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A
Indiana University is proving how higher education can create solutions with industry. We're working side by side with industry partners to fuel economic growth that powers a future ready workforce. Explore. I use impact@iu.edu impact.
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B
Bloomberg audio Studios Podcasts Radio News. Anna Wong has been definitive at Bloomberg Intelligence in Market economics. She is in conversation with Kevin Hassett, Greenfield, Massachusetts and of the University of Pennsylvania. Now at the White house. Let's listen. 100% of its sales in the US were the only customer for them and they have like 1% of the US market. And there are lots of other firms selling the same product into the US well then if we put a tariff on that guy, then it's really going to cause some harm to that firm. And so what we did is we actually went through all the different tariff classes, I guess. What are the codes called? Hs? Yeah. Okay. We went through them all and then figured out like the relative elasticities and then maximized the sort of or minimized the potential harm on this one. One of the things that we've learned is that one of the reasons why the US Has a really persistent trade deficit is that we have a few trading partners that are like, have basically a policy in their country to create jobs and dump product into the US in order to produce political stability at home for them. And so our intuition early on, as we're thinking about what's the next step, given the President's intuition about how tariffs can be an important part of optimal revenue policy, is that if we put tariffs on, say, China, then their supply is really inelastic. And by definition it is the most inelastic thing in the world because they've been just throwing stuff at us year after year after year that then they would have to cut their prices to continue to sell enough stuff so that they could create enough jobs. They had the political stability that they wanted. And I think if you look at the record, that's more or less been the case since the tariffs came on for the countries that have big persistent trade deficits with us that they've ended up having to cut their import prices by so much that there's very little effect, visible effect on inflation here in.
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C
The U.S. so what you. So when I look at the schedule of tariffs right now China is at 31% and Brazil and India are at 35%, which is higher than China. And is this a transition phase? Is there where the end point of this trade, the trade policy in this administration, say by 2028, the tariff schedule and the relative tariffs around the country will be different than what we have served now. And what's the end game?
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B
President Trump, you know, will decide what the end game is. He'll look at the deals that are being presented to us and decide if the deal is good enough. You saw, for example, that we just had a big reduction in the tariff for Switzerland after a very acrimonious phone call between the President and the Swiss that led to the very high tariff rate. And so I think that, you know, there's a negotiation underway. I think for many countries the negotiation is finished. And for some countries there's still work to be done.
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C
Do you think after all the negotiations, the trade deals and adjustments in the tariff schedule, we might be converging to your algorithm in the first Trump administration?
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B
No, I think that what we'll be converging to is something like a border adjusted business cash flow tax. Because we in the big beautiful bill, one of the things we did is we expanded the various export subsidies for multinationals. So if you have a, this is inside baseball math. But if you have an export subsidy plus a tariff plus a payroll tax, then you basically have a border adjusted business cash flow tax. And so I think that in equilibrium, what we're seeing is that we're getting lots of revenue. It's a few hundred billion already this year, and it's not causing a lot of harm. GDP now is at 4%. Inflation has been trending slightly down. And so I think that it's working the way it would if it were a border adjusted business cost.
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C
And what have you learned about optimal, how tariff fits in this optimal. Optimal tariff as well as optimal fiscal policy?
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B
I think that there's a race to produce in the US Tariff to avoid tariffs that is very beneficial for US Workers. And if you look at capital spending year over year, we're having one of the best years ever. And that's even before we go through the trillions of promises that we've made in the trade deals. And so there's that, which is the sort of capital spending effect that was somewhat of a surprise to me how big it was because I again thought that what you might see is like price adjustments and so on to by the inelastic suppliers. And then the consumers wouldn't really see much of a price increase. But I think one of the things we're seeing is a massive onshoring of activity like anything I've ever seen. So I think that it's really been a very net positive policy, despite what sort of conventional economics has been teaching us since we Went back to the textbooks when I was in grad school.
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C
Okay. So, you know, I think in Wall street, most of the firms, many of the firms have come up with this cost burden of tariff composition of around 5%. Exporters cuts at discounts, 70%, 60 to 70% absorbed by domestic firms and the rest, you know, 20 to 30% with the tariffs showing up in consumer prices. Do you disagree with, with that sort of breakdown or.
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B
Well, I think it will depend on. It's a product by product kind of analysis. And I think that it's still work in progress to figure out what the final story is. But again, we've got high growth and no pickup in inflation. I think that the Wall street folks are a lot of Wall street folks who I respect and read in the spring, we're saying that we're going to have stagflation, that we're going to have 4 or 5% inflation because of the tariffs and no growth. And so I think that allocating like the current state of the economy and the impact of tariffs on it from people who told us that we'd have a recession with high inflation with those models is probably not the best thing to do.
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C
Yes, certainly Wall street have been caught wrong on their forecast of an inflation surge which did not happen. In fact, I remember, I think the consensus upon Liberation Day, everybody revised up the core PC inflation to well over 3%, even some closer to 4%. And now we are on track to hit 2.9 or 3% at the end of this year. So for sure the consensus has been wrong on that. So recently there is a viral San Francisco Fed paper that looked at 100 years of history of tariffs and they found the net effect of tariffs tend to be deflationary. However, they also found that because it's deflationary, because it it as an aggregate demand shock more so than a supply shock and hence ultimately it raised the unemployment rate. And so far this year, when we begin the year, the consensus on Wall street is 4.1% unemployment rate. Currently we it looks as if we are heading to 4.3 to 4.4 at the end of this year. How much do you think of this slower hiring and increase in unemployment rate as attributable to trade policy or what other policies?
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B
Well, I think it's actually quite a mistake to look at 100 years of history to learn about today's situation. To do that you're making an underlying assumption of what kind of attritions call ergodicity. The idea that the data generating process is the same over time so that you can identify it in this period and then use your knowledge to think about the next period. I think that 100 years ago, if you wanted to move production from one place to another, it was almost impossible. You'd have to get it on the Queen Mary or something and move it around. And now it's really, really easy if, you know, 100 years ago, I guess we didn't have a telephone or maybe we just started to have a telephone, but now we've got the Internet and we've got AI helping us decide how to move stuff around. We've got a capital spending boom that would have been impossible 100 years ago. And so I don't think that, yeah, I don't think that history in this case is going to be that useful because it's clearly point where the assumption of ergodicity is not going to apply. And so we're seeing, you know, massive movements, you're seeing the big drug companies, every movements of production to the US that will benefit US consumers and especially US workers. We're seeing real wages already this year going up, recovering maybe about a third of the ground that we lost under Joe Biden with the high inflation. And I think that those real wages are going up because we're getting a lot of onshoring. It's not just because of the big beautiful bill's tax cuts, but also because of the onshoring from the tariffs.
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C
And well, you know that that conclusion is not just from that paper, based on 100 years of history. Actually back in 2018, when we look at the historical FOMC presentations, there was a staff presentation that used the internal workhorse model, the Fed Sigma model, I don't know if you're familiar with that to run to evaluate your, your tariff algorithm. Back in 18th, suppose there is 15% tariff on intermediate goods only and 15% on consumption goods only. And that model found that if you impose tariffs on intermediate goods, it is also over time deflationary and it boosts the unemployment rate by a little bit. In which case, how would you explain then the unemployment rate increasing from earlier this year 4.1 to 4, 5.4.3 or 4.4% later in this year. What are the drivers?
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B
Yeah, I mean, it's such a small movement that it's hard to say exactly. But I would say that one of the interesting puzzles is that, you know, first we're having a productivity boom that is really unprecedented in the following sense that when I worked with Alan Greenspan back in the 90s. It was just at the dawn of the computer age, really. And they didn't even have Netscape Navigator when I first started working at the Fed. And so you had to use something called Gopher. I don't know if you're old enough to remember this, which really wasn't that good. And Greenspan had an intuition that the computer was going to revolutionize the economy and give us lots of growth. It was a big positive supply shock. And so then when the unemployment rate actually kind of went down, we had no evidence of the productivity. Remember Robert Gordon was saying it's everywhere but in the data. But Greenspan decided not to hike rates because he believed that we were in the midst of a positive supply shock that was perhaps unprecedented. And we had a kind of five year run. It's one of the best five year runs we've ever seen, even all the way to the point where the US fiscal situation was in surplus. And so I think that it's one of the great moves of Federal Reserve history that Greenspan saw that it was a positive supply shock that would be both pro growth and deflationary.
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C
Yes, I have a.
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B
You have more stuff about that. Yes, but I say that to reference today. It's really interesting that there's like evidence in peer reviewed papers, or not quite peer reviewed yet, but at nber, which is kind of a lot of my friends at nbr, by the way, it's a secret of NBR authors like myself is that you'll very often take a paper and submit it to a journal and get the referee reports before you put it into the NBR working paper series because if you got some stupid mistake, the referees will catch it. You don't want to embarrass yourself in front of everybody by just throwing it out there. So actually NBR is kind of almost peer reviewed, but there's a lot of stuff showing big AEI gains. And the thing is that we also see it in productivity. And so if you think about the difference between say 1996 and today is that we've got this revolutionary new thing that probably is going to be a big positive for productivity. And you know, Steve Ulner and Dan Sickle, your former colleagues at the Fed, had a famous paper that you only see productivity booms after the benchmark revision. Right. So you never actually experience it while it's happening in the data. And this AI boom is significant enough that we're already seeing it in the data. Probably the benchmark revision is going to revise it up. And against that backdrop I think that the open question is how do we have high growth and then less growth in employment than we expected. And you know, I think the, the tariff could be part of the story, but I think that that probably is a very small part of the story.
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C
Yeah, I mean when we looked at the earning transcripts from this third quarter and where the so far the earnings have been surprisingly positive, in fact it.
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B
Was like the best quarter ever.
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C
So we surprises, we use AI to extract some of the themes and we did find that one of the dominant theme is that there are other stuff happening outside the trade policy that's helping offset a lot of this tariff bill. So. But focus.
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B
Yeah, I don't mean to cut you off, but I just want to highlight how important what you just said is. And the way to think about it is that trade is about 15% of the economy and the economy's. The rest of it's like 85% of the economy. And so you could do a lot of stuff in trade that has effects on the trade space that is completely overwhelmed by the 85% IT and 85% of the economy is getting this massive productivity change. And it'd be hard for a large change to 85% to not overwhelm something you did to the 15%.
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C
Yet at the same time, 66% of the economy is labor share. And a lot of academic studies are also looking into whether AI is already causing low hiring rate among young graduates. Whoever is graduating from college this year is probably in for a bad deal. So, so I think there is a puzzle out there which is if you have GDP growing at 3 or 4% at the same time you have a lot of jobs, a sense of job insecurity in this labor market. And the labor market is lagging. This, these other, you know, the GDP growth indicators and, and the question is, can this GDP growth be sustained at this 3 or 4% while the labor market is so, I mean going sideways basically with labor share probably going down probably because of productivity in spite of.
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B
It could be that. Also don't forget that there's been a big reduction in illegal immigration and employment from that aspect. And so the population growth is pretty low compared to what it was when we had tens of millions of people crossing the border. And so the break even jobs number for the payroll survey is people think it's down like quite a bit to maybe around 40 or 50,000.
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C
Yeah, between 30 to 60.
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B
Wow. It was 40, 50. You were 30, 60. I think we kind of, we're about the same range Right. So that's like another thing that we could have big increases in productivity and big increases in output and a healthy labor market with job numbers like the one that you forecasted and we'll see whether you're right or not.
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C
So 54 sounds good to you?
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B
I'm saying that it's not 100, it's that that's enough to sort of keep up with population. You'd want stronger growth than that and unemployment to go down, but the unemployment rate's a little higher than what's probably the equilibrium unemployment rate in a full employment economy, but not a whole lot.
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C
So. So Kevin, going back to this productivity boom, I recently tweeted a couple of pictures that seems to suggest some emergent micro evidence of how AI is boosting business formations. And St. Louis Fed also has a piece out showing how AI adoption is correlated to rise in sector specific unemployment. So, you know, just evidence that AI is working through at the micro level. But then the response I got made me realize that it is actually a really polarizing topic with half of, if you survey a lot of people, half of them probably say AI is a bubble. Half of them would say that there's no evidence that there's a productivity boom yet that productivity is still on trend and the improvement reflect more of a cyclical thing that happened post pandemic as opposed to this sustained AI driven productivity. So, so if you know we are going to touch on you being the one of the leading candidate for Fed chair and going back to that 1995, 1996, those two critical years at the Fed, you mentioned that Alan Greenspan was the only, really the only one, one of the few who saw evidence of productivity boom. And I reread the historical transcripts in December 1995, that particular FOMC meeting where half or more of the FOMC were agitating for holding rates Constant and in 1996 most many of them wanted rate hikes and somehow Greenspan was able to convince all this, these skeptics that something is afoot without the data to support support.
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B
Let me talk about this because there's an interesting anecdote that I don't think has ever been made public about this. So because computers were improving so quickly, then it was decided by the Bureau of Economic Analysis, a lot of great professionals over there, that they needed to what we call hedonically adjust the computer price. Which meant that if you had a computer chip that was twice as fast as the one from last year and it costs the same, then that's like A big reduction in the price of computing. And so that in a typical year, right around when we were starting to have to make the judgment on this, the computer price was dropping at about like 16 to 20% at an annual rate. And there was so much computer investment that real GDP was getting a real big kick from the fact that the deflator for computers was dropping so, so much. So I was in charge of that part of the world for the staff. I spoke a lot to Greenspan and he said to me once, how do they deflate communications equipment? Because communications equipment is basically like computers now. And went back and looked at communications equipment, rather than dropping 15 or 20% a year, was going up like 2 or 3% a year. And so then I called over, because they're actually very open about like the technical people at pea and I talk to them about, well, why is that? And they say, well, we use, when we're making our deflators, we use something called a match model approach.
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C
Yes.
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B
And so if something, we sold it yesterday and we're selling it today, then that's like we look at the price change for that and that's where we get our deflator. And we don't change the bundle of things that we use the batch bottle approach for very often. And it turns out that there were a lot of, there was at that point a lot of communications equipment produced in the US for developing countries that were kind of like really old fashioned analog things where you got like Josephine moving the wires and stuff to connect the phone calls. And since we had this really old equipment that we were exporting to developing countries, they were using the price of that to deflate communications equipment. It sounds like a very technical matter, but then Chairman Greenspan said, well, Kevin, what if we deflate communications equipment with a computer deflator instead? Like, how much more would GDP be going up? And it was like about 1.5% because of that. And so he was kind of like, yeah, we're really growing way more than we think. We've got a serious measurement problem. And then if you extrapolate from that, then if you were hedonically adjusting everything that gets like a computer to make it better, then you're putting like a deflationary force into the economy that's not being measured. And so I think that it could be that the communications story was a key moment where, you know, everybody at the board had a. Aha. Yeah, I can understand why Alan is so convinced about this.
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C
So I was going to ask you, so what your IT'S interesting. You were in the price and wages section?
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B
No, I was the business fixed investment person.
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C
Oh, that. Okay.
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B
Economic activity.
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C
Oh, I see. And what other sections where you are.
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B
No, that's the only one.
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C
Wow, that was a. You're very well placed for that.
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B
Well, that was my area. Right. Is capital spending and taxes.
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C
And he did mention in the, in the transcripts the rapid deceleration in the prices of high tech prices. But I mean, Greenspan is the pioneer of alternative data. He talked, he used, you know, men's underwear, sales for recession.
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B
The weight of gdp.
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C
Right.
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B
Remember that?
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C
Yes, yes. Lipsticks.
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B
People had to calculate the weight of gdp. I'm not kidding.
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C
Oh, wow. So, I mean, he's a chairman who's really in the weeds in the data and very creative as well. But let's not underestimate the challenges he faced on the committee, where half of the committee was against this. How did you. Did you have any insight. Insight then on how he was able to. Well, first of all, how was he able to win over the Fed staff, which is. Fed staff is very influential back then. You have the green book and the blue book now.
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B
I used to write the green book twice a year.
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C
Yes. And do you know what color is the book now?
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B
Is it the teal book? Why did they do that?
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C
To mix the green and the blue together. That gives you teal.
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B
So I mean, that's probably where all their problems began.
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C
So, you know, it was true in 1995, 1996, whenever the staff presents the data, because the Fed, the bar to argue that something is a structural change is very high because you will agree that the quality of the Fed staff is very, very high. And you know, one of some of the smartest people I know. And so for two years, even up to 1997, in the transcript, they were talking about no evidence of productivity increase. Only once they have the revisions did it show that in fact, in 1995 productivity was running at 2.5 or 3, as opposed to 1 point something. But how did, how did the interaction between the chairman and the Fed staff. How did the chairman convince the Fed staff to go? What was it like? Was the chairman directing the research and Statistics division here? Look for these signs of productivity.
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B
No, I think that there was just an excellent. So the people who were there working with Bee at that time, the person who was doing consumption, there were two of them. It was Karen Dinan, who's now a Harvard professor, and Chris Carroll, who's now at Johns Hopkins, two of the top consumption analysts like over the last 40 years, the people doing business, fixed investment were me and Steve Ulner and let's see, Prices, that was, what's his name? Actually, I forget the guy's name that was doing Prices. But then we had Steve Braun, who's now at the cea, who was putting GDP together. But I think that the really big thing that was happening was that the data were actually telling us that there's a capital spending boom really early on. And then the way that the Fed worked then, and I probably still does now, is that we take people are assigned to be like the consumption person, the investment person, the government person, the net export person. And then they forecast that with very complicated models. And then those forecasts get sent to the GDP coordinator and the GDP coordinator aggregates the models, the forecasts from each of the segments of GDP and then thinks about like what that means for interest rates. In discussion back then with Mike Pell, who was the research director, and with Chairman Greenspan. And then Chairman Greenspan might say, well, what if we move rates this way or that way and that everybody would change their forecast. So most of the stuff that really influenced decisions by Greenspan was coming out of that section of the Fed, not the section that was using at that point, an updated version of what used to be called the MPS model that was developed by Albert Ando and Franco Modigliani, that was a sort of big kind of general equilibrium model, ad hoc Keynesian general equal learning model, without a whole lot of expectations. That was the model they were using back then. And so I think it was very much data dependent, lots of work, bottom up. I don't know if you worked in the economic activity section, but we wrote a fellow named Greg Brown, who's now a professor at North Carolina, was my research assistant at the time, and we wrote computer code to do the business sector. And I think back then at the Fed, the research assistant who wrote the code, you would name the code for that part of the program by the research assistant. So there was like the GDP code that aggregates all the forecasts was named Ruth because there was an RA named Ruth. And so when we finished the capital spending program, Greg Brown did a lot of the programming, so he called it Trout. And people say they're still running Trout at the Fed that are doing capital spending. But the point is that we really, because we were the first ones to have computers really, and we had the data and we were studying computers with computers. I don't think it was a top down thing.
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C
I see that's Great. So since you started on the topic of the fed in the 1990s, you know, spotting a productivity boom is tricky. But if one think there's a productivity dividend boom but there actually isn't one, or you overestimate productivity, you could be in pretty bad situations in 1990s. 1960s is one one of that example. And also spotting whether inflation expectations are anchored is another skill that Greenspan has pioneered. The term rational inattention right about prices. Do you think right now inflation expectations are anchored?
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B
No, I don't think that they. I know that the Fed wants them to be appropriately so, but I think that we lost control of inflation in recent memory and it's more under control now, maybe not all the way there. And so, you know, I think that people would be right to worry. Well, suppose that the policy mix that we saw, you know, post Covid in the US Economy were the policy mix that came back. I don't think President Trump would do that. But say in the next administration, then wouldn't inflation go back up around 9 or 10% again? You know, why was it, if you're a person forming expectations over the next five, 10 years, which is very often a planning horizon for buying a house or something like that, that you could legitimately worry that, that inflation is going to come back up? And it's very important to think about why the Fed was unable to control inflation for so long and it got out of control and what the Fed can do to signal that that's not going to happen again. I could tell you that that what Greenspan did when he saw like really reckless spending is that he testified and said, you guys can't do this, that it's going to make it impossible for me to run the Fed and keep inflation under control. And what this set of folks did is they said, oh, it's transitory.
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C
If you were confirmed as Fed chair, would you do that?
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B
I wouldn't say oh it's transitory if it wasn't.
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C
And so speaking about inflation, so recently Trump said, President Trump said that he would like to give out these $2,000 checks to low income individuals by mid-2026. I thought the administration agreed that the stimulus checks during the Biden administration was responsible for some of that inflation. We have seen. How do you assess this trade off of trying to improve the affordability of this, these low income, medium middle income households who are struggling with these affordability issues versus giving more checks out and perhaps stoking inflation?
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B
Well, obviously the best way to address it affordability is to increase real incomes, real wages. That right before the COVID emergency, we had promised. It's kind of like the ranges you and I just talked about. I had promised, based on our modeling and the President promised at all his speeches that we'd get about $4,000 of an increase in real wages. And I had actually told him, based on our modeling, it was between four and eight. If it was you, you would have said six. But he wanted to, you know, under promise and over deliver. And then we got the 6 increase in real wages. And so therefore things were affordable. And then for the Biden four years, the real wage decline is like, depending on which measure you use, 2,500 to 3,000 a little bit more. And so real wages went down, which meant that wages went up slower than prices, which is kind of typically a key feature of most Keynesian models, is that wages are kind of stickier than prices. And so that real wage decline means that things. People are right to say that there's been a problem with affordability. And, you know, real wages are up this year in part because of the things that we're doing. But if you were to be as fiscally irresponsible as the previous Congress was, then you would for sure see inflation go up and affordability jump back into being like the change in affordability as bad as it was before. The thing is, though, that, that we've basically so far this year, reduced the deficit for just this year by, I think it's 390 billion now.
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C
Calendar year.
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B
Calendar year. It's actually like a weird thing that she's right about the calendar year, the fiscal year. The previous fiscal year numbers don't look as good, but it was because in the first quarter of the previous fiscal year, Joe Biden was shoveling money out the window. And so about 40% of the deficit came from that first quarter because they were shoveling money out the window. So if you wonder, how are we doing? We prefer to talk about calendar year rather than fiscal year, because then we don't get blamed for the quarter where they're shoveling money out the window. And if you look at that, then year over year, calendar year, we're down 390 billion, and it extrapolates to maybe 6 for the year. And about a third of it is higher revenues, tax revenues because of higher growth. About a third of it is tariff revenue, and about a third of it is reduced government spending. But if, you know, if we stay on path and cut the deficit by 600 billion, that's, you know, with A little bit of growth, you're looking at 7 or 8 trillion over 10. That's like a very significant event that reduces inflation with a big macroeconomic punch to inflation. And so against that backdrop, when it was July, we hadn't seen all this positive development yet. And so when we were negotiating with Congress with a big beautiful bill, then it was the position of the President that the tariff revenue should just buy down the national debt. But we're making so much progress on reducing the national debt that I think it's fair to think about what other policies we might pursue and like a reconciliation next year. And with all the tariff revenue that's coming in without causing a stagflation, I think it would definitely be on the table to think about how that might be rebated to on the table, but.
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C
Not necessarily a sealed deal.
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B
It would require legislation.
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C
Right. Speaking about that. So, so we did try to, you know, see how my team, we did try to see what path there, what requirement we would need in the economy to get fiscal deficit to the 3% that Treasury Secretaries got. Besant had proposed the 3, 3, 3 3% real GDP growth, which we look, look like we are getting in the third quarter. 3% fiscal deficit in three additional barrels per day of oil. But, and there's a million barrels. Million barrels. So, so three barrels isn't going to do so much. So, you know, there's a bunch of fiscal experts who, who calculate that to stabilize the debt to GDP ratio, which is hitting 100% of GDP this year, you do need an annual fiscal deficit of 3%. So I do, I do agree with you that in the, in the fiscal year, Even fiscal year 2025, you can see a lot of encouraging developments. But still we are at 4.9% of GDP in terms of fiscal deficit this year and tariff revenues is probably about 1% of GDP per year. But, but still it's, it seems really hard to get to a 3% deficit. And I will note that in the fiscal year 2025, the net interest payment on the debt has breached 1 trillion for the first time. And the increase was on par with the Medicare spending increase, which is a mandatory spending. What's your plan for bringing down interest payment?
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B
Well, I mean, what we've done so far this year is, you concede, is we've made an enormous amount of progress. But there's still, you know, let's say that if the progress that we see, you know, were to persist next year, then we'd still have only made up about half the ground that we need to make up to get to three. But given that we've made so much progress this year, I think I'm highly confident that we have a team that has a well identified goal from Scott and from the President and we'll work it out, but it'll have to be worked out with Congress in future spending restraint. And you know, I think that the tariff revenue will continue and that if we get the kind of growth effects from the capital spending that we expect, then I think we could hit 3% to even next year perhaps.
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C
Wow, that's a. It's your forecast that we could not my forecast.
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B
I'm saying that we could possibly. We really could hit.
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C
It is the necessary piece of this. A productivity boom.
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B
The productivity boom is a real necessary piece of it that I think that if productivity actually kind of wonder what your guesstimate of what the rate of productivity growth is, but let's say it's between 2 and 3 right now. Is that what's your rate?
- [38:30]
C
Yeah, I think it's the Fed's practice is to average over two years because it's very noisy and if you do that, it's about 2.2 right now.
- [38:39]
B
Yeah. So let's just say it's 2.2. And then we've got investment divided by capital minus the depreciation rate is the capital stock growth and investment is skyrocketing. So let's just say capital stock growth gives you like 3%, 4% because capital stock's big. And then that's about 0.3 times that. So that gets you up to 3 before you do something to labor. And so you're looking at pretty good growth accounting right now. That easily could be looking at a sequence of years that are from three to even four because of the productivity. If the productivity stays where it is, which I think it will.
- [39:18]
C
Okay, so now I'm switching to the hard bulk questions. Fed independence.
- [39:26]
B
That's an easy question.
- [39:28]
C
Are you aware you're the leading candidate for the Fed chair position? Is it, is it, Would it be fair to say that you are working a lot of hours right now? Are you working 60 to 80 hours?
- [39:42]
B
How is that related to the Fed independence?
- [39:46]
C
You know, I just wonder whether if.
- [39:48]
B
I look tired there's a reason.
- [39:51]
C
I mean, a Fed chair position would certainly be an improvement in work life balance for you. Probably. But on the Fed independence issue, so let's face it, you are going. If you are confirmed when you go in, you'll be facing a lot of skeptics. You will have A lot of colleagues who you will have to convince to win over to your side of the argument, Would you say so?
- [40:17]
B
First of all, I think the idea that government service makes it less likely that you'll pursue an independent Fed basically rejects the evidence of, what is it, the five Council of Economic Advisory Chairs that went on to be independent Fed people. And so I think it's a very common path for people who have worked in the White House to go on to and to work well at the Fed and to do so independently. I have been critical of the policies of the current Fed because I think they haven't been data driven enough. And I think that the way you convince your colleagues is that you make sure that you're using models that make sense and forecasts that make sense and that you have a strong argument for, say, probably productivity producing growth that doesn't cause inflation. And then you really have to be convincing with the economics. And the thing about independence that I just want to tell a little story about it that shows how much it's really important. There's a big literature that says that if the Fed loses its independence, then inflation expectations become unmoored. And so you can't let the Fed lose its independence. And the story is one that goes back to the 90s that you and I were talking about with me and Chairman Greenspan, that one of the first papers that I wrote when I was on leave from Columbia and working at the Fed was with my colleague Gibb Metcalf, who was at Princeton at the time. And we, President Clinton had run on having a BTU tax, people who are old enough to know. And the, the BTU tax was one of his main things that he and Al Gore, because they were way ahead of the curve on climate. And so Gib and I are public finance economists. We wanted to know, well, what does a BTU tax do? How does it work? How did it model it and stuff? And we wrote a paper on the economic impact of a BTU tax. And it was really, I think, the first paper in the economic literature that also we said, what we're doing the BTU tax, we should do a carbon tax too. So we had the economic effects of a carbon tax and a BTU tax. And so we had this paper, really good paper, I thought. But you had to go through the review process at the Fed and Chairman Greenspan ordered us not to publish the paper. He said that right now President Clinton has said that there's going to be a BTU tax and we can't have the Fed Looking like it's put in its finger on the scale. That's a political, political debate about the BTU tax. And so sure, it's a great paper, but the Fed's not going to publish it until debate has finished on this topic. And then like maybe nine months later the BTU tax failed in Congress. And then he said, well, it's okay, you can publish your paper now. And we subsequently got it published to the top peer reviewed journal. It's been cited a million times. But I think very fondly of that sort of story because I think that that's what it means. That's how much you have to pay attention to independence. And so if you're thinking about things that could improve with the current Fed, it feels like first there's way more communication than there was when Greenspan was there. It seems like everybody's out giving a talk every day, but they're giving talks about things that are relevant for what Congress is deciding today in ways that basically are not necessarily relevant for monetary policy. And I think that Greenspan's approach is a superior one.
- [43:52]
C
Meaning I think he has a term for it. If you understand what I'm talking, then I'm not talking either.
- [43:57]
B
No, that was something else. He very often would want to communicate things and you understood what he was saying. It just sometimes he didn't want to answer questions directly because people very often will say, hey, so what are you going to do with interest rates next week? Or something like that. That's when he would be hard to understand.
- [44:19]
C
So maybe that won't be a problem with you.
- [44:22]
B
I don't know.
- [44:23]
C
So, you know, former Chairman Bernanke was actually one of the person who pushed for all this Fed communication and transparency. And the Fed is in the process of framework review. And one proposal that seems to be on the table is for the Fed to publish Fed staff scenarios to increase the public understanding of how the Fed's forecasts actually have a various risk and uncertainty band around it. Would you support that type of transparency?
- [44:57]
B
I think that you should have transparency about the things that matter to you. If you're a decision maker, where did you come up with now's a good time to do this or that? What do you think? Like, if you think that we're in a boom, how come? And I think that one of the negative long run effects, probably the only one of Chairman Greenspan's presence is that he, because he was always like looking at every data item and then sorting it in his head and he was doing it in a really miraculous way, which made him a legend before there were computers and so on. He was always kind of suspicious of time series models, which are really conditional expectations that are getting better and better in the stock and Watson world at helping us think about the path of the near term economy. And I think the, the one thing I can say is that in terms of at least looking at the research papers, it feels like the bias against that type of work, which I think could be very useful for policy analysis and which we used a lot when we were at CEA to think about what the forecast would look like if we passed the Tax Cuts and Jobs act and we got the number right within a tenth or two out a couple of years right with those models. I think that those time series models probably need to be invested, invested more in, in the Fed. And then if there's a bigger staff that's doing that, then I think that there'll be a lot of product that will be useful for markets to digest about. Like look, if we do it this way, if we do it that way, no model is the right model. But you need to look at a bunch of models when you decide what you're thinking. I think the Fed hasn't done a good job of helping people do that.
- [46:36]
C
So that's the area you would want to invest more in. These model buildings exercise how alternative.
- [46:44]
B
Like if you look at the economic report of the President, if you look at the analysis that we did in the first Trump term, we had model, we put on the table the bottles we were using, we ran horse races with bottles and figured out what's the best model for modeling this type of thing or that type of thing. And then would publish tables where we said, well here's all eight models that help you do this and here's like the central tendency or this is the one that we believe. And so I think that that level of detail is available to us now because the economic science, macroeconomic science, forecasting has advanced dramatically since Alan was talking to the CEO of GE and using that to decide what GDP next quarter was going to be.
- [47:32]
C
How about alternative, alternative data, machine learning and you know, bottom up style of forecasting?
- [47:39]
B
Yeah, everything, look at everything and then see what works.
- [47:44]
C
Okay, well we only have a couple of minutes left.
- [47:48]
B
We are kind of past time.
- [47:50]
C
Oh really? I will just ask you one last question then. So if you were confirmed to be Fed chair, will you commit to preserving independence in the way that you understand the conduct of monetary policy?
- [48:03]
B
100% independence is anyone? There are a lot of really good candidates that the President's talking with and about, but I think that everybody I know that's a candidate 100% understands the importance of independence. And yeah, I think that it is important and that that commitment will be made whoever the President chooses over and over again during Senate confirmation.
- [48:27]
C
Okay, thank you. Kevin Hesset thank you.
- [48:33]
B
That was NEC Director Kevin Hesse speaking Fireside chat with Bloomberg Economics.
- [48:37]
A
Anna Wong Old Playbooks Won't Solve Tomorrow's Problems Indiana University is redefining the relationship between higher education and industry. We're addressing future talent and workforce needs through more than 10,000 industry partnerships, supporting and investing in young entrepreneurs and businesses that create jobs and grow the economy, and facilitating the research and development that lead to breakthrough solutions. This isn't business as usual. Indiana University + Industry is a partnership that fuels economic growth. Explore IU's impact at IU. Edu impact.
- [49:13]
D
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