Friday, April 04, 2008

Profile of John Taylor (the economist, not the wide receiver)

By Prakash Loungani (via Greg Mankiw):
Stanford’s John Taylor is among the most honored macroeconomists of his generation. Indeed, concepts bearing his name have become so pervasive that U.S. Federal Reserve Board Chairman Ben Bernanke joked that “with our appetites whetted by the Taylor rule, the [Taylor] principle, and the [Taylor] curve, we now look forward to the Taylor dictum, the Taylor hyperbola, and maybe even the Taylor conundrum.”

In 1991, at the end of his second stint at the CEA, Taylor began to think seriously about devising “a simple and practical rule”—an equation that would both help outsiders understand how the Fed behaved and give the Fed a benchmark against which to measure its performance.

The equation that Taylor proposed was simplicity itself— so simple that Taylor was able to put it on the back of his business card (see Box 1). It said that from 1987 to 1992, the Fed’s setting of its policy instrument, the federal funds rate, had been motivated in large part by two considerations:

•How close the U.S. inflation rate was to 2 percent. If inflation inched above 2 percent, the Fed tended to raise the federal funds rate target to cool inflation.
• How far the economy’s real income was from its potential. If income was below potential, the Fed tended to lower the target interest rate to stimulate the economy.

Using the metric of his rule, Taylor gives the Fed mixed grades in its more recent performance. At the annual economic conference in Jackson Hole, Wyoming, last year, Taylor showed that between 2002 and 2005, the Fed increased the federal funds target rate more slowly than his rule would have suggested. Had the Fed followed the rule, much of the boom in housing starts as well as the subsequent bust might have been mitigated, according to Taylor.

Taylor often exchanges experiences with other professors through presentations at conferences. In one of those presentations, he urged professors to practice “surprise-side economics,” whose tenets he said are to make economics lectures “less abstract, more intuitive, more relevant, and more memorable.” To practice what he preaches, Taylor—in addition to donning the California raisin costume—has tried to make his lectures memorable by having the voice of “Adam Smith” piped into a lecture hall through its public address system.

Such devotion to teaching has endeared him to a generation of students at Stanford—and won him teaching awards—but he says that his most famous student was “one that got away.” In the fall of 1995, one of the students who took Taylor’s introductory economics course was golfer Tiger Woods, who left Stanford soon thereafter. “Perhaps I explained the concept of opportunity costs a bit too clearly,” Taylor jokes. He adds that he now uses the example of Woods—and the estimate of the $40 million in earnings the golfer would have forgone had he stayed at Stanford—to explain the concept of opportunity costs to incoming students. “They get the idea right away.”

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