According to Taylor, the administration’s plan to encourage China to reform its exchange rate had three major elements: to persuade Chinese leaders that it was in their interest to end China’s fixed exchange rate regime; to encourage the Group of Seven nations to get behind the U.S. effort to change China’s foreign exchange policies; and to explain the administration’s strategy to the U.S. Congress so as to discourage protectionist legislation.
In July of 2005, China severed the yuan from its peg to the dollar and allowed the value of the currency to rise 2.1 percent against the dollar. “I think this strategy is why China moved two years later in a gradual way. This is something that will take time,” he said.
Taylor has no doubt that China’s economic leadership understands the importance of this shift. “The financial people in China certainly understand it’s in their interest to have a more flexible exchange rate,” he said.
“For someone like me, who’s concerned about volatility and stability of financial markets, it’s been very rewarding. This has all occurred fairly smoothly. You haven’t had a lot of turbulence,” he added. “The last big change
like this in my view is when we ended the Bretton Woods system in the first place in the 1970s. There you had a lot of turbulence in the markets. Some economists have called this Bretton Woods II. You are basically trying to get flexibility in China, which means flexibility in the rest of Asia. It’s occurring, but it’s slow. It will take time—not a lot of time.”
As Treasury’s chief international spokesman for four years, Taylor spent considerable time outlining the administration’s economic goals and fielded a number of questions from his G-7 counterparts about America’s very large budget and current account deficits.
He said controlling federal spending was a topic that he was frequently asked about in international meetings, and although he tried to be encouraging, it wasn’t always easy. “I’ve had a lot of jobs in Washington, and it’s always a problem to keep spending under control—very difficult. I wish it were easier. I hope the recent concerns about the deficit will generate more spending control. You have to be sympathetic of people who take steps to control spending.”
Taylor said he is encouraged that the U.S. budget deficit declined sharply over the past year, falling from $412 billion in fiscal year 2004 to $319 billion in fiscal year 2005. He pointed to the work of the Federal Reserve Board, the nation’s central bank, as one of the reasons why the U.S. economy has performed well in recent years, noting that other central banks around the world have followed the Fed’s leadership. However, he cautioned that the bank will face important challenges in the coming months.
“The reason why the U.S. economy and the world economy have done well recently is monetary policy—keeping inflation low, with central banks focused on price stability. In the U.S., this has been going on for quite a while. But it’s only recently that the Brazils and Turkeys and Southeast Asian countries have focused on price stability,” Taylor explained. “The real question is that given that they are relatively new to this, will they be able to make the adjustments in a preemptive way that the Fed has been able to do?”
Taylor served as a senior economist on President Gerald Ford’s Council of Economic Advisers in 1976, a member of President George H. Bush’s Council of Economic Advisers from 1989 through 1991, and as an economic adviser to the presidential campaigns of Robert Dole in 1996 as well as George W. Bush’s 2000 bid for the presidency. He is currently a member of an economic advisory board to California’s governor, Arnold Schwarzenegger.
Since returning to California earlier this year, Taylor has prepared to teach courses at Stanford on international finance and monetary policy and to conduct research at Hoover. He has organized his speeches from his four years at Treasury into a comprehensive Web site and has begun to work on a memoir that includes vivid descriptions of the nuts and bolts of global financial diplomacy.
Taylor has settled into a comfortable life in California. He said he is open to future opportunities to serve in government, but is eager to plunge back into academic life. “Now I can think about an issue for two or three hours. When I was in government, it was often 15 minutes and then you are on to another issue.”
John Shaw is a contributing writer for The Washington Diplomat.
