Developing a New (Alan) Taylorism for the Remainder of the 21st Century
Ignore the pond surface ripples: here are the underlying economic tectonic shifts. I take Alan Taylor’s FT interview with Martin Wolf as a demand to sketch a roadmap for navigating the 21st-century macroeconomy. Start from anchored expectations, fragile politics, frequent massive shocks, a continuing savings glut, and the insane chaos monkey in America’s White House. Were do we try to go, and how do we try to get there, in the future as we traverse the rubble left by the fracturing of the Neoliberal Order?
Very smart from Alan Taylor, in conversation with Martin Wolf <https://www.ft.com/content/e842038f-e4df-4e99-a5be-8b6f12312a12>.
I always find that when people talk to Martin Wolf, they become smarter—often much smarter. He is such a learned man and such a skillful interview that his subjects find themselves drawing together threads that they had not previously spun together and reaching wiser conclusions that they had not known that they had reached. The bonus here, as Alan Taylor receives the Treatment, is that he is perhaps the ideal subject for this procedure.
Let me pick out five threads—but y’all should read the whole thing:
(1) On how the legacy of the Volcker disinflation—anchored inflation expectations—is still with us, and therefore we need not fear (much) moving aggressively to restore inflation to its target after a shock:
Alan Taylor: We have flipped the switch from the ‘great moderation’ <https://www.ft.com/content/e842038f-e4df-4e99-a5be-8b6f12312a12>: ‘Go back to the pre-invasion forecasts… and plug in the actual price of energy.… The forecasts would have been much closer to the actual inflation path…. The framework for forecasting wasn’t wrong…. The more interesting question is about the [low] “sacrifice ratio”…. It was more of a “soft landing” than most people had expected. I put that down to expectations being more firmly anchored. This has not been a replay of the 1970s, when the anchor was dislodged and then it took the better part of a decade or two for it to be fixed again…
(2) The need for economists to accept that delivering low inflation is essential for political stability, and thus needed before we can even start thinking about doing rational growth-abundance policy:
Alan Taylor: We have flipped the switch from the ‘great moderation’ <https://www.ft.com/content/e842038f-e4df-4e99-a5be-8b6f12312a12>: ‘[After] the 1970s… economists and political scientists began running election predictions models…. [They] found that people really disliked inflation and that tended to mean incumbent parties lost…. The public wants low and stable inflation…. We could have had price-level targeting, instead, or we could have had nominal GDP targeting, or we could have had the gold standard…. That’s a political decision…. The public wants inflation to be controlled and we have to try and deliver it. Finding the regime that does this best is, I think, one of the main goals of macroeconomics…
(3) On how macroeconomic distress means that the world as a whole is likely to greatly underperform its growth potential over the next generation:
Alan Taylor: We have flipped the switch from the ‘great moderation’ <https://www.ft.com/content/e842038f-e4df-4e99-a5be-8b6f12312a12>: ‘The global financial crisis was the start of a sequence of unfortunate events — the Eurozone crisis, Brexit, Covid and the Russian invasion of Ukraine… five shocks… [that] flipped the switch from the pre-financial crisis “great moderation”. Now we think that every three years we’re going to get a new shock…. That’s been very wearing…. I’m a technological optimist and an optimist about human capital…. But… the lesson of economic history is that the effects of these major crises last much longer than a normal business cycle…. Shocks dislodge people’s beliefs and expectations in a fundamental way. Then it can take quite some time to repair…
(4) On the global interest rate outlook—for low rates—and thus incentives to borrow and invest—high. They suggest that public and private austerity are not yet urgent goals:
Alan Taylor: We have flipped the switch from the ‘great moderation’ <https://www.ft.com/content/e842038f-e4df-4e99-a5be-8b6f12312a12>: ‘My interpretation… is that “R-star” [the “neutral” rate of interest] is [still] unusually low, for reasons having to do with that flood of savings. And that’ll be with us for a long time…. I see that as an upside…. But as I said, they’re endogenous. They could be rising if those opportunities for growth materialise…
(5) On how the effects of TRUMPXIT will be a long, grinding relative decline in the prosperity of the American economy—a headwind taking what I guess will be 1%-point per year off of U.S. economic growth over the next decade, even if bond and other market vigilantes lead to Trump’s avoiding his biggest plans for self-inflicted economic wounds:
Alan Taylor: We have flipped the switch from the ‘great moderation’ <https://www.ft.com/content/e842038f-e4df-4e99-a5be-8b6f12312a12>: ‘When we’ve seen trade policy experiments in the past, even some quite big ones… you’ll generally see the pay-offs building up over a decade or two…. It’s not like we generally see a sudden step change…. It’s not like what happens if there’s a financial crisis or a pandemic…. One wouldn’t be expecting to see something dramatically bad in a very short space of time…
Let me expand on these, very briefly:
We readers thus find that we have been given the opportunity to consider not the surface pond-ripple phenomena of our economic day, but how deeper tectonic shifts will frame our world. So I chose the five of Alan’s answers to Martin that I was most struck be. And, indeed, they touch upon themes I have long considered central: expectations, political economy, systemic shocks, macroeconomic baselines, and the long shadows of historical disruption.
Consider each in turn, trying to unpack (some of) their broader implications for economic thought and policy in the post-neoliberal age:
I. Anchored Expectations & the Legacy of the Volcker Disinflation
Taylor's first point—that the post-pandemic inflation spike did not resemble the 1970s—is perhaps the most heartening. Unlike that earlier era, inflation expectations have not become unmoored. The sacrifice ratio has been low. The soft landing materialized. Why? Because the institutional and policy regimes built in the wake of the Volcker disinflation, particularly the credibility of central banks, are still with us.
This matters immensely.
The fearsome costs once associated with disinflation are not a necessary feature of the economic landscape. The tools we wield today are sharper, and the economic agents—households, firms, markets—more sophisticated in their interpretations of monetary signals. But, as always, this equilibrium is fragile. Of course, should central-bank credibility collapse, the cost of restoring expectations would once again grow to fearsome size.
II. Inflation & the Preconditions for Legitimate Politics
Taylor's second observation concerns the political economy of inflation. The lesson of the 1970s was clear: high inflation undermines democratic legitimacy. It saps trust, degrades economic comprehension, and fosters electoral volatility. Price stability, then, is not merely a technocratic desideratum; it is a prerequisite for legitimate governance and rational policy.
This reinforces a theme I explored in Slouching Towards Utopia: that the true threats to prosperity often lie in political dysfunction. A polity that cannot deliver stable macroeconomic fundamentals is one that will struggle to embark on any meaningful long-term project—whether a Green New Deal or a twenty-first century infrastructure revolution. Inflation targeting thus becomes the price of admission to restoring or creating any political-economic order supporting growth and equity even half as good as the social-democratic New Deal Order was back in its 1947-1973 heyday.
III. The End of the Great Moderation & the Age of Frequent Shocks
The third point I have chosen out of Taylor—that the post-2008 world has entered a regime of serial shocks—is profoundly sobering. Financial crisis, Eurozone disunion, pandemic, war: each has disrupted expectations and reset macroeconomic trajectories. The Great Moderation lulled us into a false belief in stability, in which one could plan for growth rather than cower in fear and try to build in robustness against future unknown unknowns. The subsequent era has proven this was illusory.
The key lesson here is historical: shocks are not symmetric. Their effects linger. They degrade the informational content of price signals, impair investment, and seed political populism. Economic history tells us that the recovery from such disruptions can take not quarters, but decades. The American Civil War, the Great Depression, the World Wars—all cast long shadows, for good and ill. Today’s sequence of shocks may prove similar.
IV. r*—so Far—Remaining Low: The Fiscal & Investment Opportunity:
The fourth point I have chosen out of Taylor's, regarding the low neutral rate of interest (r*), is perhaps the most immediately actionable. It hinges on a successful herding, corralling, and hog-tying of Trump by the bond and other market vigilantes. But, if that is accomplished, there are aspects in which the future is quite bright.
Yes, this is in contradiction to what I just said about the age of frequent shocks.
But it is what it is. It remains true that, in a world of low r*, the opportunity cost of public investment is trivial. Infrastructure, education, decarbonization—these can be financed without fear of crowding out much private activity. And private businesses can finance bold and risky plans for expansion as well.
Here we must remember Keynes’s warning about the paradox of thrift. We must remember the potential and the need for fiscal policy to step in when private demand falters. But even more, we must remember the deeper lesson: societies must not waste periods of low borrowing costs. The fiscal space still exists for the public sector. The opportunity to finance bold entrepreneurship still exists for the private sector. The political will, however, remains scarce. And so we need to double down on what we can do, we can afford.
V. TRUMPXIT & the Quiet, Grinding Cost of De-Globalization for America:
Finally, Taylor warns us against the slow poison of protectionism and populist economic nationalism. Trade disintegration does not generate dramatic crises. It does not resemble 2008. But over a decade, it lowers the growth rate, erodes productivity, and weakens the dollar’s hegemony.
We should not be surprised. As I argued in my historical work, globalization has always been both promise and peril. But its promise—rising productivity through comparative advantage and global scale economies—remains real. The damage from policies of economic isolation may take years to manifest, but when they do, the decline will be broad-based and difficult to reverse.
These insights I have picked up from Taylor demand a historical sensibility. They call for a political economy that understands the fragility of institutional equilibria and the necessity of preserving policy space. Above all, they require that we remember the long term: that inflation control is not an end but a means, that shocks are persistent, that low interest rates are an opportunity, and that globalization—however bruised—is a source of prosperity.