Stanford’s Taylor Tells Policy Makers to Abandon Temporary Fixes

John Taylor, the Stanford University economist who created a rule for guiding monetary policy, said policy makers need to abandon temporary programs as they seek to boost and maintain growth.

“We have to get away from all these temporary things” such as tax rebates and recent monetary-policy measures, Taylor said today in an interview on Bloomberg Television’s “Street Smart” with Trish Regan. “We have to get back to a strategy. I believe that will get the strong growth.”

The Federal Reserve on Jan. 25 released federal funds rate forecasts by policy makers for the first time and extended its pledge to keep rates near zero at least through late 2014. The central bank had said it would keep borrowing costs low at least until the middle of 2013.

Chairman Ben S. Bernanke said in a press conference last month that the Fed is considering buying more bonds. The Fed pushed down the main interest rate close to zero in December 2008 and has engaged in two rounds of asset purchases totaling $2.3 trillion to boost the economy and reduce the jobless rate, which fell to a three-year low of 8.3 percent in January.

That’s “contributing to this slow recovery because the Fed has bought so much of the debt that people don’t know how they’re going to undo that,” said Taylor, a former U.S. Treasury Department undersecretary. “This uncertainty has led people to sit on all this cash at the banks.”

Payroll Tax-Reduction

House and Senate negotiators are seeking to extend a two-percentage point reduction in the tax for workers through 2012, which would cost the Treasury about $100 billion. Congress in December passed a two-month extension of the tax cut, which expires Feb. 29, because they couldn’t agree on how to finance a longer continuation.

Taylor has said that monetary and fiscal policy based on clear rules, without surprise interventions, would lead to better economic performance. The central bank contributed to the housing bubble by keeping rates too low in 2003 and 2004, according to Taylor.

The Taylor Rule’s calculations for the federal funds rate are based on economic growth compared with the long-term potential for growth and inflation.

He said today that there’s evidence economic expansion comes from “getting the tax rates down and keeping it there, not doing all of this temporary stimulation.”

Taylor is author of a new book “First Principles: Five Keys to Restoring America’s Prosperity,” which calls for an expansion of economic freedom in U.S. fiscal, regulatory and monetary policy.

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