Janet Yellen speaks at Brandeis International Business School’s 25th Reunion keynote

Janet Yellen speaks at Brandeis International Business School’s 25th Reunion keynote


(audience applauding) (taps podium) – Good afternoon, everybody. I’m delighted to welcome you all today where we have the opportunity
to continue celebrating the Brandeis International Business School at its 25th anniversary. I know that many of have
traveled from across the U.S. and from 18 different
countries to be with us for this important milestone
for both IBS and Brandeis. The IBS community spans national and industry boundaries alike, and I hope that you have
the chance to connect and reconnect with one another over the course of the weekend. This afternoon, we are eager to hear from Professor Janet Yellen, former Chair of the Federal Reserve Board and the first woman to serve in that role. But before I introduce Professor Yellen, I would like to say few words about IBS, which is not only a source
of great pride for Brandeis but has also been educating
principled dynamic leaders in the world of international business for the past 25 years. IBS, like Brandeis itself, was a path-breaking
endeavor from the start. As the turn of the century approached, IBS was conceived as a response to the rise of globalization. And as the world quickly
transformed around us, founding dean Peter Petri and many other of our economists on the
faculty recognized the need for a new type of business degree, one that could prepare
students to compete and succeed in an increasingly
interconnected global economy. And so building upon the
success of the Lemberg Program in International Economics and Finance, whose first-ever class
received degrees from Brandeis just 30 years ago, IBS was established. Today, under the leadership
of Dean Katie Kate Graddy, IBS is recognized internationally as a hub for academic innovation,
one which attracts students from around the world, and
which prepares students to grapple with the emerging challenges of a data-driven world. I’m sure that many IBS alumni here today can testify to the value
of this new approach to a business degree. And as we look ahead, both
at IBS and at Brandeis, I’m confident that the
International Business School will continue to be a home for innovative forward-thinking scholarship and teaching on the pressing questions and challenges facing business, finance, and economics. And as we reflect on the accomplishments of the IBS community and
imagine what the next 30 years of IBS might look like. I want to take a moment
to recognize the legacy of the late IBS Professor Rachel McCulloch who not only left a
lasting mark on Brandeis, but also on many of those
in the room here today. Rachel McCulloch was a
trailblazing economist and leading figure in the fields of international trade
and economic policy, who joined the Brandeis faculty in 1978. She subsequently helped to
establish the PhD program at IBS, served as a chair
of the economics department, and was central in our efforts to bring together undergraduates,
graduate students, and faculty members from the
International Business School, and the economics department, to create a culture of
interdisciplinary collaboration that continues to define
how we educate our students. I am delighted to announce that in honor of Professor McCulloch’s
legacy, and with the support of our alumni and friends,
we have established the Rachel McCulloch Endowed Scholarship. (audience applauding) And as this scholarship
continues to grow in the future, we will be able to honor
the legacy of Rachel and provide a diverse group
of future business leaders with an IBS education. Please join me in recognizing the members of Rachel McCulloch’s
family who we are lucky to have with us this afternoon. Rachel’s husband, Gary Chamberlain. (audience applauding)
Where’s Gary? Daughter Laura Gehl,
(audience applauding) and Rachel’s sister Linda
Rothschild, all welcome. (audience applauding) It feels appropriate that
we are able to announce the launch of the Rachel
McCulloch Endowed Scholarship on the same day that
we welcome to Brandeis her friend, former
colleague, and fellow pioneer and economist, Professor Janet Yellen. Professor Yellen is no stranger
to breaking glass ceilings. From Yale to Harvard to the
London School of Economics, and the University of
California, Berkeley, she established herself
as a thought leader and sought-after strategist
in the field of economics. Professor Yellen served as the Vice Chair of the
Federal Reserve Board, as President and Chief Executive Officer of the Federal Reserve
Bank of San Francisco, and as Chair of the White House Council of Economic Advisers. Then in 2013, Professor
Yellen became the first woman Chair of the Federal Reserve Board, where under her leadership the nation saw an historic period of job
creation, rising wages, and the lowest unemployment
rate in decades. Professor–
(audience applauding) Professor Yellen is currently
the Distinguished Fellow in Residence at the Brookings Institution in Washington, D.C. Today, Professor Yellen will be talking with Steve Cecchetti,
the Rosen Family Chair and International Financier at the International Business School. Steve is a widely published
author with expertise in macroeconomics,
monetary policy, banking, central banking, and financial regulation. So I’m sure that he and Professor Yellen will have much to talk about today. Please join me in giving a warm welcome to Professor Janet Yellen. (audience applauding) (audience cheering)
– Thank you. Thank you. I’m delighted to
participate in this reunion celebrating the 25th
anniversary of the founding of the Brandeis International
Business School, and it’s a special
pleasure to have the chance to join with all of you,
Rachel’s friends, colleagues, her former students, and Rachel’s family to launch the Rachel McCulloch
Endowed Scholarship Fund, honoring the legacy of
my friend, colleague, and co-author Rachel McCulloch. (audience applauding) This is a fitting tribute
because Rachel played a very important role in this school. Rachel was a distinguished economist who made enormous
contributions to the field of international economic policy. She weighed in on virtually
all of the major trade policy debates of our times. The future of the World
Trade Organization, the impact of trade on
income and equality, the growing world of China and other large emerging market countries on the landscape of global trade relations, the progress of liberalization in areas such as foreign direct
investment, and services, dispute resolution, the reliance
of countries on safeguards, even the relationship between
trade and the environment. Rachel’s contributions on these topics reflected a strong
theoretical perspective, but it was coupled with a
rare and deep appreciation of the relevant economic history and the complex institutional
and legal arrangements governing trade and trade negotiations. Rachel’s work reflected
wisdom and good common sense. She knew all the issues in the literature, but also was endowed with
uncommon policy acumen. Someone whose advice was
sought by policymakers and prominent think tanks because
she got the answers right. As you at Brandeis well know, Rachel made enormous
contributions to the university. She long directed Brandeis’ PhD program, and she was a superb
teacher and caring mentor. She taught generations of
students here at Brandeis, and inspired many of
them to pursue careers in the fields of international
economics and business. Rachel took it as a given
that women in the profession have the ability to succeed, and she overcame obstacles in
establishing her own career, demonstrating that women in
the profession can thrive. She served as a role model for so many. My own association with
Rachel dates back to the 1970s when she and I found ourselves
the only two female faculty in the Harvard Economics Department. We shared an interest in
international economic policy, and quickly became fast friends. Over the next several years,
we co-authored a series of papers on global flows
of technology, capital, and workers, and in the process
had a great deal of fun. Rachel had a wry sense of humor combined with the remarkable ability to look on the bright side of things. She helped me weather the
trials and tribulations of life as an untenured assistant professor in an environment that
was frankly challenging, and we shared both professional and personal ups and downs ever since. I miss Rachel tremendously and I’m delighted to have this
chance to honor her today. (audience applauding) – Thank you, thank you very much. It’s an honor for us to
have Janet Yellen here with us today. As President Liebowitz said, Janet has had an extremely
distinguished career, first as an academic, and
then as a public official. As an academic, I think it’s
important to keep in mind that she made a number of very important and long-lasting contributions. And I knew about Janet
well before she went into public service,
something that she started, I wanna emphasize, in 1994. And so with only some breaks, it’s basically been 20 years
that she was inside of the, working in one part of
the government or another, mostly inside of the Federal Reserve. And as you all know, eventually becoming Chair of the Federal Reserve Board, one of the most important
policy positions in the world. As I suggested, I’ve had
the privilege of speaking with Janet on many
occasions over the years, and we’ve known each other
for quite a long time. But I wanna say that I learn something every time I speak with
her, and I’m sure that this is gonna be no different.
– Thank you, Steve. – So again, thank you for coming. – Thank you for that lovely
introduction and welcome, Steve. – So let me start, let
me start with something that I think is really quite timely. In early August, you
joined three predecessors, your three predecessors as
Federal Reserve Board Chairs, Paul Volcker, Alan
Greenspan, and Ben Bernanke. In writing a public statement, which if memory serves, was published in the Wall Street Journal.
– Wall Street Journal. – And that statement
went on at some length about the importance of a
central bank independence. Could you explain your views and why you felt that was
a necessary thing to do? – Yes, so the four living Fed chairs, myself, Bernanke, Greenspan, and Volcker, I think all of us share a concern about the independence
of the Federal Reserve and of course it’s generated
by President Trump’s almost daily criticism of
my successor, Jerome Powell. And his expressed belief, President Trump’s expressed belief, that he would prefer to see an arrangement in the United States more like
the one that exists in China where the central bank is not independent and decisions about
monetary policy are taken in a political set-up. So all four of us have had the experience of trying to formulate monetary policy facing different but difficult challenges, and sometimes having to do things in pursuit of the congressional
mandate that we have, which is to try to achieve price stability and maximum employment. Some of us have had to
take difficult decisions. Certainly Chair Volcker was
faced with very high inflation, and had to raise interest
rates to very high levels to bring it down to acceptable levels. But all of us felt we had an opportunity to take the long view, to work in the context of an organization that is highly professional
and utterly nonpolitical, and to make policy
decisions with a committee that is large, diverse, not a victim of group think, contains many different
opinions, engages in rich debate, but does its very best to make decisions in pursuit of that dual mandate based on facts and evidence, and with politics absolutely
never entering the room. And while I think all of
us can probably look back and identify times when
we feel we made mistakes or with the benefit of hindsight, wish we had made a different decision, we tried to do, all of us, our level best, not taking politics into account. And we all feel strongly that
monetary policy works best for the benefit of society at large, for economic well-being of Americans when it’s made in that way. Many central banks around
the world began to see that it’s virtue to have monetary policy made by an independent central bank that’s kept out of politics. And I think it’s fair to
say that in most countries around the world now, central
banks are independent. And research that’s been done
on central bank independence suggests that in countries where there is central bank independence, economic performance is generally better, inflation tends to be
lower and more stable, and the economy in terms
of its real performance, the labor market and growth, also performs better and is more stable. When politics and short-term
political pressures enter monetary policy, it’s common to see two things happening. One is a phenomenon called
the political business cycle that politicians tend to
wanna push the economy, make sure that unemployment is low. Prior to elections there’s a tendency to juice the economy, to try
to achieve low unemployment and high growth, and
there’s often a price to pay later down the line in
terms of high inflation, which then needs to be countered, hence political business cycle. In other countries, and this
is almost always what happens in every country that
experiences chronically high or either hyper, or hyper inflation, central banks are pressured by governments that can’t balance their budgets to help them out financing
those budget deficits by printing money when the
government loses the ability to issue debt at moderate interest rates. And the consequence we can see and there are many examples
of this in modern times, of high inflation and
even hyper inflation. And that’s what’s really
led the understanding that economic performance
is better when central banks operate in a nonpolitical
way, independently, but of course having to explain
what they do to the public and operating under a
mandate that is given to them by the legislature or by
the outside government, by the government, that
performance is better. And so we are worried about developments that we see happening
in the United States, politicization of the Federal Reserve and feel that that would
be a grave mistake. – Thanks, I guess to follow
up a little bit on that, the job of the Federal
Reserve has changed somewhat. The job of central banks
in the rest of the world has changed quite a bit more. But if you look today relative to say 25 years ago when you started, 25 years ago at least externally, things looked rather straightforward. There was an interest rate that was set, there was an announcement that
everybody went back to work for the next six to eight weeks, and yes of course the
Federal Reserve and others do a lot of other things
that was taking up time of supervising banks and the like, but at least from a public
perspective it was the first. If I look today, what
I see is central banks that at least in principle do more things. They certainly have larger balance sheets, they accumulate lots of assets, sometimes not public assets,
sometimes even private assets. Some of them have explicit responsibility for financial stability. And so that not only has the
public perception changed, but in some cases the laws
and the mandates have changed. In thinking about central
bank independence, where should we think about
trying to draw the line to ensure that these
things remain accountable in democratic societies? What can we think of
legitimately delegating? – So, I think that’s a very
important question, Steve, and I’d start with the
example of the United States. So the Federal Reserve, as you said, has many responsibilities
including an important role in bank supervision, but the
only place that I really think the argument for independence is strong is when it comes to making
monetary policy decisions. That needs to be, the central
bank in making those decisions must operate under a
mandate that’s given to it. In the Fed’s case, it’s
a congressional mandate for price stability
and maximum employment, and it needs to explain what it’s doing. But there I think the case for independence is really strong. There are other areas where
there’s relatively little case for independence and the
Fed is not independent. So for example, the Fed’s
role in bank supervision and regulation is something
that’s given to it by Congress, it has
rule writing authority, and a responsibility for supervising a group of banking organizations. But it does so subject to
congressional scrutiny. Importantly, the government watchdog, an agency called the GAO, the
Government Accounting Office, that looks at how tasks
are being carried out throughout the government. There’s only one area
that Congress exempted from GAO review and scrutiny, and that’s monetary policy. But the GAO comes in, at any particular time the GAO probably has 10, 15, 20 different
reviews taking place, and it reports directly to
Congress on Fed performance, issues reports criticizing
or sometimes extolling, but often criticizing, aspects
of the Fed’s performance. So I don’t think the case
there is very strong, but sometimes there are gray areas. And during the financial
crisis, we got more into areas where there were legitimate questions about exactly where to draw the line. So the Federal Reserve
was given by Congress the ability to lend to
depository institutions, namely banks, through its discount window. And in fact, the Fed was created in 1913 following the Banking Panic of 1907 where there were runs on banks and the only way to stop
those from ballooning into a full-blown financial crisis was to create an institution
that would have the ability to serve as a lender of last resort, lending against good collateral. And the Federal Reserve
was created to do that, that created a lending or
lender of last resort role. It’s not common for the Fed
to have to use that role, but it did use it extensively
during the crisis. But sometimes there were
situations during the crisis where interventions to
stabilize what was really a full-blown financial
meltdown that was taking place also required not just loans which, the Federal Reserve is empowered to lend against good collateral when
others are unwilling to do so and even to non-banks if the situation is sufficiently serious, but not to commit taxpayer resources. And in some of the
operations that took place during the financial crisis, taxpayer resources were needed. They were needed for the TARP program that injected capital
into the banking system. There were rescues carried out of AIG, the insurance company, and lending to JPMorgan Chase
to acquire Bear Stearns. There was unusual lending
and guarantees provided to Bank of America and Citigroup during the height of the crisis. The Treasury needed to
commit taxpayer resources, where in the end they received money back and it wasn’t costly,
but they were certainly putting taxpayer money at risk. The Treasury couldn’t
engage in these rescues without cooperation by the Fed. And so you would often see the Fed Chair and the Treasury Secretary
huddling together and collaborating to figure
out how to rescue firms that looked like they might blow up and take down the financial system, or even the banking system as a whole. And that got the Fed into areas that are legitimately gray. In the middle of the crisis,
because there were questions about was the Fed’s appropriate role, Fed and Treasury actually
issued a statement in which Treasury made
clear that the Fed’s role was to lend against good collateral through the discount window
and the Treasury’s role was to become involved
when taxpayer resources were being put at risk. So to me, that’s where
the dividing line is. But, you know, you were
saying the Fed’s now engaged in different forms of monetary policy than garden variety
25-basis points up or down on the interest rate. And beginning at the height
of the crisis in 2008, the Fed decided under authority it has, it had been given in
the Federal Reserve Act, to begin purchasing long-term assets. The Fed is only allowed
to buy U.S. Treasuries and agency securities, and it began to buy massive quantities of mortgage-backed securities, guaranteed by Fannie and
Freddie after they were put into receivership as well as treasuries. And in some people’s minds,
that raised questions as to whether that crossed the line into a fiscal commitment and
I guess we could have a debate about that Fed is, I’d say,
those types of purchases are a standard part now of
the monetary policy tool kit, but some people might
question whether or not that crosses the line.
– Right. If I recall correctly,
some of your colleagues on the FOMC actually questioned
that even at the time. – Well, they did question at the time. They were particularly unhappy– – Right.
– About purchases of mortgage-backed securities.
– Sure, right. – Because they felt that
when the Fed intervenes to conduct monetary policy, that it should not have the
character of credit allocation, favoring some sectors more than others. And they felt buying
mortgage-backed securities did have the character
of trying particularly to help housing. I must say, I don’t really
personally share that concern but housing was absolutely melting down during the crisis and
was a special concern, and this was clearly authorized under the Federal Reserve Act. – Right, right. Let me continue on right now
with the financial crisis since you were so eloquent
on the roles there, and ask about it a
little bit more broadly. The crisis sort of began around probably in 2007 at some point, and as you said intensified through 2008. We’re over a decade past that. There’s been extensive reform of the financial regulatory system. And I guess the question is
whether or not we’re safer today than we were a decade ago, and also whether you feel
that we’ve done enough. – So the reaction to the financial crisis on the part of Congress
and the administration was that radical reforms needed to be made to prevent another financial crisis, and the Dodd-Frank Act was passed in 2010. And gave rise to really a decade of rule-writing
to carry out its mandates. And I was very involved in
all of that work at the Fed. I feel it was by and
large an excellent piece of legislation, and it’s led to a huge
range of improvements that have made us a lot safer. I’ll list a couple, but
let me give you a sense of where I’m going with this answer, which is we did a lot, it was
a good piece of legislation, I don’t regret anything
that has been done, but I do think there are holes. And I don’t think we did enough, and I worry that as time goes by, the same kinds of vulnerabilities that led to that financial
crisis can recur. So what did it do that was good? It really saw there were
weaknesses in bank supervision and regulation, and it mandated especially for the most systemic
banks a massive improvement in terms of the amount of
capital that they would have with evermore stringent requirements the more systemic the bank in question. Requirements that banks
hold more liquidity and that they be subject to
a particularly rigorous form of capital requirement
called stress testing. Stress testing is something
the Federal Reserve began to do in 2009 when there was very little confidence that the major banks in the
country were safe and sound, and could support a recovery. And it was decided that
the Federal Reserve should undertake a rigorous evaluation of the ability of all
banks in the United States, above $50 billion was
the cut off at that time, to see what would happen if there were a severe economic downturn, and to really carefully
look at their books and evaluate how large
the losses would be, and to see whether or
not those institutions would have enough capital
to be able to support the credit needs of the economy
after a very severe shock. And people at the time really didn’t know how large the losses
were that were sitting on those banks’ balance sheets, and I will always remember that exercise. It was an all-hands on deck 24/7 exercise that lasted for months,
involved me and many weekends in 24-hour conference calls
going over all of the details. At the end of it, there was an
evaluation that was provided and it was made public
for all of the largest banking organizations of what their losses on each portfolio they had would be in such a severe situation. And at the end of that,
these banks were told, “You must have enough
capital at the end of that. “If you don’t have enough capital, “we’re gonna force you to go
to the markets to raise capital “or accept injections of
capital by the U.S. government “so that we can declare you safe and sound “and capable of supporting
the U.S. economy.” And as it turns out, a number of the banks did need additional capital. They went very quickly to the markets. Publication and evaluation of the banks’ financial situation restored market confidence. And I think it’s fair to say
the United States recovered more faster and in a more robust way than other countries
did, particularly Europe that didn’t do this.
– Right. – And stress tests are now, I would say, the core supervision tool. Every year the banks, the major banks, undergo stress tests and
engage in these evaluations and new risks that come along, possibly it’s that we’re
worried about Brexit, or what would happen some years ago if Greece was to fail
and leave the euro area and there were a collapse
of the euro area, or other risks that emerge are tested in different
rounds of the stress test. I think this has resulted
in much better understanding in the banks themselves of
the risks that they face. It’s a much better form of supervision. So these on the bank side are important. Other changes, derivative markets have been very meaningfully reformed. We now have central clearing
of standardized derivatives and much higher margin requirements on those that are over the
counter and not cleared. There have been reforms of some parts of the shadow banking
system that caused problems. Remember there were runs
on money market funds that have fixed dollar net asset values and after several years of negotiations, the SEC put in place rules that mitigate, possibly not completely solve, but at least mitigate those risks. Mortgages, mortgage lending,
I think is now safer than it was due to rules before the, rules that had been put in place
since the financial crisis. So I think a lot’s been
done but I’m still worried, and I don’t think it’s enough. Because let’s think about why we ended up with a financial crisis. Everybody understood and long understood, at least since the bank runs of 1913 if not for centuries before that banking organizations
can be subject to runs. They promise people their
money any day they want it, and use the funds that
people deposit to invest in liquid assets like loans to businesses or households for homes, and should something happen that provokes a loss of confidence in the bank and people decide they want their money, that leaves the bank in the situation of not, possibly not being
able to satisfy those demands. And runs can be contagious. When one bank looks like it’s in trouble, we can have runs on the
entire banking system. So that was always understood, but it turned out that banks
are not the only organizations in the world that might
come up with the great idea that a money-making
opportunity is borrow short, tell people they can have
their funds very rapidly, tomorrow or in a week, and use the funds to
invest in a liquid assets. And for example, before the
crisis, investment banks. Some investment banks were even part of banking organizations but
many were stand-alone entities like Lehman, Bear Stearns, Morgan Stanley. Stand-alone entities, they
had enormous leverage. They were like gigantic risky banks, and funding holdings of risky
asset portfolios heavily with overnight borrowing. And what the financial
crisis was really about was these shadow banks suffered runs, but they didn’t have a
lender of last resort. They weren’t supervised, they didn’t have meaningful
capital liquidity requirements. And ultimately when Lehman failed, we saw what the consequences were. Money market funds were very similar. They promised everyone, deposit a dollar and you’ll get a dollar back. And they invested in pretty safe assets, but not totally safe assets. And when Lehman failed, people saw there was a small fund called the reserve fund that held a lot of Lehman commercial paper and maybe that fund was
going to break the buck, and those people who realized that decided they wanted their money out first. And before long, all the money markets were suffering dramatic runs and the government had to step in and guarantee money market deposits. So that’s the shadow banking system. Entities that operate like
banks, a lot of leverage, borrow short, hold the liquid assets. And when they have runs,
they cause contagion ’cause they start to
sell the liquid assets. That pushes down the prices in fire sales and transmits contagion to any
other financial institution that holds similar assets. Well, I would say shadow
banking remains a problem. I said we addressed
money market mutual funds and put in place some meaningful reforms. Now almost all major investment banks are a part of bank holding companies, and are supervised in that regime. But there are lots of other entities that engage in activities of this sort from hedge funds to insurance companies, to we have open-end mutual
funds that promise you that any day you want your
money, you can have it, but they hold longer-term
or a liquid assets that when they turn
around and have to sell, you can have runs in contagions. And we don’t have any system in place to regulate these things that emerge. And of course, when you carefully regulate and heavily regulate one
area, the natural incentive is going to be for these activities to migrate away outside
the regulated sector. So you can be quite sure that over time, these risks will migrate. Now Dodd-Frank set up
the Financial Stability Oversight Council, which
is a group of regulators, and gave them some powers. One of the powers that they were given with respect to shadow banking was the ability to identify a financial company that’s not a bank that it thinks it’s, if
it thought its failure would pose systemic risk to the economy, the FSOC could designate that company and subject it to enhanced
bank-like supervision. And initially, now, I
mean, you can have risks that have to do with an activity, not necessarily centered
in one or two companies. So that was never a sufficient way to address shadow banking risks. But there over the last year, the FSOC has essentially got,
tied its hands in such a way that it has made it extremely difficult to ever designate another firm. I would say that we’re now in a period in which there’s deregulation,
deregulatory fever. Regulations are being dialed back, and FSOC’s designation powers
have now been, I would say, all but neutered so that concerns me. And I guess the other thing
I’d mention that concerns me is that, well the core financial
system is more resilient. One of the things that happened
in the run up to the crisis and this is common in financial crises, is that excessive exuberance
develops about something. In the late 1990s it was
about technology companies, and we saw a massive run up in the prices of technology stocks and the stock market in general. In the run up to this
crisis, it was housing. But also, I would say
leveraged lending was an area. It’s not what caused the financial crisis, but there was a lot of exuberance in leveraged lending as well, and asset-price bubbles also that form. And when those begin to go bust and there’s been a lot
of credit extension, credit growth is very rapid, and people are borrowing to take positions in these assets that are
rapidly appreciating. The unwinding of those bubbles, and the credit and the
leverage that is involved, that’s a common cause of financial crises. So many countries around the world have created financial stability councils, and given those councils powers
to restrict credit growth when it looks like it
might harm the economy. So, for example, in China,
in England, in many countries where housing prices run up rapidly, now there may not be a problem
of worrying about banks that are extending lending, but when you see very
rapid growth in credit, very rapid growth in house prices, history suggests there’s
likely a problem coming at the end of this and
it may be really wise for the sake of the
economy and its financial and economic stability to do something to constrain the growth of
house prices and lending, or other areas where this may develop. And in the United Kingdom, for example, they have put in place restrictions on the maximum loan to value
ratios that you can have in mortgages when these
concerns have arisen. Or limits on debt to income
ratios in mortgage lending. And the purpose of that
is to try to constrain the formulation of a
bubble that when it bursts is going to create, at a
minimum, a serious recession. I believe we need those tools too. – Thank you. (coughs) Excuse me. So, um, oh dear. Um, (clears throat) I, I recall the stress tests very well, and they were definitely
a very positive thing and something that I think
that we should all be grateful that the Federal Reserve
saw their way to doing that. But I am worried that
they’re being watered down, now as well.
– Well, I think, yeah, I mean–
– Not just the FSOC but the stress tests themselves.
– Well, I, I agree with you. I mean we are now in a regime where to many people it feels
like the financial crisis is history, there was too
much regulation put in place, and gradually fine-tuning is, you know, it starts by saying there are
areas where we went too far, and let’s just tailor things a bit better so regulation’s more
appropriate to the problems. But in some areas,
including stress testing, I think we’ve gone beyond that point and are beginning to engage
in changes that are dangerous. I certainly agree with
that and I worry about it. – Yeah, no, you mentioned,
you mentioned lending, and let me turn to debt in
a slightly broader context. In 20 years ago or so, the
federal U.S. government debt was about less than $4 trillion, you know, in the sort of range of
40% or so of U.S. GDP. And it was it actually falling
throughout much of the, much of the mid-19, late
1990s and early 2000s. Today federal U.S. government debt exceeds $16 trillion. What’s more interesting is that it’s now over 75% of GDP.
– Right. – And it’s rising. Now some people have said that
for a combination of reasons like the fact that interest rates are low and that we print out our own currency, that we shouldn’t really worry about this. You’ve expressed concerns about the sustainability of U.S. debt. Why are you concerned
and what might we think about actually doing about this? (chuckles)
– Okay. (chuckles) So I am very concerned,
but on the other hand, it is true that interest
rates are very low. So, okay in 2007, the U.S. debt to GDP ratio was I believe 38%.
– Something like that, yeah. – And then we had the financial crisis, the economy had a significant downturn. During that time, budget
deficits naturally grow. With a weak economy, less tax
collection, more spending. And we actively used fiscal policy at least for a couple of years to try to help the economy
get back on its feet. Today, and of course more recently, we’ve had huge tax cuts.
– That’s right. – But today and even before the tax cut, the debt to GDP ratio had
roughly doubled to 78% today. But the share of GDP that goes
to pay interest on the debt, during that same period,
2007 to this year, has almost completely unchanged. It’s now 1.6% of GDP and it
was 1.7 before the crisis. And the reason for that,
so twice as much debt relative to the economy, no
increase in interest expense relative to the economy. That’s ’cause interest rates are so low. And I think that means that our capacity to have a higher debt to GDP ratio than we would have thought
safe before the crisis. I’m perfectly comfortable
with the debt to GDP ratio we have today and think it could even be a little bit higher. But that’s not end of
story at all because, okay, so with the low interest rates it’s okay, I think, to have a higher, have more debt in the economy. I’m not worried about
the level of the debt. What I’m worried about is the trajectory that the debt to GDP ratio is on. Now in an economy where interest rates are lower than the growth
rate of the economy, and that is true in the United States and it’s true in many developed countries. If a country only issued debt, it issued debt for no purpose
other than to pay interest on the outstanding debt, that would be a perfectly
sustainable thing to do. And in fact, the debt
to GDP ratio over time would actually decline.
– Right. – So we could run, so the
so-called primary deficit is the difference between
government spending on everything but
interest, and tax revenues. And that primary deficit,
if it was in balance, that means you’re only
issuing debt to pay interest, would put us on a
declining debt to GDP path. And some people think,
“Eureka, interest rates “are lower than the growth
rate of the economy.” It’s fine to have, and you can even have
a small primary deficit and still have a staple debt to GDP ratio. But we have a 2.8% primary deficit today and that is not small, and that is a path that if you left the primary deficit at 2.8% would result in a run-up over time in the debt to GDP ratio. So that would be worrisome, but things are even
more worrisome than that because deficits are going
to rise a lot more quickly. If we leave the current set
of tax and spending programs that are on the books in place, we face a completely unsustainable rise in the deficit and in
the debt to GDP ratio. And that’s true even in a world
of very low interest rates. And the reason is that we have
a rapidly aging population, and three programs:
Social Security, Medicare, and Medicaid are increasing
relative to the economy very substantially over the next, just over the next decade and then over the several
decades after that. They will go up by about
50% relative to the economy because of aging population, and also because health care cost even though the pace of
inflation in health care cost has come down somewhat, which is great, health care costs per capita
are still growing more rapidly than per capita income. And if that trend continues, the combination of health care cost trends and aging population is going to lead to a runaway path of the debt, and there’s just no way around it. And you can hope for faster GDP growth or other kinds of changes,
lower interest rates, that mitigate it. That, you know, this is
just a mathematical outcome of the programs we have in place. And this isn’t a pleasant state
of choices, there’s nothing. This is sometimes called
root canal economics. And no politician in recent
memory has wanted to discuss how they’re going to address
it, and what are the options? The options are raise more
revenues or spend less. And we’re now at a point where if we don’t address this quickly, it becomes evermore difficult to do it. If we were to address it now,
for example raising taxes, some of the burdens would fall on people with hair color like my own. The longer we wait, the more the burden of either the spending cuts or the taxes is going to fall on younger generations. And at the time when really
we are investing, I think, far too little in young
people and children in infrastructure, in our
economy, other things we need, and if we don’t do
something reasonably soon we go to a point where Congress will have very very hard choices. These programs expenditures will grow, the deficits will grow,
interest on the debt will grow, and eventually it’s gonna
start squeezing out spending on almost everything other
than those three programs. And so this is a really
hard set of choices. Modern monetary theory, it
says you never have to worry about debt in a country that
can print its own money. And we do print our own money, but you do have to worry about inflation. And I think that’s where it’s gonna go, and that’s where it has gone in. Most economies that can’t get control–
– Right. – Of their budget situations. You know, I think one
day financial markets are paying no attention
to this now at all. You know, if you listen to
the little lecture I just gave and you’re investing in
10-year or 30-year treasuries, and you see that you’re
going to get under 2% over 10 years on a 10-year
treasury with that trajectory, you might worry a little bit about whether or not that’s a good investment, but we have a 10-year
treasury rate that’s under 2% and market participants are
obviously not focused on it. But as the situation gradually gets worse, it would not surprise me if a day came when suddenly market
participants are looking at that, and you know, I worry about
what that means for the dollar, I worry about what it means for inflation, for interest rates on
government borrowing, and for crowding out of
productive investments in the U.S. – Well, I guess current
politicians are no different from past ones, that it’s always better to promise people things. You can promise that you’re
gonna give them things, and then worry about,
somebody else can worry about paying for it. But eventually the bill does come due, so–
– Well, I think it will come due.
– And it will. Sticking with some sort of, a few, I have a few more questions about sort of some longer-term things. We have a few minutes left. Let me turn to issues of inequality, which I think are things that
you I know have thought about and spoken about. And in the United
States, income inequality has been increasing now
for a number of decades. – Yes.
– I believe the, I believe if you look
sort of at rough numbers, sort of the 1970s were the
lowest point there was the least. And it’s been getting worse.
– Well, the 1980s it began to get worse.
– Began to rise, and it’s been getting worse since then.
– It’s been getting worse and worse.
– Right, so, if I look, you know, if I look at
the last 20 years anyway, the fraction of wealth
held by the top 10% rose from an already high 67%. These are the data that I happen to, that happen to be around,
to 77%, closer to 77% now. That’s from a very high
level to a sort of even higher level.
– Yes. – By this measure, the
U.S. is currently I think at the top of the inequality
tables of advanced countries. I’m not sure this is a contest
that you really wanna win, but this country is winning. What is your view on this? What do you think that might be done? Is there a role also for,
some people believe there to be a role for central banks, and central bank policy in this, if you have any views on that.
– Sure. So, I mean, as you said, Steve, this is a long-term trend. It dates back at a minimum to the early 1980s.
– Right. – I think one important aspect of it is technological change
that has favored those with more skills. It’s tended to raise the reward to those with more education and skill, and reduced the rewards to
those with less education. Globalization is probably also part of it, and I think those two
things go hand in hand. You know, we’ve had a decline
in the role of unions, but I think the general power, labor’s bargaining power has diminished, and the decline of unions
partly reflects that. We’ve done less than many other countries to try to push against these trends. So these are trends that
the Federal Reserve policies are not able to affect. They’re very disturbing trends. So when you ask, “Does
the Fed have any role?” My temptation to say,
“The short answer is no.” But let me say a little
bit more than that, ’cause I think the Federal
Reserve can play some role and some positive role, although certainly it can’t do anything about
these longer run trends that are going to be with us. But the Federal Reserve’s mandate, the Federal Reserve was given
a dual mandate by Congress to achieve price stability
and maximum employment. And when the Fed is
successful at really achieving maximum employment, that is
a very important contributor to less skilled, less educated individuals doing better and seeing better times. And we’re seeing that
now in the U.S. economy. At 3.7%, the unemployment rate
is the lowest in 50 years. And maybe the normal rate
of unemployment is declined, so we should have a tougher benchmark. But I think by almost any measure, the labor market’s tight. And what has that meant? Almost every firm in the United States, if they have to fill out a survey, will say it is exceptionally
difficult to hire workers and they’re having a
tough time filling jobs. And it’s gotten worse, and it’s been that way now for awhile. So what are firms doing? When you can’t find people
that you think are qualified for the jobs you have to offer, firms now are realizing they
need to provide more training. They need to partner with
colleges and universities and community colleges and high schools and develop training programs, and give people the skills to bring them in to qualify for the
jobs that they offer. They need to provide and
are providing more training, lowering their hiring standards and training people to give
them the skills they need to do those jobs. If you go back to the height of the crisis when unemployment was eight, nine, 10%. If you filled out a job application and you check the box that said you have a criminal conviction, you did not have a
prayer of getting a job. I met quite a number of
people in that situation, and a large share of Americans do have some sort of arrest
or a criminal record. That’s actually changed. Now it’s still not easy,
but that’s actually changed and firms are hiring
people who have, you know, marks against them who
are checking the box. And now if we can keep a good
strong labor market going, an expansion going for a long time, I mean, I have the hope, I
can’t say there’s firm evidence of this, but there’s this
term called historesis. Historesis means history
makes a difference. So what I mean is that individuals who are getting this training,
who have less education, or had criminal records, who are establishing good job
performance, getting training, forming job networks, we
may have another downturn but maybe they will be different people and much more able to get
jobs after the next downturn because of that. And right now, wages
are rising the fastest for people at the bottom in
terms of education and skill. And unemployment rates, now
when the economy weakens the unemployment rates
rise the most for people, for minorities and those with less skill. But the African American unemployment rate peaked at 16% after the financial crisis when the U.S. overall
unemployment rate was half that. The African American unemployment rate has dropped about 6%, which
is the lowest in the history, in the history books. I think ’57 is when they started– – Yeah, yeah.
– Collecting that information, so a good strong economy does really help. Beyond that, I mean, I would focus, these are matters for Congress
and the administration, and for states and localities, but my first emphasis would
be education and training is, we’ve seen a continual widening of the wage gap between college or some college and high school or less. And that seems like a signal
that the rate of return to education is high and rising, even though education costs have risen. So it’s a good investment and
there are lots of different from childhood, early childhood education to college, community college, there are lots of good opportunities for education and training. That would be first on my list. Lots of things that would make the U.S. just a more productive economy. Investment in infrastructure and R&D, things that would improve
productivity growth would be on my list. And also the tax system, and trying to make sure that it’s fair and there’s a fair
distribution of burdens. I think we could expand the
earned income tax credit, and I’d certainly at this point be in favor of raising the minimum wage. – Yes, well that’s, well
hopefully the next Congress and the next administration
will listen to this. You mentioned the earned
income tax credit. This is a fascinating thing, it’s, what’s most fascinating
to me is it was originally a Republican program and
they seem to have disowned it at some point, and it’s a, let me, let me, I wanna make sure that we
have time for this one. And it’s an even longer term issue but it may be the most important one. For those of you that noticed, this week’s issue of The Economist focuses on climate change. Now I don’t know about other people here but I do not think about The Economist as a bastion of progressive policy advocacy.
(audience chuckles) And it’s basically, you
know, the sort of right-wing of the British establishment. But they write the following, “Climate change touches everything
this magazine reports on. “It must be tackled urgently
and clear-headedly.” I’m sure most of you
would say it’s about time. And now, you’re a founding member of the Climate Leadership Council, which among other things has published an economist’s statement
on carbon dividends. I should, in the interest
of full disclosure, I should say that I am one of the 3500 signatories.
(Janet chuckling) So, and there’s a lot of
people that signed this, but, so but climate change
may be the single biggest global challenge that we face. What is it that as an economist and as a form