Speaker 1: This is a special podcast rebroadcast in the wake of
Speaker 1: the passing of economist Alan Krueger. Earlier this week, we
Speaker 1: learned some unfortunate news. Uh. He took his own life,
Speaker 1: and we were deeply sinned by the loss. I wanted
Speaker 1: to revisit the interview I did with him in the
Speaker 1: spring of It was a fascinating conversation. So much has
Speaker 1: changed since then. Uh, the economy has clearly gotten much better. Uh,
Speaker 1: we're further away from the financial crisis. But we discussed
Speaker 1: his background in economics, the Federal Reserve, his research on
Speaker 1: minimum wage. I was astonished at what a fantastic conversation
Speaker 1: he was and and just privileged to spend time with
Speaker 1: Alan and discussing what he knew best, which was economics. So,
Speaker 1: with no further ado, my conversation with the late great
Speaker 1: Alan Krueger from the spring of my guest today is
Speaker 1: a what can I say about Professor Allan Krueger of Princeton.
Speaker 1: He was the chief Economist for the Treasury Department and
Speaker 1: Assistant Secretary of of Treasury. He was also Chairman of
Speaker 1: the Council of Economic Advisors under President Obama. Professor Krueger,
Speaker 1: welcome to Bloomberg my pleasure. So I didn't want to
Speaker 1: spend too much time waxing eloquent on your curriculum, Vita.
Speaker 1: But suffice it to say, you've pretty much won just
Speaker 1: about every award you can come up with, at least
Speaker 1: in the United States, UH for economics, and you've had
Speaker 1: a number of just really incredible UH posts. When both
Speaker 1: within the government and out in the early nineties, you
Speaker 1: were chief Economist at the Department of Labor. I was,
Speaker 1: and and what does the chief economist for um, the
Speaker 1: Labor Department actually do? That's a good question. Uh. It
Speaker 1: was a new position. Secretary Rice created it, and I
Speaker 1: was the second one to hold it. Uh. I was
Speaker 1: very Who's the first first was my good friend Larry
Speaker 1: Cats from Harvard. Larry did a brilliant job, and he
Speaker 1: left very big shoes to fill. I'll give you an example.
Speaker 1: One of the reasons why Secretary Rice created the job
Speaker 1: was he wanted to have involvement with the National Economic Council,
Speaker 1: which was also Clinton innovation. And the way the NBC
Speaker 1: was set up at that time, Bob Reuben was chairman,
Speaker 1: and Treasury Omb Labor Commerce were the members. So this
Speaker 1: was like a think tank, but with the old government
Speaker 1: representatives who are they would advised the president and the cabinet.
Speaker 1: It was the place that ran the policy process, and
Speaker 1: it's different from a think tank because it produced proposals
Speaker 1: that really mattered and it had a direct connection to
Speaker 1: the president. So the way that Bob Rubin ran this
Speaker 1: process was very organized. UH budget went through the NYC process,
Speaker 1: UM trade issues went through, and ANYC was divided into
Speaker 1: domestic issues and international issues. Other departments had a separate
Speaker 1: person who would represent them on domestic and international issues.
Speaker 1: Larry Katz was so UH skilled that he did both.
Speaker 1: So I had to fill those issues and do both,
Speaker 1: which meant being involved in NAFTA as well as UH
Speaker 1: domestic issues like the minimum wage. So so what were
Speaker 1: some of the policies that came out of that Economic Council?
Speaker 1: So NAFTA clearly was a big issue in the nineties.
Speaker 1: NAFTA was a very big issue the first Clinton budget,
Speaker 1: which was after UH sorry, before I arrived, which I
Speaker 1: think put us on a much stronger path in the
Speaker 1: early nineteen nineties. The one significant domestic policy that did
Speaker 1: not come from it was healthcare reform, and I think
Speaker 1: one of the reasons why healthcare reform in that period
Speaker 1: UH didn't do as well as it should have was
Speaker 1: because it didn't come through the NBC process, in other words,
Speaker 1: the way it was formulated with the thought process of
Speaker 1: what's the impact, what's the cost, what's the benefit? What?
Speaker 1: What is the thinking behind how some of these policies
Speaker 1: are developed. Well. Economists have I think, very systematic approach
Speaker 1: to think about policy. To thinking about policy issues, we
Speaker 1: think about efficiency, we think about equity, we think about
Speaker 1: what's gonna user resources most efficiently, and we think about
Speaker 1: what's fair, and we divide issues quite clearly in that way,
Speaker 1: and we make trade offs and UM, now it might
Speaker 1: mean that uh a lot of our proposals are not
Speaker 1: politically feasible, but I think this is a very coherent framework,
Speaker 1: and the process that was used for healthcare reform was
Speaker 1: UM much more at hoc I would say, not nearly systematic.
Speaker 1: So there's pretty much an ever going trade off between
Speaker 1: what's optimal and what's politically feasible and what's financially doable.
Speaker 1: Is that sort of the factors that that get twisted about.
Speaker 1: Sometimes you hit the sweet spot and good policy is
Speaker 1: good politics and it's nice when that works out. Other
Speaker 1: times you have to make compromises between what's politically feasible
Speaker 1: and what we'll do the most good for the economy.
Speaker 1: And one of the lessons I learned from having served
Speaker 1: in the government for five years in my career is that,
Speaker 1: you know, compromises not such a bad thing as long
Speaker 1: as compromise leads to better policy, to improvement for the
Speaker 1: American people. We shouldn't let the best be the enemy
Speaker 1: of the good. That that's the classic line. So you
Speaker 1: were at the Labor Department, and the Bureau of Labor
Speaker 1: Statistics also has a huge group of statisticians, economists, econometric
Speaker 1: model lers tell for people who may not be quite
Speaker 1: as wonky as some of us are, tell us what
Speaker 1: the BLS actually does over the course of any given
Speaker 1: month or or quarter. The BLS is housed within the
Speaker 1: Labor Department, but it has a tremendous amount of independence.
Speaker 1: For example, there's only one employee of the BLS who
Speaker 1: is a presidential appointee. That's the UM Commissioner. Everyone else
Speaker 1: is a career civil servant. The Bureau of list Labor Statistics,
Speaker 1: together with the Census Bureau, conducts the monthly household Survey,
Speaker 1: the current Population Survey, which produces the unemployment rate. It
Speaker 1: also does a survey of establishments. Nearly four hundred thousand
Speaker 1: establishments are interviewed on a monthly basis. And what is
Speaker 1: amazing to me about the BLS those are its two
Speaker 1: most important products, although it has many others, is that
Speaker 1: on an ongoing basis, it collects analysis and releases those
Speaker 1: data every month. And if you think about one, an
Speaker 1: enormous effort, that is, and to do it as carefully
Speaker 1: as they do it is quite impressive. And I think
Speaker 1: they are given a tremendous amount of respect and they've
Speaker 1: earned a great deal of credibility because they do it
Speaker 1: in such a professional way. They collect other data also,
Speaker 1: I would highlight the Employment Cost Index and I think
Speaker 1: the employment costs in dex. What exactly is that the
Speaker 1: e c I Employment Cost Index is a measure of
Speaker 1: how much it is costing for employers to pay pay
Speaker 1: their workers, and it includes not only wages, but also
Speaker 1: health insurance benefits, pension benefits, vacation time. It's calculated very
Speaker 1: much like the Consumer Price Index in that the BLS
Speaker 1: goes back to the same companies quarter after quarter, looks
Speaker 1: at the same jobs and looks at what's happening to
Speaker 1: compensation costs within those very narrow categories. We left will
Speaker 1: earlier talking about UM the Economic Council as chairman of
Speaker 1: the President's Economic Advisors, that's also part of that council.
Speaker 1: Is that? Is that correct? That's right? The chairman of
Speaker 1: the c e A place an important role within the
Speaker 1: National Economic Council. So I think people are aware of,
Speaker 1: UM what the c e A is. They know they're
Speaker 1: the you as the chairperson is the advisor to the president.
Speaker 1: But I don't think people have a clue as to
Speaker 1: how that works either within the White House. Are you
Speaker 1: guys proactively suggesting policy? Is the President coming to the
Speaker 1: Council and saying, hey have a question about this, uh,
Speaker 1: this minimum wage issue? What does it mean if we
Speaker 1: raise the minimum How does that work? What's the back
Speaker 1: and forth with that? It works in both directions. There
Speaker 1: are instances where the Council of Economic Advisors would make proposals,
Speaker 1: typically within the NBC process, where they get vetted and
Speaker 1: reviewed UH and other relevant departments would add to the
Speaker 1: analysis and help put together their proposal. UH. And then
Speaker 1: there are other times where the president says, Look, go
Speaker 1: back to the drawing board, come up with more suggestions
Speaker 1: in this area, or uh, you know. The way I
Speaker 1: think about education is like this, Here's what I think
Speaker 1: you should develop a proposal on. So it works in
Speaker 1: both directions. So I was I mentioned the minimum wage
Speaker 1: earlier and and you have an expertise in not only UH,
Speaker 1: labor economics, but you've studied the minimum wage extensively. Let's
Speaker 1: let's start out with Walmart in February, and then a
Speaker 1: month later it was Target and t J Max. And
Speaker 1: then after that McDonald's just announced an increase in in
Speaker 1: their low wage workers too up the minimum wage. In fact,
Speaker 1: they want to pay a dollar above the minimum wage.
Speaker 1: What does this say about the economy today? What does
Speaker 1: it say about where we are in the economic cycle?
Speaker 1: I think it says a couple of things. First of all,
Speaker 1: when it comes to the labor market, the invisible hand
Speaker 1: doesn't always work perfectly. Sometimes the invisible hand needs a
Speaker 1: little bit of help. In the past, when we're in
Speaker 1: a situation like we are today, where the economy is
Speaker 1: getting stronger, the job market is clearly tightening, a minimum
Speaker 1: wage increase helped the labor market to clear, and what
Speaker 1: we're seeing from companies like McDonald's and from Walmart is
Speaker 1: they are stepping in and they're raising their wages across
Speaker 1: the board. They are stepping into set a minimum wage,
Speaker 1: imposing on themselves. That's not only market forces, that's also
Speaker 1: I think a reflection of the fact that the labor
Speaker 1: market is a social entity and worker morale is important.
Speaker 1: I think these companies will find that when they raise
Speaker 1: when they raise wages, they're going to get greater productivity
Speaker 1: from the workers, will have lower turnover. Uh. So I
Speaker 1: think we're in a situation in the economy now where
Speaker 1: things are getting tight enough that companies are raising wages,
Speaker 1: and I think they're doing it in a very interesting way,
Speaker 1: which is imposing a floor on themselves, which highlights the
Speaker 1: way the job market works, which is uh, social factors
Speaker 1: have a role to play in the job market. So
Speaker 1: there are a couple of interesting things with both Walmart
Speaker 1: and McDonald's. Um With Walmart, the data was that two
Speaker 1: thirds of the are employees already working states that have
Speaker 1: a significantly higher minimum wage than the federal government, so
Speaker 1: this only affected a third of their employees. And with
Speaker 1: McDonald's it was only a company owned stores, which are
Speaker 1: of their all the McDonald's in the country, there's there's
Speaker 1: almost fifteen thousand McDonald's restaurants are are company owned, and
Speaker 1: so of the stores, and assuming the math holds up,
Speaker 1: the employees are not necessarily affected by this company owned mandate.
Speaker 1: So how significant is what these companies are doing? Does
Speaker 1: it vitiate the need for the minimum wage, which is
Speaker 1: still at seven in a quarter and has seemingly been
Speaker 1: there for decades for there to be an increase in
Speaker 1: the minimum wage? And then we'll discuss what does raising
Speaker 1: the minimum wage due to the economy. I think what
Speaker 1: these companies have done is an important step. I think
Speaker 1: it's an important symbol. McDonald's, for example, cannot dictate wages
Speaker 1: to their franchise e's. Uh, there're separate businesses in the
Speaker 1: legal sense, So the same way that they can't dictate prices.
Speaker 1: They always say at participating franchisees, it's the same thing. Now.
Speaker 1: I hope that many of the franchises follow suit. And
Speaker 1: do we do we have any history what happens when
Speaker 1: McDonald's does this do Obviously not every franchise, but you
Speaker 1: would assume that this sort of leadership is going to
Speaker 1: drive a little more action amongst the non company owned stores.
Speaker 1: We don't really have much experience with this. H This
Speaker 1: is an unusual step that they've done. I hope it
Speaker 1: does drive action with franchises. Uh, but it also highlights
Speaker 1: the need for the federal minimum wage to increase. That
Speaker 1: was my My next question is, so what would happen
Speaker 1: if the Feds took the minimum wage up to you know,
Speaker 1: I've seen three numbers get bantied about, and they're all
Speaker 1: kind of interesting. At ten dollars an hour, it's a
Speaker 1: significant increase in the states that haven't read, is the
Speaker 1: minimum wage at twelve dollars an hour? Essentially you get
Speaker 1: the inflation adjusted number from pick your point sixty eight,
Speaker 1: seventy two, whatever it is, and then fifteen dollars an
Speaker 1: hour takes a full time person working forty hours a
Speaker 1: week and pretty much gets them up to a level.
Speaker 1: And we could talk about Walmart as well as the
Speaker 1: fast food industry where they're no longer dependent on state
Speaker 1: and federal aid. I think doubling or more than doubling
Speaker 1: the minimum wage, it's a big step at once for
Speaker 1: companies to absorb what we've seen in the past if
Speaker 1: the minimum wage went up to the equivalent of ten
Speaker 1: dollars an hour, that's something that companies mostly can absorb.
Speaker 1: And in the past when states have raised their minimum
Speaker 1: wage to that level, after adjusting for inflation, we haven't
Speaker 1: seen job losses. In fact, what we've seen is that
Speaker 1: employees have more money in their pockets than they spend
Speaker 1: that money in That tends to help the economy over
Speaker 1: and it's a modest increase in minimum wage or at
Speaker 1: least keeping up with inflation, isn't a job killer, because
Speaker 1: that's always the issue. Right. People always say there was
Speaker 1: a great study done where there was a change at
Speaker 1: a border I think was New Jersey and Pennsylvania, and
Speaker 1: on one side of the border the minimum wage went up,
Speaker 1: and a mile across the border there was another one.
Speaker 1: Describe what happened there, Well, that was the study I
Speaker 1: did in the early nineteen nineties with my colleague David
Speaker 1: cart and to our surprise, I thought we were going
Speaker 1: to find that when New Jersey raised its minimum wage,
Speaker 1: the fast food restaurants would have grown more slowly, fewer
Speaker 1: of them would have opened, and in fact we saw
Speaker 1: the opposite. They grew at least as much probably a
Speaker 1: little bit more than the fast food restaurants on the
Speaker 1: other side of the border. And we also found if
Speaker 1: you look within the state, within New Jersey, the areas
Speaker 1: of the state where the minimum wage was already above
Speaker 1: the new minimum uh and wages didn't rise. Uh, they
Speaker 1: didn't grow as quickly as the parts of the state
Speaker 1: where wages were low and wages were boosted by the
Speaker 1: minimum wage. And I should add Barry that that was study.
Speaker 1: I think that study was a turning point in research
Speaker 1: on the minimum wage. Most of the subsequent studies have
Speaker 1: reached the same conclusion. And there's been some work, very
Speaker 1: careful work looking across count knees using government reported data
Speaker 1: from government tax records, for example, which tends to find
Speaker 1: the exact same result, UH that at modest levels, the
Speaker 1: kinds of levels that we've historically seen in the United States,
Speaker 1: minimum wage increases do not have an adverse effect unemployment.
Speaker 1: Let's talk a little bit about the Federal Reserve. What
Speaker 1: started in the weeks before we recorded this was former
Speaker 1: Federal Reserve Chairman Ben Bernanke launched a blog, Go figure
Speaker 1: the Fed Chairman is blogging and kind of got into
Speaker 1: this epic debate with Lauren Summers, Secretary of the Treasury
Speaker 1: in the first Obama White House, about the concept of
Speaker 1: secular stagnation. So, so let's talk about all this stuff. First,
Speaker 1: what do you think about the FED chief blogging. I
Speaker 1: think it's terrific that Ben Bernanke has started a blog. Um,
Speaker 1: he has I think quite a bit to add to
Speaker 1: the public debate on these issues. Ben was a colleague
Speaker 1: of mine at Princeton for two decades. I learned a
Speaker 1: tremendous amount from him at the university. I worked with
Speaker 1: him when he was chairman of the FED. So I
Speaker 1: look forward to reading what he has to say. So
Speaker 1: and that Princeton Economics department, mur Nankee, Krueger, Krugman, who else?
Speaker 1: Who else is in that department? Alan Binder Blind. I mean,
Speaker 1: that's like the you know, the murders row on the
Speaker 1: Yankees back in the in the old days. So let's
Speaker 1: talk secular stagnation. Larry Summer's thesis, and it's been Bill
Speaker 1: Gross the new normal, and a lot of people have
Speaker 1: said this is, Hey, We've come off a multi decade
Speaker 1: period of growth and expansion and now post crisis, it's
Speaker 1: gonna be ugly for decades. What do you say about that.
Speaker 1: I'm skeptical of of that view. I think the US
Speaker 1: economy historically has managed to grow against a lot of obstacles.
Speaker 1: I think that will happen again. I think the financial
Speaker 1: crisis did have a last effect. On the other hand,
Speaker 1: I put a lot of confidence in the ingenuity of
Speaker 1: American entrepreneurs. You know, the sensation I always had coming
Speaker 1: out of the financial crisis that was very nineteen seventies.
Speaker 1: Like I was a teenager in the seventies and I
Speaker 1: just the word malaise really sums it up. And people
Speaker 1: in the seventies thought America was over. They never regained
Speaker 1: their mojo. And then the next thing, you know, the
Speaker 1: eighties hit and everything from technology to semiconductors to the
Speaker 1: Internet to mobile the universe exploded. And and that it's
Speaker 1: always been a bad bet, says my pal Lowry Cudlow.
Speaker 1: Betting against America? Is that a Is that a fair statement?
Speaker 1: I think that's absolutely right. I mean, if you go
Speaker 1: back UH to uh the end of World War Two,
Speaker 1: there were economists who thought exactly what you just said,
Speaker 1: that malays would set in. Even Paul Samuelis and thought
Speaker 1: we would slip back to a recession, and then others said,
Speaker 1: you know what, we've got very creative entrepreneur oars, they'll
Speaker 1: figure out new products. There was a lot of pent
Speaker 1: up demand coming out of the war. Then immigration helped
Speaker 1: to fuel the US economy, and I think those forces
Speaker 1: can can work again. And you know, you go look
Speaker 1: at the equity markets from y six to nineteen sixty six.
Speaker 1: That's an epic bull market. That's a huge run, only
Speaker 1: surpassed by the next malaise at two to two thousand,
Speaker 1: another epic bull market. So let's turn our attention now
Speaker 1: to interest rates. Rates are low, they seem to be
Speaker 1: going lower. They're low around the world. Germany's interest rates
Speaker 1: are now below Japan's interest rates. If you want to
Speaker 1: buy bonds um from the Swiss, they will charge you
Speaker 1: for the privilege. It's a negative interest rate. We've never
Speaker 1: really seen an environment where rates are this low, and
Speaker 1: what does that mean about the economy and what does
Speaker 1: it say to us about the impact of central banks.
Speaker 1: This has been an extraordinary period. There's no question. It's
Speaker 1: hard to believe there aren't sufficient investments that could be
Speaker 1: taken by private companies or by the government at such
Speaker 1: low interest rates. That that they would make a lot
Speaker 1: of sense. I think we're seeing some big imbalances in
Speaker 1: the world economy. Uh. This is a point that Ben
Speaker 1: Bernanke made about the global savings squat, where we have
Speaker 1: countries which are running up very big current accounts surpluses
Speaker 1: and that's depressing interest rates. Uh. But I think if
Speaker 1: you look at countries like say China, there's tremendous amount
Speaker 1: of scope for them to increase their domestic consumption. I
Speaker 1: think as they slow and I think here Larry Summers
Speaker 1: has done very good work predicting a slowdown in growth
Speaker 1: rates in in China. Uh. I think they're going to
Speaker 1: turn more towards domestic consumption to continue to keep people happy,
Speaker 1: to make them feel like their situation is improving. I've
Speaker 1: heard the complaint that, oh, it's the Federal Reserve that
Speaker 1: has driven rates so low around the world. How do
Speaker 1: you respond to that. The Federal Reserve has carried out
Speaker 1: its dual mandate extremely well. It has a dual mandate
Speaker 1: to try to create maximum employment and stable prices um
Speaker 1: full so create jobs and reduce inflation and keep inflation
Speaker 1: steady and shooting for around two percent. It's not too
Speaker 1: far off of that in the grand scheme of things. So,
Speaker 1: I think the Federal Reserve has helped the economy tremendously
Speaker 1: over the past five years. I think we're in a
Speaker 1: much stronger position than say, Europe because of the actions
Speaker 1: are are central back has taken. You have a background
Speaker 1: in labor economics. You've done a lot of studies, a
Speaker 1: lot of really interesting things UM with labor. So let's
Speaker 1: talk a little bit about the labor force this whole recovery.
Speaker 1: One of the things we hear all the time is, Gee,
Speaker 1: there's a lot of slack in the labor force. What
Speaker 1: does that mean for a lay person? Slack means that
Speaker 1: we're not using all the resources that we can be using.
Speaker 1: And the implication of slack is that it put downward
Speaker 1: pressure on ages, which would then put downward pressure on inflation.
Speaker 1: Are we coming to the end of the slack period
Speaker 1: of of the cycle for for labor? Is that the
Speaker 1: positive reading this? I think we are. I think what
Speaker 1: we've seen with the decline in labor force participation is
Speaker 1: what you would expect giving the aging of the workforce,
Speaker 1: Given that women's labor force participation peaked in the early
Speaker 1: two thousands, UM and given that we had so many
Speaker 1: long term unemployed, it's the natural evolution of the job
Speaker 1: market that they exit the labor force, and that's what's
Speaker 1: been taking place. So so let's describe this. When when
Speaker 1: we look at the population, you have the total civilian
Speaker 1: population in the United States is three hundred and ten
Speaker 1: or so million people. We then have a labor force
Speaker 1: all the people who were either working or essentially looking
Speaker 1: for work at a hundred and fifty five or so,
Speaker 1: where are we Bullpark hundred fifty five million, And then
Speaker 1: you have people who are leaving the labor force. They
Speaker 1: basically said either they're retiring or they just kind of
Speaker 1: give up on looking for a job. And people have
Speaker 1: been making a big deal about the declining participation right
Speaker 1: in the labor force. If I'm hearing you correctly, you're
Speaker 1: saying some of this is a function of just the
Speaker 1: aging of the baby boomers. You have sixty people a
Speaker 1: day retiring, and some of them is just the peak
Speaker 1: participation of women. Explained that a little bit. What had
Speaker 1: been fueling our rise in labor force participation from the
Speaker 1: nineteen fifties up until two thousand was more and more
Speaker 1: women joined the labor force that reached a peak in
Speaker 1: two thousand. The puzzle y labor force participation has since declined.
Speaker 1: For women, it declined in the last recovery, so this
Speaker 1: is not new in the current recovery, and it's declined
Speaker 1: an approach pretty broad base, well educated women as well
Speaker 1: as less educated women, women with children, women who were
Speaker 1: not married and don't have children. So it's been a
Speaker 1: pretty ubiquitous phenomenon and that had been fueling the rides
Speaker 1: in labor force participation, and now we're starting to see
Speaker 1: a little bit of a reversal of that. We've seen
Speaker 1: a little bit of a reversal over the last decade.
Speaker 1: So more recently, the labor force participation rates seemed to
Speaker 1: stop falling and actually started to increase. Is this just
Speaker 1: a little noise in the data series, or or perhaps
Speaker 1: we're seeing that drop come to a halt. I think
Speaker 1: that's noise. I think at best we could say labor
Speaker 1: for its participation is stabilized. Maybe some of the young
Speaker 1: people who left the labor force to go back to
Speaker 1: school are coming back. I think that's a positive sign.
Speaker 1: But that's against the backdrop, as you said, of increasing
Speaker 1: number of baby boomers reaching the retirement age and retiring.
Speaker 1: So we've been talking a little bit about baby boomers,
Speaker 1: and we've been talking about that post War War two era.
Speaker 1: Let's talk a bit about the middle class, which, based
Speaker 1: on what we've seen recently, almost appears to be a
Speaker 1: post War War two phenomena. Following World War Two, yet
Speaker 1: everybody come back. You had all these UH servicemen come
Speaker 1: back on the g I Bill, and it seemed we
Speaker 1: had this giant, multi decade boom and the middle class
Speaker 1: just exploded in terms of size and wealth, and that
Speaker 1: seems to be unwinding. What's really going on with the
Speaker 1: middle class these days. The middle class has been under
Speaker 1: a lot of pressure, and we've seen the middle class shrink.
Speaker 1: I think that's unhealthy for the economy. I think it's
Speaker 1: it's one of the reasons why we are facing problems
Speaker 1: when it comes to aggregate demand, because the middle class
Speaker 1: tends to spend their income unlike very high income people
Speaker 1: who have a higher savings rate. And I think it's
Speaker 1: bad for the country because I think our country works
Speaker 1: better when we have a broad middle with a common interest.
Speaker 1: So when we look at the people who are doing
Speaker 1: best in the country, the top one percent has done
Speaker 1: really well. Top ten percent has done pretty well. But
Speaker 1: when we take the top one percent of the top
Speaker 1: one percent, the point oh one percent, they've done phenomenally well.
Speaker 1: What what is behind that? Friends? They've done well in
Speaker 1: part because uh, there are people there have come up
Speaker 1: with new products, very innovative people. In part because there
Speaker 1: are people who inherited wealth, and increasingly that top tenth
Speaker 1: of one percent are going to be those who inherited
Speaker 1: their wealth as opposed to those who were successful entrepreneurs.
Speaker 1: But also we've seen enormous changes in the bottom nine.
Speaker 1: You know, if you look along education lines, Uh, I
Speaker 1: find the following calculation quite revealing. If you took the
Speaker 1: top one percent and said we're going to keep their
Speaker 1: income at the same shares as it was nineteen seventy
Speaker 1: nine and redistributed that to the bottom nine, if one could, uh,
Speaker 1: that would raise the average families income by about seven
Speaker 1: thousand dollars a year. But if you then compare a
Speaker 1: family where you have a household headed by a college
Speaker 1: graduate versus a household headed by a high school graduate,
Speaker 1: the difference in their earnings since nineteen seventy nine has
Speaker 1: increased by twenty three thousand dollars over three time times
Speaker 1: as much. So it's not only the top one percent
Speaker 1: that's causing the shifts and inequality that we're seeing and
Speaker 1: putting pressure on the middle class. You know. One of
Speaker 1: the fascinating stats I saw related to that was the
Speaker 1: unemployment rate amongst people with college degrees, and then the
Speaker 1: unemployment rate amongst people with graduate degrees or science, technology, engineering,
Speaker 1: and mathematics degrees. It was low, low single digits. Even
Speaker 1: when the unemployment rate was eight nine percent, it was
Speaker 1: in the Two's quite amazing that there's such a strong
Speaker 1: demand for those sort of employees. Increasingly, the US economy
Speaker 1: has been demanding workers with higher levels of skills, and
Speaker 1: you see that really throughout the distribution, not just graduate degrees,
Speaker 1: but if you compare people who have skills in manufacturing
Speaker 1: skills and welding, they're doing better than people who have, uh,
Speaker 1: just a high school degree and not a specific training
Speaker 1: in an area BLS. One of the things we talked
Speaker 1: a little bit about the Bureau of Labor Statistics earlier.
Speaker 1: I found that any time I had a question about
Speaker 1: a report or anything that came out, I had the
Speaker 1: ability to pick up the phone and actually get that
Speaker 1: economist on the phone who would walk me through what
Speaker 1: they did. Is this pretty standard operating procedure there? I
Speaker 1: was astonished by that. BLS is a very transparent organization.
Speaker 1: They're there to help. They want people to understand what
Speaker 1: it is that they're doing. They don't want people to
Speaker 1: misinterpret their data, so they're very open in that. In
Speaker 1: that way, what is it like producing the sort of
Speaker 1: data they crank out every month? How many economists and
Speaker 1: statisticians work there? And what is the process like creating
Speaker 1: those models? Well, it's more data than models, you know,
Speaker 1: it's really more Uh, interviewing households, interviewing businesses for the
Speaker 1: unemployment report, the Census Bureau on the behalf of the
Speaker 1: BLS goes door to door to over fifty households. That's
Speaker 1: every month, every month. Now, they don't go door to
Speaker 1: door every month. They go door to door the first
Speaker 1: time they interview them. Then they say next month is
Speaker 1: it okay? We call you. But on a rotating basis,
Speaker 1: they're interviewing over fifty households a month, giving them a
Speaker 1: short questionnaire, and then they're processing the data h screening
Speaker 1: out mistakes. Uh uh. If somebody misreported their income, for example,
Speaker 1: and then producing the unemployment rate and related statistics. This
Speaker 1: is all done by career employees. Uh. They don't inform
Speaker 1: the administration about the results until the night before the
Speaker 1: data are released to the public. So the so the
Speaker 1: President gets a phone call, Hey, tomorrow's nonfon payroll. He
Speaker 1: finds that out twelve hours before everybody else. The President
Speaker 1: receives a visit from the Chairman of the Council of
Speaker 1: Economic Advisors with a memo in hand describing what the
Speaker 1: next day's report will be. The Chairman of the Federal
Speaker 1: Reserve receives a one page sheet called the Chairman's Data
Speaker 1: Sheet with some of the key statistics that are going
Speaker 1: to come out the next day, also provided by the
Speaker 1: Chairman of the Council of Economic Advisors, as does the
Speaker 1: Treasury Secretary. So I picture someone with the briefcase that's
Speaker 1: handcuffed to the the the secret agent walking into the
Speaker 1: Federal Reserve, walking into the White House. It's really not
Speaker 1: that cloaken dagger, is it. Well, it's a secure facts,
Speaker 1: a secure facts. Oh that's fascinating and um, one of
Speaker 1: the things I found fascinating about the BLS was about
Speaker 1: ten years ago, maybe a little longer, they changed the
Speaker 1: birth death model and this caused all sorts of of
Speaker 1: mayhem amongst the tinfoil hat types for people who aren't
Speaker 1: economic wanks. What is the birth death adjustment? Well, this
Speaker 1: is really inside baseball, But in the establishment survey that
Speaker 1: the BLS does every month, they don't do a very
Speaker 1: good job bringing in new companies. Where the company has failed,
Speaker 1: they don't know for sure that it failed. Maybe it
Speaker 1: just failed to respond. It doesn't mean necessarily it's kind
Speaker 1: of out of business. So to adjust for the births
Speaker 1: and the deaths, they have an additive factor. Could be positive,
Speaker 1: could be negative, And that's based on information that's coming
Speaker 1: in from payroll tax records, where the b l as
Speaker 1: could judge how far off it's been in recent months
Speaker 1: and use that to make an adjustment. I think the
Speaker 1: outside world tends to focus a lot on the birth
Speaker 1: death model as opposed to uh, the data that's coming
Speaker 1: in and the data that's coming in from the establishments
Speaker 1: are really much more important than the birth death adjustment.
Speaker 1: We had terrible news this week with the passing of
Speaker 1: the great economist Alan Krueger. It was my privilege of
Speaker 1: speaking with him in the spring of and this is
Speaker 1: a continuation of that conversation when we get more in
Speaker 1: depth and get into the weeds about economics, the Federal Reserve,
Speaker 1: and the labor markets. My guest today Professor Alan Krueger,
Speaker 1: not Krugman, not Alan Blinder, Professor Alan Krueger. People get
Speaker 1: that wrong all the time, don't they all the time?
Speaker 1: Krugman and I we get each other's mail. True story
Speaker 1: about ten years ago. I my office was three Park Avenue.
Speaker 1: I have a cousin with the same name as me,
Speaker 1: Barry Riddoltz. He's a lawyer. He was working for Golden
Speaker 1: Tree Mutual Funds. There's no tea at the end of
Speaker 1: his name, so he's O l Z. And we're in
Speaker 1: the same building. We would get each other's male. What
Speaker 1: are the odds that someone with the same name and
Speaker 1: it's not, you know, if you're John Smith, statistically right.
Speaker 1: But it was just always always sort of sort of fun.
Speaker 1: So Krueger, not Kruegman. Um, I have so many other
Speaker 1: things I want to I want to talk to you
Speaker 1: about before we have to send you on on your way.
Speaker 1: We talked a lot of a lot of misconceptions, a
Speaker 1: lot of heras people have what what do you think
Speaker 1: about economics or the BLS data or whatever. What do
Speaker 1: you think is the biggest misconception about economics out there? Well,
Speaker 1: I don't know if it's a misconception. There's kind of
Speaker 1: uh paranoia that the BLS is a tool of the
Speaker 1: administration and is pressured to come up with uh particular results.
Speaker 1: And you know former I'll say this, former g E
Speaker 1: CEO Jack Welsh, Right before the November twenty twelve election,
Speaker 1: there was a fairly decent employment number, and he infamously
Speaker 1: tweeted out, Hey, those Chicago guys will do anything to
Speaker 1: win election. They doctored these numbers and and people were
Speaker 1: really astonished about it. He ultimately ended up getting pissy
Speaker 1: with fortune quitting, storming off, how often do you run
Speaker 1: into Oh, the president is manipulating these numbers? What was
Speaker 1: unusual about that episode? And I remember it very well.
Speaker 1: It was October of two thousand twelve. The unaployment rate
Speaker 1: fell from eight point one to say, and he's not
Speaker 1: a giant drop, a fairly a healthy full, but not
Speaker 1: anything ridiculous, So certainly not unprecedented. Look at it with hindsight.
Speaker 1: Is now five and a half percent. We were clearly
Speaker 1: on a path then when the economy was getting better
Speaker 1: and he was denying it um and I was asked
Speaker 1: to respond to what he said, and I'll I said
Speaker 1: then what I'll say today. No serious person doubts the
Speaker 1: credibility of the Bureau of Labor Statistics. That it's it's
Speaker 1: a civil sermon group. It's not political appointees. Only one
Speaker 1: person BLS is a presidential appointee that earlier, the commissioner,
Speaker 1: and all these people are just lifetime economist, statisticians and others. Look,
Speaker 1: the numbers may not be perfect, but it's not some
Speaker 1: grand the president is telling them. Now, we've to be fair.
Speaker 1: We've seen massive changes in the way things are done
Speaker 1: that have had a tendency to have an upward bias.
Speaker 1: We we talk about the civilian labor force. When you
Speaker 1: had a chain was it, I don't remember if it
Speaker 1: was Korean War or Vietnam vietnamee War. Somebody changed how
Speaker 1: that was counted to not include military and it had
Speaker 1: a beneficial effect. There have been tweaks like that. Look,
Speaker 1: when the Beer of Labor Statistics makes changes, it does
Speaker 1: it in a very deliberate fashion, usually with an outside
Speaker 1: group giving it advice. It made a major change when
Speaker 1: it redesigned the survey, which probably raised the measured unemployment rate.
Speaker 1: So uh, it certainly makes changes to try to keep
Speaker 1: up with changes that are going on in the economy
Speaker 1: or to improve its measures, but it would not make
Speaker 1: a change in the middle of an election. And I've
Speaker 1: noticed that whenever they make a change, there's an there's
Speaker 1: a footnote six months before we're reviewing this, we're taking
Speaker 1: comments about that. Here's the proposed set of changes. I've
Speaker 1: been critical of the or focus on the BLS number
Speaker 1: because it's a series and everybody obsesses about each month
Speaker 1: when you really have to look at the long term
Speaker 1: trend and you could have a really good number, a
Speaker 1: really bad number in any given month that's still within
Speaker 1: that channel and being off of the average very often
Speaker 1: as just noisy. And as you've mentioned the upward revisions.
Speaker 1: So so the most recent non farm payroll UM I
Speaker 1: believe was a pretty soft number and some of the
Speaker 1: revisions were kind of negative. Also, now, is that the
Speaker 1: beginning of the end or does that look just like
Speaker 1: it's a noisy data series. I thought we were due
Speaker 1: for a singer and uh, you know, what are the
Speaker 1: odds that you'd get twelve months in a row over
Speaker 1: twohund thousand if the true underlying growth was over two
Speaker 1: dred thousand. It's not all that high. So uh, it's
Speaker 1: not a surprise to me in a way that we
Speaker 1: see one number which is out of line. Um, we
Speaker 1: get two or three more in a row, Hey, that's
Speaker 1: a problem. Two or three more aboutnemployment insurance claims start
Speaker 1: to pick up if some of the other indicators come in.
Speaker 1: Let me jump in on that, because before in my
Speaker 1: office we were previewing these numbers and talking about this conversation,
Speaker 1: and my head of research said, hey, be sure to
Speaker 1: say to Professor Krueger, see if he's familiar with the
Speaker 1: fact that we're at some crazy record low for initial
Speaker 1: unemployment claims. I think you said, it's back to where
Speaker 1: we haven't seen lows like this in fifteen years. Is
Speaker 1: that accurate? Weekly initial claims are very low? Uh. I
Speaker 1: think we have seen them this low in the in
Speaker 1: the recovery, but they're at the lowest point that they've
Speaker 1: been in the recovery. You know one thing I'll add, Barry,
Speaker 1: when I worked in the administration, I reached the conclusion
Speaker 1: that the UI claims are very informative, and we haven't
Speaker 1: changed the information that are coming out with the UI
Speaker 1: claims in fifty years. Why don't we try to extract
Speaker 1: more from it? Which industries are laying off people, what
Speaker 1: education groups, which age groups, And that's something in which
Speaker 1: the Labor Department has been looking into into doing so,
Speaker 1: in other words, take the data and try and slice
Speaker 1: it a little finer, by by sector, by education level,
Speaker 1: by geography. Exactly what else do you look at their Well,
Speaker 1: those are the main things, and um, they do produce
Speaker 1: it by geography already, they do that with a weak delay,
Speaker 1: so that's already available. But I think we could learn
Speaker 1: a lot from industry because we know that manufacturing and
Speaker 1: construction tend to be more cyclical industries, and in some
Speaker 1: sense they're leading indicators. So I think we can extract
Speaker 1: more from these data. And also knowing about the demographics
Speaker 1: I think would be very helpful. So let's talk briefly
Speaker 1: about the non farm payroll. You know, it's considered a
Speaker 1: coincidental or lagging indicator. It lags the business cycle. But
Speaker 1: there are parts of it that I always find fascinating
Speaker 1: within within the non farm payroll data. I've always found
Speaker 1: the numbers for temp help to be very insightful because
Speaker 1: if companies are un sure about where we are in
Speaker 1: the economic growth cycle, but they're starting to see a
Speaker 1: slide uptick in demand, they might hire a bunch of
Speaker 1: temp workers and hey, if it works out, they become
Speaker 1: full time workers. I've argued that that's a little bit
Speaker 1: of a leading indicator. How wrong am I? I was
Speaker 1: gonna say, You're pretty much in line with the research,
Speaker 1: and the research has found that temporary help trends are
Speaker 1: leading indicator. And then what about hours work? That's another thing.
Speaker 1: When you start to see the hours tick up, it's
Speaker 1: always easier to say to somebody who's got twenty or
Speaker 1: thirty hours, hey, here's a little more time, instead of
Speaker 1: going out and hiring a brand new person. Well, hours
Speaker 1: worked are extremely important for a number of reasons. One
Speaker 1: because it says how much labor is being utilized in production,
Speaker 1: and that could be more important. If you have a
Speaker 1: two tense three tents of an hour increase in weekly hours,
Speaker 1: that could be more important than the headline jobs number
Speaker 1: in terms of total labor input. It's also important to
Speaker 1: people because it affects the income that they're receiving. So
Speaker 1: I closely watch hours worked. And one thing I'll mention,
Speaker 1: which I don't think it's gotten enough attention, is everyone's
Speaker 1: focused on the slack that's coming from workers who are
Speaker 1: part time who wanted to be full time. But hours
Speaker 1: worked are actually reasonably high and back to where they
Speaker 1: were before the recession. That was a question. So where
Speaker 1: hours work? Because I remember, oh, nine ten, when you're
Speaker 1: coming out of the we were in like thirty point
Speaker 1: one in that ring. I don't remember if we got
Speaker 1: below thirty, but it was really the bottom of the thirties.
Speaker 1: We're we're hours work now they're back to where they
Speaker 1: were in two thousand and eight, and if you draw
Speaker 1: crisis pre crisis, uh two thousand seven, they're back to
Speaker 1: where they were in two thousands. How many is that
Speaker 1: per week? On average? It's in the thirties bies. Because
Speaker 1: I normally should know this off the top of my head,
Speaker 1: and I don't. So he's going for the secret facts
Speaker 1: that he got from the labor department. I was we
Speaker 1: just saw this teen show. I got some blue sheets
Speaker 1: which had it, but I don't. I'll build up. So
Speaker 1: but it's a significant improvement, and we're back the signs
Speaker 1: and it's back to the trend that we were on
Speaker 1: prior to the crisis. Yes, so we've returned to trend
Speaker 1: and so that's kind of that's kind of fascinating. So
Speaker 1: I don't think there's that much hidden slack in terms
Speaker 1: of work hours. So you had mentioned, um, let's let's
Speaker 1: talk a little bit about the FED. You had mentioned
Speaker 1: you thought the FED had done a really good job.
Speaker 1: You know what didn't happen this recovery, whether it's the
Speaker 1: federal Congress or what have you, that would have made
Speaker 1: it better, faster, stronger. Well, I think Congress made a
Speaker 1: major mistake with the sequester. We cut back discretionary spending.
Speaker 1: We did it in an arbitrary way. We should be
Speaker 1: investing more in research and development, more in infrastructure, more
Speaker 1: in education, and Congress cut that back. On top of that,
Speaker 1: I think Congress could have extended the payroll tax cut
Speaker 1: into we had it in Uh, why is this still
Speaker 1: that just mad pursuit of austerity, that misguided pursuit of austerity?
Speaker 1: Has that argument been laid to rest when you see
Speaker 1: the austerity put in place by Europe and the much
Speaker 1: more moderate austerity in the United States. How the two
Speaker 1: two regions had recovered. I don't know if it's been
Speaker 1: put to rest, but I certainly take that as pretty
Speaker 1: strong evidence that the US is doing better because we
Speaker 1: pursued a different fiscal policy and a different monetary policy
Speaker 1: for that matter, but we were pretty in terms of
Speaker 1: historical fiscal stimulations. You had the stimulus plan, but it
Speaker 1: was different than previous stimulus plans, and that a big
Speaker 1: chunk of it was temporary, was temporary tax cuts, it
Speaker 1: was temporary unemployment extensions. It wasn't like a massive infrastructure
Speaker 1: build out, and then you had all these ongoing layoffs
Speaker 1: at the state and local level. So net net up
Speaker 1: until only a few months ago, told government meant hiring.
Speaker 1: Um has been a drag unemployment absolutely, you know, if
Speaker 1: you look at the big picture, which is government spending,
Speaker 1: including state and local together with federal, the stimulus only
Speaker 1: lasted about three quarters It was just uh the end
Speaker 1: of two thousand nine early, and since then it's been
Speaker 1: phasing out. One might have said in two thousand nine
Speaker 1: that a risk of this stimulus was that it would
Speaker 1: become permanent, but that hasn't happened. And if you look
Speaker 1: at state and local governments. While they were receiving support
Speaker 1: from the Recovery Act, from the Stimulus Bill, they weren't
Speaker 1: laying off teachers and firefighters and police. And it was
Speaker 1: only after that money ran out that we saw layoffs
Speaker 1: reach really historically high levels in the state and local
Speaker 1: government sector. Right, And when we look at the two
Speaker 1: thousand one recovery, that was a huge additive to to
Speaker 1: what the economy was doing two thousand one and the
Speaker 1: early eighties. So only Democrats seem to be uh president
Speaker 1: when fiscal policy is working against the recovery. Well, well,
Speaker 1: my argument has long been that the party out of power,
Speaker 1: and I hope I'm not engaging in any false equivalency here,
Speaker 1: but the party out of power always complains about budgets
Speaker 1: and deficits, and you know they're arguing. What they're really
Speaker 1: doing is arguing against the policy of the opposing party,
Speaker 1: and Republicans do it and Democrats do it. It just
Speaker 1: seems that this time, with this president, it was an
Speaker 1: effective argument that had gained traction from people who previously
Speaker 1: were the furthest thing in the world from deficit hawks.
Speaker 1: You know, if you supported Medicare Section D and unfunded
Speaker 1: tax cuts, and and a war of choice in Iraq.
Speaker 1: You're spending a lot of money. I'm not arguing about
Speaker 1: those policies. You're not a deficit hawk if you're gonna
Speaker 1: deficit spend for those things. When the roles reverse, who's
Speaker 1: in the White House, Suddenly you become very concerned about
Speaker 1: debt and deficits. It seems a little disingenuous. Oh, it's
Speaker 1: even worse than that, in that it wasn't only the
Speaker 1: war that was costing money. It was also adding Medicare
Speaker 1: Part D prescriptions you without paying for it, and cutting
Speaker 1: taxes in large measure for high income earners, and also
Speaker 1: without off setting that with spending cuts elsewhere. So I
Speaker 1: guess I'd take a somewhat more partisan view. Having worked
Speaker 1: for President Clinton and President Obama. You know, President Clinton
Speaker 1: signed a balanced Budget Act, uh, physically responsible Act. President
Speaker 1: Obama wanted to address the drivers of our deficit, which
Speaker 1: is healthcare costs and entitlements. That was part of the
Speaker 1: Grand Bargain negotiations, along with military spending. Was was a
Speaker 1: big issue that had had an impact in the sequester. Right,
Speaker 1: that's right, um, But military spending is winding down on
Speaker 1: its own. It's been coming down on its own as
Speaker 1: we um reduce our engagement in the Middle East. So uh,
Speaker 1: you know, actually, if you look at the trends, it's
Speaker 1: quite remarkable because we saw a pretty sharp decline in
Speaker 1: military spending in two thousand and uh twelve, two thousand
Speaker 1: and thirteen, and that was the got the economy. Ultimately,
Speaker 1: I think it's better for those resources to be used
Speaker 1: for civilian purposes. Uh. But we haven't really addressed the
Speaker 1: drivers of the deficit in spite of the emphasis and austerity,
Speaker 1: because we haven't done much to address the long run
Speaker 1: entitlement costs and health care costs. So that seems to
Speaker 1: be a partisan policy debate where the philosophies are so
Speaker 1: far apart there's almost not a you know, normally you
Speaker 1: can horse trade a little bit. Back in the days
Speaker 1: of of Ronald Reagan and Tip O'Neill, there was a
Speaker 1: lot of back and forth, and they weren't so far
Speaker 1: apart that I got something, you've got something. All right,
Speaker 1: we come up with some a policy that everybody can
Speaker 1: live with, declare victory and move on to the next thing.
Speaker 1: As the parties get further and further apart and I
Speaker 1: don't know if I would argue that both parties aren't
Speaker 1: moving away from the center at an equal pace. As
Speaker 1: a former Republican, I could tell you that the right
Speaker 1: has moved further away from the middle much faster than
Speaker 1: the left has. Um, I haven't changed my you know,
Speaker 1: I grew up a Jacob Javits Republican, which today puts
Speaker 1: me too far to the left of you know, anybody
Speaker 1: who's a Democrat in half of the anyone who is
Speaker 1: a Republican and half of the Democrats. By the way,
Speaker 1: I just pulled up the BLS data, manufacturing work week
Speaker 1: decrease at point one hours to forty point nine. Manufacturing
Speaker 1: work work weeks always longer, and then um total employees
Speaker 1: on private non front pay rolls thirty four declined point
Speaker 1: one to thirty four point five. So but that's still
Speaker 1: substantially above where we began thirty four and a half
Speaker 1: as normal, that's about that. That's I would say, that's
Speaker 1: about where you would predict we should be based on
Speaker 1: the trend before the recession. Factory over time three point
Speaker 1: four hours, is that considered substantial? That's high? And you know,
Speaker 1: the adorable good sector has made a remarkable recrd for
Speaker 1: you look at the auto sector, it's made a remarkable
Speaker 1: recovery in this uh economic climate. Let's let's talk about
Speaker 1: that because it brings to mind a really fascinating conversation
Speaker 1: I had with Jonathan Miller, who is UM one of
Speaker 1: the best known real estate appraisers. He's on all the
Speaker 1: time with Tom and others. Wherever credit is tight, that
Speaker 1: sector is doing poorly. And wherever there's loosening of credit,
Speaker 1: such as automobiles, you know, people are now saying, hey,
Speaker 1: we have a subprime problem in automobiles. We're on a
Speaker 1: pace to sell seventeen million automobiles in the United States.
Speaker 1: That's a record number, even as total miles driving still
Speaker 1: I think, are we still below where we were pre crisis?
Speaker 1: There was a huge dip. We've recovered some of it.
Speaker 1: I think we're about halfway back, but that's a massive number,
Speaker 1: seventeen million. It's remarkable. I mean, it shows how much
Speaker 1: pent up demand there was, and it also shows I
Speaker 1: think that our auto companies are doing a better job.
Speaker 1: They're producing better cars. If you look at Chrysler today,
Speaker 1: to totally different kind of car and now owned by
Speaker 1: Fiat instead of H and same thing with GM. When
Speaker 1: you look at GM. I'm not a GM guy, but
Speaker 1: I have to tell you the the Catalacs that have
Speaker 1: come out are really nice. The new Corvette is a
Speaker 1: spectacular car. And their competition for the camera and the accord.
Speaker 1: Um it begins with an al and I'm not accessing
Speaker 1: that word. No, no, no, that's Chevy Lumina, is it?
Speaker 1: Maybe it's Lumina. Oh no, it's the um Impala and
Speaker 1: the new Impala. You think of Impali, think of a
Speaker 1: giant car, but it's their Camray slash Honda chord competitor.
Speaker 1: They're winning all sorts of awards. It's amazing how far
Speaker 1: the US owner industry has come post bailout. Absolutely. I
Speaker 1: actually just wrote a new study together with Austin Gulsby,
Speaker 1: who was my predecessor as chairman of the c e A.
Speaker 1: I'm the Auto bellout and it has been far more
Speaker 1: successful than we expected in two thousand nine. UM. I
Speaker 1: find Austin to be a fascinating guy. Who was on
Speaker 1: a panel with him in Las Vegas some years ago
Speaker 1: about the bailouts, and the conversation was, why don't we
Speaker 1: do for the banks what we had done for GM
Speaker 1: and Chrysler. You know, it always seems that when there's
Speaker 1: a Wall Street person as UM Treasury in the Chief
Speaker 1: Treasury Department, Wall Street gets treated well. When you get
Speaker 1: a like you did in the most of the prior century,
Speaker 1: when you have an industrialist or a manufacturer, somebody from
Speaker 1: that side of UM the economy, Wall Street doesn't seem
Speaker 1: to get bailed out. The manufacturers get bailed out. Is
Speaker 1: that just the nature of people protecting their own industry?
Speaker 1: Or asked differently, why did we not treat the banks
Speaker 1: the way we treated GM and Chrysler. Well, it's a
Speaker 1: very good question. Uh. First of all, I was involved
Speaker 1: when Tim Geitner was Secretary, and Tim really is not
Speaker 1: a Wall Street person. He was a public servant. He
Speaker 1: spent his whole career at that Treasury or of the
Speaker 1: I m F for than the New York Fed. But
Speaker 1: people have accused him as president of the New York
Speaker 1: Fed being very close to Wall Street. Is that not
Speaker 1: an accurate description? You know, I think he should be
Speaker 1: judged by his actions, and I think he was consistent
Speaker 1: in the principles that he applied to the bailout to
Speaker 1: the extent that he could have been he was constrained
Speaker 1: by the law. UM, I think he did a remarkable
Speaker 1: job protecting taxpayers. You know, all of the money came
Speaker 1: back and then some the money that went to the
Speaker 1: financial sector during the bailout. He protected our system of
Speaker 1: the hierarchy for investors and bond investors and senior creditors. Uh.
Speaker 1: And I think our recovery is a lot stronger because
Speaker 1: of the very difficult decisions that he he was forced
Speaker 1: to make. UM. The role of banks, I think it's
Speaker 1: pretty special in the economy, So I think one could
Speaker 1: make a case for treating the financial sector differently in
Speaker 1: the midst of a financial panic. Um, the problems that
Speaker 1: the auto companies were facing were very long in the making,
Speaker 1: and they needed to restructure. It was not just a
Speaker 1: temporary problem that they were facing because of a run
Speaker 1: on banks, which was uh, in some sense the issue
Speaker 1: in the financial sector. So I think one could fault
Speaker 1: the financial bailout. Personally, I would have liked to have
Speaker 1: seen us put more restrictions on the banks when it
Speaker 1: came to lending. I would have liked to have seen
Speaker 1: some requirements which eventually were put on there We're done.
Speaker 1: For example, in the small business lending fund to encourage
Speaker 1: banks to lend more to small businesses. UM. I would
Speaker 1: have liked to have seen the executive compensation restrictions last longer. UM.
Speaker 1: But having said that, UH, I think the stress tests
Speaker 1: and the um UH use of TARP funds UH did
Speaker 1: rescue the system, did make it possible for the recovery
Speaker 1: to begin. So to two bullet points, one observation and
Speaker 1: then a question. I have to ask you one of
Speaker 1: I'm an automotive enthusiast. I love cars. My mother will
Speaker 1: tell you car was literally the first word I ever said.
Speaker 1: And one of the sites I used to read all
Speaker 1: the time, I mean, long before the financial crisis was
Speaker 1: called The Truth about Cars. And they had a segment
Speaker 1: called GM Bankruptcy Watch Part one through you know, two
Speaker 1: hundred and they were saying, here's the math. It's unsustainable.
Speaker 1: GM can't keep generous pension, generous healthcare, nine levels of executives.
Speaker 1: They can operate like this, that it's a house of cards.
Speaker 1: That asked the collapse, and it turned out that was accurate.
Speaker 1: But so the restructuring and the bailout and the resurrection
Speaker 1: of GM and Christ will tend out to be a
Speaker 1: great thing. For the economy, a great thing for the
Speaker 1: auto sector. So here's the question I always ask about
Speaker 1: the banks. Yes, banks are important, banks are special, and
Speaker 1: that's why we can allow insolvent banks to put the
Speaker 1: entire system at risk. We can't allow crazy leverage. We
Speaker 1: can't allow reckless spending and lending and speculation to put
Speaker 1: the economy at risk. So here's what the counterfact rule
Speaker 1: I want to ask is what would have happened early
Speaker 1: in the financial crisis. If so, let's refresh people's timeline.
Speaker 1: You had March O eight, You had Bear Stearns go under,
Speaker 1: and and the Federal Reserve essentially guaranteed to JP Morgan.
Speaker 1: They would backstop Bears books and it was sold first
Speaker 1: for two dollars a year, then ten dollars a share.
Speaker 1: It turned out to be a phenomenal acquisition for JP Morgan,
Speaker 1: a huge home run. Then as we worked our way
Speaker 1: through the summer, things started to get a little dicey.
Speaker 1: We had issues with Fannie and Freddie and the g
Speaker 1: s c S. I'm still not convinced that the American
Speaker 1: taxpayer's been made whole. There were tax waivers given um
Speaker 1: and offsets, and Fannie and Freddie's have been throwing off
Speaker 1: a lot of money. I don't know if that's break even.
Speaker 1: I think a I G is now break even even
Speaker 1: including the tax benefits they got. I'm not positive about that.
Speaker 1: So we're almost but not quite made whole. We certainly
Speaker 1: didn't get the benefits of that very risky investment. If
Speaker 1: I was an investor, Hey, here's a billions of dollars
Speaker 1: one day, I hope to break even on it. Not
Speaker 1: not what Wall Street typically looks for, but the counter
Speaker 1: factual is what would have happened if we would have
Speaker 1: set to City Bank. Okay, you guys have had problems
Speaker 1: every twenty years, it seems. Let's temporarily put you into
Speaker 1: receivership with Uncle Sam acting as the debtor, you know,
Speaker 1: creditor in possession, the the provider of UM. The creditor
Speaker 1: acting as UM offering all of the debt funding. During
Speaker 1: this reorganization, will wipe out the shareholders, will give a
Speaker 1: haircut to the bond holders, will fire fire that top
Speaker 1: level of senior management who clearly have driven the bus
Speaker 1: off the off the road, into the into the lake,
Speaker 1: and we'll spin them out as a as a brand
Speaker 1: new entity. Same thing with Bank of America. The argument
Speaker 1: I used to say is, we'll clean up Merrill Lynch,
Speaker 1: We'll get rid of their debt, will spin them out
Speaker 1: as a free standing anthony. We'll take countrywide the biggest
Speaker 1: mortgage underwriters, will clean them up, will spend them out
Speaker 1: there now freestanding debt, free clean company. Will take Bank
Speaker 1: of America, same thing. Then we'll take all of this
Speaker 1: what people are calling toxic debt, which is on toxic assets,
Speaker 1: which is really a bit that's toxic at hundred cents
Speaker 1: on the dollar, but there's some price ten fifty cents
Speaker 1: where that's a good investment, and we'll auction that off
Speaker 1: and net net will go. We'll tear the band aid off.
Speaker 1: We'll go through this painful process, but then will be
Speaker 1: much healthier on the other side. What's wrong with that counterfactual?
Speaker 1: I think there are a few things, and fortunately the
Speaker 1: economy didn't get so bad that that was necessary. There
Speaker 1: was something. How close will we to that point? Though
Speaker 1: people have said we were The phrase I heard from
Speaker 1: Ben Bernanki was we were staring into the abyss. We
Speaker 1: were staring into the abyss. There's no question we were
Speaker 1: staring into the abyss. How close did we come. Well,
Speaker 1: the turning point was the stress tests. So had the
Speaker 1: stress tests shown that the city was as insolvent as
Speaker 1: you uh suggested, I think in different course of action
Speaker 1: would have been taken. But given that the stress tests
Speaker 1: helped things to turn around, given that the stress tests
Speaker 1: provided investors with the information that they needed and the
Speaker 1: confidence that they had that they can invest, given that
Speaker 1: city was able to raise money at that time, was
Speaker 1: able to uh, we'll raise money from the government, or
Speaker 1: which which stress test to be talking about? What this
Speaker 1: stress test was at the March of oh nine, But
Speaker 1: I'm talking October in October eight, when the when the
Speaker 1: tarp was first past. If that money didn't go to
Speaker 1: these banks, if the money go to the banks, the
Speaker 1: but but had we pursued the strategy that you laid out, uh,
Speaker 1: taxpayers would have paid much much more instead of actually
Speaker 1: making money on these TARP investments. They would have lost
Speaker 1: hundreds of billions of dollars. When I are where would
Speaker 1: those losses have come from. The losses would have come
Speaker 1: from wiping out the debt that you mentioned, from recapitalizing
Speaker 1: the banks with government money. On top of that, I
Speaker 1: think you would be looking at at least five years,
Speaker 1: maybe a decade of having having those companies under government receivership.
Speaker 1: That long. It's not a twelve month or an eighteen
Speaker 1: month process, clean them up and then take them public again.
Speaker 1: Look at some of the bank failures that we've seen,
Speaker 1: they've taken they've taken years, and that's banks that are
Speaker 1: one hundred is large as a city. On top of that,
Speaker 1: had UH Treasury done what some people were in my
Speaker 1: view irresponsibly urging the Treasury to do, which was to
Speaker 1: take over those banks, we would have seen a run
Speaker 1: on other banks, and it would have made the problem
Speaker 1: much worse. If you're gonna wipe out the shareholders of city,
Speaker 1: what are you gonna do. If you're a shareholder Bank
Speaker 1: of America, you're gonna sell. That's gonna make Bank of
Speaker 1: America's problems much worse. Uh, and then so on down
Speaker 1: the line. So I think we would have seen um
Speaker 1: a UM a wave of bank failures which would have
Speaker 1: cost the taxpayers billions of dollars and which would have
Speaker 1: set the recovery back years. So you think this was
Speaker 1: the healthier way to proceed. So I only think in retrospect,
Speaker 1: there's no question. I mean, you could say, um u
Speaker 1: that it was a mistake because it costs taxpayers so
Speaker 1: much money, but it hasn't in the end, well that
Speaker 1: the taxpayers had a lot of money at risk, and
Speaker 1: now we know what the benefit of hindsight, all or
Speaker 1: nearly all, or maybe even a little more than all
Speaker 1: have has been recovered. So net net, the cost to
Speaker 1: the taxpayers was not great. The risk to test payer
Speaker 1: money was fairly high. So the question I want to
Speaker 1: ask is, you know, pre crisis we had and I
Speaker 1: understand Sweden is much smaller in the United States, but
Speaker 1: we had the Swedish approach, which was throw everybody into
Speaker 1: receiver ship, clean them up, spin them out. And then
Speaker 1: we had the Japanese approach, which is, hey, we have
Speaker 1: these vertically stacked Kurt Susan, you can't kill back of
Speaker 1: Minsubishi because you have Mitsubishi heavy industries in Mrsubishi Aerospace
Speaker 1: and MSUBSI real estate on top of that. And to
Speaker 1: to go Swedish and the United States would have wiped
Speaker 1: out Goldman sachs um Macy's general mode it right too.
Speaker 1: It would have been that sort of collapse. But why
Speaker 1: did this sort of thing work? In other countries with
Speaker 1: financial crises. Is it just that Sweden is so much
Speaker 1: smaller than us, Their financial crisis was just so much
Speaker 1: more you know, manageable or or what is philosophically different there?
Speaker 1: I think Sweden had maybe four major banks, you know,
Speaker 1: just a totally different scale. And don't delude yourself, taxpayers
Speaker 1: would have been a tremendous risk if the government would
Speaker 1: have taken over the major banks in the US. So
Speaker 1: it's not as if a risky strategy was pursued and
Speaker 1: it paid off and you got it take into account
Speaker 1: the cost of the risk. There was risk on either side.
Speaker 1: So it's it was a choice amongst risky strategies. It
Speaker 1: was the least bad solution, the least that had solutions.
Speaker 1: So let's let's go back to the FED a second.
Speaker 1: What else should the FED have done? And I have
Speaker 1: to remind people there were many very creative, very innovative
Speaker 1: policies put into place. If anybody was going to be
Speaker 1: the perfect FED chairman, it was the guy who was
Speaker 1: the student of the Great Depression and who was committed
Speaker 1: to not repeating those mistakes. So what else could or
Speaker 1: should the FED have done post crisis? A couple of things.
Speaker 1: And Uh, first of all, I think the FED could
Speaker 1: have done more to prevent the crisis. It could have
Speaker 1: raised lending standards, and that's something that Ned Gramlck had
Speaker 1: absolutely within the FED. And I think it had to
Speaker 1: do with the mindset of the FED, which is probably
Speaker 1: still there, that the banks could regulate themselves, that it
Speaker 1: didn't need to be very So let's let's back. Let
Speaker 1: me interrupt you right here. Ed Gramleck was a FED
Speaker 1: governor who had gone to Alan Greenspan, who was the
Speaker 1: FED chairman, and said, we have a problem. We have
Speaker 1: a problem with some problem lending. We have a problem
Speaker 1: with predatory loans. We have banks mending making loans to
Speaker 1: people who clearly can't pay them back, and when these default,
Speaker 1: it's going to cause a domino cascade. And and Ed
Speaker 1: unfortunately passed away before the crisis. But it turned out
Speaker 1: all of his warnings were tremendously precedent. He was a
Speaker 1: hundred percent correct, that's absolutely right. And the FED had
Speaker 1: it within their preview to say we're gonna require ten
Speaker 1: percent down payment, and if you had ten percent down payment,
Speaker 1: the value of a house falls by six seven percent.
Speaker 1: Owners not underwater and you're in a very different situation
Speaker 1: than if you have loans with nothing down or one
Speaker 1: two down. They were actually cash out homeport purchases where
Speaker 1: you could buy a house and take a second at
Speaker 1: the same time. So you walk into the house fifty
Speaker 1: dollars richer, no skin in the game, and every incentive
Speaker 1: to walk away. That's right. So I do hold the
Speaker 1: FED responsible UH for a very core component of the crisis.
Speaker 1: Not not exclusively, but they certainly were a major factor. Look,
Speaker 1: I mean if the private sector didn't have the collective
Speaker 1: delusion that home prices would continue to grow, we wouldn't
Speaker 1: have had the crisis too. So that there were many
Speaker 1: uh factors that led to the crisis. I don't think
Speaker 1: that one could say there was a single cause on
Speaker 1: the recovery. UM. I think where I would fault the
Speaker 1: FED was in prematurely ending UH quantitative easing. You would
Speaker 1: have extended it further, uh not QUE three, but say
Speaker 1: q E two, so I would have had a more
Speaker 1: continuous QUE two. I think they took the photo off
Speaker 1: the gas a little bit too soon, and that's led
Speaker 1: to this stop and start in terms of in terms
Speaker 1: of QWI. So I I know we don't have you
Speaker 1: for very much longer. Let let me ask you one
Speaker 1: more related question on the FED. Bill Gross had an
Speaker 1: interesting observation about FED rates, and he said, you know,
Speaker 1: if the FED didn't take rates down to zero, had
Speaker 1: they stopped at one percent, it would have allowed the
Speaker 1: economy to appear a little more normal. It would have
Speaker 1: allowed them to have a little more flexibility, and then
Speaker 1: all the screaming about zurup and zero bound and everything
Speaker 1: else would have gone away, and the process of normalizing
Speaker 1: of federal reserve policy would have been a little easier.
Speaker 1: What are your thoughts on that. I find that argument
Speaker 1: hard to accept, given that the tailor rule says we
Speaker 1: should have negative rates, so the FED went as far
Speaker 1: as it could go, and then it actually reinvented the
Speaker 1: playbook by going a quantitative easing. So uh, to me,
Speaker 1: that argument doesn't make much sense. And I think we've
Speaker 1: seen some countries make that miss stake and then they
Speaker 1: decided to go all the way down to zero or
Speaker 1: as close as they can go. So in the final
Speaker 1: few minutes we have let me ask you um one
Speaker 1: or two more questions, and and I have my favorite question.
Speaker 1: I ask everybody first, UM, what shifts do you see
Speaker 1: coming up? What? What are people not really thinking about
Speaker 1: that they really might should be aware of. Well, I'm
Speaker 1: sure people are thinking about it, but demographic shifts are
Speaker 1: having a tremendous effect on the US. Slower growth in
Speaker 1: the working age population, uh, slower rate of immigration to
Speaker 1: the US. I think, uh, we missed a major opportunity
Speaker 1: to reform our immigration system. Disappointed that Congress wasn't able
Speaker 1: to pass the bill. The Senate bill, which was not
Speaker 1: a perfect bill, would have been a big improvement over
Speaker 1: our current system. Um. And I think businesses need to
Speaker 1: give a lot of thought to how the aging of
Speaker 1: the US population, the slower UH or decline in labor
Speaker 1: force participation of women, how that's going to affect their
Speaker 1: business model. How can they make work more flexible so
Speaker 1: they can attract more workers? And then my final question
Speaker 1: I ask everybody the same thing, and I'll ask you this,
Speaker 1: what do you know about your profession about economics today
Speaker 1: that you wish you understood when you first started out? Oh,
Speaker 1: there are a lot of things, um uh. You know,
Speaker 1: the economics profession is an amazing, amazing field. Economics for me,
Speaker 1: it was attractive because it's about people about what matters
Speaker 1: in people's lives. And I don't think there's anything more
Speaker 1: important than having a job so you can support a family.
Speaker 1: Uh So that's why I went into labor economics. Uh.
Speaker 1: I think we don't have enough diversity of views in economics.
Speaker 1: I think people cling very tightly to their views, and
Speaker 1: maybe that human nature, people are slow to update, to
Speaker 1: change their mind in spite of evidence. And um, I
Speaker 1: think it would be healthier for economics if we took
Speaker 1: a broader view. Just just one very simple area is
Speaker 1: more economic history. Uh. We tend not to emphasize economic
Speaker 1: history and graduate education in economics, and the crisis that
Speaker 1: we lived through had many elements in common with past
Speaker 1: financial crisis. And I think one would have done very
Speaker 1: well to understand Charles Kindle Burger's work, work on manyas
Speaker 1: and panics and crashes, understand the Great Depression. Uh So
Speaker 1: I'd like to see economic history become a part of
Speaker 1: the core and economics. You know, there's there's the old
Speaker 1: quote Wolf Street. People are notorious about failing to learn
Speaker 1: from the past. Um, And there are all sorts of
Speaker 1: variations of that. If someone wanted to find your work, UM,
Speaker 1: where would they go. How do they how do they
Speaker 1: track down things you're producing? I have a web page
Speaker 1: which has all of my research on it www dot
Speaker 1: Krueger k are you e G E R dot Princeton
Speaker 1: dot e du and the link there will will bring
Speaker 1: people to research. So that was my interview with Alan
Speaker 1: Krueger from the spring of Earlier this week, we learned
Speaker 1: some unfortunate news. Uh. He took his own life and
Speaker 1: we were deeply sinned by the loss. It really was
Speaker 1: a privilege being able to sit down with him. One
Speaker 1: other thing I have to share about Alan Krueger. I
Speaker 1: was fortunate enough to have lunch with him before my
Speaker 1: interview with Serena Williams, where he fed me a bunch
Speaker 1: of of questions. I've only been playing tennis a few years.
Speaker 1: He's been playing for a lifetime, and he was just
Speaker 1: so generous with his time and so kind and helpful. Uh.
Speaker 1: He helped make not only his interview great, but the
Speaker 1: interview that I did with Serena that much better. Just
Speaker 1: a charming, generous, wonderful man and he will be greatly missed.
Speaker 1: I'm Barry Ritults. You're listening to Masters in Business on
Speaker 1: Bloomberg Radio. Ex