Interview with John Taylor

![Taylor has argued for higher interest rates than what the Fed has set over the past decade. (John Taylor Stock Photo)](/content/uploads/Taylor.jpg)
Taylor has argued for higher interest rates than what the Fed has set over the past decade. (John Taylor Stock Photo)
John Taylor is a Professor of Economics at Stanford and a Fellow at the Hoover Institution. Since receiving his PhD from Stanford in 1973, he has enjoyed a distinguished career in both academia and public service. He is particularly famous for developing what has since become known as the Taylor Rule—a formula that suggests appropriate interest rates based on inflation and GDP measures. Aside from his research, he has served in several government positions, including as Undersecretary of the Treasury for international affairs from 2001 to 2005.

The Review recently sat down with Dr. Taylor for an extensive discussion. In the transcript below, Taylor talks about his recent book, Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis (Hoover, 2009, 92pp.). He also shares his insights on current economic policies, California’s budget crisis, the McCain campaign, and more.

SR: What was your motivation for writing Getting Off Track?

JT: The original motivation was a talk I had to give in Canada in honor of the former governor of the Bank of Canada, David Dodge, and I thought it would be a good opportunity at that point, in November of last year, to summarize all my research over the last few years. And I went ahead and sat down and did that, and what I decided to do in that context was to divide the question up into smaller pieces that you could handle, guided by my research. In each case I found that government actions or interventions were quite important…That’s the talk I gave, and I thought it was significant enough flesh it out, if you like, and then write it up in a book.

SR: So your thesis, then, is that in each of these cases, government intervention either caused a problem or made it worse.

JT: Right.

SR: You devote a lot of the book to the discussion of monetary policy over the last decade. You argue that the Fed’s actions during that time did not adhere to the policy rule for interest rates that you developed, and that rates were consequently too low for too long, thereby fueling the housing bubble. Why didn’t the Fed follow the Taylor Rule? What was their thinking?

JT: We don’t know for sure, because they’re not always clear, but they tried to be clear in this case. They said they wanted to keep rates extra low for a long period and then raise them slowly at a measured pace. And for the most part the communication was that they were doing that to prevent some kind of deflation, like what had been experienced in Japan prior to that period, in the 1990s. The concept was that by holding rates lower than normal for a longer period, they would reduce the chance of that. If you like, it could be in the context of risk management, trying to reduce those downside risks. I think that’s probably the most frequent argument I heard. Also, early on in that period—it was after 9/11—a lot of general concerns about the terrorist attacks, and then of course you had the dot-com bubble bursting in 2000-2001. But I think by 2004 you’re well beyond that. It’s three years into the expansion, and you still have the interest rates at 1%. It makes those reasons less reasonable, but that’s certainly what was stated.

SR: How about the critique of your argument that Chairman Greenspan made—namely that it’s not really the overnight interest rate [which the Fed effectively sets] that impacts long-term mortgage rates and thus housing construction?

JT: Well, there’s a couple of things to say. One is that at that time 30% or so of mortgages were adjustable rate, which are definitely keyed to the short rate; there’s a short rate that they link to. Moreover, there was a huge increase in that percentage during that time, so in a way the extra stimulus was not just from the adjustable rate mortgages but also from the fact that they grew in proportion, quite a lot. And I think part of that was to take advantage of those very low interest rates. So that’s the first thing; it’s not just the longer-term rates, which [Greenspan] is referring to.

Second, I don’t think it’s clear that a higher short rate could not have raised long rates…The [Greenspan] argument is that international forces around the world [i.e., an international savings glut rather than Fed policy] were pulling the interest rate down…I think that you can argue that the unusually low rates during that period were confusing the market–confusing people who were trying to forecast future short rates–and therefore probably held the long rates down.

And I’d say the third thing would be that if you look globally, you don’t see a very high global savings rate that would bring long-term interest rates down. Global savings rates are relatively low, so you would have to make the argument in terms of peoples’ intended or desired saving, and that’s hard to measure, so it seems to me not fully developed empirically as an argument.

SR: After raising rates, in 2007 and 2008 the Fed cut rates dramatically again as it became apparent that this was a large crisis. You argue that this was a policy mistake. Why?

JT: There’s several reasons that it’s a policy mistake. First, it really wasn’t a problem of not enough liquidity, which is really what the low interest rates would have been aimed at. It wasn’t like you needed extra liquidity; it was a problem in the banking sector. So the low interest rates would not be aimed at that directly.

Second, going back to the guidelines, I’d like something like a Taylor Rule to guide things, and [rates] came down much more quickly than [the rule] would suggest. Obviously, in a recession you cut rates, but there was nothing particularly significant enough to warrant those very sharp rate cuts. And to some extent, [the cuts] were movements around the time of stock market changes and were very sharp compared to what they would be normally. I think that’s why the dollar weakened so much, and that of course raised oil prices compared to what they otherwise would be.

Certainly, I was at the time recommending much less in terms of rate cuts, based on my analysis, based on the conventional policy rule analysis. And then even giving some extra reduction based on the spreads in the money market, you still don’t get the very low rates they got so rapidly in the spring of 2008.

SR: The book briefly mentions the role of Fannie Mae and Freddie Mac, in terms of expanding the market for lower-quality mortgages. How big was their role in precipitating the housing crisis?

JT: I think it added fuel to the fire of the very low rates. They were given encouragement and given guidelines and goals to buy certain amounts, certain fractions of their portfolio, in affordable housing, which generally meant that the loans were more risky than they otherwise would be. They were definitely encouraged to do that. Their being able to take the mortgages off the originators’ hands as part of the securitization definitely encouraged [the proliferation of low-quality loans]. I don’t think there’s any question about it. I don’t stress it in my book as much as the other things, because I try to mainly focus on things where I have pretty hard evidence and I can do correlations or pictures or econometrics. So I don’t stress it as much as the other things, but it seems to me it’s there…Also, I think it’s important that at the time people were out there–including Greenspan–saying that it was excessive, and legislation was proposed to try to bring [Fannie and Freddie] back in. And so as a lesson for the future I think it’s important to get that right.

SR: A large portion of your book is devoted to the liquidity versus solvency dispute. In particular, when interbank lending rates rose in 2007 and continued into 2008, there was controversy at the time about whether that was primarily due to liquidity constraints or concerns about the banks’ fundamental risk. You argue that it should have been clear to policymakers at the time that it was a risk issue. What was the evidence that led you in that direction?

JT: We got evidence on measures of risk in the banking sector, basically the yield spread between secured and unsecured loans, so that would represent risk to the lenders. And that risk measure—secured versus unsecured—was highly correlated with the spreads in the markets. (Libor-Overnight Index Swap is the one that most people focus on). That’s probably the most convincing evidence.

There’s also some correlations with the credit default swap rates. [Here, a CDS is essentially insurance on default by a bank.]—not as close a correlation, but it goes in the same direction. So that was when it was convincing to me.

And then you had the panic in the fall of 2008. The correlations are even stronger during that period. So I think it was pretty clear at the time. I’m not quite sure why I wasn’t able to convince the policymakers about it.

SR: Zooming out for a moment, what’s the implication for the general public of high interbank rates? How does that affect Main Street, if you will?

JT: Well, interest rates will be higher, for one thing. But also banks will be more stringent in their loan criteria, so if someone [seeks to] get a loan, they’re going to look at them once, twice, three times, because the credit’s not as readily available. So there is definitely a sense in which you can have a credit tightening because banks don’t want to lend as much because of their own risks, and that impinges back on the ability of people to get loans.

There are escape mechanisms. Corporations can borrow directly in the market. There’s the commercial paper market, there’s other ways to get funds, but it’s hard to switch really quickly to other sources. So this concept of a credit crunch definitely can be quite severe, and I think you certainly saw that last fall.

SR: Most people, at this point, would agree that risk/solvency issues were motivating the high interbank cost of funds. The liquidity explanation, particularly after what we saw in 2008, has a lot less currency today. So aside from “I told you so,” what sort of lesson do you want to impart by exploring this topic in the book?

JT: It’s very much not an I-told-you-so type of thing. It’s really trying to get it right in the future. And so the message from my work is pretty clear, that we got off track. Things were working pretty well, following policies that kept inflation low, that didn’t try to fine-tune or intervene too much, and that worked. To the extent we tried to go further than that—trying to keep rates extra low for risk management, introducing all these new [Fed liquidity] facilities, starting to do active fiscal policy like the rebates last year (which continues now), all those things seem not to have helped, and in my view have made it worse—caused it, prolonged it, etc. So the lesson is really not to do all that intervention, to try to follow a steady, prudent path for monetary and fiscal policies. It’s going to be quite important.

There’s different reactions to my analysis. The part about the lower interest rates beginning in 2003 being an impulse for that period, I think more and more people agree with that. There is the dispute you mentioned with Alan Greenspan, but the current Treasury Secretary has [agreed with me]; he was a member of the [Fed Open Market Committee] at the time. A number of others have indicated the same thing. So I think that view is becoming more widely held. Alan Greenspan sometimes calls it “conventional wisdom,” but I think that’s probably too far a consensus concept.

As for the other things [in the book], it’s going to take a while for other people to do research, and they might be proven wrong in the end. But I think these other things—the liquidity misdiagnosis, and then this very ad hoc response in the fall of last year, which I think scared people—there’s really big lessons from them. [And] not just [about] monetary policy; I think fiscal policy in a sense is just as important, and regulatory policy as well.

SR: On the subject of fiscal policy, why was it that the 2008 stimulus failed to have a meaningful impact?

JT: I think economic theory gives you the answer. It was largely temporary tax rebates, and people don’t usually spend large, temporary tax rebates. They spend of a fraction of it—this time it was a particularly small fraction, it seems. So I don’t think it’s a surprise from the point of view of economic theory. Maybe it’s a surprise that more people were not out there saying it wasn’t going to work, but there was a very quick consensus developed in the Congress and the administration that this is what they should do. And the momentum was really very strong, and that’s what they did. And now we have this evidence that it didn’t work.

SR: So you would say, then, that you need a permanent income change in order to motivate substantial changes in consumer behavior.

JT: Yes.

SR: Again on the subject of fiscal stimulus, of course we now have this much, much bigger 2009 program. Presumably this would correct for any disadvantage in scale that the 2008 stimulus had. So is the current stimulus a good idea, or not?

JT: No, I don’t think it’s a good idea. I don’t think the scale really does correct for it. For one thing, it’s larger in scale but it’s spread out over time, so in any particular period it’s not bigger—it’s smaller, really. If you just want to measure the stimulus effect on consumption, it’s spread out over a couple years, so it’s not clear how much larger it is right now.

I think the largeness also has the disadvantage of a much larger increase in the debt. That has its disadvantages in terms of people thinking their taxes are going to be higher in the future, for that reason, and interest rates will be higher. So those have negative effects. And this [stimulus] was more on government spending than the previous one, but a lot of it is transfer payments, not government purchases of goods and services for infrastructure. It was actually quite a small amount of infrastructure spending. So I don’t think it will have much impact. If you look at how much has been paid out, it’s actually a very small amount already. I think the total infrastructure pay out is less than a billion dollars at this point.

SR: At the time this was being debated in Congress, there was an alternate proposal with more of a focus on payroll tax cuts as part of the stimulus. Would that have been a better option, or is it still the same basic problem?

JT: To the extent it’s permanent and reduces marginal rates permanently, then it would have more of an effect. I don’t think the payroll tax proposals were permanent, though. So no, I don’t think I would argue that they would have been more effective. They weren’t permanent, or at least expected to last a long time.

[Permanence] would be good, because then you’d also reduce marginal tax rates with the payroll tax. You would reduce the [tax] rate on income.

SR: Moving on to the banks, it’s sort of a mixed picture. They’ve had some success securing debt and equity financing in the last couple weeks, even without government guarantees. The interest rate spreads that drive their profits are pretty healthy because of the low rates. But at the same time, they still have all these bad assets on their balance sheets, and you still have a very soft economy. So what’s your assessment of the financial sector. Is it basically solvent and functional, or is there some great reckoning that we’re going to come up against?

JT: Well, it’s borderline, if you like, on the solvency issues. I think that depends on where the economy goes. It’s endogenous. If you have what people call the Great Recession, where unemployment goes above 11% and we have continued negative growth for the rest of the year, then you’re going to see quite a few more bank failures. I don’t think there’s any question about that.

But I don’t know if that’s the most likely scenario. It seems to me that we’ve seen a very sharp reduction in spending last fall. [The reduction] kind of came to a stop in December and January, and it’s basically slowed down. So if you look at that period, I think there’s more and more evidence that there was a panic. We got hit very hard by what happened last fall, and then it kind of stopped. So that’s a change in circumstances for the banks, and if you can sort of stay at that level for a while, unemployment will rise from where we are at this point, but I think [after that] you’ll see much less stress in the banks.

In the meantime I think you’re getting some negative results from the various government interventions. This is way beyond my book, in terms of time, but all of the direct involvement in the management and salaries of the banks and the implications that it could have in the future, the change in the priority of debt-holders in the case of the automobile workouts, some of the interventions of the FDIC (how they intervened with Washington Mutual), I think all those things are raising concerns in the banking sector.

If anything I would say that the banks are maybe holding up some of their activities because they are concerned about all this government action, in two ways. They could be hoping there’s going to be more bailouts, so they’re slowing down their willingness to sell the toxic assets, figuring there’s going to be government help later, so they’ll get a higher price. But also [they are] just concerned about the intervention of the government generally. Banks are making a lot in so-called “fees.” They’re finding the borrowers and then taking the business and selling it to other financial institutions, hedge funds or private equity, just getting the fees for it. That’s a sign that they’re worried about something in the future—either waiting or [fearing] something might get worse.

SR: What do you think about the current direction of the bank bailout—the TARP equity infusions, the stress tests, the Public-Private Investment Plan, etc.?

JT: I think it’s probably a mistake to have done the stress tests, because they have stress tests all the time, and all this did was to take four months or so between the announcement and when it actually took place. I don’t think that was wise. I think they were probably looking for something to do and something to say and then had to go through with it in the end.

To be more positive about it, now that it’s done, people can see that there’s some advantages to having the regulators do a thorough risk test and work together on that…Maybe that will help them in the future, working together so that there’s no gaps in what the Office of the Comptroller of the Currency, Office of Thrift Supervision, FDIC, Fed and all those other regulators are doing.

SR: So you think it’s a good precedent for regulatory cooperation?

JT: Yeah, I think so.

SR: Looking at government actions—or lack of actions—over the last couple of years, so far you’ve made a lot of criticism. Is there anything that really stands out that the Bush and Obama administrations have gotten right in dealing with this crisis?

JT: Well, the Bush administration did some really good things in terms of the 2001 recession and the expansion that followed that. The tax cuts in 2001, the permanent cuts in 2003 added with the dividend and capital gains cuts, keeping a lid on taxes, all those things were very, very important in terms of the overall economy. And that continued, really—that’s still there, quite frankly. Those taxes haven’t increased yet, although they’re about to. I think that has made the economy much better than it otherwise would have been. So that was the prime example, I would say, for Bush. It’s not really in the crisis part of this; it’s earlier.

With respect to the crisis, I’d say at this point you have to give people the benefit of the doubt about what goes on in some of these decisions. I don’t want to say that I would do the same thing, but it seems to me you have to recognize that the Bear Stearns intervention was a completely new thing, and it’s hard to see how they could have done it much better. But then after that is when I begin to say “Geez, why don’t you make it clear what you’re doing?” so that we can anticipate a little better what would happen when Lehman or whatever would go down.

On the Obama side, there’s some good things on economic policy generally. I think this movement back from protectionism seems to be happening so far. The idea of not renegotiating NAFTA has been a good thing to do. I think the idea on the mortgage side of trying to help the homeowners a little bit more, moving in that direction is somewhat reassuring. It’s pretty small, but at least it’s something. But otherwise I would have to say the stimulus package, this huge deficit, more generally the current budget—those are all really quite worrisome kinds of things. Plus, the intervention into firms, which didn’t begin here with Obama but seems to be accelerated, is worrisome.

SR: On the subject of international issues, you were responsible for international affairs at Treasury as Undersecretary. You did a lot of work with emerging markets, ensuring that the sovereign debt process there was stable, predictable, and orderly. Now, of course, a lot of emerging markets are in a lot of trouble. Do you think the current situation threatens the progress that was made?

JT: It certainly threatens it, I think mostly in countries like in eastern and central Europe, where moving out of the Soviet Union’s approach to policy was a big change. People had just gotten used to capitalism. This is a way for people to say capitalism is not working. I think that’s a real threat to their future.

But generally, it seems to me, no. I think that in a way the emerging markets are emerging from this—although they’ve been hit very hard; it’s been huge hit—pretty well. It’s been nothing like the crises they saw. In Brazil, it’s not nearly as bad as it could have been if they didn’t have better policies in place. In Turkey it could have been a complete disaster. China is doing okay. India’s not as bad as it might be.

[But] I think certain countries, in particular eastern and central Europe, are kind of worrisome in this respect, because their whole approach to policy is a little less firm (my observation, politically).

SR: We saw recently that you had made some noise about the latent money supply that the Fed has been building up. You’ve suggested that maybe it’s time to start thinking about how we’re going to put the brakes on this. There was some criticism of that:* we still have a huge employment gap, there’s not much inflation that we’re seeing at this point, the output gap is big as well, etc. So what is John Taylor thinking, suggesting any sort of tightening action at this point?

(* See Desmond Lachmann, The American blog: http://blog.american.com/?p=689)

JT: I haven’t seen too much of the criticism of what I said yet, so I can’t really respond to that. In fact, the reactions I’m getting…have not been negative. Also, I didn’t say rates should rise. The important thing there, in that message, is that someone [at the Fed] has leaked to the Financial Times that their Taylor rule estimate for the interest rate is -5%. And that suggests you’ve got a long time before you need to worry about positive interest rates. So I went through the calculation and I got .5%, not -5%. So they’re off by a decimal point and a sign, which is pretty bad. And so that suggests it might be a shorter time before rates would have to rise than you’d think from reading the Financial Times’ estimate from the Fed. So that was my main point. There’s more risk here than you might think.

The second part of it, though, is that reining in this huge expansion of bank reserves is not going to be easy, and they should think about a specific exit strategy and be clear to people about what it is. So that was the second part of my message. I don’t think I’ve gotten criticism [about] either of those. I mean, the Fed has not explained how they got -5%, and it seems to me other people looked at it and said, “Yeah, I can see minus five seems a little deep at this point.”

It’s too early to raise rates, but it’s not too early to talk about it. I think the more they can talk about it the better. But look, everybody doesn’t agree on everything, that’s for sure.

SR: In light of the large increase in monetary reserves and the mounting debt the government is incurring, are you worried about the currency going forward?

JT: Sure, in the long term. In the remarks that you referred to, I also said that the budget deficit is so large that, if something doesn’t change, we’re going to have to have a huge inflation to get rid of it, and that inflation would roughly double the price level. So doubling the price level, as you know, means the currency would be worth half as much, so that’s a 50% depreciation of the dollar—if all those bad things continue and happen in the future. So yeah, that’s a reason to worry. The reason to point it out, quite frankly, is that hopefully there will be a change, because none of this has to happen. None of this is necessary if policy corrections are made. The reason to make all these points is to help [induce] some kind of a change.

SR: But something has to change in fiscal and monetary policy.

JT: Absolutely.

SR: Going to a different area altogether, you’re a member of the California governor’s Council of Economic Advisors. What does that entail?

JT: It’s not like the president’s Council of Economic Advisors, which is a full time job, and you can’t do anything else. We meet four or five times a year. It’s chaired by George Schultz. We usually meet for three quarters of a day, for part of which the governor comes. We give an outlook, forecast, talk about some policy issues maybe on his mind or on our mind. So it’s topics that range from tax reform to energy policy to the budget, so it’s an informal group, and it gives him advice. I think it’s important for governors to have that kind of a forum to discuss issues with economists or professionals outside of their own offices and their own operations.

SR: There’s certainly a lot to talk about with California. We have some of the most affected housing markets in the country, double-digit unemployment, and of course the monumental budget deficit. Broadly speaking, what does the state have to do to get its house in order?

JT: You know, it’s got to find a way to control spending. That’s the whole problem. If, during the governor’s term, spending had been held to the growth rate of population plus inflation (kind of like nominal GDP growth), we wouldn’t have this problem at all. Spending would be much lower, so the budget would be in balance. It’s quite amazing.

So that’s a lot of growth, right? As the population grows, you spend more. As prices are higher, you spend more. So if we would just have held to that growth rate, we would have been fine. So I think looking forward, that’s what you’ve got to think about doing, just controlling the growth of spending. There’s a tendency, when tax revenues rise, to spend it, and then your revenues fall in a recession, and you’re in trouble because spending is so high.

A lot of it is political. The governor tried some important things with respect to spending and other kinds of initiatives early in the term. He didn’t get it, and since then it’s been a real battle with the legislature. But I think the people have to really be clear that this is a state with a huge number of resources. It has industries and places to do business from Hollywood to Silicon Valley. It’s got great universities. It’s got great research labs. And so there’s no reason why a state like this has to be running a twenty, thirty, forty billion dollar deficit and relying on funds from the federal government.

SR: We’re inferring here that you would oppose 1A then, the proposition extending the temporary tax increases. [Note this interview occurred on the eve of the special election.]

JT: Yeah, I’m not in favor of that. What [the impending rejection of 1A] is telling us is that people want to deal with the spending issues and don’t think that tax increases are the answer. There’s a concern about how the “rainy day” fund would work. These are things for which, the more and more people look at it, they say “Geez, why does Sacramento have to run this way? Why can’t we fix it?” It’s not just the governor. He’s got a huge battle with the legislature on every issue. We’ll see what happens with the propositions, but the hope I would have is that it would wake people up to say that we don’t have to have it this way, this political fighting constantly. And [we should] just [have] a sensible policy with respect to spending, so that you don’t have to suddenly be laying people off when the money stops flowing, because it’s cyclical. You could actually reduce the volatility of the revenues by having a flatter tax, too. So there are a lot of good things that can be done, but probably [via] bigger, more permanent-type policies than what is currently on the table.

SR: As Undersecretary of the Treasury, you worked with Secretary O’Neill as well as Secretary Snow. What was that like? Was it a different environment under each of them?

JT: Their personalities are quite different. Their ways of doing things are quite different. They’re both very successful CEOs of big companies.

Paul O’Neill has got lots of ideas…sometimes just throwing out ideas and encouraging people to work on them. I always appreciated the degree of freedom he gave me to run my areas, and he didn’t interfere very much, which there’s a tendency for people to do. He spoke openly quite a bit, and that concerned people. Sometimes, as someone who’s running a large organization, the way you talk about things has to be different. We talked about the exchange rates for example. You know that story. [O’Neill came under criticism for de-emphasizing the strong dollar policy insofar as the exchange rate is not a direct instrument of policy but rather the result of other economic and policy factors. This is a technically sound precept, but some observers at the time worried that it signaled a departure from longstanding “strong dollar” rhetoric.] So that’s an example.

John Snow has a different style. He very much wanted to work with the Congress to get things moving, sort of [strategically oriented]—here’s the things we need to do. He’s good in economics. He’s got a PhD in economics. He has law degree. And so he’s kind of more “operational,” I’d say, in terms of getting things done—a different style completely. Also, I benefited from the fact that he gave me a great degree of independence.

SR: And how about the president? You worked with President Bush on a number of occasions.

JT: Right. Well, my experience with President Bush has always been very good. I refer to a lot of this in Global Financial Warriors [Norton, 2007, 324pp.]. He seemed to have, in my dealings with him, an ability to motivate, give the general principles of what should be done, what he’d like to [see] done, and then let people go ahead and work it out and become involved with him when it was necessary. So all the things I dealt with him [about], they worked very well. He [gave] the degree of autonomy needed, but also the leadership when it was necessary.

SR: Before serving as Undersecretary, you had been in government before, but in an advisory capacity, and of course the other positions you had held were academic. So was there anything that was surprising in the role of Undersecretary, that was totally different from what you had experienced before?

JT: Well, there’s a huge difference between running something and giving advice to someone who’s running something. The Undersecretary job has a lot of operational responsibilities that you have to do. It’s not so much a surprise; you know it’s happening. But it’s very much different, if you like. It’s hard to get that experience without actually doing it. There’s sometimes the pressures of time, there’s multitasking, so many things you’re doing at the same time. You have to learn to delegate well—learn to delegate down, delegate up. And those are things which are difficult to teach or to learn without doing it. [Also, there’s] the idea of having clear goals for people, giving them their goals, giving them the opportunities and the chance to fulfill those objectives and goals without interfering too much, but at the same time having a good way to monitor what they’re doing. Those are all things which are not so much surprises, but really differences.

The biggest surprise, of course, for a while, was 9/11. There’s just no way to convey how huge that was at the time in terms of affecting just about everything that we were doing. Huge surprise.

SR: The last historical thing we wanted to ask about was your experience with the McCain campaign. You were an advisor in the ’08 campaign. How extensive was that relationship, and did he take your advice?

JT: Yeah, it was very extensive, and I think, basically, we worked well together. I spent a lot of time travelling around the country with him, basically. We went to rally after rally, state after state, talking about things on the plane. It was a very fascinating campaign, actually. I always enjoy working in campaigns, by the way. It’s a part of policy that people don’t understand or talk about enough and write enough about. But economic policymaking in campaigns is always fascinating to me.

Much of what I was doing at the time was thinking about what the overall tax policy should be. I liked his tax policy; he didn’t want to raise taxes, he wanted to have a healthcare plan with a big tax credit for people. Like anything, everybody doesn’t take all your advice, but we were quite consistent about things.

There’s the financial crisis, beginning with the weak economy, which became very clear pretty much by the time he was moving up in the polls again. How to deal with that, and the crisis itself, and all the ins and outs of that: it was a fascinating experience. I’d like to write a book about that sometime.

SR: As a technical, academic economist, did you ever find that you had to cut corners as a campaign participant, in terms of advocating policy? Did you make concessions to political realities?

JT: Well, there’s two parts of the question. “Technical” means finding a way to simplify, but that’s important for anybody, to move from the technical way to think about things to make them understandable and simple. Whether you’re an accountant thinking about all the ins and outs…or whether you’re an economist talking about the benefits of lower taxes, you still have to translate that to people so they can talk about it on the stump and feel comfortable with it. For me it’s much different from teaching. You’ve got the same kind of things, and I enjoy that, simplifying things. It’s not a talking-down type of thing; it’s just a different way to think about it, and that’s important.

The second part of your question is kind of another kind of change, and that is, to what extent do your economic views get influenced by the political views, if you like.

SR: That’s what we were driving at.

JT: Yeah. And I think that part, it’s always there. I actually feel in this case, at least [with respect to] the things I was doing, [there were] pretty few [compromises]. You know, the idea of not having to raise taxes to deal with the budget, that you could deal with it by controlling spending growth, going through the advantages of that, sort of reviewing what happened in the Reagan revolution—[there was] very little in the way of compromising.

I’m sure I could think about some things if you pressed me some more, but not a lot. And sometimes, of course, the compromises occur when you’re not so much in the campaign, but when you’re trying to implement things, after a campaign. Then you’ve got to negotiate off of your positions, but I think by and large the economic platform of McCain was very consistent with my own thinking.

SR: Are there any books or projects in the pipeline right now?

JT: Well, the financial crisis is occupying all my time. We’re coming out with a new book called The Road Ahead for the Fed, written actually by a dozen people—George Schultz; Alan Meltzer; Don Kohn, the vice chairman of the Fed; myself; and some other people—where we’re going through a number of the issues that are of importance to getting off this situation where the Fed is now, if you like, an exit strategy, the kind of thing you asked me about before. And that’s coming out in a few weeks, actually.

After that, there’s a lot of things on the financial reform side that we have to get straightened out, so I hope to participate in that a little bit. I’ve gone back to Washington to talk about some of those issues, whether you should have a systemic stability regulator or not. So I’ll continue to work on that.

In terms of a book, I don’t know if I’ll do this, but as I mentioned before, I think there’s a couple weeks in the middle of the [McCain] campaign which involved a heavy amount of economics and politics. That would be interesting to explain to people or write about. It’s almost like a two week period from roughly around the time of [the collapse of] Lehman Brothers through the first debate. It could almost be a day-by-day discussion of how things worked. I think it would be interesting for somebody to write about that. I don’t know if it’ll be me, but as I say, campaigns are fascinating for seeing how politics and economics interact. And obviously we live in a democracy, so you just can’t ignore the politics. It’s part of the economics and getting things done. So I think that would be interesting to do sometime.

Subscribe to the Stanford Review