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John Taylor: The Republicans' Shadow Fed Chairman


The Stanford University economist's blistering policy critiques have inspired GOP leaders

He doesn't have a vote in Congress. He doesn't sit on the powerful Federal Open Market Committee. He isn't a member of President Barack Obama's Council of Economic Advisers. Nonetheless, Stanford University's John B. Taylor is considered one of the most influential economic voices in Washington.

Taylor's followers include the new GOP House leadership, the chairmen of key House committees, Presidential hopefuls, conservative thinkers, and others suspicious of Federal Reserve Chairman Ben Bernanke's stimulative monetary policy and perceived alliances with Obama Administration officials. His Economics One blog is a must-read for Republicans seeking an alternative economic blueprint—and for Democrats hoping to deflect it. Representative Paul Ryan (R-Wis.), who chairs the House Budget Committee and speaks to Taylor every two to three weeks, says he "is probably the leading voice with the highest level of credibility in proposing an alternative view to the Fed's."

Taylor, 64, seems to relish his new role as shadow Fed chairman. He has produced a flurry of well-timed newspaper op-eds and open letters, speeches, and papers. "I think there's a responsibility in civil society to speak out," Taylor says. Some of his views have hit a nerve. "He's very mild-mannered and easygoing personally," says Alan S. Blinder, the former Fed vice-chairman. "When he gets the word processor in his hand, he sometimes is intemperate."

It's not just the Fed's easy-money policy that gets Taylor typing furiously. He's also critical of the Dodd-Frank financial regulatory overhaul and former Fed Chairman Alan Greenspan's monetary calls. Taylor claims that had Greenspan followed his monetary policy formula, called (what else?) the Taylor Rule, interest rates from 2002 to 2005 would have been higher, preventing the housing bubble and bust and the unemployment that followed. Greenspan counters that Taylor has made "a number of inaccurate connections" about his record.

Taylor also decries Obama's $814 billion economic stimulus package, saying it neither boosted the economy nor lowered unemployment. States mostly used the funds to reduce their level of borrowing, he says, rather than to increase spending.

Raised in Pittsburgh, where his father was a nuclear engineer, Taylor became a household name among economists with a 1992 speech in which he introduced the Taylor Rule. It grew out of work he did as an economic adviser to President George H.W. Bush. Even Bernanke once said the rule is "remarkably useful" as a guide to set the Fed's benchmark interest rate. Simple enough to fit on his business card, the formula recommends a target rate based on how far inflation and economic growth are deviating from ideal levels, pegged in Taylor's original work at 2 percent for inflation and 2.2 percent for growth. Taylor says the recipe would produce a Fed interest rate close to zero, where it is today.

Bernanke, however, says even more stimulus is needed to build demand and lower unemployment. He has pursued a "quantitative easing" program involving large purchases of Treasuries and mortgage debt.

Taylor was Under Secretary of the Treasury for International Affairs from 2001 to 2005, working on post-Sept. 11 projects to contain the flow of money to terrorists and help rebuild Iraq's economy. He returned to Stanford and wrote a 324-page account of his Treasury stint called Global Financial Warriors. He was passed over as Fed chairman when Greenspan retired in 2006.

Taylor's latest beef is round two of Bernanke's quantitative easing, dubbed QE2, in which the Fed plans to buy $600 billion in government bonds. Taylor says QE2 shows no evidence of working and risks stoking inflation. Bernanke took the unusual step of defending the policy in a Washington Post op-ed and on CBS' (CBS) 60 Minutes. He declined to comment for this story.

The critiques by Taylor have inspired some GOP pols. Sarah Palin said in a Nov. 8 speech that she was "deeply concerned" about the potential inflationary effects of QE2. Taylor, who advised John McCain and Palin in the 2008 Presidential campaign, says he has not spoken to Palin since the election.

He was among 23 signatories to an open letter to Bernanke in the Nov. 16 Wall Street Journal and New York Times, calling on him to halt the bond purchases. The next day the four top Republicans in Congress, including now-House Speaker John Boehner (R-Ohio), who had met with Taylor and other economists before the election, wrote to Bernanke expressing "deep concerns" over the purchases. Two weeks later, Taylor and Ryan, in an op-ed in Investor's Business Daily, wrote that "QE1 failed to strengthen the economy, which has remained in a high-unemployment, low-growth slump, and there is no convincing evidence that QE2 will help either."

The silver-maned professor is popular among Stanford undergrads; sometimes he pretends to be the voice of Adam Smith, which he pipes in over loudspeakers during lectures. He stresses that he remains friends with both Greenspan and Bernanke. "I feel what I'm doing now, as much as I can, is getting the facts out," Taylor says in his office at Stanford's Hoover Institution, where the decorations include framed Iraqi currency he helped create.

Some economists say the Taylor Rule may not be the right prescription for today's economy. "Inflation is a little bit below the target, and unemployment is way above the target, so clearly we need more demand," says Jeffrey A. Frankel, a Harvard professor who was an economic adviser to President Bill Clinton.

Taylor's advice to GOP lawmakers: take away the Fed's discretion to set rates and make it follow a Taylor Rule, or similar recipe. He also proposes stripping the Fed of its mandate to pursue full employment, which Taylor says the Fed has used irresponsibly to justify QE2. Even some of his Fed allies are wary of his by-the-numbers approach. "This is no criticism of John: No model I know of replicates the real world," says Dallas Fed President Richard W. Fisher. Still, with the ear of so many Republicans, Taylor is likely to keep the Obama Administration and the Fed on the defensive for the next two years.

The bottom line: John Taylor's critiques of QE2 are inspiring Republican leaders to keep challenging Fed and White House economic policies.


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