Speaker 1: Runt You by Bank of America Mary Lynch. With virtual reality,
Speaker 1: virtually everything will change. Discover opportunities in a transforming world.
Speaker 1: Be of a, mL dot Com, slash VR, Mary Lynch,
Speaker 1: Pierced Fenner, and Smith Incorporated. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best of economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course, on the Bloomberg The Morning David Garrel
Speaker 1: with Michael McKee. This morning, Tom Keene at the Council
Speaker 1: on Foreign Relations. In just a few moments, he's gonna
Speaker 1: sit down with Robert Kaplan, the President and CEO of
Speaker 1: the Federal Bank. See the man himself in his If
Speaker 1: you have it, you can listen here, or if you're
Speaker 1: on the Internet, you can pull up the web feed
Speaker 1: from the CFR even aview. Robert Caplan before situated him
Speaker 1: and the pantheon of Fed presidents. Right now he's becoming
Speaker 1: a little more influential. Of course, he's fairly new, and
Speaker 1: it takes a little while to get your sea legs.
Speaker 1: But Uh, he's a guy who was executive at Goldman
Speaker 1: Sachs and Harvard University professor for a long time. So
Speaker 1: a very smart man. Uh, different than previous Dallas FED
Speaker 1: presidents and much more of a centrist and much more
Speaker 1: of a practical thinker rather than coming from a particular
Speaker 1: political point of view. And uh, he is a voter
Speaker 1: this year. Uh. And tell us a bit about the
Speaker 1: Dallas FED itself. You look at all of these various districts.
Speaker 1: What's what's the historical reputation of the Dallas Fed. Well,
Speaker 1: historical reputation has been very very free market, anti regulation,
Speaker 1: and very tough on inflation. And we have no inflation
Speaker 1: to speak up at this point. That's less of an issue,
Speaker 1: but Kaplan is less It's not that he's against free markets,
Speaker 1: but he is not pushing that as much. They're also
Speaker 1: very concerned with trade issues and they do a lot
Speaker 1: of work on the US and Mexico and have for
Speaker 1: years and now of course that's come front and center
Speaker 1: as an issue absolutely as we look ahead to the
Speaker 1: next f O MC meeting taking place on the thirteenth,
Speaker 1: I believe thirteenth and fourteenth in Washington, d C. As
Speaker 1: he mentioned Robert Capital of voting member of the f
Speaker 1: O m C this year. He the thirteenth president and
Speaker 1: CEO of the Federals at Bank of Dallas, former professor
Speaker 1: at the Harvard Business School, author of a number of
Speaker 1: books on on leadership as well, and still fairly new
Speaker 1: to the job, right, Mike, Yes, this is I think
Speaker 1: his second year, uh and his his first year as
Speaker 1: a voter, and so far he has voted with the
Speaker 1: majority in every case to raise rates or hold an
Speaker 1: alternating meetings. We'll see what he does that. I would
Speaker 1: bet you, given what he has said, that he has
Speaker 1: going to vote for a rate in Greece in June.
Speaker 1: Since yesterday we saw Lele Brainer, the dove, the Dove's
Speaker 1: dove on the FED say a radio increase is likely
Speaker 1: very soon. And everybody he takes that to me. In June,
Speaker 1: a number of FED policymakers speaking here before the quiet
Speaker 1: period that precedes at the f O m C meeting
Speaker 1: go ahead. Yeah, you know, they expanded the quiet period.
Speaker 1: They moved it back so it's longer. And I was
Speaker 1: sitting with a FED stafford yesterday who was listening in
Speaker 1: on Little Brainer's speech, and she said, thank god, unless
Speaker 1: we have to worry about more days in which they
Speaker 1: can't test. Weeks was before the last meeting. It seems
Speaker 1: like that there were a tremendous amount of speeches. Seems
Speaker 1: like the quantity of speeches has increased. Let's head over
Speaker 1: to the council in formulations up Park Avenue from O
Speaker 1: Bloomberg eleven through with Studios. Tom Keene interviewing Robert Kaplan
Speaker 1: of the Dallas Fan I'm not going to go through
Speaker 1: your bio because it will just take too long, other
Speaker 1: than to say he was Marshall Professor at Harvard Business
Speaker 1: School by way of the University of Kansas, which is
Speaker 1: always a good thing. What have you learned about the
Speaker 1: heritage of the Dallas Fed parachuting in Well, Uh, there's
Speaker 1: a great history in the Dallas Fed. But with the
Speaker 1: most significant thing to me about the Than district is
Speaker 1: uh the business dynamics. It's uh. We're largest energy producer
Speaker 1: in the United States, largest exporting state Texas is in
Speaker 1: the United States. Growing. President will go after you, after
Speaker 1: he's going after the Germans. Well, I won't even go
Speaker 1: near that. But uh, but and we're growing very very rapidly.
Speaker 1: We're uh migration of people in firms to the state
Speaker 1: of Texas in particular has been a significant trend is
Speaker 1: accelerating over the last fifteen years. We have a national
Speaker 1: growth rate to three whatever it is, what's the Texas
Speaker 1: growth rate? If we're we're going about a full percentage
Speaker 1: point faster over the last fifteen years on average every year. Uh,
Speaker 1: And so what it's going to be this year, I'm
Speaker 1: not sure but that but for lots of reasons, people
Speaker 1: and firms are moving to the eleventh districts, So we're
Speaker 1: growing very rapidly. And that'll be one of our themes here,
Speaker 1: particularly to dive into the concept of John Edwards to
Speaker 1: America's and maybe we can talk not you're just stricks
Speaker 1: outside Texas, but the two Texas is a more general statement.
Speaker 1: I want to go to an idea that I was
Speaker 1: talking with our Matt Bestler about and and and this
Speaker 1: is this wonderful thing. This is a mouthful, folks. For
Speaker 1: those of you not in economics, this is why you're
Speaker 1: not in economics. The Dallas Fed trimmed mean PC. That's
Speaker 1: your proprietary view of inflation. What I know in my
Speaker 1: work at Bloomberg is inflation and the vector of it
Speaker 1: now is front and center. Is the vector up or
Speaker 1: is a vector to disinflation again. So it's been weak
Speaker 1: the last couple of months. If you go step a
Speaker 1: little further back, it's been gradually increasing from fourteen fifteen
Speaker 1: to sixteen to seventeen. That the thing that's giving people
Speaker 1: pause is over the last two months, particularly March, for
Speaker 1: a number of I think idiosyncratic reasons. Inflation dipped, telecommunications, pricing,
Speaker 1: other factors. But you notice the e C came out,
Speaker 1: Personal consumption expenditures came out yesterday, and I think it
Speaker 1: showed me that the April number is sort of back
Speaker 1: on trend. The number for most people quote the trailing
Speaker 1: twelve months, and you'll notice the trailing twelve months after
Speaker 1: yesterday declined. But the reason for that is not that
Speaker 1: April was week. It was that a year ago April
Speaker 1: was so strong. So I actually think while inflation has
Speaker 1: been slow and uneven, I don't think we have a
Speaker 1: deteriorating trend. I don't believe that's what's going on. To
Speaker 1: text off this one is the Dala's heritage. I get
Speaker 1: to it in a moment, but let's talk about them more.
Speaker 1: Washington centric analysis we heard that from Governor Brainerd earlier
Speaker 1: today and all the other feed speakers all diving into
Speaker 1: this mix. Is your take that the prism around around
Speaker 1: that table of the ECHOS building. Is your take that
Speaker 1: it's a traditional study of inflation or is there a
Speaker 1: new new to how the feed itself has to deal
Speaker 1: with this odd thing? There's definitely, in my judgment, a
Speaker 1: new new. Now I'm not an economist, I'm a business person,
Speaker 1: but I have I work with lots of economists, so
Speaker 1: I think that gives me a little different perspective. But
Speaker 1: the things that are new, I'll mention two, in particular,
Speaker 1: global over capacity, particularly because of China. China has been
Speaker 1: growing GDP on average about six and a percent a year,
Speaker 1: but the problem is it's they're increasing debt to GDP
Speaker 1: in order to achieve that growth, and they're creating over capacity,
Speaker 1: not just an infrastructure, but an industry is like steel.
Speaker 1: So that's increasing global over capacity that's creating a headwind
Speaker 1: for inflation. And then the second thing that's significant is
Speaker 1: technology enabled disruption, which is another way of saying machines
Speaker 1: are increasingly replacing people, but consumers can use technology now
Speaker 1: to shop for pricing more than ever in our lifetime,
Speaker 1: and therefore the pricing power of businesses is less than
Speaker 1: has it been at any time in our to the
Speaker 1: PhD economists, and wants you to know that, I mean,
Speaker 1: a guy like you come from a different world. Uh,
Speaker 1: the guy up in Minneapolis comes from Cary, comes from
Speaker 1: a different world, et cetera. Do you guys have an
Speaker 1: advantage because you didn't read the textbooks? Well, I think
Speaker 1: many of the many FED presidents, or I would say
Speaker 1: even most do what I do. I look, I talked
Speaker 1: to all the economists, I go through all the economic theory,
Speaker 1: all the economic data, and then I talked to probably
Speaker 1: thirty c e o s. Every month, we do surveys
Speaker 1: among businesses, small businesses, big business as. We do not
Speaker 1: only industrial surveys, but energy surveys, service sector surveys, and
Speaker 1: I put them both together. So a lot of my
Speaker 1: understand about what's going on out there I look at data,
Speaker 1: but a lot of it also comes from talking to
Speaker 1: business leaders. Talking to business leaders is in the present.
Speaker 1: What are your thoughts on forward guidance? This concept is
Speaker 1: silliness of data dependency. Do you find the dots to
Speaker 1: be a constructive tool? Well, so there's a few questions
Speaker 1: in there. So let's talk about data. Let's take data
Speaker 1: dependency for starters. So I'm not I'm not crazy out
Speaker 1: the term data dependency. I prefer to look at data.
Speaker 1: But as a business person, again, I like to look
Speaker 1: at secular drivers, and then data as the economy unfolds,
Speaker 1: either confirms or makes me question the effect these drivers
Speaker 1: are having. So, uh, for example, GDP growth is sluggish.
Speaker 1: I think the big driver behind that. One of the
Speaker 1: big drivers is aging demographics, slowing population growth, slowing workforce growth,
Speaker 1: and so that makes that makes sense to me. Uh
Speaker 1: So I think you got to look at both. But
Speaker 1: I prefer to look at drivers, and then the data
Speaker 1: sort of confirms, like it would as a business person,
Speaker 1: what track we're on or whether whether the drivers are
Speaker 1: having the effect. I think, Carrie, let's go two hours.
Speaker 1: This is going too well, all right, So that you
Speaker 1: talked about the dot plot, so that makes plain of people.
Speaker 1: I think most people here probably come on, we all
Speaker 1: know what the plot. Well, it's shockingly some people may
Speaker 1: not know what the dot plot is. But every quarter,
Speaker 1: all the FED presidents and the governor's submit we all
Speaker 1: submit our forecast for seventeen, eighteen nineteen in the medium
Speaker 1: term GDP inflation not only headline, but core unemployment rate
Speaker 1: and what we think the neutral rate is likely to be,
Speaker 1: which will come back to settle out. So that's referred
Speaker 1: to affectionately or not so affectionately as the dot plot
Speaker 1: or the summary of economic projections. But that gives you
Speaker 1: a pretty good feel every quarter of what each of
Speaker 1: us is thinking about and the views there. There's a
Speaker 1: scatter chart, but they tend to congeal around. Uh, certainly,
Speaker 1: where's the vector of that chart? Right now? What are
Speaker 1: we going to see in future? Dot? I mean you,
Speaker 1: I know you're filling your form out on the way
Speaker 1: from Reagan into the Ecles Building, right, But actually, I mean,
Speaker 1: come on, there's a lot of analysis going into this thing.
Speaker 1: But is it a valuable tool? Sure? And what's it
Speaker 1: gonna show us in the number of If somebody who's
Speaker 1: been observing the FED now for thirty years, that's me
Speaker 1: and my business career, I think I think it's very useful, um,
Speaker 1: because it gives me a pretty good idea about what
Speaker 1: every participant around that table is thinking. Uh, and when
Speaker 1: there are differences, it gives us a basis to debate,
Speaker 1: so I think it's very useful. My own view, just
Speaker 1: my dot has been GDP growth, for example this year
Speaker 1: would be between two two and a quarter percent. I
Speaker 1: think the unemployment rates four point four percent now I
Speaker 1: think it's going to decline further as we get at
Speaker 1: the end of this year. It's not the only employment
Speaker 1: measure I look at. I look at something called you six,
Speaker 1: which doesn't go on the dot plot, which I'll come
Speaker 1: back to. And my own view is inflation will slowly
Speaker 1: but gradually over the next two or three years, not immediately,
Speaker 1: but the next two or three years. Get the two percent.
Speaker 1: Within your wonderful books on leadership, there is implied through
Speaker 1: all these books confidence. One of the great mysteries in
Speaker 1: this room at the Council on Foreign Relations, one of
Speaker 1: the great mysteries in your Dallas district is where is
Speaker 1: business investment? Where is the confidence to move forward? Let
Speaker 1: me just start with the Mathness is it because the
Speaker 1: people that you used to talk to an HBS, they
Speaker 1: can't figure out where the risk free rate is? Are
Speaker 1: the distortions so great? So let's take let's take the
Speaker 1: first part. Business confidence right now is high? Okay, there's
Speaker 1: a lot of business optimism, and you see business investment
Speaker 1: is stronger this year than it's been in the last
Speaker 1: few years. The issue is, UH, that's great and it
Speaker 1: can help GDP growth, but se approximately the economy is
Speaker 1: the consumer. So at the end of the day, businesses
Speaker 1: are more optimistic for several reasons, but ultimately everyone is
Speaker 1: watching the consumer. The consumer is the primary driver of
Speaker 1: GDP growth. Increased business investment though helps and businesses right now,
Speaker 1: we're optimistic, do they see it? The disconnect right now
Speaker 1: is while they're more optimistic, then when you ask a
Speaker 1: business leader, do you see improvement in your business? Oftentimes
Speaker 1: the answer is not yet, but we're expecting it. We're
Speaker 1: expecting We're still there. Does it have to do with
Speaker 1: rain art rokeof length or duration coming out of the
Speaker 1: financial crisis? It just takes kind to heal or there
Speaker 1: a new format of globalization where American business is waiting
Speaker 1: to pull the trigger on the nostalgic investment. Remember, so
Speaker 1: for me, UH, I think some business leaders are hopeful,
Speaker 1: UH that fiscal and other policies might help improve GDP growth.
Speaker 1: That's part of it, UM and UH. In addition, though
Speaker 1: some of the things that have been headwinds which I
Speaker 1: don't think are going away, sluggish population growth which has
Speaker 1: a big effect on consumer spending, and sluggish GDP growth,
Speaker 1: but also increasing disruption and new business models increasingly are
Speaker 1: displacing old ones, which are giving many business leaders pause.
Speaker 1: Even though they want to invest in their business, they're
Speaker 1: not sure that the model that they're investing in is
Speaker 1: going to be sustainable. So I think that's a that's
Speaker 1: a countervailing headwind which is putting a bit of tamping
Speaker 1: down a little bit of options. So you wandered down
Speaker 1: to college station and you have to give a lecture
Speaker 1: at the business school, and some wise guy in an
Speaker 1: A Corps uniform stands up in the back and goes,
Speaker 1: excuse me, sir, do you believe in GDP because that's
Speaker 1: a whole belief right now that these statistics, these traditional
Speaker 1: models that we have don't work anywhere. How do you
Speaker 1: respond to the youngster Texas A? Yeah, So here's here's
Speaker 1: the things that are clear, and here the things that
Speaker 1: are getting debated. GDP growth still it's not perfect, but
Speaker 1: it's still pretty good measure of economic activity. There's an
Speaker 1: issue a lot of people raise about transfer pricing. You
Speaker 1: know Apple, uh innovates a phone here, but they manufactured overseas.
Speaker 1: But I still think GDP growth is is pretty good measure.
Speaker 1: The debate has been about the unemployment rate UH and famously,
Speaker 1: you know many many people have gotten on television said
Speaker 1: the four point four percent. That's a great number, but
Speaker 1: it's not a real number. So I like to go
Speaker 1: to U six, which I mentioned earlier. Here's what U
Speaker 1: six is in the lingo, So you three to use
Speaker 1: the lingo is the headline unemploy himent rate. You six
Speaker 1: is unemployed plus discourage workers plus people who are working
Speaker 1: part time if in a better economy would rather work
Speaker 1: full time. I think that's a better measure of slack.
Speaker 1: That's at eight point six percent right now, here's the problem.
Speaker 1: The pre recession low in that number was eight point
Speaker 1: one percent, So we're gradually moving toward the prerecession low.
Speaker 1: And in a hundred and sixty million person economy, difference
Speaker 1: between eight six and eight one, it's less than a
Speaker 1: million workers. While they're slack. There's not as much slack
Speaker 1: as people might think. And here's the second problem, which
Speaker 1: we'll get to. Where there is slack, it is highly
Speaker 1: correlated to lower levels of educational attainment i e. College
Speaker 1: and less than college. That participation rates and employment rates
Speaker 1: if you finished college are very high in the United States.
Speaker 1: They could get better, but they're pretty high. Even if
Speaker 1: you've finished some college, they're relatively high. If you went
Speaker 1: to high school, though, they're lower, and if you've got
Speaker 1: some high school education, they're much lower. And so the
Speaker 1: problem is where they're slack and discourage workers. There's there's
Speaker 1: a high correlation between high school and less than high school,
Speaker 1: and that's why there's a number of things we're gonna
Speaker 1: need to do to address that runt. You by Bank
Speaker 1: of America Mary Lynch. With virtual reality, virtually everything will change.
Speaker 1: Discover opportunities in a transforming world. VI of a mL
Speaker 1: dot Com slash VR, Mary Lynch, Pierced Fenner and Smith Incorporated.
Speaker 1: There's something new from Bloomberg. It's called Lens. Starting right now,
Speaker 1: you can use the Bloomberg iOS app off your iPhone
Speaker 1: or iPad or our new Google Chrome extension to read
Speaker 1: any news story on any website, scan it, and then
Speaker 1: instantly see the news stories relevant market data from Bloomberg.
Speaker 1: In addition, see all the bios of the key people
Speaker 1: mentioned in the story. It's called lens, and it is
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Speaker 1: of any story you may be reading. Again, Lens brings
Speaker 1: you the power of Bloomberg's news and data. Download or
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Speaker 1: the Chrome Store to try lens out. Learn more at
Speaker 1: Bloomberg dot com slash lens. I want to ask one
Speaker 1: more monetary question before we dive into what some of
Speaker 1: the research you and your team have been doing at
Speaker 1: at Dallas. One of my treasured books is out of
Speaker 1: the Dallas fed and it is a beautiful, thick monograph,
Speaker 1: exceptionally smart set of essays in honor of John B. Taylor,
Speaker 1: Stanford University. It was a symposium, it was done. I've
Speaker 1: read the whole thing cover to cover. It is math
Speaker 1: warning for those of you have the CFR, I'm sorry,
Speaker 1: algebra differential equations, but within that is some brilliance. Do
Speaker 1: you buy the traditional economics of the feed when the
Speaker 1: media trots out the Phillips curve and you and I
Speaker 1: can go much deeper than trying to answers, do you
Speaker 1: buy the orthodoxy still works? Or do we have to
Speaker 1: amend it. So let me talk about some things that
Speaker 1: have been used historically that I think need to be adjusted.
Speaker 1: The Philip's curve, for example, which talks about transmission. If
Speaker 1: you're at full employment, you would expects wage pressure. You
Speaker 1: expect that wage pressure to translate into price pressure and inflation.
Speaker 1: I would say because of globalization, i e. This excess
Speaker 1: capacity issue, and also what I talked about disruption, the
Speaker 1: fact that businesses have less pricing power. I think the
Speaker 1: Phillips curve is still is alive and well, but it's
Speaker 1: more muted, meaning to extent there's wage pressure here today,
Speaker 1: it's less likely that gets transmitted to prices because business
Speaker 1: customers won't accept the price increase. And um, because businesses
Speaker 1: can replace workers with technology and there's wage pressure, it
Speaker 1: puts some downward pressure on wage pressure. So that's one example. UM.
Speaker 1: I would say. The second thing is the economy is
Speaker 1: dramatically different than it was ten years ago, twenty years ago,
Speaker 1: and thirty years ago. You know, a lot of people
Speaker 1: like to refer back to the Reagan air and it's
Speaker 1: and here's what's so different, uh, aging demographics. So the
Speaker 1: trend over the last thirty years has been going like this,
Speaker 1: slowing population growth, lower participation rates, and over the next
Speaker 1: ten years, the bad news is it's gonna get worse.
Speaker 1: And it's one of the few things we can forecast
Speaker 1: with a lot of confidence. And we think the participation
Speaker 1: rate today sixty it's likely to diplo. So that's one issue.
Speaker 1: Globalization is different today than it was twenty and thirty
Speaker 1: years ago, meaning, uh, we're much more globally intertwined. But
Speaker 1: the trade relationships I think are being misdiagnosed a little
Speaker 1: bit today, meaning uh, it's not a zero sum game.
Speaker 1: Our relationship, for example, with Mexico, in our judgment, increases
Speaker 1: US competitiveness, has caused jobs to stay in the United
Speaker 1: States that we'd otherwise lose, most likely to Asia. And
Speaker 1: so you have to think about globalization different disruption. We've
Speaker 1: already mentioned that I got one last one and I'll stop,
Speaker 1: and that is the debt supercycle. We are much more
Speaker 1: leveraged today than we were ten years ago, certainly twenty
Speaker 1: years ago and thirty years ago. Uh. Government dead held
Speaker 1: by the public is now seventy it's been going up,
Speaker 1: and present value of unfunded entitlements is now forty six trillion.
Speaker 1: Dollars also been going up, and because of aging demographics
Speaker 1: makes it worse. And that's that last part. I think
Speaker 1: that creates a head wind that isn't talked about that much.
Speaker 1: Reason it's not talked about his rates are so low.
Speaker 1: If you had more normal interest rates, I think we'd
Speaker 1: be having a much more intense national discussion on that.
Speaker 1: I want to take to some of those themes, but
Speaker 1: I got so it changes everything. The FETE analysis, you
Speaker 1: have to talk agree, it changes the world is different.
Speaker 1: So we've got to change the way we look at Okay,
Speaker 1: we're gonna do that in a minute, but I got
Speaker 1: to rip up the script on one question. I want
Speaker 1: to speak not so much to the president. Is a
Speaker 1: public official, I'm not. I know you're not going to
Speaker 1: take shots in any other I am not. I know
Speaker 1: you're not. We're gonna get that out of the way.
Speaker 1: But what I would suggest, within the format of the
Speaker 1: counts on foreign relations and the heritage of this shot,
Speaker 1: we can go back to Jacob win or Chicago and
Speaker 1: talk about America is a mercantilis power. You're on the
Speaker 1: border with Mexico. They're gonna build the walls. You can
Speaker 1: see it outside your window on Pearl Street. Are we
Speaker 1: gonna end up being a mercantilist America? Is that a
Speaker 1: real risk? It's it's a direction we we would be
Speaker 1: well served not to go in. And here's the Here's
Speaker 1: the problem is the of the imports it's from Mexico today.
Speaker 1: Is US content okay? Means these goods going back and
Speaker 1: forth across the border. Adding jobs in the US is
Speaker 1: not the only criteria. Are they globally competitive? That that
Speaker 1: will they sustain? Will they be here ten years now?
Speaker 1: The relationship with Mexico allows us to be more globally competitive.
Speaker 1: Here's the second problem is geo politically. I think this country,
Speaker 1: maybe we've taken it for rent, is very well served
Speaker 1: by having stable relationships with stale relationship with our neighbor
Speaker 1: on our southern border. UH. It has been. It's a
Speaker 1: very helpful to the United States. And my only my
Speaker 1: main concern I think NAFTA my own view, and I've
Speaker 1: said this publicly, will get renegotiated in a constructive way
Speaker 1: despite the rhetoric. But the mood in Mexico UH is
Speaker 1: much more. And I go down there a lot and
Speaker 1: spend a lot of time with leaders there is more
Speaker 1: anti American. And my concern is when there's a presidential
Speaker 1: election in Mexico in the summer of two thousand eighteen,
Speaker 1: unless we unless we can improve this this tone, it's
Speaker 1: more likely that you'll have to be an American to
Speaker 1: get elected as the president of Mexico in the summer
Speaker 1: of two thousand eighteen. I think that would that would
Speaker 1: not serve the United States very well. Let us call
Speaker 1: us together here before we get to your questions here
Speaker 1: in about twelve minutes, I want to call us together
Speaker 1: some of the themes you and your research have been
Speaker 1: working on. UM. I go back and forth with Michael Dell,
Speaker 1: who's a leading technologist of your shop. Arguably he jumped started.
Speaker 1: I mean I think asleep the band Asleep at the
Speaker 1: Wheel would think they jump started Austin. But we'll give
Speaker 1: the credit to Mr Dell. The answer is technology disruption
Speaker 1: is owned by the eleventh District. I know out in
Speaker 1: California they think they don't know you guys own it.
Speaker 1: What have you learned about technology disruption in our two
Speaker 1: America's Uh, Well, the first thing I've learned is no
Speaker 1: one owns it. It's everywhere. Uh, it's affecting every mall,
Speaker 1: it's affecting every business. It's even affecting higher education. Used
Speaker 1: to be people you just think higher education it's not
Speaker 1: going to get disrupted. It's getting disrupted. It's everywhere, and
Speaker 1: it's springing up in every state in this country. And
Speaker 1: so what does it mean. It means workers are far
Speaker 1: more likely in the next thirty years to have to
Speaker 1: find a new career or a new job during their career,
Speaker 1: which means skills training is much more important. Worker adaptability
Speaker 1: is much more important. And the problem is worker mobility
Speaker 1: is declining lower, so it means if you're going to
Speaker 1: find a new job, it's probably gonna have to be locally,
Speaker 1: which is why we're spending a lot of time on
Speaker 1: the Dallas FED and in our research focusing on creating
Speaker 1: these partnerships between businesses, educational institutions, nonprofits to to create
Speaker 1: skills training for a whole series of jobs to let
Speaker 1: people who get who lose their job, to get trained
Speaker 1: and back into the workforce. We're doing it much more
Speaker 1: in the United States, but not quickly enough. We did
Speaker 1: that when the Cowboys went six super rolls in a row.
Speaker 1: We called it the community college model. Is that the
Speaker 1: model that works or what's the new community has to be?
Speaker 1: There's community colleges are a part of this. It has
Speaker 1: to be a partnership. Okay, So we have a number
Speaker 1: of businesses in our district. They have to get together
Speaker 1: and we help facilitate this. At the FED, we convene people.
Speaker 1: They have to say, we need so many pipe fitters,
Speaker 1: automotive technicians, registered nurses, insurance specialists, go on and on
Speaker 1: at the I T people and we have enough slots
Speaker 1: that to the local community college if we if we
Speaker 1: create a training program, we can take these see tangible
Speaker 1: results of that. You see it all over the state
Speaker 1: and all around the country. My concern is it's not
Speaker 1: happening fast enough. We have to scale it up. And
Speaker 1: the reason it's not so easy to scale it's got
Speaker 1: to be done locally. It's not the kind of thing
Speaker 1: you scale nationally so easily because it has to be
Speaker 1: done locally, because worker mobility is lower. That's why this
Speaker 1: is so hard. Link this idea and frankly many other
Speaker 1: ideas to the tragedy. I haven't read about it in Texas,
Speaker 1: but we have an opioid epidemic across a leaguered Middle West.
Speaker 1: I'll pick on West Virginia, Ohio. I'm sorry, sunder Deportment
Speaker 1: that I did that. But there are these geographies of
Speaker 1: incredible disassociation from the world of economics, in the world
Speaker 1: of a better America's President Obama called it, what do
Speaker 1: you need to do in the eleventh district to jump
Speaker 1: start those people who are truly outside the good? So
Speaker 1: all the work we do, first of all, there's a trend,
Speaker 1: as you know, people moving from rural areas in two cities. Uh.
Speaker 1: But the big trend, and the big thing that you
Speaker 1: keep coming back to, is if you have lower levels
Speaker 1: of educational attainment, you are more likely have poor health,
Speaker 1: You're more likely to use drugs, you're more likely to
Speaker 1: be incarcerated. Everything that's bad is more likely that you're
Speaker 1: likely to have a shorter lifespan. And so I think
Speaker 1: the two things that can be done I talked about
Speaker 1: workforce development, that there's a second thing, which also spent
Speaker 1: a lot of time on early childhood literacy. So we
Speaker 1: have to improve the school system. But what happens is
Speaker 1: all our work shows that we look at says if
Speaker 1: you start kindergarten behind, you never catch up. Okay, it's
Speaker 1: already too late. Minnieapolis has done great. They do great
Speaker 1: work in Minneapolis FED on this and so and we've
Speaker 1: piggybacked on that zero to five. We've got to do
Speaker 1: much more in this away from the Dallas FED. Yeah,
Speaker 1: we're dealing with the guy out of Kansas who owns
Speaker 1: leadership and own great service to Harvard Business School. Why
Speaker 1: can't we jump start this? What's the impediment? What is
Speaker 1: the constrain to getting the five year olds jump started?
Speaker 1: I'll give you my own view, and this is somebody,
Speaker 1: but I'm speaking for myself. Spent a lot of time
Speaker 1: in the nonprofit World Forward Foundation on this first awareness
Speaker 1: just making clear people has to be done locally because
Speaker 1: you know what you're gonna You have to do this
Speaker 1: with a local program. So you've got to make business
Speaker 1: leaders aware of it. Government is unlikely to allocate enough
Speaker 1: money to solve this, so means business leaders and nonprofits
Speaker 1: have to get together or you have to form nonprofits
Speaker 1: so that kids are read to if their parents don't
Speaker 1: do it. Uh at ages one to three, four and five,
Speaker 1: and so, I think this takes leadership, and this is
Speaker 1: something that business leaders mayors in this country are spending
Speaker 1: time on But it's gonna take I think if we're
Speaker 1: waiting for the government to solve this problem, Washington, what
Speaker 1: does any government or state govern if you if you're
Speaker 1: waiting for government to solve this, you can stop. It's
Speaker 1: that they can do it, but it's got to be
Speaker 1: done from leadership leaders locally and I'm talking business leaders,
Speaker 1: community leaders, nonprofit leaders, and yes, local government leaders need
Speaker 1: to take ownership. And I think they are and this
Speaker 1: is one of those things. We're just not doing it
Speaker 1: nearly fast enough given the demographic trends, which suggests if
Speaker 1: you if you don't improve educational attainment level, it's twenty
Speaker 1: years from now, wealth inequality is going to grow much much,
Speaker 1: to a much greater degree. Within that wealth and equality
Speaker 1: And you mentioned this earlier in our discussion, is the
Speaker 1: concept of age and you talk about an aging America. Yeah,
Speaker 1: I looked at last night out on Twitter. There's a
Speaker 1: wonderful a six decade distribution of Japanese population dynamics. It's
Speaker 1: a terrible problem there to see those issues. How do
Speaker 1: we deal with that as a public policy? And by
Speaker 1: the way, I'll just I'll mention on Japan they have
Speaker 1: a much worse demographic issue than we do, and they've
Speaker 1: had very slow depth geographic GDP growth. The one thing
Speaker 1: they have that we don't have very high savings rate,
Speaker 1: and they can they they're highly leveraged, but because um
Speaker 1: the Central Bank has bought a lot of that and
Speaker 1: they can restructure this. We and we are very highly
Speaker 1: leveraged also, so we really we've got to grow faster.
Speaker 1: And the problem is as the workforce ages, we can
Speaker 1: create incentives for people to work longer, but there's no
Speaker 1: gain around. Even if we do that, we're just delaying
Speaker 1: the inevitable. Participation rates are declining. Now, how do you
Speaker 1: solve that? Workforce development would help. The second thing that
Speaker 1: would help is immigration. Some I know it's controversy built
Speaker 1: sensible immigration reform. Immigration has been key to this country.
Speaker 1: Immigrants and their children have made up over half the
Speaker 1: workforce growth in this country over the last twenty years,
Speaker 1: and it's our judgment of the Dallas Fed that if
Speaker 1: you go out the next twenty years, it's going to
Speaker 1: be higher than that because of aging demographics. So if
Speaker 1: we do things that limit sensible immigration, we are likely
Speaker 1: to slow GDP. Based on what you're saying, you're not
Speaker 1: going to get the new slots at the White House,
Speaker 1: with with with with within. That is what is the
Speaker 1: tone out of Washington and what many perceived to be
Speaker 1: a anger across this nation about immigrants, anger about this,
Speaker 1: anger about that. I'm sure you see that within the
Speaker 1: eleventh district, how do policymakers move beyond the angers of
Speaker 1: two thousand seventeen um. So, actually within the eleventh district,
Speaker 1: I think I wouldn't. I would say it's a little
Speaker 1: bit more balanced the view because of the fact we're
Speaker 1: right on the border with Mexico. I would say the following.
Speaker 1: When I go around Texas, New Mexico and Louisiana, which
Speaker 1: is primary and I talked, go to rural areas and
Speaker 1: we talk about what the actual trends are. Uh, I think,
Speaker 1: and we've talked about this fact globalization is increasingly being
Speaker 1: conflated with technology enabled disruption. What I mean by that,
Speaker 1: twenty years ago, many jobs that were lost in this
Speaker 1: country we're due to globalization, and we can go industry
Speaker 1: by industry and give examples today not so much. Uh,
Speaker 1: it's technology enabled disruption is far more responsible for job displacement.
Speaker 1: And the trends were saying than probably globalization is, and
Speaker 1: to the point where I think part of key elements
Speaker 1: of globalization are more likely to be part of the
Speaker 1: solution than part of the problem, because I think a
Speaker 1: lot of the disruption we're seeing is due to technology. Uh,
Speaker 1: and I think we're mixing them up, and I don't
Speaker 1: think we're being well served by it. How does the
Speaker 1: Dallas FED, I mean, seriously, how does the Dallas Fed
Speaker 1: respond to the idea that on this morning in Abilene,
Speaker 1: there's somebody with brown skin worried they're gonna be picked
Speaker 1: up by the US government. That's a new feeling for
Speaker 1: millions of Americans. What is your research show is a
Speaker 1: better outcome to that? Well, I guess I would observe
Speaker 1: the following. And I've said this publicly a few times
Speaker 1: several times, and I'll say it again. Um, consumer is
Speaker 1: the economy, Okay, And so I'm insensitive to anything that
Speaker 1: affects consumer spending, particularly among groups that have a very
Speaker 1: high propensity to spend, which tend to be lower, lower
Speaker 1: middle income groups. So healthcare reform I'm very sensitive to
Speaker 1: to the extent people are more concerned about access to
Speaker 1: health care, access to be able to get subsidies or
Speaker 1: be able to be eligible for medicaid. They are more
Speaker 1: likely to save them to spend. And there are millions
Speaker 1: of immigrants living in this country, and to your point,
Speaker 1: they're not going out and shopping, They're staying home. They're
Speaker 1: afraid if they go out they may not come home
Speaker 1: on margin, and that it's too soon for the data
Speaker 1: to pick it up. So I'm hearing it anecdotally, and
Speaker 1: I believe we're going to see it. I think those
Speaker 1: people are more likely to save than to spend, and
Speaker 1: those two effects have some muting effect on consumer spending
Speaker 1: and therefore GDP growth. Within that and with the responsibilities
Speaker 1: that Cheery Olne has, I don't want you to speak
Speaker 1: for the chair, but I would suggest that she has
Speaker 1: a huge burden and responsibility as we somehow normalize ourselves
Speaker 1: back to rates. Do you believe we can do that
Speaker 1: for that person in Abilene or for the rich guy
Speaker 1: outside Dallas who's employing people. Can we do it in
Speaker 1: a way of stability? Do you worried within the media
Speaker 1: about the doom and gloom if we raise rates six
Speaker 1: times in two thousand seventeen, Well there'll be instability. So
Speaker 1: my own view is the following. UM, I got raise
Speaker 1: rates six times. There, I got that we're not going
Speaker 1: to do that, uh in a rapid way. UM. I
Speaker 1: believe because of these secular headwinds. UH. And and we
Speaker 1: say this, I say this over and over again. I think,
Speaker 1: while I believe we should be removing accommodation, because I
Speaker 1: think we're getting we're near full employment, and while it's
Speaker 1: been frustratingly slow, we're moving toward our inflation target, although
Speaker 1: I think not yet. Over the next few years, we
Speaker 1: should be removing comedation. But it's got to be done
Speaker 1: patiently and gradually. UH. For those who say, why aren't
Speaker 1: you raising rates more dramatically, I think the secular headwinds
Speaker 1: we just talked about, these, these factors that make this
Speaker 1: economy different than ten years ago and twenty years ago,
Speaker 1: means that we at the Central Bank need to be
Speaker 1: much more careful we remove accommodation. And that's why my
Speaker 1: own view is everybody, every people, everyone around the table
Speaker 1: has an independent view. I believe we should remove accommodation,
Speaker 1: but gradually and patiently, because I don't think this economy
Speaker 1: is running away from US. I don't think inflation is
Speaker 1: running away from us. I wish it were, and I
Speaker 1: think we need to do this in a very careful way.
Speaker 1: You have a wonderful heritage here for this question, the
Speaker 1: idea of Dallas, McTeer, Fisher Kaplan. And yet you live
Speaker 1: for a long time in the people's republic at Cambridge.
Speaker 1: How far is Dallas away from rosen Gren in Boston?
Speaker 1: What is that divide? Where's the ven diagram? So Eric
Speaker 1: of a different view versus debt. It's interesting. I knew
Speaker 1: Eric rosen Grin when I was in Cambridge, and uh,
Speaker 1: you know, I think the great thing about the FED
Speaker 1: I've learned there's great the great people. Uh. But around
Speaker 1: the table, um, each of them gives an does an
Speaker 1: independent analysis the economy and gives a view on what's
Speaker 1: going on in their district. And so um you know
Speaker 1: my views on this. Uh, well I won't. I won't
Speaker 1: compare them to others. But they're very similar to many
Speaker 1: people around the table. But they come each come from
Speaker 1: different districts. That there are some things we have in common, uh,
Speaker 1: and a number of things that I said, the secular
Speaker 1: trends affect all of us. The other thing I think
Speaker 1: I hear about everywhere is the skills gap. So I'll
Speaker 1: just get this in the skills gap in the United States,
Speaker 1: Meaning with all these issues we just talked about in
Speaker 1: educational attainment, there are more openings for skilled workers there
Speaker 1: in the supply of workers. So part of this educational
Speaker 1: attainment issue and the urgent need for workforce development is
Speaker 1: we're missing an enormous opportunity. And this is probably true
Speaker 1: in every district in the country where their businesses cannot
Speaker 1: find skilled workers. I think I quoted the n f
Speaker 1: I B Survey, a small business survey unless I think
Speaker 1: almost fifty I think of them reported they can't find
Speaker 1: workers to fill skilled jobs. So this is a big opportunities. So,
Speaker 1: while each district in the United States is different, there's
Speaker 1: a number of these trends that and themes we have
Speaker 1: in common. What are the adjacency effects of low taxas?
Speaker 1: Texas is on fire, It's always been on fire, and
Speaker 1: a lot of that is tax policy. I looked at
Speaker 1: the personal savings rate to disposable income. Savings rate to
Speaker 1: disposable income back then in the regime seems to be
Speaker 1: one with a lower aggregate tax set, and then the
Speaker 1: next ten twenty years was with a higher tax asset
Speaker 1: which brought down savings. Is that the Texas distinction is
Speaker 1: different texts. I think. I think there are a number
Speaker 1: of things. First of all, UH, pro business culture, relatively
Speaker 1: lower level of regulation. Yes, central location. Yes, there's the
Speaker 1: tax issues. Some people love tribute some of it to
Speaker 1: the weather. But I know I can tell you this
Speaker 1: having spent a lot of my life traveling to Texas
Speaker 1: with my dad and jewelry salesperson. Uh, Texas is a
Speaker 1: very welcoming place for people who of their most people
Speaker 1: I meet, most CEO s I know in state are
Speaker 1: not from Texas. They've moved there. They migrated their business there.
Speaker 1: Taxes might not have been the reason, might have been
Speaker 1: workforce availability, um, it might have been the fact that
Speaker 1: other businesses that are related to them have moved there.
Speaker 1: So there's an ecosystem that makes it a very attractive
Speaker 1: place for businesses to move. We're gonna get the questions.
Speaker 1: Is one more question, Ben, I'm gonna go to you first,
Speaker 1: so you get a warning. I'm gonna Ben Steel here
Speaker 1: with the first question. But I got one more question.
Speaker 1: Cathleen Hayes and I go back and forth on this.
Speaker 1: The idea I hate this phrase a border tax. Isn't
Speaker 1: there no border, it's a tax against everything. Where are
Speaker 1: you and where are your PhDs on the efficacy of
Speaker 1: an import tax? And I believe has more countries involved
Speaker 1: in Mexico. So uh, I'll answer this in a political
Speaker 1: way as you would expect. Uh. Yeah, So our analysis
Speaker 1: is as follless um, And I'll go through the pros
Speaker 1: and the cons which the only way know how to
Speaker 1: do it. Um. Uh. The challenges will be there gonna
Speaker 1: be winners and losers from this. Uh. For example, retailers
Speaker 1: have made very clear people in our district that it
Speaker 1: will eat into their margins. And I think a lot
Speaker 1: of people in businesses are people are focusing on the
Speaker 1: fact that, boy, businesses they didn't think imported that much
Speaker 1: turn out import a lot more than they thought. Imports
Speaker 1: are very critical to competitiveness. And then the second issue
Speaker 1: is what's the effect on consumer prices here? Now the
Speaker 1: counter to that has been but the currency will adjust.
Speaker 1: But the truth is it's a big uncertainty how much
Speaker 1: the currency will adjust and will adjust enough to offset
Speaker 1: the fact that this border tax has to be paid
Speaker 1: by consumers here. And then the third thing, which you
Speaker 1: don't know and you can't quantify is retaliation what's the
Speaker 1: likelihood of retaliation? Uh? It is critical to the United
Speaker 1: States and certainly the US domiciled companies to be a
Speaker 1: able to sell goods overseas. A lot has been made
Speaker 1: recently for about the fact that of SMP five hundred
Speaker 1: neighborhood of half revenues and profits come from outside the And
Speaker 1: And I'd say, if there's retaliation, what will be effect
Speaker 1: on US companies and US employment. So I think there's
Speaker 1: a lot of uncertainties. If you could get through those
Speaker 1: five years from now, Um, certainly there will it will
Speaker 1: create incentives for people to locate manufacturing here or locate
Speaker 1: facilities here. But I think they're enormous number of uncertainties.
Speaker 1: So and I don't think there's been enough time to
Speaker 1: analyze in my judgment, UH, particularly the retaliation issue. What
Speaker 1: what's the likelihood? And so I think that's one of
Speaker 1: the reasons why this may You know, people are very
Speaker 1: concerned about implementing this kind of policy. Thanks for listening
Speaker 1: to the Bloomberg Surveillance Podcast. Subscribe and listen to interviews
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