Economic Outlook 2019: New York

Good. Evening everyone it's a pleasure, to be here happy New Year to all of you welcome. To economic, outlook 2019. My, name is Martha Rajan as the voice of God said. I'm. The Dean and George Spratt shields professor of accounting at Chicago. Booth it's. Great to be back in New York I've been Dean for 18 months this is the the, second time that I've had the pleasure of participating. In, EO in New York the. Series, will continue from here we. Have economic outlook, in Chicago. Next week and. Then we have economic outlook in Hong Kong on January. 29th, so. It's great. That all of you are here it's wonderful, that you have chosen to engage with the school in this fashion. Economic. Outlook I think is a unique event it provides, a. Wonderful, way for our, path-breaking faculty. To bring, their research, to. You it's. A great way for you to meet the thought leaders at booth talk. To them about the ways that they are thinking about the future, ways. That they are evaluating, emerging trends, and. Ways. For them to share with you key insights, to try to reframe, our understanding, of the world around us we. Have a great program this evening, we. Have amazing. Panelists, professors. Randy Kroszner and Eric Hurst from Chicago Booth who are here to share their insights and I'll introduce them in detail in just a bit we're. Also very grateful to Kathleen Hayes from. Bloomberg who has come here to moderate this event. I, thought I might maybe spend a couple of minutes giving you a little update on the school and. If. You think, back to sort, of what is the mission of the school right. Our mission has always been very clear it's to create knowledge that, has enduring, impact and to, influence and educate current, and future leaders of the world and I. Think on both dimensions, it's fair to say that we're doing very, well we have excellent, momentum, across. Many. Many dimensions, thanks. To our outstanding faculty, and. Our staff students. And our, incredible alumni community we have, great. Sort of alumni I think more, than 53,000. Alumni now across the globe who help us in many many ways.

Thinking. About the school and this past year many. Of you maybe saw the the deans report, that I sent out I'm sure all of you read, through it pretty carefully. But. I'll summarize anyway. So. One of the things I think that we're, most proud of and I think excited, about as a school is that we had a pretty amazing recruiting. Year in, many ways I think probably the best year that we've, ever had. We hired a total of 18 faculty, members who began, at booth as of, July and another. Five who took a deferred. Admission. And and been in. Some ways and will begin next year and this, is across a wide variety of fields sort of accounting, finance economics and, and operations, so. I think at the junior level we were incredibly, successful I, think in some ways, one. Might say overly successful we, have very little room at Harper now for faculty offices, which. Is a problem. But. In, addition to being successful at the junior level we've also done, some, very exciting. Senior. Level hires, we. Hired Amy, Ward from, USC. To come and be a full professor, of operations, management. So. We really have a leader now who looks at operations. Applied to service, industries, and in particular, and we're very excited about the direction that that's going to take the school in I think, operations, is a field where we, really should be the best in the world at what we do and and bringing. Amy and is a huge step in that direction. We. Also hired Ralph, Khoisan, back. I mean Ralph had been a finance faculty member at booth for many years and then left went. To lbs, and NYU and was. Going, to move to Princeton, but chose, to come back to booth and started in in July as a professor of Finance. We. Also had great. Hire in microeconomics. Sendhil. Mullainathan who, many of you may have heard, of, from. Harvard economic from the economics department moved. To Chicago. Booth, central. Of course very renowned scholar, winner, of the MacArthur, Genius grant for his work and has. Done work in a wide variety of areas including. Sort. Of core, microeconomics. Work. On poverty. Social enterprises, machine. Learning so you know obviously incredibly, eclectic person. And, he. Is going to be at the forefront of putting. Together a new Institute, at the school that. Deals with human and machine intelligence. And. In fact sindelle right now he's just starting he's going to teach a new course on artificial intelligence as an elective at booth. Which, is sort of an incredible thing you know it's a class I wish I could take it's. An amazing thing for us and. And, the faculty that we're bringing in continue, to do amazing, things get, worldwide, recognition for what they do last, year when I was here I mentioned, you know that was when Richard Taylor had won his Nobel and I.

Made, The joke that we have you know three active Nobel Prize winners on our faculty, which. Is three more than every other Business School combined, which. Is certainly a true statement and. We're. Very proud this year that the winner Paul. Romer was both, an undergrad at Chicago and a PhD from Chicago, so you know we not only have great faculty but they produce great students, as well who go. On to do amazing things. Bob Zimmer did make me point out to me that he was an undergrad in mathematics, not economics, but so he took credit for that. But. So we continue to do amazing things and I'd mentioned we hired Ralph Khoisan back to to. Booth and just, this past Sunday. Ralph, was named the winner, of the the Fischer black Prize which. Is given every two years by, the American, Finance, Association, for the best financial economist, in the world under the age of 40 so. And the, last, winner of that prize two years ago was Amir Sufi who's of course also at at Chicago, Booth so. I think the eight times this award has ever been given four, of those awards have gone to booth faculty, including the last two so. It just speaks volumes, to sort of a caliber of the the faculty we have and the great things that they have done. And. I think, the eminence extends, not just to fields in economics, and related areas but, also to fields, like behavioral, science, so. Just this past June. Nick, Epley and Eyal ed Fishbach, were both awarded the. Career, trajectory, award by the Society, for experimental. Psychology. Now. This is the highest award in that field and no. University has ever had more than one winner on their staff at any given time and, the fact that both faculty. From booth won at the same time this year again it's just incredible, testament. To the quality of faculty we have so we're. Very proud and excited about, the, school so the. Great faculty that you knew the great work that was being done I'm proud to say that that we do continue along that great trajectory to this day. When. I was hired as as Dean one of my goals one, of my KPIs. That Bob gave. Was. To do more to connect booth with the University, I think. He felt that this was something where, there were great, synergies, and great, value to be had and which I completely. Agree. With Bob on one. Of the big things that we did just this past year is. That we have now partnered, with the college, which has done, amazing things in terms of you know the growth in its eminence over the past 15 to 20 years so. We've recently partnered, with the Economics Department and, we've. Introduced, a new undergraduate. Major, called, business economics. So. This is sort of the biggest move, by booth into undergrad, teaching I think in over 60 years, when. From, the time when Booth was kicked out of teaching undergraduate so. There, they're now happy to have us back not everybody is but most people are happy to have us back and. The. The demand, for what we teach has been overwhelming, in, so, you, know as an undergrad you can now major in Business, Economics including. Taking classes, in accounting, and, corporate finance and marketing in addition, to the core liberal. Arts and the court lasses you take in the department, so I think this is going to be a huge. Huge success, story for. The university. In. The MBA program itself, we continue, to do really well the incoming. Class at, Booth was the, highest. Caliber class, that we have had in terms, of scores and other things and. Also in terms of diversity the, entering. Class 42%. Of the entering class was women which. Is the highest number that that we have ever had. I. Would. Say that it's not all I would say diversity isn't great on all the dimensions, in the sense that we had probably the least. International. Class we have had in quite a while, so. The number of students applying from overseas, has gone down largely, for reasons having to do with the difficulty of getting visas.

And And so on so. We tend not to have students, applying from places like you, know Eastern Europe and the Middle East where they're it's. It's hard to get student visas even if you get in so. You know hopefully this problem, goes away soon we'll see. It, was supposed to be a joke but anyway let me let me not cover. On. The programs one other thing I'll point out is that our Executive, MBA program. Celebrated. Its 75th anniversary, this, past year so. We had the very first EMBA. Program, in the world started in 1943. And, I think for 20 years there was no other MBA, program, sort of after that and. You, know we were then the first school to have programs on three continents, we. Began a program in Barcelona, one in Singapore and the. Barcelona, one now is in London and the. Singapore, one moved to Hong Kong so. One of the key things we achieved this past year is that we completed, the new building in Hong Kong that's. Going to host not just boots a MBA, program, but, also study abroad programs, for college students in Hong Kong so this, is a true partnership between us and the university to raise. The funding and complete the building we, had the grand opening at the end of November Joe Neubauer who who's here our chair of our board of trustees was there to do the opening. It's, a spectacular facility. And I urge all of you if you have the opportunity, to be in Hong Kong to to go take a look at that. Lastly. Just setting up this event right booth has a long, tradition. Of, informing, public, discourse, through. Forums, like economic, outlook, through. Our initiative on global markets through. Chicago, Booth review which is our research. Publication. And. We. Also have our annual management conference. Which I would like to give a plug, for that, will be held May 3rd in Chicago. So we'll have a keynote conversation, with Howard Marks the co-chairman. Of oaktree capital and. Obviously booth, alum and. Conversation. To be moderated, by Professor, Anil Kashyap, so. The conference also ago is going to have breakout sessions, networking. Receptions, and so on so, I strongly encourage all of you to come, there as part of reconnect, weekend. So. With that let me introduce the panel for today we have Eric Hirst and Randy Kroszner as I mentioned, and the, discussion, on trade wars deficits, and inflation. Rhetoric. Or reality. Eric. Who's. Sitting, in the middle Eric is the divine rad professor, of economics, at Chicago Booth he. Also is the co-director. Of the Becker Friedman Institute and, the, join York faculty, fellow at Chicago, Booth so, eric is a macro economist, but with very sort of eclectic tastes, his. Work focuses, on the housing markets, labor. Markets, household, financial behavior, and, one. Strand, of his research which he spoke a little bit about last year, looks. At the factors, underpinning. The decline in employment rates, of young. And middle-aged workers in the u.s. so. He talks, about what is the importance, of technological. Advances, in, explaining, both the decreased labor demand, as well, as the decreased labor supply, for less.

Educated Workers. Eric's. Work has been extensively, covered in in the, New York Times Washington. Post economists. And so on he. Won the 2006. Tiaa-cref. Paul. Samuelson, Award for outstanding, scholarly, writing on lifelong, financial, security, and in. 2012 he won the aving Marion Kauffman Prize medal for. Distinguished, research in entrepreneurship. He. Also got the 2017. McKinsey, Award for Excellence in MBA teaching so thanks, to Eric for coming back to economic outlook this year. Randy. Kroszner who many of you know is the norman bobbins professor of economics, and i'm, very pleased to say he's now a deputy dean at. Booth we managed, to twist his arm so in july he, joined the dean's office. Oversees. All of our executive, programs, and all, of our global programs, so. Randy was of course governor of the Federal Reserve from. Six 2009. He. Chaired the committee on, supervision. And regulation of banking institutions. And. The Committee on consumer, and Community Affairs. Currently. Randy is the chair. Of the federal research Advisory, Committee to the US Treasurys Office, of Financial Research. So. Randy during his term, in the government took a leading role in developing, responses. To the financial, crisis, and new. Initiatives, to improve consumer. Protection, and disclosure. Including. Rules related, to home mortgages, and credit, cards, and. Prior to that Randy served in the White House in, the President's Council of Economic Advisers. From 2001, to 2003. He. Comments frequently, in the international. Media, provides. Advice to financial, institutions central. Banks sort of government. Organizations throughout, the world it's, great to have Randy back with us again. And, finally, I wanted to thank Kathleen. Hayes or moderator, global. Economics, and policy editor for Bloomberg television, and radio. Kathleen. Has covered the US economy, and the Federal Reserve for more than 30 years and for the, past two years she's also broadened, out her coverage to do more work related to the. Economies and central banks of Asia, traveling.

Regularly, To Japan. Now. Some of you may have seen a little preview of some, of what we will cover today last, night on Bloomberg where Kathleen, interviewed Randy. Kroszner so thanks. Kathleen for moderating the panel so, please join me in welcoming formally, Kathleen on the. Okay. Well. What. A year huh think. Back a year ago if it was early January. Right, everybody. Was waiting to see how. Much the Federal Reserve would raise interest, rates we'd come off another. Year of a bull, market in stocks. Mark, is kind of wondering if the Fed could raise rates as much as they thought, labor. Market, look pretty good unemployment. Already low expected, to get lower and here we are at the end of the year, and the, Fed did its for interest, rate increases, and some would say labor, markets looking better than ever the latest employment report, if you follow these things closely you know. Even. People who think the labor markets is that strong said wow that was blockbuster. In December, but. The, stock market, had a very, very bad year a very bad quarter a very bad December, and it seems like in so, many ways and I was going to also mention a, couple other things of course we've. Got a government shutdown we've got a trade war that continues, and gets worse and if we want to go global we're gonna see what happens to Theresa, May I'm actually rooting. For Theresa May at this point but it's, it's it's an interesting juncture, and I think if you were to take one track, of that one set of data once one set of news flows you'd say yeah things are looking pretty good like, the Federal Reserve did in December if, you take another flow of data, or news stories, and of course some things that Randy looks, like the opioid, crisis, which gets some jawboning, from time to time but nobody really seems to do much about it and it does seem very linked to some of the structural problems in the labor market now we're. At a place where you wonder, ok where were there where are we going, it's. So easy for a while it seems but politically for investors, and now, it suddenly, is a lot harder so, with that we, have to people are going to take well. You know the same questions, I think a lot of different angles and, I want to ask you both you. Know from from your vantage point Randy you were at the Fed Eric you Brothers concentration, on labor markets entrepreneurs, though many aspects, of what's really part of the economy and how it works how does the economy look to you let's start with you Randy. So. We. Have a lot of jitters, in the in, the financial markets and of, course. We'll have suddenly, changed their view from well things are looking pretty good too, we're going off the cliff, markets. Tend to be much more volatile, than the underlying economy. Is and if. You look at the underlying economic. Data it's. Hard to see the economy going off the cliff now, having. Been at the Fed from 2006, to 2009 I never say never about anything so anything could happen but.

I Don't really see see. That being the case the, labor markets. Are. Solid, sound, Eric, I'm sure will comment more more, detail on that. Consumption. Is sound. Investment. Is is, up and so, the, fundamentals, seem to be there. We. May not have quite as much optimism, as we had about the from both the consumer, and the, and. The. Business. Side but still a fair amount of a fair amount of optimism, maybe, not the peak but still still, a fair amount and so, I think it's perfectly reasonable of the Fed has said that the economy is strong they, don't see the economy falling off the cliff and. They're. Gonna be sensitive, to what. We're the the data, are, but. They, see things looking pretty, strong now, that seemed to spook the markets when when, they said that which is a bit of a surprise because they've. Been saying that all along and the underlying data, were we're. Quite quite. Solid. Obviously. There are a lot of clouds on the horizon whether. It's sort of trade war issues, whether it is fiscal, deficits, whether. It is just kind of the broader, dysfunction. In in, Washington, and it's not unique to Washington. But sort of around the world so, it's not that there aren't aren't. Concerns, about, about. What could go wrong but I think the fundamentals, are looking. Reasonably, good will, we grow as strongly as we did this last year growing more than 3% highly. Unlikely, are. We going to go into recession it's certainly possible but that's certainly not my modal forecast and just, because of the volatility, over the the markets of the last few last. Month I that. Hasn't really changed my, view. Materially. Of whether we're likely to see, a downturn. Not. Professor. Hearst. With. One, thing Randy said that when I could focus. In on a little bit the, going off the cliff part I think that's. Pretty. Much well. In the tail of the distributions, that doesn't happen ran, relatively. Frequently in most periods of time so. I think what we're thinking about is you know how much is a slowdown going, to you, know look like when it happens and what, is the probability of that happening, and. So I'm kinda get the feeling now, what, we're kind, of in the last year or so kind, of similar to where we were maybe ninety nine two thousand or so where. You go through a period of a decade. Plus, growth. Period, we came out of a recession. 2009. Ish and, we've now had about ten years where the economy has grown from a really, low base when we had the in the depths of the recession but, it's been about ten years of growth which by historical, standards in. Peak. To peak kind, of you, know business. Cycle that's a relatively long period of time and I believe we're, about four. Months away five months away from the longest expansion, in you. Know post-war, US US. History so. We're going along and. People. Are saying well. Flipping. Coins or, probabilistically, eventually, these things happen, and we've. Kind of gone through a, cycle. And even though things are looking pretty good there, seems to be a fair bit of uncertainty, in the markets, and. When I say the markets I mean you all I mean the people the agents, in the economy because it's showing up in prices so, that uncertainty is out there and you can see that through little pieces and news lead. To big. Movements, in in, prices, and. You. Know where, is that uncertainty coming, from well Europe. Might be slowing for for different reasons with breath get gonna look like how, our trade war is gonna play out how long they're government shutdowns, going to exist you know we have rising deficits, in the in the background, how are we gonna deal with those so, all of these things are creating some uncertainty. And, that's. Why little pieces of news are moving markets. Up and down and, you. Know from my perspective, just. Like we did in 2000, we had session it was a very mild recession, there was a slowdown. But. I don't think you, know, off. The cliff is something that you, know I don't like Randy I don't see much signs of that but there could be recessions, they happen from time to time a lot, of them time they are things like you know we grow a little fast and then we have to correct a little bit and we grew a little fast and maybe we have to correct a little bit and so. I think that is in the distribution, and so we could go a period, of time where. You know the economy, slows, down a little bit more and, we have to remember a part of last year's growth came.

From Really, large fiscal. Stimulus, you know we had a big tax cut okay, and that big tax cut put more money in my pocket more money in your pockets, and we spent that money and that, boosted, GDP, and. You. Know that gave us a little bit of a little, bit of kick and you. Know eventually. We, might think as deficits. Arising we're gonna have to pay that back as, those tax cuts expire we might spend a little bit more so, that's an adjustment the fiscal, slowdown. Contributed. To our growth last year and some of that's just going to correct naturally. To begin well if I listen to Eric. I think well, gosh you know it's in the distribution maybe, not could be just a little recession, throughout, that time it seems, to me if I'm the Federal Reserve I would, be thinking. About that pretty hard and, we, can assume the Fed is thinking about that pretty hard because they've signaled they can be patient. And. I think there's there's there's a couple of angles here and I think that one for. You Eric, is the labor market, looks strong on the surface right you got good jobs growth. Wages. Myth they're up to about three percent year-over-year to me they're. Showing some improvement and, I, guess if you're the Fed you say well those wages eventually. Help boost inflation, do you see that happening now because that we were also talking about inflation we're talking about the Fed from from your labor market, expertise, is that's something you'd be worried about if you could take one of those seats on the board like Randy did yeah. So. Where. Inflation, come a wage pressure is a big, predictor, of inflationary. Pressures, occurring. So when the economy overheats. In some extent you, know prices wages. Rise that, passed on in terms of prices you start getting inflationary, pressure when you're thinking about where, is inflation coming from the labor market, is, a good is a good signal it's the biggest cost of firms and when wage pressure, starts rising, you, start seeing inflationary, pressure let, me just flip the question around now and ask, why aren't wages rising and. So now this is not a, 2018. Question, or a 2016, question, or 19, yeah, our 2008. Question this has been Nino twenty, years in the US where. Wage. Growth has, been muted. At best and, in real wages for the median worker you. Know are. Slightly, above. 2007. Let it levels not, much. Above you know which, in your mind you got to contrast that with you, know the 40 prior years prior to. 2000. Where on average median wages were growing about you, know one, and a half two percent real for. For, about a forty year period. So, why. Is it that the wage. Growth. Has been so muted and this is where you've seen me last year many of you you can if you see me tomorrow I might say the same thing where, while. Cyclically. The labor market is doing pretty well there. Are structural, forces, in the labor market that are weak in the labor market today in those structural, measures are, still weaker than they were in 2007, in much, weaker, than they, were in. 2007. Force. Or how do I measure those structural, forces you, could take a look at the, you, know employment-to-population ratio for. Prime age workers okay. So not the unemployment remember, the unemployment rate measures, only those people who are looking for a job who, are going to to find a job some people just aren't looking for jobs in their prime age and these, workers tend to be less educated and, they tend to be concentrated in, the Midwest in places. Where manufacturing. Was predominant, and they, are sitting idle relative. To where they work now there's. Less of them sitting idle in 2018. And there was in 2016. In, 2012. So there is a cyclical. Component that, happens in every business cycle when the longer, the recovery goes you, know the employment-to-population. Ratio, goes. Up the unemployment, rate goes down but. The trend if you look from peak to peak that. Is you know a downward trend, that has been occurring for pretty much you know 20. Years strongly. And then slightly in the the two decades before that but you. Know from 2000, on, the. Employment-to-population ratio is. Well below trend for prime age workers so there's nothing to do with the aging of the population, it's. Just for prime age workers and. What that means is there is some labor sitting on the sidelines they're. Not looking for a job and when, they're sitting on the sidelines, that mutes, wage pressure and, even. More. So the, wage pressure for us to. Be going up so, when you look at our wages.

Wages. For those of us with a bachelor's, degree or more that's been going up where, the wage pressure has been most muted which is most of the population, is for, people without a bachelor's degree and that has been stagnating, quite, a bit and that's keeping wage, pressure. In. The aggregate economy down. So, I think you know when you hear these statements where. The news sometimes, this is a store eclis strong labor market they are focused on one metric, of the labor market which is the unemployment rate, but. By these other metrics wage growth and you. Know employment-to-population ratio for. Prime age workers. We're. Not at historic, highs you. Know and we're still below 2007. In 2007, was below 2000. So there is you know in a historical, sense the, labor market, for certain types of workers are. Not at these historic, highs that you're seeing so Randy, with all that I mean the, Federal Reserve still. On your right Jay, Paul made it very clear in December, he still made it in anything he said recently that the. Economy looks stronger than particularly when they look the labor market and they think then what's going to fall more and we're going to get inflation. And. I think but I I think that's one of the reasons why people are. Got. Thereby this has got a bit more agitation, like why you keep raising interest rates at a time when. Inflation what's. The big accelerant. Is that is that it is the Fed making a mistake because that's a lot how about a lot of people interpret the big stock mark itself particularly at the end of the year saying you guys you keep you keep raising rates. You, are going to be the force that helps precipitate, the recession, as central, bank's occasionally. Are alright. A few different pieces in there than we've built up some of the things that Eric was saying and then get to some of the other pieces of the question so. The. The. Labor market has so, there's certainly those. Cyclic. Components, as you said employment. Population ratio overall, as well as even for this group has improved in the last year, because. Eric, was very pessimistic last. Year about this and you continues to be on that pessimistic, in the long run we, have gotten a little bit better in the shorter, run but. The other point is an important one we're not at the peaks of 2007. Now, some, might argue that the peaks of 2007. Were somewhat, artificial, and we. Wouldn't sort of get get. Back there, so, we. Have seen some improvement even for, the low-skill. Prime. Aged males, we certainly seen it in a lot of a lot, of other areas that's, helpful, but. There's. There, is a longer-term. Challenge, in the in. The market but for the short term intermediate run, of what the the the, Fed is thinking about they're. Welcoming these these, changes, they're not not, brings back 2007, but what, helping us then, on the inflation front, so. Exactly's. Eric was saying you, know the vast majority of expenses, for US, corporations. Are, related to to wages and. And. So the. Key thing that the Fed is will be looking at and this is debating, is we're. Starting to see a little bit more increase. In in, wages both nominal, and real wages not dramatically, more but but, a little bit more and so. Does that portend a, spike up in. In. Wages, and inflation and. The. Key is. Wages. And inflation so. When. Can wages. Rise an, inflation, overall not rise well, that can happen when productivity, growth is strong we've. Had relatively. Muted productivity, growth in the last last few years and that's one of the reasons why real. Wages have not gone up very much as Eric had said over the longer on history, basically. Real. Wage increases, have been very closely related to overall productivity. Growth it's. Very hard to get productivity, growth unless, you have a lot of increases, in the education, of the labor force you, can't really say we've had a lot over the last decade or a lot of investment, so that people, are working with things that make them make, them more productive, and. That, I think is going to be the real challenge going, forward and, this relates to the, the. The, interpretation, of the fiscal issues so, was, what passed a year ago a. Short-term. Fiscal stimulus or was, it a fundamental, reform, so. If it was primarily a short-term, fiscal stimulus, then a lot of boost up of consumption over the last year maybe that'll still have some legs in the first quarter but.

Then It'll fall off and, we'll be in much more difficulty, in the rest of rest, of the year if, there's something more fundamental that, happened that is changing. The incentives, for investment, and improving. The the, efficiency of the allocation, of investment, so getting rid of some of the kind of crazy pieces, of the of. The. Of. The tax code that led people to do investments, purely for tax reasons rather than for substantive reasons and of course we haven't gotten rid of that but, if we can reduce some of that and we can increase incentives, for investment then. We'll be able to have higher wage growth and higher, productivity growth without, the Fed having to respond, and kill the, kill. The so-called. Kill the growth and that's a debate that people are having we don't know. We. Did see in q2, and, not as much in q3, and. Increase in investment, so that's consistent, with some of the reform, interpretation. But we have to see whether that's going to persist or not one or two quarters, is not enough to really be able to judge that if, we continue to get that then I think the Fed is going to be comfortable in saying it's. Okay that wages starting to rise more rapidly this. Is going to be a moment like sort of the the Greenspan epiphany. In the late 1990s. Where, he said we don't need to raise rates because, even though the economy is roaring ahead even though the labor market is very strong we're. Gonna have a lot of productivity, growth and that's gonna be, okay and so, that's I think it's one of the key debates that people are having right now inside, of the Fed and I don't think I don't think they know and I don't think we know because we need more data to be able to figure that out yeah I just, want to emphasize two, things I'm hearing things in the news lately that I just think should. Be more nuanced than then, I know. But. Even for the point of my eye which. Is which takes a lot for me to get there and so the first image is you, know the Fed Reserve I, don't. Think and I would, argue strongly, should not be the solver of structural, problems in the labor market the Federal Reserve is designed, to measure, model. Keep inflation in check and, to. Mitigate. You. Know, cyclical. Fluctuations and, so, that is their goal and you.

Know The structural problems in the labor market about you, know we could talk later on about automation, or trade or you, know barriers. To skill acquisition that, is not the job of the central bank and their, mandate, is to keep inflation in check and to. Keep, the economy kind, of rolling on so those, issues I've been talking about if I was sitting on the board would not be part. Of my decision-making, in terms of of, making. Federal Reserve policy again to the extent that affects wages I might, be and on, the other side you. Know the Federal Reserve has been dealing, for 20, years with. Low, wage growth in the US this is not a recent, phenomenon the. 2000s. Despite how well the labor market was doing on all metrics unemployment. Rate employment-to-population, etc. Wage, growth was rather low during. The 2000s, as well and yet interest, rates were still doing, up, and down as the Federal Reserve saw fit to manage the economy, so just because wage growth is low the Federal Reserve could do different types of policy for exactly the same reason, that Randy said there's a whole bunch of stuff that affects wages, that are outside the Federal Reserve's control, productivity, growth and you barriers human capital, and trade so, yeah, as a central, banker my, goal is to, you know keep, inflation in check and mitigate. You. Know cyclical fluctuations and, I think you know the French central bank is doing that right now, and if I was sitting there too, I would not be you, know deviating. From my policy, to try to normalize interest. Rates to some historical, norm, that'll, give me more room to act, when, I need to act ten five seven years down the road for bigger recessions, as opposed to smaller recessions, okay I would put you both of you and you're not a stock market guy I am, NOT however you, just mentioned, that I think okay so should. The Federal Reserve keep, raising interest rates right, now I mean it. Seems would, you've. Got again, you've got a stock market that's sold off you've.

Got And. You've got a strong labor market in both you would is it is it time to, to pause is it time I mean because you're right they can't solve structural, problems, but, in trying to manage the cyclical, aspects, of the economy, they. Can make mistakes I think. They can make mistakes but there's machine that tells me. So. There's. Nothing that tells me now that would make me want to deviate from my plan of just. Gradually. Slowly. Returning. Rates to. Normal. Levels to keep the the economy in check do you agree with him Randy I, mean I think the Fed has followed a very sensible, policy, and. It's. This has been one of the slowest. Pace, of increases. Of interest. Rates ever, and. It's, been you know you. Know Greenspan. Had talked about at a pace that was likely to be measured this, makes Jesus. Man look like a rabbit. I'll. Leave that for others to decide and. It's. A very, gradual, pace and and. Also it's been very interesting as usually what happens is the Fed can get behind the curve like you, know historical, mistakes they, sort of let the economy get rolling inflation starts to move up they're hoping that it'll be productivity, growth it's not and then I have to raise rates really really, rapidly and then that often ends up either. Taking, the economy of itself for being a. Really. A signal of the, who's gonna be getting. Into trouble getting, into trouble anyway. Slow. Gradual, path now. They have. A very, rough, estimate of where they they, try to see where, interest rates would be that. Are neither causing, expansion or contraction being, relatively neutral and that sometimes this sort of neutral rate or technically. It's called R star and. And. So they're getting into the realm of roughly. Where they estimate that that to be and, if that's a perfectly, reasonable place, to pause, this. Inflation. Is around two percent which is rough for their goal growth. Is reasonably, strong but uncertain, to be as strong going forward, and this, is a good time to sort of take stock and seeing, where, things are going and I, thought that's more or less what Powell, and others had said, for. The, last few months of last year apparently, they didn't see that or didn't hear that when when, Jay was was, speaking back in December and caused some tremors, in the market I think they've now made it very clear that it's, time to just sort of sit back reassess, take, a pause see, where things are if, inflation takes off without productivity, growth then they'll have to move the kind of moves down they'll come, down but.

It Strikes me as perfectly plausible I know Jim, Bullard who was. A good friend who was on the, board when I was there has sort, of said he like we're, one, interest. Rate hike away from recession and gosh. If if, the entire US economy hinges. On, 21. To 25, bases, are. Much more fundamental than that it's not the heads it's. A problem so I think it's a bit of an exaggeration the, pit defense a very powerful organization with. A lot of other stuff that's going on and one, quarter of a percentage point I can't really see being well no but that's signaling, discounting, a Federal Reserve it's gonna keep raising rates in the face a lot of stuff I think you being a little unfair to Jim but that's that's okay Joe get Jim here Nick call. Him right now but no speaking, of things that are out there trade. War okay let's let's go there because as economists. You. Know. That for the longest time no. Economist, could question that, free, quote-unquote free, trade was the perfect thing meanwhile. A president got elect at least in part because he noticed some of those people in certain states that. Somehow trade. What. Might have been free, but it didn't really work for them he's free or trade and. I think it made a lot of people start thinking well gee maybe there has been something wrong about the model of how trade actually works, not in a model for an economist. So. What. Is is there is there any, benefit. In this quote-unquote trade more our that, is are we making progress or the US and Chinese making, progress is it, going to help jobs like that's kind of a loaded question because I know what. You. Think but that is certainly, from, a political standpoint, from this whole sense of populism, you know rising, more in the US and around the world that is an element, what's. What's. What's, what. So. I think. You. Know there's two parts of that one, is related to kind of the things we, were talking about earlier which is, something that is going on which. Is the. Displacement of. Certain. Types of jobs and certain types of industries, that affect certain types of people that have occurred rather, rapidly. In. A historical, contest, during the the 2002. Particularly. 2010. Period so, we lost about, six. Million manufacturing jobs, on a base of 18, million manufacturing jobs. Between. 2000, and 2010, with, more than two-thirds of that occurring before the recession started okay. So that's it was a curring pre recession and. So. There. Is something going now we've gone through. Technological. Shifts in the labor markets, in the past okay, a hundred years ago we, were all farmers, a robot, comes along we called the robotic tractor and, we. All left. We. All left the farms and got reallocated, to other sectors, and, so, that happens and that's kind of the way our models work is people sectors. Rise sectors. Fall as sectors, fall people reallocate. To the new sectors, some, of those sectors have different skills so people acquire skills, to move to those sectors and it's not like labor, falls when at, one point you, labor - you know the employment rate Falls when 80 percent of us used. To be farmers and now four percent of us are farmers those, shifts happen and we readjust, the. Question, that I think more. Economists including, myself are thinking about now is, what affects the speed of that adjustment so. How quickly do. We adjust and, are, some shocks easier. To adjust to and some shocks harder to adjust to and so when we were all farmers and then, manufacturing. Comes along the, skill, mix of a farmer and the skill mix of the manufacturer, aren't, that different from each other okay they're, very, similar in the skill mix and, now, manufacturing. Goes away and we're gonna eventually in, the long run however that long that occurs. Gonna. Move to other sectors but. It takes time now to take a manufacturer. And turn him into a computer programmer, or a high. Skilled service provider or even a low skilled prefer service provider and my dad was a manufacturer. Randy's. Heard me say this before he would have been an awful Walmart. Greeter awful. Just. All the time so there's a certain skill set he had that, didn't translate, even, to the the the. The. Labor market that we have today so some of what's going on is that speed of adjustment is slow now, what. Does that bring us back to the trade question, we.

In Our mind when we're thinking about where that decline in manufacturing came. From how, much of it came from trade, and the answer is some of it there's some studies going on my buddy David autor at MIT has, some work showing that you know causally. The rise of China actually put, pressure on. Manufacturing. Employment in the US but. That's not all the story and how do I know it's not all the story because despite, manufacturing. Employment falling. By, almost, a third during, the early 2000s. Manufacturing. Output was up so, how do you get manufacturing, output going. Up with. Inputs. Going down. There. Was a shift in the production, process. Of manufacturing, where, we moved from producing, with a very larger. Amount of labour to a large amount of capital and so, what has happened now is even, if China was an original, shock that, might have caused, the. Manufacturing, sector. To adjust. Part of the adjustment, was automation, and that. Means if we go, back now and start putting barriers, to trade it's, not like the manufacturing, jobs come, back why. Because the manufacturing, jobs now we're just fundamentally, different than the manufacturing, jobs that have left and I, think for why I'm, reasons. Where I think a trade war, now in a job sense is not. Going to actually help, these. Displaced, workers, is just that the manufacturing. Sector, has changed fundamentally and, it's more automation now than, it is in trade and if you listen to the trade record rhetoric, well I think it started, in a job since now, it's more about intellectual, capital and, trying, to protect. Technologically. Technology. Transfer, across countries, and that's a different issue but, even those issues I don't think are gonna help the, labor market, that we're seeing today what we're really thinking, about with these structural issues is we just got to somehow, take people. Who had a skill, in this. Kind of you know low to middle skill manufacturing. And somehow, get them to, have the skills that work in the labor market today and trade wars aren't gonna do that and you, know, energy. You know environmental, contracts aren't gonna do that it's gonna be something around you know human capital and adjustment. And it'll happen naturally so. The question is you know are there policies that we could do to, speed it up and we might be able to talk about that later but it's not a trade. Issue. All. Right and I think it's interesting though that if we're, going into a more high-skilled. Technological. Economy, and. That's what the jobs gonna come from that again the whole issue of protecting the intellectual, property is very important but Randy what's your, what's. Your take on trade. More where it is where it's going does it have benefit, is it going anywhere actually at this point so. I think exactly, as Eric, was saying towards the end it. Seems to been transformed, much more to be a focus on intellectual. Property and, technology. Transfer or, technology, thefts depending, on what your view, is of that. And. And, and I think what that means is, that this. Is not going away so. There might be some face. Saving measures about. Something to do with cars or, a few other narrowly. Trade related issues but, I think it's a much bigger much. Much bigger issue that the administration, has with, the, Chinese, and it's, it's really a, the. Whole approach of the regime and, and. I think so when I worked, in the the. White House back in the the. Early 2000s, was you know bringing, China. Into WTO, and, and. Then the idea was that China. Would be a bit like Japan, so, if you look back 40 years Japan. Was the China of its day and. You, know really rapidly growing economy, there are a lot of questions about enforcement, of intellectual property there, were a number of in lawsuits. About. Exactly. These issues the. Thought was if you bring them into these. Global. Institutions, and as, they become wealthier, they, will become innovative they will want patents, to be enforced. Etc, and so, the analogy was sort of like Japan that. Was wrong. China's, not acting, like like, Japan and, I think for a few reasons one is sort of a fundamental, difference in the regime but, to technology, is dramatically, different today than it was in, the old days in the old days was.

About Making, cars and selling cars now. It's largely about data, and so. Because. Of the scale that the. China has. They. Have enough technology that, now you can, feed the AI machine, with a billion. Observations. Of, people's. WeChat. Information. Or other things like that and so you, can you can make a lot of technological progress today. Even, if you're not engaged. With the rest of the world given. Where where China, is just because of the scale of what they have and so they don't have to, engage, as, much so, Japan is a mutt you know as a relatively, large economy, but still hundred, 20 million, people not, ten, times that amount technology. Was different because you're making cars and selling cars there just weren't that many cars to sell one, you've got a gigantic, internal. Market and two if it's about technology you've got this this bigger. Bigger, ability, to make progress, internally. Just because of the the data and so, I think this issue is not going to be going away I think, this is one, that is a very, important, and fundamental one, and so. I, think, that even, if there may be some. Trade. Agreements, related to cars or a few other things this, is going to be an ongoing thing and I think the analogy that we had that, we could just bring people into, these global institutions, and they, would then be like us it, was a false one and I think that has to do both with regime, and has to do with technology do you think the trade. War is the best way to solve that issue should they be decoupled, or bundled. Right now the approach, is to bundle and I don't know that, comes with cost not only on, one side but also on the other I mean these were farmers. And manufacturers. It's a drag and lots of different, sectors, and it creates uncertainty as, well, so I'm just trying to get a census know is the best way to do this to decouple the issues or not so they know it's really tough because I think the, administration said ok we've been trying on this for a while we've gotten nowhere and. So, we've got to try something that's really gonna hurt and, and, and, I think you, know as exactly this jpowel said it's very hard to see any imprint, on the US economy at least so far of any. Of these trade disputes, on China. I think, it's had more, of an impact and will have a significantly. Greater impact, if there were to raise the the, tariffs that have now been been, deferred for for, a few months and. Regardless. Of what you think of the president the president someone, who, is. Is. A negotiator, and he can tell when he has the, upper hand and I think he thinks he has the upper hand on these issues right, now now, that may not be true in a few years but. I think right now he feels he has that and so that was the lever that I think he and the administration felt that they had I. Think, trying, to I think they think you know an alternative would have been to build sort of a grand international, coalition, said. You know he and his children would be, you know dead and buried by the time you'd, get that together and they, wanted to get something done, high-risk, very, much high-risk, but, I can understand, why. They. Might take a higher risk strategy, because, the the traditional strategies, weren't working before, we open up to questions in a few minutes I want to get a couple more things in here and and one I guess I'm thinking about where the government shut down for, months maybe, years who, knows. We've, got, you. Know this this this shift that you could certainly, have expected, right you know Trump gets elected my, god I gotta this Republican. Trump, president you know the White House and then the Democrats get the house and they. Take you know the the tables sort of turn again. So. It's just such a great juxtaposition right. Because now you've got you, know Trump on one end and the people supporting, him Republicans. Whether they want to or not kind of thing got, this new wave of Democrats, right and you've got progressives. And, somebody, even probably some a socialist, right and the Bernie Sanders, group is there and it, seems like you, know where is this debate going.

And When you look at any, part of it you want to Eric you want to look at deficits, do, you want to look at taxes, like or you to ratty I mean we're gonna put a let's. We need money -, we need to redistribute money to people who don't have it because they can't find jobs because of all these forces they can't make enough money, you. Know or, you. Tax the wealthy what what's uh as economists, looking, at this what do you see what, makes sense what's. What's, we, are we moving in a, crazy way in some kind of right direction. There's. Lots. Of questions they're moving. A straight answer there, might be I mean so. You. Know in. Periods, of. Slow. Growth. Particularly. In you know in. Disruptive. Growth where there are some winners and losers so, think about automation, and recent periods, where. There's gonna be an adjustment that happens but during the transition there is winners. And losers there. Tends to be movements. To pull. Both sides of the political spectrum okay. So people move towards you, know certain types of you know isolationist. Populism, some, people move to more socialist. Populism. So you get that kind of movement cuz why people are struggling it on how to process it I might life, is and doesn't look as good as I thought it was going to be but, that guy I'm pointing to you particularly, your, life looks pretty good and. That. Guy looks pretty good so we're sitting here in. The Wall Street Main Street people we, know what you who is who. And. And. So, we're seeing that so when some people are so they move to the extreme so you're seeing both of that going on now so both. Types, of policies. Might, have short, run support. But, come at kind of long run costs, and whether. That be you know kind of what we're seeing now where. We're potentially. You know getting, backlash, against. Immigration. And trade there are benefits to that in the long run that comes out you know some short-run benefits though of stopping it down you, forego those long run when you start talking about seventy, percent tax, rates on you, know marginal tax rates on income. That. Sounds nice to some people now but that comes at a cost, okay, people you know once you start telling me you're gonna tax income at seventy percent at the upper end that, spills over my name infect my labor supply today but it might affect my human capital, you could start people going less going to school less starting businesses and that has effect on growth in the long run and so things that you know to navigate. This, period, of time where you go through these periods, of adjustment, where there are observable. Winners and losers and. You. Know that comes with this political. Movement. To extremes, and those could be very disruptive, to, the.

Long-run, Prospects, of a so, when you're hearing now move in both extremes, so moving towards you, know some very liberal elements, of Democratic, Party very conservative, elements and because, one thing I want you on the table with you and Randy to is this, because I think there isn't you know you talk we it's, easy to talk about how things change is when your some losers it's easy to talk about farmers, going into we're going into factories, but, I think a lot of people are looking, at, AI. Artificial. Intelligence, robots. The increasing use of robots, robots. Displace, people you, can say oh but people are going to make robots but it takes far fewer people to make the robots, that, are displacing, people, I mean it's not an equal trade, there necessarily, it wasn't the same with the tractor either the, tractor you the same to the tractor these. Kinds of things so what it is is what happens is we start moving now to an economy, which we've been doing for a long period of time of high, sales curva services, okay, you'd like to come you, know have some people who come and give you some, high-skilled. Service which, you'll be you know us sitting, here giving you information or, you have a doctor, who, could actually you, know you. Know stay ahead of the robot in terms of diagnosis has to be working somebody has to be working to buy your service, and somebody has to be making something people will buy and I think this whole thing about universal income and, taxes. And where they're going I think even with regular people who don't have sophisticated, economics. There's something they kind of feel that is changing, and that's why they're kind of worried. And people are you, know even middle-of-the-road, people who are not considering, themselves socialist, they're kind of going where's this all heading so but I'm saying that same fear if you go back and look at newspapers was exactly, the same we're.

Moving When the farms were moving but moving us off the farms and it's all about transition, dynamics, and, it's about the speed of that transition dynamic so every one of these types of. Adjustments. Are, these these innovations, come, with some disruption they, always do okay and it's all about in the long run people will just know one way would be moving up the chain and getting human capital now. The question, that you, know we're, thinking about, now as a profession, is how, much human. Capital, can. People get could ever put it the other way can everybody get the. Human capital that is needed to be successful in the labor market right now and I don't know the answer, to that but that to the extent if you can't move up that human capital chain. And. You don't need everybody to move up but if you don't have enough people moving up that, could cause periods. Of prolonged sluggishness. Randy yeah so it's exactly the we were the move from using. Just. Human. Labor to then using. Donkeys. And, horses and. Then moving to tractors, and other things and there, had been all these concerns, you know the Luddites were concerned that all of these these. Things would destroy, the ability to generate. Jobs and generate income and obviously. That, hasn't been the case. A lot more income, a lot more jobs but, very dramatically, different ones with dramatically, different skills that are necessary the concern, that, a lot of people have is and an Eric was getting at this from before that this transition is going going, to happen much more rapidly and so you're gonna have, this very rapid transition, from. Traditional. Activity. To needing, very high skills to make the robots exactly, if you're getting at Kathleen and. And. Then so a lot of people will be left behind for. A significant, amount of time and and, can, we give enough skills to two, people so, they can be successful in, that in. That realm and that's been one of the motivations behind this idea of so-called universal, basic income that. You provide, people with with. Some sort of income. Because. They won't be able to be successful in the future so, one I think that's too, pessimistic you, know I think perhaps some transition. Or, to just assume that no one will ever be able or that very few people you will have those skills, or be able have those skills I think that's exactly what people would have said back in the late 18-hundreds, yeah and then in the eighteen twenties yeah is with it is what they said it's not yeah before it as it is what they say yeah it's actually very instructive to go back and look at some of these these. Books from. Those, periods, about, about. These things it's it's it's extremely extremely. Interesting, because if you take off the some of the specifics, they. Could be the same rhetoric that's that's, being used today and so, and but, what's interesting is this, is an interesting book called give people money by. Anne Lowry that is. About. Universal, basic, income she's very big advocate of universal, basic income but. Actually the first half of the book could. Have been meant written by Milton Friedman said. How could this be here's someone who's on the super left saying, give people money but. If you actually look at what Friedman, said about. About. Providing. Support for lower income people he was not someone who said forget about him don't worry about it he said we can do, things that will be helpful to people and, so, of. Course no, one paid attention so, we have welfare policy, that gives people food stamps gives them this because in that we basically try to micromanage.

Low-income People's lives, Friedman's, approach was like no no we don't do that we have something like the Earned Income Tax Credit give people incentive, to work, but, effectively subsidize, them so that they have more more income, and. And. That you, know and that they, then build skills etc etc through, through, that and. So. The. First part of this book I think it's totally sensible because it's basically, Milton. Friedman's critique of what if. You rely today how we could treat welfare, policy the second half the book gets back to what what, Kathleen was saying is this, sort of Cavalier, approach well. To. Do this at the level that that. Many people have proposed well, that'll cost like an extra, thirty, or forty percent of GDP, we'll get that from somewhere. It's. Just like forgetting, about the budget constraint is a little bit as a little bit crazy and so. So. I think there's some issues in universal, basic income that, makes sense thinking about are we doing our welfare policies, in a sensible way that, give people the right incentives, to build skills and, not try to micromanage their, lives but. The big picture is like well we'll. Just kind of give up and just give people money and the money will come from somewhere, one. I'm not sure where it's gonna come from and two, I think that's far too pessimistic and, it's just is a very bad way to think about, people's. Lives and what and and how they want to be people don't want to be on unball yes people want to be able to acquire skills and be productive, and, enjoy you. Know being, able to make a contribution and, I think the Friedman type approach where you might have an earned income tax credit where people, have an incentive to to, work and you effectively subsidize, their. Income, that's. A much more sensible way to go than this other approach and it's also one that is potentially, affordable, this other approach is not yeah and so for me it's a besides. The, hugely, expensive component. In a period where we have. You. Know deficits. Are jumping, now where some forecasts, are coming in at 180.

Percent Of GDP debt in you. Know 15. Years or ten years at, current tax play and so so, that's I don't even know if we'd be able to afford something, like, that in. The wild district. There's another issue that I have with the universal, basic income in, that it slows down the adjustment, and so, part of what we want to be doing is we want people to, adjust in. Anything, that provides some sluggishness, in the adjustment. It. Has, a cost now on the other hand people, are suffering, so how do you manage these two things one my, four policies, are, always, like you know they, have the expansion. Of the Earned Income Tax Credit so, if you work I will subsidize you so that gets them to take the incentive to where they think they might be able to find some jobs and then start building some skills, second. I do, believe, in, expanding. Apprenticeship, programs in, the. Manufacturing, sector and I might even tack subsidize, that and, the reason I'd have to tack subsidize, that is these, programs, are very inefficient if I do it well. The, if I only I do it and Randy doesn't it's not an equilibrium because, as soon as I do it Randy's gonna hire all my workers sure I've got trained for free so we needed to coordinate the equilibrium, where all of us provide these types of, incentives. Simultaneously. So I might try to do a tax incentive for that third. I probably, would, also think. About, changing. The skill acquisition in. You. Know the high schools around the world you, know we used to have a little bit more vocational, training I wouldn't track like Germany, does but, I would I. Would actually offer options, where, not everybody needs to take trigonometry. In. Order to be successful, in the current labor market so you might have some, tasks, that actually could start providing some skills that the labor market is developing now the downside of these is you train them in skill X and that goes away ten years from now but, I figure once you have a little bit experience, in you know getting this it's easier to reallocate, that at some point down the line and lastly, I'm a huge fan of high skilled immigration, as. Well, bringing. In high skilled immigration and against do two types of things one. Is there, tends to be some strong. Evidence that they create a lot of jobs where they do spill over to, some lower skilled workers and second. Anything that keeps our income in check I think is a good thing so income. Inequality, it's. Something on my mind and we, tend to know the current track is, it. Is growing over time and that tends to end in very, disruptive. Outcomes. For societies, so things, that can mitigate that, type of transition. I think high-skilled, immigrants, would, be one way to keep that in check but, also. Also. Provide some spillover to to, lower skilled workers okay. Well. I think we're ready to open this up to some questions we've touched on a number of things and probably there's a number of things we haven't touched on that, you all have questions, you'd, like to ask and, I'm going to say for, starters there's a number of people in the audience you never know how many people want to ask questions but frequently lots of people do so I have a couple of rules one.

Of The rules is, you get pretty. Much one question, at a time

2019-01-31 14:57

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