Stanford Economist John Taylor Will Receive Adam Smith Award

John B. Taylor, Stanford University economist and former U.S. Treasury under secretary for international affairs, will receive the Adam Smith Award, NABE’s highest honor, during the annual meeting in San Francisco.  Author of the widely applied “Taylor rule” on setting central bank interest rates to control inflation, the economist will deliver the 26th annual Adam Smith address at the luncheon on Monday, Sept. 10.

Taylor’s working title for the address is  “Surprising Predictions of Monetary Policy Rules.”  As is tradition, Taylor’s Adam Smith address will be published in NABE’s Business Economics later this year.

Known for his dramatic flare in teaching college economics, Taylor declined to reveal his plans for delivering the Adam Smith lecture.   On occasion, he has summoned the spirit of Adam Smith and scripted a “dialogue” with the venerable economist.  In general, economists should look for ways to “entertain and educate at the same time,” he said.

In a wide-ranging phone interview on July 31, Taylor also shared observations on prospects for U.S. monetary policy, the strength of the global economy, progress on financial and economic policy in Iraq, and his concerns about fighting the global war on terrorist financing.

Path-Breaking Researcher, Public Servant, Teacher

Recognized as a groundbreaking researcher, public servant, and teacher during a career of more than 30 years, Taylor exemplifies outstanding leadership in the profession of economics, said NABE President Carl Tannenbaum, chief economist, LaSalle Bank.

“John Taylor’s path-breaking research into global monetary policy and his service as Under Secretary of Treasury for International Affairs are just two highlights of a far-reaching roster of achievements that is among the most impressive in our profession,” Tannenbaum said.  He also expressed appreciation for Taylor’s participation in NABE meetings and conferences over many years.

As recipient of the Adam Smith Award, Taylor joins the company of Milton Friedman, James Tobin, Gary Becker, and George Stigler.

In President Bush’s first term, from 2001 to 2005, Taylor’s service as Treasury under secretary took a different turn after 9/11 as he found himself forming an international coalition to freeze and track terrorist financing and subsequently traveling to Afghanistan and Iraq to implement plans to stabilize the financial systems after the wars and regime changes in these countries. Taylor describes his experiences “in the trenches” in his book  Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World

Given that the foreign reserves in the Iraqi central bank had been stolen by Saddam Hussein shortly before the invasion and most records were lost in the looting that followed, Taylor said the immediate challenge was to find a way to stabilize the financial system; the plan was to pay Iraqis with U.S. dollars that had been frozen in the pre-war period and then introduce a new Iraqi currency to replace the Saddam dinar. At one point, what Taylor called “a huge logistical effort” involved loading enough currency to fill twenty-seven 747 airliners and flying it into Baghdad from seven printing plants around the world.

Iraq Economy “Working Pretty Well”

While Taylor currently holds no formal position in the Bush administration or as part of the global effort on terrorist funding, he remains fully engaged in the discussion and often travels to Europe and elsewhere to talk about his book and the continuing effort to cut off terrorist funding. “Given the circumstances on the ground, the security problems, the economy [of Iraq] seems to be working pretty well,” he said.

There is concern in Iraq that shortages, some related to security challenges, could cause price spikes and push up the overall inflation rate.  “They have to watch the inflation rate.  In fact, they have recently raised interest rates to combat that.  The central bank governor, the same person who took charge in 2003, is still in charge. We keep in touch and on an upcoming visit to the United States, he will visit Stanford, where we will have meetings with him,” he said.

As head of the U.S. Treasury international team in Iraq, Taylor helped negotiate a major reduction in Iraq’s international debt with representatives of G-7 countries.  Since returning to Stanford in 2005, he has given classes on these and other negotiations and invited his German counterpart to the campus for what turned out to be a revealing discussion on the difficult talks they had over the debt reduction in Iraq. When the German official joined Taylor before a group of Stanford students, the two offered their “behind the scenes thinking” and arrived at a new understanding of what had occurred during the negotiations, Taylor said.

To a significant degree, Taylor believes that the strength and balance of the global economy has been the result of better international financial cooperation that evolved from coordinated efforts in the war on terrorist funding.   “In a number of countries, the monetary policy and fiscal policy, and exchange rates” are more in sync, he said. “To the extent that this is part of the overall mission of the global financial warriors, it’s going well.”

“In terms of the global economy in recent years, I’ve never seen it so good,” he said.  “We haven’t had a financial crisis of the kind we saw in the 90s in five years now—since 2002 with Uruguay.  We have not had a recession anywhere in the world, to speak of, and there has been no contagion during this recent period.”  Average growth around the world has been about 5 percent, about 3 percent in developed countries, and 7 percent in emerging economies, he said.  “The challenge now is to maintain this stability and strong growth,” he added.

Not Good Time To Introduce Formal Inflation Targeting

Describing the U.S. economy in similar terms, Taylor said he believes that the U.S. Federal Reserve “has the interest rate about where it should be right now.” (At its Aug. 7 meeting, the Federal Open Market Committee left the target federal funds rate at 5.25 percent, where it has been since June 2006.)   “Our exports have improved due to the strong state of the world economy and this has mitigated the impact of the housing decline on the overall economy.  This expansion is continuing and the probability of recession is still very low,” he said.

The Fed has a “good policy in place that has been working for a number of years” to hold down inflation, Taylor said.  “So I don’t think it’s necessary to go to a formal specific inflation target number at this point.”   Given the current political climate, shifting to an explicit inflation target may unnecessarily raise concerns that the central bank would be ignoring unemployment, he said.

“It could be confusing right now, quite frankly, because people would think they don’t care about anything but inflation, which is not true, of course,” Taylor said.   “Despite my interest in monetary policy rules and predictability and credibility, I don’t think a specific numerical target would help and it could have some problems, at least for the short term.  Maybe in a few years.”

On an inflation-related issue, Taylor urged that researchers turn to the wage side of the equation and try to dig below the aggregate employment cost index data, compiled by the Bureau of Labor Statistics, to better understand wage determination.   “We need more work on ECI data to better understand wage inflation,” he added.

Attention Needed to Funding on Terrorist Financing

Overall, Taylor thinks that Congress needs to pay more attention to “the financial side of the war on terror” as it debates funding various homeland security programs. He put the question of funding for the terrorist financing effort in the broader context of Congress working to implement other recommendations of the National Commission on Terrorist Attacks Upon the United States, known as the 9/11 commission.

“The 9/11 commission gave an A- grade to the terrorist funding program and most of the attention has gone to the other programs that got Ds and Cs.   I’m still very much of the view that we need to make more of this effort,” Taylor said.  

Getting the attention of officials involved in foreign policy and working with them to consider economic and financial issues should be a top priority, he said.  “It’s really different from military issues.  But it’s so important to get them working together.”

Still Challenged To Teach Undergraduate Economics

During his 23 years at Stanford, Taylor has gained a reputation not only for his teaching skills but also for his continued dedication to students.  What continues to draw him to teaching in general and to freshman courses, in particular?

“In general, I just have an enjoyment of explaining difficult things to people.  It’s sort of like doing a puzzle.  How am I going to get this across?   Sometimes it involves simplifying to get to the heart of the matter.   Of course, that can be done at different levels.” 

“At the beginning level, you have people who are still trying to grasp what opportunity costs are and things like that.  But at the more advanced undergraduate level, which is what I’m focusing on now in my teaching, they can learn very sophiscated things if it’s explained well.  It’s very interesting to me and I enjoy it.”

His donning of a California raisin costume for an introductory economics class several years ago earned Taylor the reputation of a gifted teacher who knows how to hold his audience.  To the tune of Marvin Gaye’s “I Heard It Through the Grapevine,” he told students about the basics of supply, demand, and government subsidies to agriculture, weaving the lyrics into his presentation. 

Taylor added that he believes that as a matter of policy, “universities should not forget about the teaching.  There’s a temptation to go to the research too much and so, if I’m going to make that claim, I need to do it myself.”  

In general, business economists should look for ways to entertain as they educate, Taylor suggested.   “In some sense, in the universities, we have more of a captive audience because the students have to take the courses,” he concedes.  “But for a business economist who wants an audience to listen to a forecast or for principals of a firm, the communication has to involve some way to make it interesting.  I would never shy away from ways to make the subject interesting or memorable even though it seems kind of crazy or like entertainment.  It seems to me that it’s part of teaching.”

At Stanford he also has served as director of the Introductory Economics Center and director of the Stanford Institute for Economic Policy Research. Earlier, he taught economics at Princeton University, Yale University, and Columbia University.

Prolific Researcher, Author

Currently, Taylor is the Mary and Robert Raymond Professor of Economics at Stanford and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution.  A prolific author of research papers and textbooks, he also frequently contributes essays and op-ed pieces to major newspapers.

His public service includes the California Governor’s Council of Advisers (2005 to present), chair of the Working Party on International Macroeconomics for the Organization for Economic Cooperation and Development (2003-2005), the Congressional Budget Office Advisory Panel, member of the President’s Council of Economic Advisers (1989-91), and research advisor at the Federal Reserve Bank of Philadelphia (1981-84). He was also an economic analyst at Townsend Greenspan and Co., New York, from 1978-81.

Among his many awards and honors are: fellow of the American Academy of Arts and Sciences, fellow of the Econometric Society, research associate at the National Bureau of Economic Research, the Alexander Hamilton Award for leadership in international finance at the U.S. Treasury; the George P. Schultz  Public Service Award at Stanford University, and the Distinguished Service Award, U.S. Treasury, for design and implementation of financial reconstruction in Iraq.

Taylor earned his doctorate in Economics at Stanford in 1973 and his bachelor’s degree in economics (summa cum laude) at Princeton University in 1968.

Recent Adam Smith winners include William Poole of the Federal Reserve Bank of St. Louis (2006), Dale Jorgenson of Harvard University (2005), Nobel laureate Lawrence Klein of the University of Pennsylvania (2004); Alan Meltzer, Carnegie Mellon University (2003); Edward J. Kane of Boston College, George C. Kaufman of Loyola University of Chicago, George J. Benston of Emory University, who shared the 2002 award; Henry Kaufman of Henry Kaufman & Company (2001); and Alice Rivlin of the Brookings Institution (2000).  The full list is available at the NABE Hall of Fame.