Last January, Stanford University economist and Bush adviser John B. Taylor was considered a shoo-in for the top slot on the President's Council of Economic Advisers (CEA), a Cabinet-level position. But after talking it over with GOP eminence grise George P. Shultz, Taylor decided he would be better off taking a job as Treasury Under Secretary for international affairs.
To be sure, the CEA post ranked higher in the Washington pecking order. But Shultz, a veteran of the Nixon, Ford, and Reagan Cabinets, knew how important--and influential--the Treasury job could be. When Schultz headed the Treasury Dept. in the early 1970s, Paul A. Volcker had been his chief international trouble-shooter, and together the two had helped revamp the global monetary system. "[Taylor will] learn a lot from it," Shultz says. "He'll have to mess around with very operational, practical problems."
More important, if Taylor plays his cards right, he might even follow in Volcker's footsteps and become chairman of the Federal Reserve. Officially, 75-year-old Alan Greenspan's tenure is not up until June, 2004. But some of his friends think he'll step down before that, once the economy has recovered from its current malaise.
Taylor, a top-flight monetary economist and former candidate for vice-chairman of the Fed during the first Bush Administration, would be on the short list of contenders to replace Greenspan. Fed policymakers already use his "Taylor rule"--linking interest-rate changes to the economy--in their deliberations. And Taylor could be counted on to follow Greenspan's lead in keeping inflation in check without stifling economic growth.
What's not clear is whether Taylor, 54, has the political acumen and the Wall Street credibility for the Fed job. Although no political neophyte--he served as a member of the CEA under Bush's father and was chief economic adviser to Bob Dole during Dole's failed bid for the Presidency--the mild-mannered Taylor has yet to prove his mettle in the rough-and-tumble world of Washington. And he's a relative unknown on Wall Street, outside of a small band of bank and brokerage-house economists who use his monetary rule to try to predict Fed rate moves.
"HE'S A GENERAL." All that is about to change. Taylor's new job puts him at the center of one of the most pressing issues facing the Administration: what to do about the faltering global economy. "He's not just a lieutenant," say his boss, Treasury Secretary Paul H. O'Neill. "He's a general in this encounter." How Taylor fares will make or break his career as a Washington policymaker and determine his chances of becoming Fed chairman.
It's not an enviable assignment. The world economy may be on the verge of its first recession in nearly 30 years as the downturns in Europe, Japan, and the U.S. feed off one another. Emerging markets are jittery--despite big International Monetary Fund loans for Argentina and Turkey. And the once mighty dollar is looking shaky.
If that weren't enough, Taylor has to contend with a boss whose painfully candid style has unnerved investors more than once. He must also cope with second-guessing from Bush's chief economic adviser, Lawrence B. Lindsey--an erstwhile rival for the Fed job.
At Stanford, Taylor won a reputation as a first-rate teacher--even going so far as to dress up as a raisin to demonstrate to an economics class how TV ads increased demands for the fruit. "He reminds me of Alan Greenspan," says Martin Anderson, a fellow Stanford professor who has known the Fed chairman for more than three decades. "He's very quiet, but he knows his subject backwards and forwards."
MIXED RECORD. In fact, Greenspan and Taylor have known and liked each other since the early 1970s, when Taylor served under the monetary maestro at President Ford's CEA. Greenspan was so impressed with Taylor that he hired him later at the Townsend-Greenspan consulting outfit after they both left government. There, Taylor helped Greenspan develop macroeconomic computer models to forecast the economy. "He's very smart. He's very collegial. He's a delight to work with," says Greenspan.
So far, Taylor's record as the nation's top financial diplomat is mixed. Under gentle but persistent prodding from the U.S., the central banks in Europe and Japan have taken further steps to ease monetary policy. But even Taylor has doubts that this will suffice. "There's a difference of opinion," is how he politely puts it. "In a few months, we'll know more."
Taylor has also come under fire for working with the IMF over the summer to put together an additional $8 billion in financing for cash-strapped Argentina. Critics charge that Buenos Aires had already squandered billions of dollars in IMF assistance and didn't deserve the extra money. They wanted Treasury to send a message to investors that the big international bailouts put together by the Clinton Administration were a thing of the past. "We've just rescued the speculators," laments longtime Taylor friend Allan H. Meltzer, a professor at Carnegie Mellon University who wrote a history of the Fed.
Taylor sympathizes with these concerns. Indeed, he once called for the abolishment of the IMF, contending that its bailouts encouraged excessive risk-taking by speculators and emerging-market governments. But he argues that "you have to take steps as you go and be gradual about it. It's not a good idea to be disruptive and make things worse."
That's the sort of hard-headed pragmatism that Shultz hopes Taylor will take away from his job as Treasury Under Secretary. He'll need it if he ever lands in Alan Greenspan's shoes.
By Rich Miller in Washington
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