John Taylor ’68 is the Mary and Robert Raymond Professor of Economics at Stanford University, and the George P. Shultz Senior Fellow in Economics at Stanford University’s Hoover Institution. He was previously the Under Secretary of the Treasury during the George W. Bush administration and a member of the Council of Economic Advisors during the George H.W. Bush administration. He sat down with The Daily Princetonian to talk about his University experience, as well as his views on current fiscal policy and college education costs.
The Daily Princetonian: How did you end up at Princeton, and what did you enjoy doing outside the classroom?
John Taylor: Well, Princeton is a terrific place for undergraduate education; that’s one of the reasons I decided to go there. I was from Pittsburgh, Pa. I valued the emphasis on professors discussing and having undergraduates involved in their research, the senior thesis being an example of that, junior papers, etc. So, the emphasis on working with professors on their research. My interest in monetary policy in particular, macroeconomic policy more generally, actually started in Princeton. I took a course from assistant professor Philip Howrey ... on macroeconomics in a dynamic setting. I got very interested in that topic because it was quite different from the standard IS-LM [investment-savings, liquidity-money] or aggregate demand-aggregate supply that was in the textbooks. So based on that I decided to do a senior thesis on the topic, and he was very helpful in that, and that was on monetary policy, strategies, rules for the Fed or any central banks to take. That’s how I got interested in the subject, and I decided based on that interest I would get a Ph.D. in economics and wasn’t quite sure what I was going to do, but it seemed like a next step given my interest in it, and I went to Stanford for my Ph.D. in economics.
DP: You testified before Congress recently about monetary policy, so could you talk about the Federal Reserve’s recent actions to raise interest rates? What do you think about this policy, and what did you think about the Fed’s policies during the 2009 recession, where it kept interest rates low?
JT: First of all, I have been very positive about monetary policy in most of the ’80s and ’90s. One of the [reasons] I was so interested in monetary policy in the late ’60s and ’70s was that it was so terrible. Inflation got higher and higher, unemployment got higher and higher, the economy just was not doing well as you went into the ’70s. That was a lot of my research, which looked for better ways to do policy. Policy did get better in the ’80s, and there was probably no bigger fan of the Fed in that period than me. They changed their policy to get inflation down, the unemployment rate came down, and for much of the ’80s and ’90s things went very well. In more recent periods, and I tend to focus on the period right before the crisis, 2003–2005 in particular, they seemed to change their policy back again, and they held interest rates very low — some people called it “too low for too long” period. That, I think, in fact caused investors to take more risks, searching for higher yields. It led to acceleration of the housing boom; it ultimately put the economy in a position where the crash was very severe when it occurred in 2008 particularly. So, I have a criticism of the Fed leading into the crisis compared to their good policy in much of the ’80s and ’90s. Since then, during the crisis, during the panic especially in 2008, I think they did a good job in what’s called lender of last resort. They provided funds to the financial institutions where there were runs and things like that. The Fed’s actions were good. But then after the panic was over, they continued with very unusual policies, and that’s what you asked about, and so except for the period during the panic of 2008 going into 2009, I think they should have tried to get back to normal policy — I call it to normalize policy — and begin bringing about that way back in 2010 and 2011. And now, as you say, it looks like they are getting back to the more normal policy. They’re doing it gradually, but they’ve been delaying it for quite a while, but they’re getting back to it and that’s good news. So I’ve been quite supportive of that. Some of that requires moving interest rates back to a more normal direction, and I think that’s basically going to be beneficial to the economy.
DP: From a fiscal policy standpoint, the Trump administration wants to return to a period of 3 percent GDP growth. Based on its budget outline, do you think that’s possible? Do you have any recommendations for it?
JT: Sorry to step back a bit, I’ve also been very disappointed in the recovery which we’ve had from the crisis [in 2008]. We had a very deep crisis that hurt lots of people in 2008 and 2009, but the recovery from that crisis has been remarkably poor, only 2 percent growth for all those years. You not only had a terrible crisis, you had a terrible growth. My recommendation all through this period is that we needed a change in policies, and th[at] change in policies would be tax reform, regulatory reform, budget reform, and monetary reform, four buckets. That hasn’t happened in any of the dimensions in a few years, but now it looks like there’s a chance that it will happen, and ... to some extent that the administration is on the same page on many of these things with Congress. For example, regulatory reform has already begun, tax reform they’re working on, there’s financial reform that’s in the works. All of those things are good news for me, because they follow a more pro-growth policy that has been missing for quite a few years.
DP: One of things economists point to when explaining the slow growth is that there hasn’t been too much gain in worker productivity. Why is that, and what can be done to get productivity back up?
JT: Regulatory reform, tax reform, budget reform, monetary reform, the same four things. There’s no question that the low growth now, just 2 percent, is productivity growth being low, some people think it’s something else but I don’t know many. Productivity growth has been very low, also the labor force participation rate — that is, the number of people in the population who are actually in the labor force — has fallen quite a bit. So both of those things are the things that would be responsive to policy changes, so take, for example, tax reform. Tax reform, part of it is to reduce the corporate tax rate, which is the rate on businesses, so that gives businesses more incentive to invest, more incentive to expand, and that investing in expansion improves productivity, because workers now have more equipment, more tools, more computers, more innovations to work with, and so that’s where their productivity comes from. So that’s why tax reform, for example, will boost productivity growth. There’s also regulatory reform, a lot of the constraints on startups, a lot of the constraints especially in manufacturing are because regulations have increased quite a bit. There’s also the financial sector, regulations have increased quite a bit. That affects bank lending, so that’s another thing which would increase investment, firms’ expanding, I think increase labor force participation as well as productivity growth. It all hangs together in my view, and is a policy problem if we’re able to deal with it. [It] will address low productivity, low labor force participation, and those, in turn, will create higher growth.
DP: There’s been a lot of discussion about the rising costs of college education. As an economist, how would you solve this problem, and what steps can be taken to lower costs?
JT: Well, I am in education, and I see lots of improvements that can be done, especially related to productivity. There’s a huge number of innovations, there’s online actions, there’s different ways to improve learning, different ways for students to interact, and so I think there’s a lot of gains there. For example, Purdue just bought Kaplan, which is an effort to do more of this kind of innovative thinking. That’s one thing: The costs are high because there hasn’t really been much improvement in productivity of education. I would say, though, that there is a more serious problem in K-12 in the United States, and there we have a huge disparity around the country. Some areas have very good schools and the students do very well, some have very poor schools, and the students don’t do well. Unfortunately, it’s frequently related to whether you’re in an urban area or a poorer rural area, and so I think that that’s another area which we have to be concerned with, in this case not just get costs down but to get the effectiveness of the education up.
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