Government intervention, like it or not, is everywhere in today's economy. While companies such as Goldman Sachs (NYSE: GS), JPMorgan Chase (NYSE: JPM), and American Express (NYSE: AXP) repaid their bailout funds in full, Washington still has a firm grip on companies such as Citigroup (NYSE: C) and Bank of America (NYSE: BAC). These ownership stakes that took shape around this time last year were unprecedented, to say the least.

Yet some of the most powerful interventions don't grab as much attention, because they target the whole economy, rather than individual companies that are easy to point fingers at. They're the interest rate cuts, tax policies, liquidity injections, and stimulus packages that began years ago.

To get a better understanding of the latter, I recently had a brief email chat with Stanford economist John Taylor. Dr. Taylor is perhaps most famous for creating the Taylor Rule, a formula that guides monetary policy and has become a standard lesson in nearly every economic textbook. Alan Greenspan, Ben Bernanke, and Paul Krugman have all frequently cited his work.

His latest book, Getting Off Track , argues that failed government policy created and prolonged the financial crisis. Below is a summary of our conversation, which centered on the book's main topics:

The biggest surprise [of economic policy over the past few years] was the return -- with no empirical evidence that it would work -- to highly discretionary policy interventionism after two decades of emphasis on developing clear predictable policies where government tried to set the rules for the market and then tried to get out of the way. For example, the stimulus package of 2008of temporary tax rebates was passed with much support, even though there was no evidence that it would work (and it did not). This activism is being increased now, despite even more evidence that it does not work. More generally, policymakers have developed a bailout mentality which will be hard to reverse.

I am more convinced that the economic policies the United States was using from the early 1980s until recently were responsible for both creating economic stability and encouraging economic growth during that period. My earlier research had shown, for example, that the period of the Great Moderation was largely due to good monetary policy. But now we have even more evidence: Once we got off track, economic performance deteriorated significantly.

Over the past year, my concerns about the difficulty of implementing good government policy have grown. For example, when I was heading up the international division at the United States Treasury (2001-2005) I was in charge of developing and then implementing a policy of a new currency for Iraq. I later wrote a "lessons learned" book about such implementation tasks, showing how difficult they were and how policymakers need to be more concerned about implementation of policy. Now we are learning more about how existing supervisory and regulatory policy was not implemented well, as exemplified by the problems in the highly supervised and regulated banks and the gaps relating to the [structured investment vehicles]. I also think that the intervention into [ Washington Mutual ] and Wachovia raises questions about how an even more complex resolution process would be implemented in practice.

I also asked Dr. Taylor to provide a list of economic policies that he believes are the most damaging to the economy. His answers:

Have your own thoughts on the outcome of Uncle Sam's hand in the economy? Feel free to share them in the comment section below.

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