Economic Outlook 2020 Event – Chicago


– Today we look forward to hearing what’s on the minds of our
incredible set of panelists so, I’m gonna introduce
each of them to you. Starting with Austan. Our first panelists
Austan Goolsbee, who is the Robert Gwinn Professor of
Economics at Chicago Booth. Austen, of course, served in Washington as Chairman of the Council
of Economic Advisors and a member of the President’s cabinet. Before Washington, his
research earned him recognition as a Fulbright Scholar and a Sloan fellow. And he has been named one of
the hundred global leaders of tomorrow by the World Economic Forum. Austin serves on the economic
advisory panel to the Federal Reserve Bank of New York and has also served
previously on the panel of economic advisors to the
Congressional Budget office, the U.S. Census Advisory Commission and as a consultant for internet policy to the Antitrust Division of
the Department of Justice. And, of course, in 2009 he was voted
D.C.’s funniest celebrity. So, please welcome Austan for
returning to EO this year. (applause) So, I’m gonna go to the
left here to Randy Kroszner who’s the Norm Bobins
Professor of Economics and Deputy Dean for
Executive Programs at Booth. Randy served as a Governor
of the Federal Reserve System from March 2006 to January 2009 where he chaired the committee on Supervision and Regulation
of Banking Institutions and the committee on Consumer
and Community Affairs. He currently chairs the Federal Research Advisory Committee to the U.S. Treasury’s
Office of Financial Research. So, Randy took a leading
role in developing responses to the financial crisis and new initiatives to
improve consumer protection and disclosure including roles
related to home mortgages and credit cards. Randy also served in the
White House as a member of the President’s Counsel of Economic
Advisors from 2001 to 2003. Randy is a frequent commentator
to the international media and provides advice to
financial institutions, government organizations and
central banks around the world. Please welcome Randy Kroszner. Thank you for being here.
(applause) And our third panelist, Raghuram Rajan, who is the Katherine Dusak Miller Distinguished Service
Professor at Chicago Booth. Raghu served as the 23rd Governor of the Reserve Bank of India from September 2013 to September 2016. And between 2003 and 2006
he was Chief Economist and Director of Research at the IMF. So, Raghu’s research
interests are in banking, corporate finance and economic development and, in particular, the role
that finance placed in those. Raghu latest book, “The Third Pillar: How Markets and the State
Leave Communities Behind”, came out in 2019 and
was a finalist for the Financial Times’ Best Business
Book of the Year award. Please thank Raghu for
being with us today. (applause) And finally, we are very pleased
to have as our Moderator, Kathleen Hays, Global
Economics and Policy Editor for Bloomberg Television and Radio. Kathleen has covered the U.S. economy and the federal reserve
for the past 30 years now. And for the past few years
she has broadened her coverage to include the economies of central Asia and has been doing a lot of work there and traveling to Japan quite frequently. Hopefully, not on private jets. – Ooh, ooh, ooh, I wish. – Sorry, little Nissan joke there. (Kathleen laughing) So want to thank Kathleen for
moderating the panel today and please take it away, Kathleen. – Thank you.
(applause) And, thank you for inviting me back. As I learned last year this is
not only an informative event with value added, insights,
it’s also really fun and I’ve always been a big fan of and saying, “you can have
fun with serious stuff.” So, it’s great to be
back with the dream team as they were just referred to. And I just say when I
listen to him talking about all these new programs, all this makes me want to go
back to school, doesn’t it? It would be so much fun. So, maybe, this is the next best thing. And this year, and it’s
only my second year, don’t make it sound like we’ve
been doing this for 20 years and here’s what we’re doing now. We’re gonna start with a look at tech. And there’s so many aspects
of this we can talk about but we’re gonna really
focus a lot on big tech, where we’re going, especially what it means
for the financial system. Then we’re gonna move a
little bit more broadly into our economic outlook. But one of the reasons we
want to talk about this is more and more, over time,
the developments in tech, in big tech, small tech,
whatever it is, U.S., China, doesn’t matter where you go, is having more and more
of a potential impact or actual impact on where
the economy is going. So, Randy, I want to start with you. The non-bank system, big tech, moving more and more
into the banking system. Now in some ways, I think, particularly starting
with the financial crisis, it was pretty clear that a lot of these big banks
are ripe for disruption. So, where are we now? Is this a risk or is this something that is inevitably gonna happen and maybe even make the
financial system more efficient? – There are a lot of
challenges and potential risks but what’s kind of amusing is that many of my friends in
the banking community say, well, thank God for
your former colleagues, it’s bank regulation that
keeps those big tech firms out because nobody want to be
regulated as a commercial bank. And, so, it’s much more difficult for entry to come in here
than it is, for example, in China where you have
some of the tech firms becoming some of the largest
financial institutions there. Because in some sense it’s very natural if you’re on your mobile phone and you’re thinking of buying some product Alibaba, Tencent, someone else and they know everything about you and so they know what your
appropriate interest rate would be and so they can just
offer it to you right there if you want to buy a refrigerator, you click one button to pay full price now or you just click another button and pay over the next few years. That’s a totally natural
combination of things that in the U.S. and actually
much of western Europe, there’s a lot of regulation
that makes that very difficult. Now, part of the motivation
for that is a concern about, now we talk about big tech but, of course, there had been a lot of
discussion of the big banks and big finance sort
of taking things over. We have a long history
in the United States going back to the Jacksonians and the populous sort of
rising up against the banking and financial system, in particular, killing the what was the prototype for the what’s called the second
bank of the United States which is a prototype for the Fed. And so, it’s interesting that we now see tech kind of
taking on that big tech role. People are very concerned about it but in some sense there’s
an unintended piece here that banking regulation is
keeping some of them out, some of the tech players out, but certainly we see that in other areas that don’t have that a lot of entry. – Okay, well, we’re getting
Raghu’s mike straightened out. So meanwhile, we’re gonna
let Austan jump in on this. What do you think? When you step back and look at the economy and the interaction big banks
and credit and all this, do you see this as a big
trend when you’re looking at– – For sure, for sure, it’s a huge trend, not just in finance, in many things. I think that the lesson of China and the financial payment system, it’s kind of a sobering lesson. I think there’s a major
component of people who feel good that either because of antitrust or because of financial regulation, we’ve kept that consolidation
of the biggest retailer, the biggest payment system and the private space all
being one in the same. I think it’s natural that
they will find inefficiencies in the current financial system. And, improve them and that part is good. I think the Fintech universe is maybe less concerned about financial stability as traditional financial institutions so that’s a little more worrisome I think. And, I think in many of these
if not a natural monopoly, they’re big economies of scale so it probably will be that
once this system rolls out it will look like the
Chinese system or others in that there will be a small
number of very big players and then Fintech will be in exactly the same hot water and messy space that all the other big tech firms are. Where we’re looking,
we can’t help but say, look at how much power they have and should they be broken up? And how can they be controlled? And I think we’ll have a
bunch of important decisions to be made it’s just they’re
just a couple of years away. – But I think that’s one
of the big concerns, right? Because we know, so
Raghu you jump on this, you can all jump in on it, that the government
understandably, the congress, has a hard time not bailing
out any kind of financial firm. I don’t care if they’re
non-bank, Fintech, whatever, that seems to me the
concern that they’re saying, yeah, they might take on more risk and they kind of evade the rules. But are we just setting
ourselves up for another some kind of access and
China’s had plenty of those, that we’re gonna have to pay for? – Yeah, that’s a very big worry. I think this is a new beast. It brings together data, it
brings together networks, and, of course, that together with all the
other stuff they’re doing creates an enormous amount of power. That’s what Austan was talking about. We can get to that but on the Fintech side I think the big concern
is many aspects of Fintech are trying to bring value to a place where there are economic rants. And one of the concerns is
when the rants dissipate are they still gonna
be able to make money? Or, are they gonna engage in this ruthless competition
which drives profits down? In which case you may get the excesses that you’re talking about. Let me give you an example. There are hundreds of people
trying to get into remittance because remittances where
you see Western Union charging and arm and a leg for transferring money across border. Well, we’ll get it there,
we’ll charge half the price and we’ll still be plenty rich. The problem is once you get in there, Western Union is gonna cut it’s prices and you’re gonna compete
with five other people doing exactly the same thing. So, they’re not thinking
beyond that first step when they disrupt industry and then they have to
compete for new business. And this is where I
think I want to believe the marriage of big banks with Fintech would be better than Fintech
alone or big banks alone. The problem, of course, is there are cultures which
don’t necessarily mesh and so they don’t necessarily come up with the right products when
you get Fintech and the banks. But the banks that can figure out, here are some real problems we haven’t succeeded in dealing with when we bring Fintech to this problem, we can reduce transaction
costs tremendously, we can make it much
easier for the customer, therefore, there’s big value here. Those other guys who’ll
really gonna benefit from the banking side on doing this and, of course, there will be Fintech who will figure it out on the other side. – You know the thing is, like with the accelerated attention paid to artificial intelligence, there are examples of where AI and Fintech are improving things a lot. But thus far, it’s still much more promise than has been reality. And if you go look at
bitcoin, for example, it’s not even reducing
the transaction fees. The transaction fees are
actually still enormously large and in my favorite example, they headed the big bitcoin convention and they refused to
accept bitcoin as payment for the convention because they said the fees are too high, they would charge 25%. So, I still think, we’re a few years away. It could be a big thing but I still think we’re a few years away. – Yeah and I think exactly
as Raghu was saying, so far the major financial
institutions have not been able to take advantage of
their natural advantages. So, the large banks know an
enormous amount about you. If you have your mortgage with them, you have your credit card with them, you have your bank account with them. So, in some sense, that’s the data that all the Fintechs would love to have but the banks get this naturally in doing these other functions. They haven’t been able to marshal that to be able to say, ah, and
here’s the right product, or here’s the thing that
we should be offering to a particular customer, and I’ve talked to a lot of
the banks and boards about this because they want to get there but their cultures just don’t mesh. So, what they do is they hire
all these people with like plaid shirts and wooly
caps and long beards and they get on the
elevator with Jaime Dimon and they can’t stand being on the elevator with Jaime Dimon because
he’s there in his suit, kind of dressed like we are and so they go into the office, they do that for a year or two, then they leave and they
do their own startup and sell that to Jaime Dimon. But the big banks haven’t been able to take
advantage of that yet. It’s really quite amazing. Their IT systems are so poorly structured that they can’t do this. And, actually, part of
this is the long legs of banking venture relation. I think I’ve mentioned
to this group before, we start these completely crazy laws that made it very difficult
for banks to branch and so especially in the old days when you didn’t have markets
where you can diversify the only way you can try to
diversify is geographically. So, it’s like someone read
a book on finance and said, okay, how can we make the
banks as risky as possible, make them put all their
eggs in one basket? Well, we eventually get rid of these laws and so all of our major
financial institutions have come as some senses
like Frankenstein’s monsters of these mergers. Which I shouldn’t call
them Frankenstein monsters, it makes sense to put them all together. But one of the things that I think the regulators
didn’t think about, this was long before I was at the Fed, we should’ve required that
they integrate their IT systems and say, that’s great, you’re making a more efficient structure. Didn’t make sense to have 20,000
banks in the United States. We still have about 5 or 6,000
banks in the United States which is a lot. What they should have
done is say, that’s great, merge but we won’t let you
do the next major merger until you’ve integrated your IT systems. And we haven’t done that and
so they’re still struggling. And I also think that sets
up for a lot of potential cyber risks that these organizations. – There’s another aspect of legal risk especially with the AI. We heard Dean Riesen talk about work which indicated bias in
some of the AI systems. Well, one of the worries for big banks is that when you actually
run some of these systems there is bias that you didn’t figure out. There’s some proxy for race or
there’s some proxy for gender which doesn’t show up but once you use it you tend to bias your lending. And then you get the lawsuits and then you have so much liability. These Fintechs don’t have to
worry about so much that’s one. Second concern I have about Fintech is we haven’t been
through a down cycle yet and have we optimized
for just the up cycle and not optimized for the down cycle and what happens then? Can they actually collect the
money when people’s incomes no longer are sufficient to make payments. So that’s another thing we
should be worried about. Regulators worry, Fintech less so. – The thing in the financial
sector is it’s fundamentally about trust in your financial institutions that’s the strength of any
bank is it’s reputation and the payment systems
now it’s gone bonkers. If you’ve got a teenage
kid, they will tell you we want you on Venmo so I start looking and Venmo every payment you
make is public knowledge, it’s a social network. And, there is among young people a level of trust in
these startup companies or maybe they haven’t thought
about the issues of distrust. Should they be distrustful? If there is a down turn, I wonder if a whole generation
of people are gonna discover, wait, what happened to my money? What do you mean? – Everybody’s too trustful in tech. Look at the big, they
run together in my head. Just in the last week there
was a huge hack in the cloud. Big, big companies have been
just everything taken over. I don’t know. Clouds are huge, people keep going there and I wonder if some day,
I’m gonna be extreme here, we’re gonna go back to
everybody having servers and not having their stuff up there because it just not as safe as it looks. I want to quickly say the audience. And you’re such a lovely audience. When I walked in I felt I
was going to a football game or something, so exciting, so buzzy. Your sending out questions,
I’m writing them down because I want to get through
a few things as the moderator I can selfishly make sure
I get to ask questions I want to hear answered but we’re gonna start
bringing in your questions and plenty of time to run
through a lot of them. And another thing I want
to ask you guys about, in the academic world,
I love things like this where you have someone like Mark Carney. He’s suave, he’s smart, he’s been the head of the
Bank of England, he’s leaving. Saying giving this kind
of surprising speech, three months ago, where he
talked about digital currency. How they need to be developed. Forget the dollar, this is gonna be more
secure, more something. And then I love that just a few days ago, Gita Gopinath, she’s now
working for Christine Lagarde, very, very prominently, – She’s a former Booth facu–
– Started her career at Booth. – That’s right. Yes, yes, yes, yes. An OpEd the Financial Times oh, come on, central banks develop digital
currency, are you kidding? Dollars, all kinds of reasons why the world’s reserve currency. So, I want you to start on this Raghu. Where do you stand on this question? – So, I think she was
reacting to the notion that somehow others will
develop a digital currency which will take over
the role of the dollar. And I think that may have been
the thrust of Mark’s speech though I’ve only read reports of it. And I think she was coming
at it from the perspective of her research which is the
dollar is really dominant, there’s a lot of pricing
in exports in the dollar. One of the reasons people trust the dollar and 60% of pretty much
every transaction of finance is in dollars is because
it is a deep open market and the U.S. historically,
until very recently, didn’t try to use finance as a means of pressurizing countries. One of the concerns is that this politicization
of the dollar now, may, in fact, turn people to turn away. One example is Russia
which has moved away from holding it’s reserve in dollars at least to the extent that
it did and you can imagine that could expand if the
dollar’s used as a weapon. But a broader point
was more about the view that the dollar would be replaced. And I don’t think we
need to go there to argue that digital currencies
could have a strong future. The question is will it
be central banks that will issue them or will it be a
Libra or something like that? Again, it’s the power of networks, it’s the power of information. One of the big concerns that central banks have
about Libra is first, this is not a company that is well known for protecting your information. It’s also a huge monopoly
in it’s own right. So, add to it a payments monopoly and what else can that lead to? That’s certainly a
concern across the world. And certainly from the
perspective of small countries, a very big fear is Libra will
displace their own currencies. Because it’s so much easier to use and if you can get in and out easily, why would you hold a depreciating currency in a small sort of developing country rather move into the Libra. So, these are concerns
that need to be addressed. I think one of the big
concerns Libra’s always had is they have to persuade the regulators and I have to say right now the regulators
have not yet been persuaded. – And look, just think about
every country of the world. I kind of don’t understand
how or what the circumstance Facebook would want to
get into this in that any illegal activity, if you look at bitcoin a vast
chunk of the transactions are obviously, they’re not good. We had a woman came and gave a paper that analyzed the whole block chain as of I think her data went
up to 2017 or something and she said, well, 25% of these transactions
are money laundering and then the audience, we were like, how do you know that? And she said, well, their people coming to or coming from the site,
moneylaundering.com, launder your bitcoin, I was like what. So, imagine now Libra
becomes the big currency and somebody makes a payment, somebody buys whatever, sends you a payment for a
terrorist action or I buy drugs. Every country of the world is
gonna view that as a massive threat to their sovereignty
and they’re not wrong and they’re gonna try to
hold Facebook accountable in their country for facilitating
criminal transactions. And they’re not wrong to do that. They’re gonna say Facebook
should go put some regulator and govern what’s happening
in the transactions the way banks do and
then once that happens, they’re in the regulated world. – Austan, just on that point, it is true that bitcoin would
be used largely for laundering otherwise the transaction
costs are not worth it. If you want to make a
payment for your coffee, you’re not gonna use bitcoin precisely because of the cost that you pointed out. But, it is possible that
something like Libra could be so easy to use that the vast majority of
the transactions are legal and some small minority are
illegal as true of money also. But, you’re absolutely right that they have a huge
amount of reputational risk and they will have to
convince central bankers one, that they will be able to control the loyal customer problem but also, I guess, that they
will not misuse the information and the networks that
they obtain as a result. – But you know they will misuse it. – But this is the interesting thing. They really know their customer. (laughing) There’s nobody else who
knows their customer like some of these big tech firms. But its very interesting to
see this sort of back and forth about whether central banks should be issuing a
currency or not digitally. And there’s been a lot of
discussion about whether China’s gonna do that because
the Chinese central bank and the Chinese system
works rather centrally and so if they want to eliminate currency and if people object, the objectors are not gonna get very far. They will be able to execute on that. And it’s gonna be very interesting to see if they do something like this ’cause, again, it could be
a very interesting test case for how things would operate. Because obviously it would
be all centrally controlled. Every single transaction
would be monitored. Many of the transactions
are already monitored through the large fintech firms but this would make it complete and in some sense it’s
very interesting to see the different models around the world. You have GDPR in Europe which
is a lot of data protection, privacy issues, so a lot
of fragmentation of data. China’s the opposite where everything kind of goes into the
central government’s computer and they can monitor everything and we’re sort of somewhere in between. And its gonna be very interesting
to see how that develops. Is that something that’s
gonna be a strength for China? Is it gonna be difficult for
the West to compete with? Or, is it something that’s
gonna lead to more problems because people become outraged in China that the extent of this
monitoring and rise up against it. I think that’s one of the big
political economy questions that come out of these big tech issues. – Okay, I want to just
put a very broad question on the table in terms of
technology, innovations. For each one of you, what’s
the biggest plus and minus because it’s great to see
things, many things disrupted, they do get more efficient,
new things happen and at the same time
some people read about some concentration
developing in the economy. Competition, innovation, equality. What, for each one of you, is
the big question right now? – For me it’s what do we do about the jobs that are lost due to automation? That’s gonna continue, that’s gonna possibly going to increase. How do we find ways in which people can rediscover good work? And, I think the first
thing is, obviously, as people lose jobs and wages fall, the market
will react to some extent. But the question is, can
we prepare them better for the kinds of jobs that are emerging so that some combination of tech and human will emerge again to do a better job than tech alone or human alone? And I don’t think we’re
thinking very hard about it. We throw out education as
something that’s necessary but what kind of education? And, how do you get education to the places that are being left behind? What do we do in those places? What should those places do and how do we facilitate their doing it? We haven’t had that conversation. And I think this is the
central conversation that we should be having because this is a source
of political fracture in a number of industrial countries and if the reaction to
that political fracture is to actually put enormous constraints and markets and corporations, et cetera, we will eliminate our ability to actually react to the problem. – What’s interesting is I think
it’s more the fear of that than the actuality of that
because if you look over the, we just got the jobs report this morning, and it’s astonishing that
we had basically more than 20 million jobs created
over the last decade. The unemployment rate of 3
1/2% and what’s interesting is that there’s been more job
growth at the low-skilled sector. The reduction of the unemployment rate has been greater there, the growth of jobs has been greater there. So, we actually haven’t seen this yet but I think it’s an issue
because people fear that. But it actually hasn’t happened yet. – Well, what has happened is the jobs that paid at the middle
level have disappeared and you’re getting many
more jobs at the lower level and some jobs at the upper level but there’s a gap in between. Now whether those were
protected by strong unions and there were rents there or they were truly well-paid jobs the reality is, the middle is
much thinner than it used to be and this is across industrial countries. So, today to get one of
those really good jobs the leap you have to make in terms of your skilling, your education, is much higher than it
used to be in the past. Where with a high school
job, you get a good job at GM and that’s, you’re made for life. So, I think you’re absolutely right. We’re talking about jobs in
a period where unemployment is really, really low and so we need to ask what
jobs are we talking about? Well, not the kind of jobs which put an earpiece in your ear and tell you which bin to go
to next to pick up the stuff that you put together and
pack it and send for Amazon. – And not to add a potentially
depressing component to that. If the economy’s doing well and the unemployment rate is this low and people are already so angry
about wages and immigration and blah, blah, blah, imagine what happens
during the next recession. It seems like this could
be a dark path in a way– – And I see this in the U.K. Because the U.K. has near
record-low unemployment, a very high labor force participation and part of the Brexit support is exactly on these labor issues. Where it’s sort of hard to see, it’s very hard to make an argument that people are losing out on their jobs because of competition from immigrants because the unemployment rate is so low and labor force participation is high. So I think that’s one of the big things that will come with the next downturn. Not just what will happen with
the risk models and fintech but exactly as Austan said, if people are upset already
when the unemployment rate is at record low in so many countries, what’s gonna happen when the
unemployment rate goes up? – So, let’s look at what
gonna happen this year because one of the
things that’s interesting about the job’s report this morning, the payroll’s growth did slow down. It was only 145,000 new
jobs down from 266,000, that can be kind of volatile. But I think one of the most
interesting numbers was our average hourly earnings,
basically a measure of wages because it was only up 2.9% year over year and it’s never gotten that
high since the Great Recession. It was up to maybe 3.5%
year over year, one month. But it used to be a lot faster and that’s with not only
the U-3 unemployment rate staying at a 50-year low
but the U-6, a newer number, that brings in people working part time ’cause they can’t find another job. It got to an all-time low and then in an environment like this. Wages can’t rise. Where are we, guys? What’s happening in the year ahead? Let’s start with that aspect of it. The labor market, where it’s going. And, is it finally gonna get tight enough for people to start making more money? Because they’re getting more jobs and put us on another
course, or a faster course. Go ahead, Austan. (audience chuckles) – Make a joke. – Look, I think if you’re of the view that you think the job market’s
about to get really hot and wages are gonna start going upward, you’re in the camp of the inflation hawks and the problem there is
they’ve cried wolf for nine, 10 straight years. In 2010 they said we’re about
to unleash the wage price inflation spiral and in 11, to be 12, 13, 14, et cetera. Now they’re saying, look, now it’s 3 1/2%, it’s about to go up and that might be true but I guess I just find it implausible just because it’s been
wrong so many times before. I think in the jobs numbers today is just a microcosm of this weird thing which is we basically have two economies. Anything that deals with the consumer and the job market looks excellent. And anything that’s on
business, investment, or manufacturing, manufacturing’s
actually been in decline for several months.
– Manufacturing jobs were down 12,000 in the latest report
– We’re down a bunch and that’s why I say that’s in microcosm. And, overall GDP growth has been mediocre and slow, so what we can’t figure out is which is these is right? Is one of those a leading
indicator of the other one but we just don’t know which. Am I in front of the
line, no, you’re in front, we’re in a circle. – So, what’s difficult to understand is you get into a room with businesspeople and you ask them how’s it hiring? They say impossible. I can’t find the right people. I’m willing to pay, I’m paying a lot and I still can’t find people. This is a very tight labor market. So, that would say the old forces that we thought about, higher wages, should show up some time, we
should see greater inflation but there are many steps
here which have to play out. One, your hiring at the entry level may not translate into an
across-the-board wage hike especially if a lot of older people at higher salaries are retiring and your average wages
don’t move up that much. That used to be the Japanese phenomenon and with the retirement
of the baby boomers its possibly something that’s
happening in the U.S. also. Looking at the details of the
labor force in your firm is actually very important. The other thing that seems to
be happening is the usual, a lot more automation when
you find people hard to find. A lot more up training within
the company of entry-level people to do a higher jobs when
you can’t find those people. So, companies are reacting so as yet it doesn’t seem to show up in generalized inflation of
the kind we saw in the past. Some of that is possibly also because expectations
are reasonably anchored, people aren’t saying it’s
gonna be 10% higher next year and not demanding that
kind of wage increase. However, I think the hawks are wrong. It’s not gonna happen tomorrow that we suddenly have
an outburst of inflation, but at the same time
the doves are also wrong in the sense that this
is never gonna happen. I think what we’ll see is a steady increase in the
cyclical component of inflation even though some of the longer-term trends especially at stemming from
population go the other way. So, we will see a steady rise in inflation if monetary policy stays on hold. But, this is where the Fed
has been thumping on the table and saying, we don’t care if
it goes up a little higher, we’re willing to watch it,
we’re not gonna be preemptive. So, interest rate increases
for the foreseeable future until we see inflation really
pick up are off the table. – So Randy, put yourself
back at 20th and Constitution and you’re sitting at the table
with the other FOMC members, where would you be right now? I think a lot of them,
you guys follow the dots? The Feds every three months
updates its view of the GDP, unemployment and inflation and last dots were there were 13 out of 17 who see no rate changes this year. Only three that do, maybe one, where would Randy Kroszner be right now? Where do you see the economy going particularly when you look at what we saw in the jobs report from December? – I feel like saying I am not a dot. Like, I am not a crook, I am not a dot. So, actually, I wanted to
build on one of the things that Raghu said because I think the
data on the wage growth, we have to adjust it because what he was
saying was one part of it that you have a lot of retirements of relatively high-wage people and also the other piece
of it is what I was saying that you’ve had this
disproportionate growth in the lower-skilled sector so when you look at the average that’s gonna understate
where wage growth is. So, it actually is a bit higher. The San Francisco Fed has been doing some adjustments of this. It’s not dramatically higher, but it’s not quite as low as it seems. And the Fed certainly looks
at those kinds of things. They’re thinking about
where are the wage trends? Where’s the pressure? I think the thing that’s very
much weighing on the dots and keeping them low is
the specter of Japan. Because Japan got into a
very difficult situation and is still in that difficult situation where they acted a little bit too quickly when inflation started to come up because they were in a deflation situation and came up basically to zero and then they started raising rates because they said, we’re
worried that the tight markets, tight labor markets in our growth is gonna lead to high inflation. Well, that lead to a situation that people no longer
believe the central bank was the very credible and very
committed to fighting inflation. And despite incredible
amounts of asset purchases, they now have a central bank balance sheet more than 100% of GDP. Despite Abe when he was
elected making this super sale publicly saying this is
one of the three arrows of Abenomics which is to fight deflation despite putting in someone whose whole reputation
was that the central bank could do more and had no limit and be able to fight deflation, they still haven’t been
getting anywhere near 2%. So, I think the Fed is very worried about getting ahead of things and is worried that since they can barely get
to 2% even in this situation they’re gonna hold back. And I think that’s from their
risk management point of view that weighs on them very heavily, and I think that’s a
perfectly reasonable thing that’s gonna leave them waiting
for the inflation to come. Also, they’re doing a bigger re-think of their fundamental model and so they’ve had, since
2012, a 2% inflation target. Well, they’ve been under it for every year for the last seven years since they had it and so probably the new regime will say we’ve been under it for seven years, we’ll be comfortable for
being over it for seven years or get the average to 2%. And so, that again, is trying
to get people to expect, ah, the Fed is not gonna
stop when they get to two and so that you don’t get
into a Japan-like situation. – Even Eric Rosenberg, Boston
Fed, who’s pretty hawkish is, I think, signaled the
willingness to see the inflation rate in range, et cetera. So, I want to bring in a very simple, smart audience question now. Because we’re looking
about where we’re going. And the longer the expansion gets the more people think are we
going to have a recession? Now I look out and I don’t really see any
big recession risk right now, but Austan I know you’re
worried about manufacturing. We’re talking about the Fed,
are you sitting there thinking, yeah, yeah, yeah, whatever, we need more but you’re worried about
manufacturing being weak. You’re worried about those other things. Is that somehow where a
recession’s gonna come from? Or are we gonna get like Australia? They haven’t had two quarters of negative growth in 30 years. – I think that these
comments are all spot on and the Fed, it was barely a year ago, you remember our discussion
last year was coming out the previous December, the Fed was saying they were
confident they were gonna raise rates four times in 2019 and some people were saying
they’re being conservative, they’re gonna raise it six times in 2019. And instead we end up cutting rates because this same dynamic that it’s really hard to get out of, you have a financial crisis, it’s a struggle, you gotta change, you’ve got asset bubbles pop, you gotta change the focus
of what they’re doing. My advice to you is don’t
get over optimistic. It again sounds like people are we made it through that risk of recession now it’s not there. I still think if you look
at the 15 recessions or 14, depends how you want to count them, post-World War II in the United States, Fed interest rate raising
or keeping high is by far the biggest cause of recession. It’s about 2/3 of the recessions. Popping asset bubbles
is the number two cause and rising oil prices is the third. Now, rising oil prices
is not as big of a risk but of the two major causes
you at least gotta say there’s a yellow light there. And, that the last five
years of policy decision and stated understanding of the economy hasn’t been that great
for the Fed’s model. It’s good that they’re
reevaluating the model because the model’s been
wrong 37 quarters in a row in the same direction the same way. – Some people have been arguing
lately, here and there, that it’s been wrong to always say we’ve got to keep the expansion going, we’re gonna avoid recession. At some point recessions are healthy because they clean out excesses, they clean out things that have developed that shouldn’t be there. Oh, look at Austan, you don’t agree. – I would just say, I’ll take
the jury trial on that one. Your advertisement is
let’s embrace a recession. It’s gonna be good for us. – I think the better way of saying that is not so much to create a recession but to be wary that as
the expansion proceeds the risk builds up. Now, the two traditional
risks were inflation, as the labor market gets
tight inflation pops up, we just talked about it. Not that big a risk and it’s probably gonna be
more gentle than in the past. The second big risk is not so
much asset bubbles as credit because that’s the
greater danger we’ve seen. And, credit is getting a little iffy. Periods of extended liquidity, especially combined with a stronger sense that the Fed is there to back
you up if things go south which has been reinforced
this year after the Feds about turn in December, means people are willing
to take more risks. And where are the risks? You see it in private equity, you see it in a variety of other places that credit has expanded. A lot of people sitting
in Baa instruments. What if it gets downgraded because of a downturn in the economy? This will be a lot of
crowded trades around there. Lots of pension funds
and insurance companies have gone out in the risk spectrum because they’re searching for yield. A lot of this is predicated on
interest rates remaining low. So, to the extent the Fed stays put not as much of a worry. To the extent that the Feds is forced in some way to raise interest rates, perhaps more of a worry. Worry for term spreads,
for credit spreads, all those could expand
if they tightened a lot and higher interest rates would create that asset bubble collapse. So, the reason I think at least some of us on this panel are a
little more sanguine is we don’t really see that pop up in interest
rates any time soon. It’s not a reason not to be worried that the fragilities are building up. – Okay, I want to just throw out a couple more things on the table and I’m gonna continue to start working in more of our lovely audience questions. We’ve had from, gosh, what’s today? It’s Friday, just over a week ago, we’ve had all of a sudden a huge increase in geo-political risk and one of these that
brought it back to mind was Raghu just mentioning oil prices aren’t going to too high and we have interviewed
tons of people last week. Strategists, economists, what the risk is. As long as oil, and actually
there’s tons of supplies, so supposedly very hard for oil to move above 70
bucks a barrel right now. Does this change affect the economic outlook for this year at all? – I don’t think it does. Let me just say the reason I said that about oil prices is the danger. Three things happen. One, we became a huge oil producer. So, if the price of oil goes
up there will at least be some significant part of the U.S. economy and manufacturing economy that
benefits, not goes down. Prices haven’t moved that much and the U.S. economy has
gotten a lot more energy efficient per dollar of GDP than they were in the 70s and 80s. So, it could be tumultuous in oil markets if things go a certain way but I just don’t think that that has the same economic
impact that it used to. – I differ from you a little bit here because I think sentiment matters. And, one of the things the
Iranians showed us earlier last year was that they
could essentially target all of Saudi Arabia’s oil facilities. What happened that time is it
didn’t make a big difference to the oil market because
there’s a lot spare capacity which came back on at that time. But the repairs are still going on because they were pinpoint
in how they targeted the Saudi Arabian facilities. I can’t believe that the Iranian reaction to what happened to their
general, it has ended. I have to believe there is another shoe or whatever waiting to drop and there will be more back and forth. I hope that it is mild, it doesn’t provoke a reaction
from the United States. The United States doesn’t
feel it needs to react but I think geo-political risk
is certainly on the calendar and I’m not sure there’s
that much spare capacity in the oil markets if the Saudi facilities or the UAE facilities are
targeted in a very careful way. That’s one, the other thing I think we should pay attention to is trade risks. That we’re, again,
banking a lot on the China and the U.S. coming together
with this interim deal. My worry is, first, it’s taking
a long time to iron it out because it’s very complex
to get even to first base. But there’s a lot more to be done here and how does this play out? How does the trade frictions
with Europe play out? We have a President who
is not very predictable. And, my worry is that this
could be a source of risk as we go on into the next
year, into this year. (applause) – But trade has actually
had very little impact. Very little negative impact on the U.S. It’s a small part of GDP. Even with these high
sounding tariffs on China that’s just trivial for
the overall economy. It’s very painful in the
particular areas that it’s hitting so I don’t want to suggest otherwise. But overall it’s had very little impact. The CBO has estimated very
small impact on GDP of all these trade issues. So, I think it has much
bigger impact than China I think that’s why the
President picks that because it’s something he
feels he can put more pain on an opponent than on ourselves. But I very much agree that
I don’t think this is over. It’s not even clear that the deal’s gonna
be signed on the 15th because we now hear the President say, well, maybe it’s 15th, or soon after.
– The deal is trivial. – It’s on a few soybeans and a few cars that really isn’t gonna matter. It’s not a hill of soybeans, it’s not
gonna matter all that much. Whether we have it or not it’s not gonna matter very much for US GDP. But the issue is gonna
continue to be there. And I think the issue
gets back to something that Raghu had said about sentiment, and I think all of these things are whether it’s geo-political
risk, the oil markets or other things, it’s about sentiments because there’s something
that we don’t fully understand about why investment has been so low. Because you’ve had this
astonishing recovery, you’ve had in over a
very long period of time, in a large number of countries, you’ve had unemployment
rates at very low levels, you’ve had promises from central banks to keep interest rates low
for an extended period of time and they have and many central banks
have made them negative, well, that makes a lot
of investment projects look pretty good when
you’ve got negative interest rates but no one’s taking the bait. The concern had always been, we go negative and all of these crazy
investment projects come up because who can’t beat
a negative hurdle rate? Well, people aren’t doing that. And that’s something that
I don’t fully understand and I don’t know if you guys have a good explanation for that, but that’s a thing that worries me about the length of the recovery because as you know last year
even though the stock market was down I was relatively optimistic because I didn’t see in the
fundamentals of the data things going south, and I think we had a reasonably good year. But my concern is to sustain the recovery at some point you’re gonna need investment, and if you have some of these risks whether they are perceptions about trade even if it’s not the actuality of trade but it’s perceptions about what’s going on in the Middle East, we have even less investment I think it then becomes harder
to maintain growth. – What do you hear in China? You’ve been going to China a lot. That’s some of the other side of it. If this is a trivial
phase one deal, I get it. In China, we showed them, we
knew Trump would step back. I’m not convinced he’s
really stepped back. I don’t know with so much going on if he’s really gonna
push hard for phase two. And of course many people say forget it. They won’t stop subsidizing
their small- and medium-sized businesses, they can’t and they won’t. And, when it comes to
intellectual property, they’re never really
gonna do anything there. At some point, does
everybody just move on? And do we need it? Should we care? One of our audience
questions is asking about how much of the weakness in manufacturing has been caused by the tariffs? Could there be other things
that are causing manufacturing weakness like not enough
skilled manufacturing workers? But I think that’s a decent question. Are we paying a price from this, you seem to think not so much. Is there a risk if we do let it go? Is there a risk if the
President keeps pushing? – Well, more than trade, I
think, is the issue of investment and global supply chains. What this conflict has done is
thrown a lot of uncertainty. If I produce in China will I
be able to supply my factories in the U.S. because something
might come in the way? Will I be forced to
excise a Chinese company from my supply chain because either we increase tariffs or because we ban that
company from supplying? So, there’s a lot of
uncertainty about this and the natural reaction over time is, let me separate myself from China, let me make sure that my supply chain goes through friendlier countries that are not gonna be influenced by this and that same logic is
playing out in China. Am I gonna have enormous
exposure to the U.S. market? Am I gonna buy a lot of
chips from U.S. companies when I know that ban can emerge? So they are, in a sense, trying to innovate to find
their way out of this. Expect in the next five
years they will be far less dependent on some of the key U.S. products that they buy today. China, by the way, has made
enormous strides in innovation. So, at some point, this
has been a fact of history. When countries innovate themselves, they strengthen property rights because they want to protect
their intellectual property, get innovation. China’s getting to that point so I wouldn’t be too pessimistic about China protecting
intellectual property, but what I would say is
they’re much stronger competitors now in some areas. Not all, but in some areas
than they used to be, and that’s the reason
they’re protecting property. Not because they don’t
want to steal anymore. – Well, I think that’s
a good point, actually. And they did even set up a
couple of intellectual property courts last year and I don’t know– – They made enormous improvements there, enormous improvements. – Well, let’s ask a bit about something from one of our
minds out here in the audience and something that you touched on Raghu and that is more about
turning more towards Europe and how that comes out globally. The Brexit, something’s gonna
happen now, Boris Johnson– – You think so? – Something’s gonna go through. Poor Theresa May, nobody supported her. That’s a whole other story
and so Boris has stepped in and built on all the progress she made. And there’s this question of
trade with the U.S. and Europe and there’s this question of
Germany still being pretty weak and it’s in large part
because China slowed down because isn’t Germany the
most export dependent country in the world?
– One of the most. – Even more than China, exactly. So, when we look at the
outlook for this year, it’s a big story. It’s very important, but does
it really affect the U.S economic outlook for the next year? – Well, certainly, there are
a lot of challenges in Europe as you’re describing and it’s no accident
that the Europeans picked Christine Lagarde to be head of the ECB. She’s a person who’s been a
finance minister. She was actually head of a law
office here in Chicago. And the Bears are one of her
favorite teams in the world as I found out because I
wasn’t following very closely when I was in Washington when
I first met her she said, I’m from Chicago, she said,
“How are my Bears doing?” I said, “I don’t know.” (laughing) I’m in the middle of a financial crisis I’m not worried about the Bears. – They were 2 and 14 at that moment. – So was the economy. (laughing) So she’s a finance minister. She’s head of the IMF and Raghu and others well know
people often joke that IMF stands for it’s mostly fiscal and so they put someone who’s
focused on fiscal policy as head of their monetary, the
ECB, the monetary institution. And I think the reason
for that is precisely because Europe is trying to get more fiscal easing from Germany. Germans, of course, didn’t want this but the French, Macron’s
been very skillful in getting the people into
the key EU positions that he wants to be credible to able
to convince the Germans that they need to use fiscal policy because they’ve been running
an extraordinarily tight policy and in her first speech as ECB Governor, she talked more about fiscal policy than she did about monetary policy. And, the Germans are actually
talking about fiscal expansion which just had been seen as
complete anathema before. So you’re gonna get more fiscal expansion and I think that’s gonna help Europe, at least in the short run,
to survive this next year. They are very dependent on China. That’s why U.S. tariff policy
on China has much more of an impact on Germany than it does on the U.S. – Interesting. Of course, Germany’s not
the only one in Australia which has been beset by
these awful bush fires and they’re still going. Their government which has a surplus, things have been slowing down. The head of the Reserve Bank
of Australia, Phil Lowe, would really love not to
even think about starting a quantitative easing bond purchase program against negative rates. Even as they’ve got
this money they could spend and up until now they’ve
been very, very reluctant to do any fiscal spending at all. Maybe it’s gonna change more, but
the last couple of times I’ve interviewed Josh Frydenberg as recently as October at the IMF, no, no, no, no, no, no, we
promised the people a surplus. But this seems this is the
problem around the world or maybe it’s not a problem
if you want a surplus. Resist, resist. But then it seems to me the tough part is that it puts so much of
an onus on central banks when things slow down. Do you want negative rates? A lot of people think
they’re really a bad idea. But it puts central banks
in a position at some point where that’s all they can
do. They can buy more bonds, they can shove liquidity in, they can increase people
reaching for yield when they have negative rates. Is that maybe not in the
U.S., Austan’s frowning. Is that– – I don’t have a– – But think about it. – So, my concern is that,
so we’ve had three forces. We have this crisis
that Randy talked about. We have the cycle which
we’ve been talking about and the third is the
structural transformation. As a result of aging, et
cetera, of our economies. Our economies are changing day by day. There’s that transformation. There’s also the
place-based transformation. Some places doing extremely
well, the big cities, some places doing extremely poorly, the semi-urban areas
which lost big employers. So, I think we focused
a lot on the recovery from the crisis, which was really good, and since then we’ve been really focused on the cyclical component. How do we get this back up? But we’re not able to
distinguish the structural that, in fact, we have aging populations, we have development needs
in part of the country. How do we fix those? So, whenever the talk gets to fiscal, it’s always loosely the Keynesian fiscal, let’s dig holes and fill them up again. Without specifics what are we
going to do with the fiscal? And when you get to what are we gonna do, it becomes much harder because these are deep problems
which we need to tackle. We should have been tackling
them right from the get go. But if we are to do it
now, it requires design. And nobody’s talking about design. How do we get money to
Janesville, for example? How do we get Janesville to pick itself up because the GM factory has closed there? That’s the kind of thing we
should be thinking about. We’re really, again, just
talking about fiscal in a very airy fairy way that it will fix the cycle. But unemployment is not the problem. The nature of employment is the problem. That’s the structure of problem, it’s not a cyclical problem. – I agree, it’s all about,
whether it’s government invested or private invested, we just haven’t been
seeing the investment. So thinking about using
if there are countries that have relatively low
amounts of debt outstanding and interest rates are astonishingly low, are there ways that you
could build infrastructure or reduce some bottlenecks or do something that will help to catalyze private-sector investment. And I totally agree with you that it has not been the focus
and it should be the focus. There’s a lot of discussion about every city want to open it’s own incubator and so everywhere you go and I’ve been doing a lot
of traveling around Europe and the Middle East and Africa to
visit a lot of our alums there, they always want to
bring me to the incubator but a lot of that is not helpful. If every city is building an incubator you’re just competing
with each other for that. That’s not actually, necessarily, helping the growth of innovation. And so I think we’re not using the fiscal resources appropriately. I think a carefully thought through plan where you are focusing on bottlenecks, we’re focusing on high returns and doing things that can
catalyze private sector investment, that makes sense but I totally agree, spending money for spending
money’s sake doesn’t make sense. – Also Randy’s admonition
before about the haunting nature of Japan on the dot blot
also haunts this discussion because that was their thinking. We’ll engage in massive
infrastructure spending, we’ll engage in massive public
spending of various forms and it hasn’t gotten, it didn’t increase the natural
growth rate of the economy. And you can look and say, well, maybe they chose the wrong things but it does haunt us, I think,
trying to increase that. – An audience question now because we’ve got
haunting, we’ve got this. I’m a journalist, I’m always gonna as those,
oh my God, questions. Everything seems to be a challenge. Is there anything you
guys are excited about looking into the next
year, three to five years? What like, yes, I’m so, that’s
gonna make such a difference, this is gonna be great? – The opening of the
London Campus this fall. (laughing)
Come visit. – You have to look at the
technology that’s coming and say we can do so much more. So, technology has to be
the source of optimism. Even though there is a lot of pessimism about the way we’re using it now but the possibilities it
affords us are so enormous whether it’s in energy,
whether it’s in fintech that we talked about, I mean every area’s gonna get disrupted. There was a question
earlier about which industry do you think is most ripe for disruption? Education. We still teach in the classroom the way we taught 3,000 years ago. You guys come to the classroom, some of you guys I know
some of my students are here and you listen to us drone
on in front of the classroom. That’s the way it’s been for 3,000 years. But that could get disrupted and how much better it would
be for people around the globe if they could get the best
teachers at relatively low cost and they could learn fast. We have all these possibilities. I’m optimistic we’ll figure out the way so long as we don’t put
roadblocks in the middle. – One you’re kind of thinking long term and what are the grand things but I think in the just nitty gritty of, since the financial crisis we
recovered in the United States better than anybody else and let’s pat ourselves on the back and some of it we did a
bunch of things right. The unemployment rate is remarkably low and like I say anything having
to do with the job market and consumer has been both very strong and pretty sustainable. It wasn’t fueled in the mid-2000’s. Much of that expansion was fueled by falling and falling savings. So, the savings rate for the United States literally got to zero percent. The savings rate has
remained 5% plus in the U.S. since the financial crisis so this is on some measures as good as any time for that and it’s coming out of
what was a very difficult and could have been and
has been in other places, very persistent problem
that we didn’t have, so I think we should view that positively even in the short run. – We’ve made a lot of progress
on health around the world. It’s been incredible improvements there and I see that a continuing trend on that. Whether it’s just like basic
things about mosquito nets so that people don’t
get bitten with mosquitoes that have particular diseases. Innovations in all sorts
of areas of medicine. Progress may be a little
bit slower in the U.S. than it has been, but if you look globally a lot of people’s lives
are much, much better than they had been and I think that trend is
certainly going to continue because there’s just been
incredible innovation there. – Since you mentioned education, one of the audience questions
was about student debt. How that affects where the
economy is and where it is going. There are some who are
running for office who say forgive all student debt. There are others say we should at least means
test this a little bit. To me, its just there’s a lot of questions about how people ever
took on that much debt. Anyway, what’s the, I don’t
know what question to ask you but what’s the answer? What’s important here? Is there something that should be done? Something that shouldn’t be done? – I woudl make three points on student debt that you didn’t have a specific question so I’ll give you three. – Thank you. Save me.
– Three way to think about it. The first is you will hear some people say there’s 1.2 to 1.5
trillion of student debt. And they will say, is that the next sub-prime housing bubble? I think that’s a wrong way
to think about student debt. Because the thing about the
sub-prime housing and others, fundamentally, what happens
is you got a lot of debt and then the value of the asset went down so there were a bunch
of people under water and that was the nature of the crisis. Here the underlying asset, if
you want to call it the asset, of human capital has
never been more valuable. There is no sense in
which the asset went down. It is still a lot of debt and if you look at where the debt is versus where the defaults are, they aren’t exactly the same. The biggest students debts are people, the Dean is gonna get mad at me, they’re people who go
to professional schools. If you look at law
schools, business schools, medical schools, they have
the largest amount of debt. But they have very high pay back rates. That’s not where the default is. On the default side the
crisis is not entirely but is predominantly, people
who are starting programs and dropping out and not
finishing the programs. So they get a bunch of debt
but they don’t get the degree and the for-profit education sector is about 5% of the students and 50% of the defaults on student debt. And so I think that that space
needs a deep reexamination, because what is happening is
at the same time the payoff for community colleges is
the highest it’s ever been, they’re the most starved for resources that they’ve ever been. All the states are saying
we don’t have any money. Yes, there’s huge benefits
but we can’t you give the money so their enrollments are shrinking and that’s pushing more people
into more expensive programs in the for-profit sector,
which when they drop out then they have this debt. I think it’s centered there and that means life is
gonna be very difficult for people who are in that space but that’s something different than is that a threat
to the financial system which I don’t think it is. – Okay, another question
broadly along these lines. One of the audience questions
was an interesting one saying, does deflation or very low inflation
in the United States relate in any way to large debts and deficits
thinking Reinhart-Rogoff, this time is different. Maybe there isn’t. It’s okay if they say no,
don’t leave, don’t worry. Does that some how tie in to
why we don’t see prices rising? – I don’t see a direct
link between the two. Certainly you can find
some examples of that but I don’t think that’s
systematic evidence of that. Now, the challenge is I’m not giving you a good
alternative explanation and I think as Austan and
Raghu were also saying that we’re not quite sure why we’re having such low inflation. – But isn’t it partly
because we have technology which puts all kinds of prices out there? Makes it much clearer how much goods cost, maybe how much services cost, so maybe how much you’re worth. Doesn’t it have something to do, that it started years ago with China, many, many years ago when they pegged their
currency to the dollar? And so they’ve had very low wages. Don’t low wages in overseas countries have some impact on wages domestically? You say, well Kathleen, that’s only
in comparable industries– – The only complication– – But aren’t there a lot of
things that are holding prices down and holding wages down? – Maybe but just remember
most of the U.S. economy as Randy said before doesn’t
face foreign competition. We’re mostly domestic. – All the technology
has had a huge impact. That’s one reason why we’ve
lost a lot of middle class jobs because all those middle manager jobs started being outsourced years ago. The more we had technology
coming in so you don’t need somebody to do that job. – Kathleen, that’s absolutely right that the labor market expanded
to being a world labor market and that put pressure
on wages for a long time but with unemployment where it is there is wage pressure building. If, in fact, the world was
so comparative, we should see some of that demonstrated in higher prices because you’re saying people
have very little margin. Instead the talk today is
they’re absorbing some of these wage increases in their margins and that would suggest
it’s less competitive at least at the firm level. I think I would echo Randy, we don’t really understand
what’s going on very well. And, I think we need to understand better. Role for research. – A couple of other questions,
oops, one just moved in. I won’t be able to ask it. Do you feel tech giants are
subject to a sufficient amount of antitrust regulation today? And I think that goes
directly to Elizabeth Warren’s push to say, no, you have to break them up and interestingly, I don’t
know if you guys know who Roger McNamee is at Elevation Partners who invested with Bono years ago and Uber and so many companies. Roger has written a whole
book called, “Zucked” and he’s totally behind this. So, someone who’s been in
Silicon Valley for a long time. He actually started as
a mutual find manager feels that this is a big issue. As economists, as professors,
what do you guys think? – I don’t think there has
been enough antitrust scrutiny of purchases of small companies that could be potential competitors. I’ve been more on the
side of a more muscular and aggressive posture towards
the big tech companies. That said, I think the knee jerk, well, let’s break them up,
doesn’t really make sense. And if you start thinking through
situations where there are network externalities breaking
up Microsoft in the old days into two separate operating
system companies would just lead very rapidly to one of those
becoming a dominant operating system again because of the economics. But I was tempted to give
it as the answer when you asked what’s some big thing
that’s pressing right now that we should think about? I think it’s worth
remembering the last time there was this much disruptive
technological change, in the Industrial Revolution
at the turn of the century, how much it changed politics and that it was precisely
in response to the feeling that the government is not doing anything, that they literally changed the
Constitution multiple times. They made senators directly
elected, women got the vote, they instituted all of antitrust policy, they changed the Constitution
to allow an income tax where it never existed before. If you just keep stuffing
that under the rug eventually the piles of dirt get so big that everyone starts tripping on it, and I wonder if we’re
approaching that environment and as some of the questions
have been going by here and some have been about Bernie Sanders. Must drive Bernie Sanders bonkers that a billionaire, Tom Steyer
has spent ten times more on television advertisements and a hundred times more
on campaign expenses, and he, I don’t know if you saw, in the latest poll in South Carolina, I think Tom Steyer just passed
Bernie Sanders in support and a world in which billionaires
are competing in the same primary with populists who
are saying let’s burn it down and break them up is a strange world. And that’s the one we’re in. – I think on tech we have to be careful. I think the old ways of
regulation may not work but we have to recognize the
old concerns in regulation. About excess power, for example, the Brandeisian view still
is there which is why Austan says we should probably
think about this before it overwhelms us. There are alternatives
to breaking them up. For example, if the big
concern is networks and data, on networks, interoperability. Everybody says it can’t be done but if that could be achieved that would give smaller
guys a much bigger leg up because now they can
access the same network that the big platform has
and they can reach everybody. So that might be another
way rather than breaking up. Second is data. There’s a lot of data being
captured and monopolized. Should that be captured and monopolized? Are there ways of sharing it so that everybody has
a level playing field? The reality is these are companies that are giving a very good
service to the ordinary consumer but that can’t be our only metric. Our metric has to be
what else is going on? Who else is paying for this? Because there’s no such
thing as a free lunch. And it could be we’re paying
today through the high cost of through the advertisers paying them. It could we’re paying tomorrow
because of lower innovation. So the question is how do we fix these? Maybe a different antitrust than the past. – The example that Austan gave
of the attempt to break up Microsoft because of this
dominant operating system. That’s laughable today. That’s what was killing them because they were trying to
stick to just what they were doing in the past and it’s Satya Nadella, who’s a Booth graduate,
saw that we should do Microsoft should do something
completely different. Should effectively compete
with what it was doing, should acknowledge that people are not buying as many laptops and go to the cloud and
do other sorts of things. So to have broken up Microsoft, that would just be completely irrelevant and crazy today, so I think it shows those kinds of structural remedies they may seem very sensible today but in five years from
now they may seem kind of crazy. So, I very much agree
that we need to rethink what is it that’s an issue? It used to be one of the
key things for antitrust was power over price but now so much of what’s occurs is free. The power is precisely
because they’re not charging– – But, it’s never free, is it? – Yeah, exactly, the voice of God. It appears to be free. Obviously you’re paying with …
there’s a reason they’re giving something to you, but in terms
of the traditional price it’s not a price mechanism. A traditional price mechanism. It’s a data mechanism,
it’s a services mechanism, it’s an information mechanism, it’s something that’s very different. And because so much of
our antitrust law is about traditional markets where power
over price was a reasonable metric, we have to think of new metrics when price isn’t really
the relevant issue. And we’re not there yet. – Really quickly, I’m just
asking each one final question because I think we’ve just
about run out of time. So when you guys look out over this year you kind of mentioned this but each one of you when
you speak to our audience what’s the number one thing
you’re watching this year? When you’re watching the economy, what’s important, oh boy, that made the difference
for better or for worse, what is it? You can think for a second,
like 10 seconds maybe, it’s a big question. – So, the thing that is
the biggest risk would be or concern that I have that
we’re not well prepared for would be cyber risks. So if you think, because all
of our discussions about big tech and about data, just think if someone were to … and these things are
usually not just a bad actor from the outside somehow
getting into a system and disrupting things. Usually, it’s someone who
is a disgruntled employee who has the keys and then may work with some bad actor but let’s say you have some
disgruntled employee of a large financial institution
who helped some bad actors to get in and let’s say the
large financial institution becomes somewhat uncertain about how much is in everybody’s account. What happens to the payment system, it completely grinds to a halt. Now maybe the Fed could step in say we’ll make good on all those accounts. It’s possible they can do that, but that’s something
they’re not ready to do. They don’t have the information for. And that could be
extraordinarily disruptive. And so I think it fits
with this big tech issue and I think that’s something
we’re just not well prepared for. – Okay. – He’s taken cyber so I
have to look elsewhere. I say geo-political. I’m very worried that the
world has too many strong men and they’re really most of them men, (audience applause) who have very sharp elbows and seem to have very thin egos. And I worry that gets us into
a situation where people are unable to back off. We’ve seen that in the China, U.S. I’m glad that we seem to
be finding at least a pause, but there are so many
areas around the world of potential conflict. We haven’t talked about North Korea. We certainly haven’t talked
about the various people in the Middle East. Russia’s another potential area. So, I don’t see, I mean we do need to
re-create a new world order. We’ve just thrown the other, the previous one out of the window, but I don’t see momentum behind that. And to my mind this is a
process of the next decade before we feel safe again. – For me I’d say, let’s ask, at our meeting next year, what
will be the biggest change? And then, if we were still
meeting here 10 years from now what’s the thing to be watching? For next year, I think what
happens in the election in the United States is
gonna have the biggest impact on policy, and that’s all
we’re gonna be talking about next year is what does this mean? So, I would keep an eye on that. And don’t necessarily
believe the information if you’re reading it on Facebook because they’re allowed to
change it however they want. Over the longer term, I think
the thing that you should keep your eye on is the
productivity growth rate. Especially in the United States but everywhere because we, the economists,
have always said that is where our standard
of living comes from and in the last five to 10 years for reasons mostly we don’t
understand, it slowed way down and that might explain why
wages haven’t been rising for some time. It might explain a bunch of things. And when we come back
in ten years, let’s hope we’ve gotten it back
going to something like historical trends otherwise
I fear it’s gonna be even nastier and people
are gonna be even angrier. – Okay, well, we’re all
set up for next year. This is great. I want to thank University of
Chicago Booth School of Business for inviting me back and the panelists because
if they didn’t approve I would not be here. Working with Jane
Rodriguez and Sam Jemielity, and they’ve been great and it’s always great to see you guys. Like I say the room
was just buzzing today. It’s always fun to come here. Thank you so much for having me. (applause)

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