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EXCLUSIVE: Former Romney Advisor John Taylor on the Fiscal Cliff

Morgan Housel
December 10, 2012

We're three weeks away from the fiscal cliff -- a $600 billion combination of tax hikes and spending cuts Congress and the president are scrambling to avoid.

Last week, I sat down with Stanford economist John Taylor, a man with deep experience in both politics and economics.

Taylor served as undersecretary of the Treasury for International Affairs under president George W. Bush, and was recently an economic advisor to Mitt Romney. He's also one of the most influential monetary-policy economists in history (and is the name behind the Taylor Rule, for all you economics wonks).

I asked Taylor what he thinks about the cliff, and what will happen to the economy if we go over. Here's what he had to say (transcript below).

Morgan Housel: What's your take on the overall situation and what outcome would you like to see happen from the fiscal cliff?

John Taylor: First thing I always say about the fiscal cliff is, remember, it didn't come from outer space; it wasn't aliens that brought this. It was created in Washington, so since it was created in Washington, it can be fixed in Washington. Perfectly capable of doing it. In fact to me, it's a symptom of how dysfunctional our economic policy has become at this point in time. It's a lot of uncertainty, unpredictability, temporary stimulus packages, temporary reduction in taxes, temporary postponements and what's happened, the fiscal cliff just happened to synchronize that so it all occurs at the same time, so it's really a symptom of the problems.

I think the best guess is that there'll be a kick-the-can-down-the-road type of solution at this point. I hope it's better than that. I hope it's an agreement to do something substantial, but I don't see that right now. People seem to be convinced there's only one way to get this thing fixed, but I think it's a real concern. Even if it's a temporary solution, it's a concern because we'll continue, I think, with these very uncertain, unpredictable policies.

Morgan Housel: Of course, the reason we're here is because the can has been kicked down the road so many times already in the past two years, with the debt ceiling deal last summer, which is more or less why we're here right now. Is there any reason to believe that if we kick the can down the road again we're eventually going to be able to fix this topic? And I guess what I think about a lot is as long as borrowing costs are so low, there was no real urge for Congress to address the deficit. Is that fair?

John Taylor: Well, it's a facto