Europe Should Ignore U.S. Call to Prolong Stimulus, Stanford's Taylor Says
Europe should ignore U.S. calls for continued stimulus and stick to austerity plans when Group of 20 leaders meet this weekend because budget cuts aren’t likely to trigger a new recession, economist John B. Taylor said.
“You don’t need extra stimulus packages right now,” Taylor, the Stanford University professor who created a rule to guide monetary policy, said in an interview yesterday at a central bankers conference in Oslo. “That is an important message right now, especially with the G-20 meeting coming up.”
U.S. President Barack Obama is urging G-20 nations to support the global economic recovery by focusing on growth, while Germany and the U.K., are focusing on reducing budget deficits, setting a course for conflict at the G-20 summit June 26-27 in Toronto.
“We should move quickly, expeditiously, toward consolidation because the debts and deficits are too large and will be a drag on the economy,” Taylor said. “It would be beneficial not to have additional stimulus, but try to move towards a budget consolidation. I think that would be good for the recovery.”
U.K. Finance Minister George Osborne this week outlined the biggest budget cuts in 50 years to trim a fiscal deficit equal to 11 percent of gross domestic product. Germany is holding to G-20 commitments on exit strategies from fiscal stimulus, calling on the U.S. to join Europe in reducing spending.
Taylor, 63, has held government posts under two Republican presidents. He was Treasury undersecretary for international affairs from 2001 to 2005, during George W. Bush’s administration, and a member of the President’s Council of Economic Advisers from 1989 to 1991 under George H.W. Bush.
European Union officials are designing new regulations to prevent a repeat of the sovereign debt crisis that began when Greece’s deficit ballooned to 13 percent of GDP, more than four times the EU limit. European leaders last month hammered out a 750 billion-euro rescue program ($926 billion) for the region’s weakest economies to bolster confidence in the euro.
Obama said in a June 16 letter to his counterparts that they must avoid the “mistakes of the past” when economic support was withdrawn prematurely. German Chancellor Angela Merkel says “there is no alternative” to cutting deficits.
“Almost always consolidation occurs more slowly than planned and so I think it’s not appropriate to worry too much about them going too fast right now,” Taylor said. “I don’t see a risk of deflation. I don’t see a risk of a double-dip,” he said, referring to concerns the global economy will slide back into recession.
Taylor has argued that the Federal Reserve’s low interest- rate policy after the dot-com bubble burst in 2000 was the principal cause of soaring U.S. house prices in the last decade. Fed Chairman Ben S. Bernanke said in a January speech that the Fed’s monetary policy after the 2001 recession was “reasonably appropriate” and better regulation would have been more effective than higher rates in curbing the boom.
The so-called Taylor Rule uses the divergence between optimal levels of inflation and unemployment to estimate where the benchmark interest rate should be. The rule suggests the U.S. federal funds target rate should have been higher than it actually was from 2001 to 2009.
The G-20 accounts for about 85 percent of global GDP. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.