Stanford economist John R. Taylor offers Bloomberg Businessweek readers some helpful ideas about spurring economic recovery.
A theme of your newest book on restoring America’s prosperity is that you think austerity is stupid.
I don’t think austerity is the word we need right now to get the budget balanced. We really just need to get spending to the level it was as a share of GDP as recently as 2007. Get spending to that level gradually, and you balance the budget without tax increases.
One of your points is there has to be clear policy. Do we have that?
I don’t think we do. Just think about the debate about the two-month extension of the payroll tax cut. We’re debating that and it’s uncertainty all over the place.
Did we abandon predictable policies because of exogenous shocks?
I don’t think it’s outside shocks. We had the idea of stimulus packages as early as 2001. The Federal Reserve had very low interest rates in 2003, ’04, and ’05. We had a stimulus package in early 2008. That’s all before the financial crisis itself. Since then we’ve had more interventions, stimulus packages, breaks for first-time home buyers, cash for clunkers, and a two-month payroll tax cut extension. What happens in Washington is people have to do something. Before, we didn’t see these stimulus packages. We had a Federal Reserve that followed a more predictable policy. I think that’s the kind of thing we should be striving for.
