary policy and a lot of the chapters i suspect we will find fall under the category of don't do this again. but what we have today is what appears to be a powerfully expansionary monetary policy. yet inflation remains subdued by the price industry, value of the dollar in exchange rates seems fairly stable given especially with happening in europe. supposedly not the case that monetary policy is a six stationery as it seems the white house is inflation that not yet taking off or are we still living in a period where we're

fortunate to have low inflation and with big into the cake an awful lot of trouble down the road quite >> two reasons why you don't see a lot of it. one is because i began my discussion. the economy is still very weak. it's basically putting downward pressure on a lot of good in a lot of wages. that doesn't mean you're not selling in certain areas like oil here and there. that's usually what happens in the housing bubble was broad-based. it popped up in certain areas and i think that's part of the issue. a second explanation is a lot of the monetary expansion is simply being located at the banks. it's an expansion of what we would call bank money and they are just sitting on that. this thing on it because there's so many concerns about policy and what the regulations will be in the economy is basically we. but i would add one thing to this. that is even though the main goal of the federal reserve should be price stability and power of the currency, it can do

a lot of other things than we've seen a lot of those things are bad. so monetary policy has to be prevented from doing terrible things that you did in the great depression. the kinds of things that led to the crisis we have now. i think a lot of the sluggishness of the economy is actually due to the monetary policy. the self is creating uncertainty. people don't know how much effect as in the markets. people think it's a big fat during the stockmarket. i don't see that, but we don't know for sure. but i think this whole thing about a very interventionist, i predict it will how long rates will be low itself is negative to the economy, even though it have to be negative on inflation right now, it is a negative to the economy and it's one of the main reasons he would like to know the focus a little bit so it doesn't do the things that

are so often harmful. >> one thing i've learned that ben bernanke was a student of milton friedman's and he'd publicly suggest that something like the great depression had never happened. do you think that his hand is being forced into citing his policies or is it something he actually believes? >> i do not think it is being forced. teens are encouraged sometimes you get support one way or the other from people. i think the interventionist approaches with their following. so if you happen to have a more interventionist philosophy, you are going to be supportive of that. if you have more viewable space predict it will type of approach to policy, you are going to be against that. so i think you are seeing support largely for those reasons.

i can answer about the political side. they do write read them a book that try to be a substantive about this as possible, deep into which the interventionist philosophy on the chairman site is a major effect to hear any trace that back many, many years ago of interactions with the chairman myself, but also reactions that people like milton friedman had in reading some of things that chairman bernanke wrote. they are especially discussions in there about what milton friedman was saying. and of course the federal reserve works in a situation where the chairman has extraordinary power. ceo of the whole organization that works by consensus voting. so i forget many people objecting. i think you do have to think through the rule of the chairman is an individual shearman you assess these things and i try to address that as best i could come keeping to the facts as

much as possible in my book. okay, thank you. [applause] >> thanks very much, john. in conclusion again, read the book. it's a good read, but policy, good economics and we're grateful to you for sharing your insights with us today. ladies and gentlemen we are adjourned. professor taylor has agreed to sign copies of this book for anyone who would like one. [applause] >> i just want to tell you a little bit about how this book came to be inadequate to read a chapter from the book. in 2009, september 2009 a book that i had written called the imposter's daughter about my own father and his arms and

deception came out and i was meeting am reading this one and a woman approached me and said, you know, i cannot believe you are here come your story and introduced herself as the fiat the a and are out. that of course magi dropped a year after the scandal and it was completely mind blowing and i was following it like everyone else. i cant another family over the course of two years. like so many people that have been following the story, i of course thought that andrew was most likely involved in the involved in the in its brother had known all about his father's frog. ask them the streets had to have known. it was only really pretty dress to be that brought me into the story. i was a journalist and i wanted to get to the truth of the story like every other journalist out there and most of the people in the public. so when it came time they're ready to write a book and i sat down with them and was taken into the heart of their story, i

was absolutely astonished to find that nothing i thought i knew was true. science is going to read to from the chapter the confession itself. and then we'll go. the confession. at 6:50 a.m. come and remark were once again perch in the conference room behind the trading floor. they shot each other looks, what a neocon that something was terribly wrong. for 8:00 a.m., peter still hadn't arrived. mark shook his head. a suite at our desks. truth according to court filings had taken out some 15 million into separate withdraws from a brokerage account in the three weeks. ernie had us remove the money to a cobia bank account so he could use it to cover redemptions. she did his bidding unquestionably, something the media claimed as proof of her involvement. but then the family moved millions of dollars around all the time, buying votes and

apartments, making large purchases a multimillion dollars donations to philanthropic organizations. when he would bark at her and that would've been the end of the conversation. it wasn't until 920 and andrew spotted peter make its way across the trading floor. peter is bernie's brother. he signaled for mark and they hurried into the conference room. xander took a seat he felt the back of his neck grow hot. peter stood by the door. i talked to her father. it's bad. he wants to talk to himself he said. injure stomach dropped. he knew as uncle put a positive spin on things. the brothers push the chairs back and followed his uncle on the trading floor. they were shouting orders at their desk. a world of administrative offices in a cluster of secretaries and large conference rooms. the walk seemed to take forever. when they arrived at the office they found him sitting behind his desk leaning back in his

chair, staring at a television set on the ceiling. he did great summary of the knowledge their arrival. andrea peter took the two chairs good marks on the couch to the left of his desk. for the two ministers had an intense silence. i don't know where to start bernie finally began. his voice caught in his throat and tears welled up in his eyes. intercept a river of alarm that through his chest if you study burning intensely. let's not do this at the main desk. let's move to the table in the corner. the four gathered around a small conference table at the far end of the war while entered a shade more privacy. again bernie started to talk and could not continue. dumbfounded and wash his father struggle for words. i can't do this hear bernie finally said. and religious other thing is that he entered quote the world of the surreal. what could possibly be so bad that he couldn't even discussed at the office. but it would go to your part may andrew suggested.

i will go in my past? berney cleared his throat. peter you stand on the show while we go to the apartment. he nodded and left the office. the coat closet outside his office. as they struggle into enter jerry said to secretary, bring the car around. we value? the market is open i can do his chops from time to time. when you're in business. andrew, mark and burning that the elevator in silence and waited for lee watching the rain streaked across revolving door there was no smalltalk. andrew tried to blend into the surroundings, wishing he could be teleported to the parent department so he could get whatever is going happen happened over with. the car pulled up to a backlight, not me. again the road in silence. bernie sanders between his two sons in the back seats, misty head and shaking the struggling

to hold it together as though he again received bad news in trying to cope with that he says. he stared out the window at the early christmas shoppers come to spring a dead son. he dropped them off and 60-foot in front of the interest rate the bernie's penthouse apartment. the three rode up to the 11th floor entrance they moved them obeying the rule. they laid their coats across the banister taking care not to drip water off the floor. was greeted them at the door, her face grim. she too had no idea where has been been astronomical data type for family play percentages suspected the news was bad. somehow protected the the mayhem on wall street paper he had called from the office instead of coming to tell you. i can tell you on the phone. i'm coming home with the boys. she gotten off the phone shaking and waited for them in the kitchen. together the family entered the sitting room to enter never liked with dark green eyes tacky carpeting, leather chairs and have the