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Keep Bush Tax Cuts as Economic Stimulus, Stanford’s Taylor Says

Tax cuts enacted under the administration of former President George W. Bush shouldn’t expire, according to John B. Taylor, a Stanford University economics professor and a former Treasury undersecretary.

“A statement that taxes will not increase on Jan. 1 would be a good stimulus,” Taylor said in an “In the Loop” interview on Bloomberg Television. He added that Congress needs the “political will” to control government spending and that he doesn’t expect a return to recession.

He commented as Federal Reserve Chairman Ben S. Bernanke prepared to give his assessment of the U.S. economy at a conference in Jackson Hole, Wyoming. Bernanke said today that the central bank “will do all that it can” to ensure a continuation of the economic recovery and outlined steps it might take if growth slows.

According to Taylor, Bernanke can support the economy by clarifying Fed policy.

“One of the things that’s holding back the economy is the considerable degree of uncertainty on what policy will be, including monetary policy,” Taylor said. “It would be a good stimulus, if you like, to remove a lot of that uncertainty, to clarify what policy is going to be, remove some of the disagreements.”

Taylor, 63, who served in the Bush administration, is the creator of the so-called Taylor Rule for guiding monetary policy that central bankers worldwide use to help set interest rates.

The Taylor Rule uses the divergence between optimal levels of inflation and unemployment to estimate where the benchmark interest rate should be. The rule indicates the U.S. federal funds target rate should have been higher than it actually was from 2001 to 2009.

Taylor has argued that the Fed’s policy of low interest rates after the dot-com bubble burst in 2000 was the principal cause of soaring U.S. house prices in the past decade.

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