Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: Welcome to the podcast. I'm Barry Ridholts. You're listening to
Speaker 1: Masters in Business on Bloomberg Radio. My guest today is
Speaker 1: really one of the most storied economists, UH in America.
Speaker 1: Other than the Nobel Prize, He's pretty much won every
Speaker 1: award an economist can win. UH. He's a professor at Princeton.
Speaker 1: He was the former chief economist at the Treasury Department.
Speaker 1: He was chairman of the Council of Economic Advisors. UM
Speaker 1: to the President, he was I, I like, the list
Speaker 1: is so long. I could keep reading you this, but
Speaker 1: I'll let you I'll let him tell you in his
Speaker 1: own words. Alan Krueger is a labor economist. He's a
Speaker 1: specialist in how various parts of the economy work, how
Speaker 1: labor interacts with the broad economy. UM. He's just a
Speaker 1: tremendously insightful person when it comes to analyzing economic policy,
Speaker 1: analyzing the data that the economy produces. And he's one
Speaker 1: of those rare birds who can actually explain these things
Speaker 1: in plain English. You know, a lot of what we
Speaker 1: talked about today is a little wonky. Those of you
Speaker 1: who are either economic students or economists, or even just
Speaker 1: portfolio managers who look at the macro world and are
Speaker 1: curious what it means. This is about as plain English
Speaker 1: of a conversation as you're ever gonna want to hear
Speaker 1: relative to really wonky, complex sophisticated subjects. And he makes
Speaker 1: it not only understandable but interesting. And I find that
Speaker 1: to be a very rare quality um in someone who's
Speaker 1: an economist. There there were no digressions into mathematical formulas,
Speaker 1: there were no you know, footnoted abstractions. But see, it
Speaker 1: was just really a fascinating and intelligent conversation. I find
Speaker 1: him to be a really um neat person, very knowledgeable,
Speaker 1: very informative. I think you'll find this conversation really quite interesting.
Speaker 1: Without further ado, here is my conversation with Professor Alan
Speaker 1: Krueger of Princeton. This is Masters in Business with Barry
Speaker 1: Ridholts on Bloomberg Radio. My guest today is a what
Speaker 1: can I say about Professor Alan Krueger of Princeton. He
Speaker 1: was the Chief Economist for the Treasury Department and Assistant
Speaker 1: Secretary of of Treasury. He was also Chairman of the
Speaker 1: Council of Economic Advisors under President Obama. Professor Krueger, Welcome
Speaker 1: to Bloomberg. My pleasure. So I didn't want to spend
Speaker 1: too much time waxing eloquent on your curriculum, Vita, but
Speaker 1: suffice it to say, you've pretty much won just about
Speaker 1: every award you can come up with, at least in
Speaker 1: the United States, UH, for economics. And you've had a
Speaker 1: number of just really incredible UH posts. When both within
Speaker 1: the government and out in the early nineties, you were
Speaker 1: chief economist at the Department of Labor, I was. And
Speaker 1: and what does the chief economist for um, the Labor
Speaker 1: Department actually do? That's a good question. UH. It was
Speaker 1: a new position. Secretary Rice created it, and I was
Speaker 1: the second one to hold it. UH. I was very
Speaker 1: who's the first first was my good friend Larry Katz
Speaker 1: from Harvard. Larry did a brilliant job, and he left
Speaker 1: 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 innovation and the way the NBC was
Speaker 1: set up at that time. Bob Reuben was chairman and Treasury, Omb, Labor,
Speaker 1: Commerce were the members. So this was like a think tank,
Speaker 1: but with the old government representatives who it would advise
Speaker 1: the president and the cabinet. It was the place that
Speaker 1: ran the policy process, and it's different from a think
Speaker 1: tank because it produced proposals that really mattered and it
Speaker 1: had a direct connection to the president. So the way
Speaker 1: that Bob Reuben ran this process was very organized. UH
Speaker 1: budget went through the n EC process, UM trade issues
Speaker 1: went through, and anyc was divided into domestic issues and
Speaker 1: international issues. Other departments had a separate person who would
Speaker 1: represent them on domestic and international issues. Larry Katz was
Speaker 1: so UH skilled that he did both. So I had
Speaker 1: to fill though shoes and do both, which meant being
Speaker 1: involved in NAFTA as well as UH domestic issues like
Speaker 1: the minimum wage. So so what were some of the
Speaker 1: policies that came out of that Economic Council? So NAFTA
Speaker 1: clearly was a big issue in the nineties. NAFTA was
Speaker 1: a very big issue the first Clinton budget, which was
Speaker 1: after UH sorry before I arrived, which I think put
Speaker 1: us on a much stronger path in the early ninety nineties.
Speaker 1: The one significant domestic policy that did not come from
Speaker 1: it was healthcare reform, and I think one of the
Speaker 1: reasons why healthcare reform in that period UH didn't do
Speaker 1: as well as it should have was because it didn't
Speaker 1: come through the NBC process, in other words, the way
Speaker 1: it was formulated with the thought process of what's the impact,
Speaker 1: what's the cost, what's the benefit? What what is the
Speaker 1: thinking behind how some of these policies are developed. Well,
Speaker 1: economists have I think, very systematic approach to think about policy.
Speaker 1: To thinking about policy issues, we think about efficiency, we
Speaker 1: think about equity, we think of about what's gonna use
Speaker 1: our resources most efficiently, and we think about what's fair,
Speaker 1: and we divide issues quite clearly in that way, and
Speaker 1: we make trade offs and UM, now it might mean
Speaker 1: that UH a lot of our proposals are not politically feasible,
Speaker 1: but I think this is a very coherent framework, and
Speaker 1: the process that was used for health care reform was
Speaker 1: UM much more at hoc I would say, not nearly
Speaker 1: a systematic So there's pretty much an ever going trade
Speaker 1: off between what's optimal and what's politically feasible and what's
Speaker 1: financially doable. Is that sort of the factors that that
Speaker 1: get twisted about Sometimes you hit the sweet spot and
Speaker 1: good policy is good politics, and it's nice when that
Speaker 1: works out. Other times you have to make compromises between
Speaker 1: what's politically feasible and what we'll do the most good
Speaker 1: for the economy. And one of the lessons I learned
Speaker 1: from having served in UH the government for five years
Speaker 1: in my career is that you compromises not such a
Speaker 1: bad thing as long as compromise leads to better policy,
Speaker 1: to improvement for the American people. We shouldn't let the
Speaker 1: best be the enemy of the good. That that's the
Speaker 1: classic line. So you were at the Labor Department, and
Speaker 1: the Bureau of Labor Statistics also has a huge group
Speaker 1: of statisticians, economists, econometric modelers tell for people who may
Speaker 1: not be quite as wonky as some of us are,
Speaker 1: tell us what the BLS actually does over the course
Speaker 1: of any given month or or quarter. The BLS is
Speaker 1: housed within the Labor Department, but it has a tremendous
Speaker 1: amount of independence. For example, there's only one employee of
Speaker 1: the BLS who is a presidential appointee. That's the UM Commissioner.
Speaker 1: Everyone else is his career civil servant. The Bureau of
Speaker 1: List labor statistics. Together with the Census Bureau, conducts the
Speaker 1: monthly Household Survey, the Current Population Survey, which produces the
Speaker 1: unemployment rate. It also does a survey of establishments. Nearly
Speaker 1: four hundred thousand establishments are interviewed on a monthly basis.
Speaker 1: And what is amazing to me about the BLS those
Speaker 1: are its two most important products, although it has many others,
Speaker 1: is that on an ongoing basis, it collects, analysis and
Speaker 1: releases those data every month. And if you think about
Speaker 1: one an enormous effort, that is, and to do it
Speaker 1: as carefully as they do it is quite impressive. And
Speaker 1: I think they are given a tremendous amount of respect
Speaker 1: and they've earned a great deal of credibility because they
Speaker 1: do it in such a professional way. They collect other
Speaker 1: data also, I would highlight the Employment Cost Index and
Speaker 1: I think the employment costs in DEX. What exactly is
Speaker 1: that the e c I Employment Cost Index is a
Speaker 1: measure of how much it is costing for employers to
Speaker 1: pay pay their workers, and it includes not only wages,
Speaker 1: but also health insurance bun it's pension benefits, vacation time.
Speaker 1: It's calculated very much like the consumer price index in
Speaker 1: that the BLS goes back to the same companies quarter
Speaker 1: after quarter, looks at the same jobs, and looks at
Speaker 1: what's happening to compensation costs within those very narrow categories.
Speaker 1: I'm Barrier Hults. You're listening to Masters in Business on
Speaker 1: Bloomberg Radio. My special guest today Professor Alan Krueger of
Speaker 1: Princeton University and former chair of the Council of Economic
Speaker 1: Advisors to the President. We left or earlier talking about
Speaker 1: UM the Economic Council as chairman of the President's Economic Advisors,
Speaker 1: that's also part of that council? Is that? Is that correct?
Speaker 1: That's right? The chairman of the CEO plays an important
Speaker 1: role within the National Economic Council. So I think people
Speaker 1: are aware of UM what the c e A is.
Speaker 1: They know they're the U as the chairperson is the
Speaker 1: advisor to the President. But I don't think people have
Speaker 1: a clue as to how that works either within the
Speaker 1: White House. Are you guys proactively suggesting policy? Is the
Speaker 1: President coming to the Council and saying, hey have a
Speaker 1: question about this, uh, this minimum wage issue? What does
Speaker 1: it mean if we raise the minimum How does that work?
Speaker 1: What's the back and forth with that. It works in
Speaker 1: both directions. There are instances where the Council of Economic
Speaker 1: Advisors would make proposals, typically within the NBC process, where
Speaker 1: they get vetted and reviewed UH, and other relevant departments
Speaker 1: would add to the analysis and help put together the proposal. UH.
Speaker 1: And then there are other times where the President says, look,
Speaker 1: go back to the drawing board, come up with more
Speaker 1: suggestions in this area, or UH, you know, the way
Speaker 1: I think about education is like this, here's what I
Speaker 1: think you should develop a proposal on. So it works
Speaker 1: in both directions. So I was I mentioned the minimum
Speaker 1: wage earlier, and and you have an expertise in not
Speaker 1: only UH labor economics, but you've studied the minimum wage extensively.
Speaker 1: Let's let's start out with Walmart in February, and then
Speaker 1: a month later it was Target and t J Max,
Speaker 1: and then after that, McDonald's just announced an increase in
Speaker 1: in their low wage workers too up the minimum wage.
Speaker 1: In fact, they want to pay a dollar above the
Speaker 1: minimum wage. What does this say about the economy today?
Speaker 1: What does it say about where we are in the
Speaker 1: economic cycle? I think it says a couple of things.
Speaker 1: First of all, when it comes to the labor market.
Speaker 1: The invisible hand doesn't always work perfectly. Sometimes the invisible
Speaker 1: hand needs a little bit of help. In the past,
Speaker 1: when we were in a situation like we are today,
Speaker 1: where the economy is getting stronger, the job market is
Speaker 1: clearly tightening, a minimum wage increase helped the labor market
Speaker 1: to clear. And what we're seeing from companies like McDonald's
Speaker 1: and from Walmart is they are stepping in and they're
Speaker 1: raising their wages across the board. They are stepping into
Speaker 1: set a minimum wage, imposing on themselves. That's not only
Speaker 1: market forces, that's also I think a reflection of the
Speaker 1: fact that the labor market is a social entity and
Speaker 1: worker morale is important. I think these companies will find
Speaker 1: that when they raise when they raise wages, they're going
Speaker 1: to get greater productivity from the workers will have lower turnover. Uh. So,
Speaker 1: I think we're in a situation in the economy now
Speaker 1: where 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 floora 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 their employees already working states that have a
Speaker 1: significantly higher minimum wage than the federal government, so this
Speaker 1: only affected a third of their employees. And with McDonald's
Speaker 1: it was only a company owned stores, which are of
Speaker 1: their all the McDonald's in the country, they're it's almost
Speaker 1: fifteen thousand McDonald's restaurants are are company owned, and so
Speaker 1: of the stores, and assuming the math holds up, the
Speaker 1: 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 quartern, has seemingly been there
Speaker 1: for decades for there to be an increase in the
Speaker 1: minimum wage, And then we'll discuss what does raising the
Speaker 1: minimum wage due to the economy. I think what these
Speaker 1: companies have done is an important step. I think it's
Speaker 1: an important symbol. McDonald's, for example, cannot dictate wages to
Speaker 1: their franchise's. Uh, there're separate businesses in the legal sense,
Speaker 1: So the same way that they can't dictate prices. They
Speaker 1: 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. Uh. 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 raised them. Innimum
Speaker 1: wage at twelve dollars an hour, essentially you get the
Speaker 1: inflation adjusted number from pick your point six seventy two,
Speaker 1: whatever it is, and then fifteen dollars an hour takes
Speaker 1: a full time person working forty hours a week and
Speaker 1: pretty much gets them up to a level, and we
Speaker 1: could talk about mart as well as the fast food
Speaker 1: industry where they're no longer dependent on state and federal aid.
Speaker 1: I think doubling or more than doubling the minimum wage,
Speaker 1: it's a big step at once for companies to absorb
Speaker 1: what we've seen in the past. If the minimum wage
Speaker 1: went up to the equivalent of ten dollars an hour,
Speaker 1: that's something that companies mostly can absorb. And in the past,
Speaker 1: when states have raised their minimum wage to that level,
Speaker 1: after adjusting for inflation, we haven't seen job losses. In fact,
Speaker 1: what we've seen is that employees have more money in
Speaker 1: their pockets and they spend that money in that tends
Speaker 1: to help the economy over at it's a modest increase
Speaker 1: in minimum wage or at least keeping up with inflation
Speaker 1: isn't a job killer, because that's always the issue. Right.
Speaker 1: People always say there was a great study done where
Speaker 1: there was a change at a border I think was
Speaker 1: New Jersey and Pennsylvania, and on one side of the
Speaker 1: border the minimum wage went up, and a mile across
Speaker 1: the border there was another one. Describe what happened there, well,
Speaker 1: that was the study I did in the early nine
Speaker 1: nineties with my colleague David cart and to our surprise,
Speaker 1: I thought we were going to find that when New
Speaker 1: Jersey raised its minimum wage, the fast food restaurants would
Speaker 1: have grown more slowly, fewer of them would have opened.
Speaker 1: And in fact we saw the opposite. They grew at
Speaker 1: least as much, probably a little bit more than the
Speaker 1: fast food restaurants on the other side of the border.
Speaker 1: And we also found if you look within the state,
Speaker 1: within New Jersey, the areas of the state where the
Speaker 1: minimum wage was already above the new minimum UH and
Speaker 1: wages didn't rise UH, they didn't grow as quickly as
Speaker 1: the parts of the state where wages were low and
Speaker 1: wages were boosted by the minimum wage. And I should
Speaker 1: add Barry that that was study. I think that study
Speaker 1: was a turning point in research on the minimum wage.
Speaker 1: Most of the subsequent studies have reached the same conclusion.
Speaker 1: And there's been some work, very careful work looking across
Speaker 1: counties using UH government reported data from government tax records,
Speaker 1: for example, which tends to find the exact same result
Speaker 1: UH that at modest levels, the kinds of levels that
Speaker 1: we've historically seen in the United States, minimum wage increases
Speaker 1: do not have an adverse effect on employment. I'm Barry
Speaker 1: rid Hults. You're listening to Masters in Business on Bloomberg Radio.
Speaker 1: My special guest this week is Professor Alan Krueger of Princeton.
Speaker 1: He's the former Chief Economist of the Treasury Department and
Speaker 1: chairperson of the President's Council of Economic Advisors. Let's talk
Speaker 1: a little bit about the Federal Reserve. What started in
Speaker 1: the weeks before we recorded this was former Federal Reserve
Speaker 1: Chairman Ben Bernanke launched a blog, Go figure the FED
Speaker 1: Chairman is blogging and kind of got into this epic
Speaker 1: debate with Lauren Summers, Secretary of the Treasury in the
Speaker 1: first Obama White House about the concept of secular stagnation.
Speaker 1: So so let's talk about all this stuff first. What
Speaker 1: do you think about the FED chief blogging. I think
Speaker 1: 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 ur Nankee, Krueger, Krugman, who else?
Speaker 1: Who else is in that department? Alan Blinder 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 lasting 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 Caudlow
Speaker 1: betting against America? Is that? 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 Samuels 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 entrepreneurs, they'll figure
Speaker 1: out products. There was a lot of pent up demand
Speaker 1: coming out of the war. Then immigration helped to fuel
Speaker 1: the US economy, and I think those forces can can
Speaker 1: work again. And you know, you go look at the
Speaker 1: equity markets from to nineteen sixty six, that's an epic
Speaker 1: bull market. That's a huge run, only surpassed by the
Speaker 1: next malaise at two thousand, another epic bull market. So
Speaker 1: let's turn our attention now to interest rates. Rates are low,
Speaker 1: they seem to be going lower. They're low around the world.
Speaker 1: Germany's interest rates are now below Japan's interest rates. If
Speaker 1: you want to buy bonds um from the Swiss, they
Speaker 1: will charge you for the privilege. It's a negative interest rate.
Speaker 1: We've never really seen an environment where rates are this low,
Speaker 1: and what does that mean about the economy and what
Speaker 1: does it say to us about the impact of of
Speaker 1: central banks. This has been an extraordinary period. There's no question.
Speaker 1: It's hard to believe there aren't sufficient investments that could
Speaker 1: be taken by private companies or by the government at
Speaker 1: such low interest rates that that they would make a
Speaker 1: lot of sense. I think we're seeing some big imbalances
Speaker 1: in the world economy. Uh. This is a point that
Speaker 1: Ben Bernanki made about the global savings plot, where we
Speaker 1: have countries which are running up very big current accounts
Speaker 1: surpluses and that's depressing interest rates. Uh. But I think
Speaker 1: if you look at countries like say China, there's tremendous
Speaker 1: amount of scope for them to increase their domestic consumption.
Speaker 1: I think as they slow and I think here Larry
Speaker 1: Somers has done very good work predicting a slowdown a
Speaker 1: growth rates in in China. Uh. I think they're going
Speaker 1: to turn more towards domestic consumption to continue to keep
Speaker 1: people happy, to make them feel like their situation is improving.
Speaker 1: So in the last minute we have in this segment,
Speaker 1: I've heard the complaint that, oh, it's the Federal Reserve
Speaker 1: that has driven rates so low around the world. How
Speaker 1: do you respond to that? It the Federal Reserve has
Speaker 1: carried out its dual mandate extremely well. It has a
Speaker 1: dual mandate to try to create maximum employment and stable
Speaker 1: prices um full. So create jobs and reduce inflation. Let's
Speaker 1: keep inflation steady at shooting for around two percent. It's
Speaker 1: not too far off of that in the grand scheme
Speaker 1: of things. So I think the Federal Reserve has helped
Speaker 1: the economy tremendously over the past five years. I think
Speaker 1: we're in a much stronger position than say Europe because
Speaker 1: of the actions are are central back has taken. I'm
Speaker 1: Barry rid Helps. You're listening to Masters in Business on
Speaker 1: Bloomberg Radio. My special guest today is Princeton's professor Alan Krueger.
Speaker 1: He is the former chief Economist at the Treasury Department,
Speaker 1: at the Department of Labor and chairperson of the Council
Speaker 1: of Economic Advisors to the President. So you have a
Speaker 1: background in labor economics. You've done a lot of studies,
Speaker 1: a lot of really interesting things UM with labor. So
Speaker 1: let's talk a little bit about the labor for this
Speaker 1: whole recovery. One of the things we hear all the
Speaker 1: time is, Gee, there's a lot of slack in the
Speaker 1: labor force. What does that mean for a lay person?
Speaker 1: Slack means that we're not using all the resources that
Speaker 1: we can be using. And the implication of slack is
Speaker 1: that it put downward pressure on wages, which would then
Speaker 1: put downward pressure on inflation. So we mentioned in a
Speaker 1: previous segment that Walmart has raised their minimum wage and
Speaker 1: and McDonald's had done something similar. Are we coming to
Speaker 1: the end of the slack period of of the cycle
Speaker 1: for for labor? Is that the positive read in this
Speaker 1: I think we are. I think what we've seen with
Speaker 1: the decline in labor force participation is what you would
Speaker 1: expect giving the aging of the workforce, given that women's
Speaker 1: labor force participation peaked in the early two thousands UM,
Speaker 1: and given that we had so many long term unemployed,
Speaker 1: it's the natural evolution of the job market that they
Speaker 1: exit the labor force, and that's what's been taking place.
Speaker 1: So so let's describe this. When when we look at
Speaker 1: the population, you have the total civilian population in the
Speaker 1: United States is three hundred and ten or so million people.
Speaker 1: We then have a labor force, all the people who
Speaker 1: were either working or essentially looking for work at a
Speaker 1: hundred and fifty five or so, where are we Bullpark
Speaker 1: hundred fifty five million? And then you have people who
Speaker 1: are leaving the labor force. They basically said, either they're
Speaker 1: retiring or they just kind of give up on looking
Speaker 1: for a job. And people have been making a big
Speaker 1: deal about the declining participation rate in the labor force.
Speaker 1: If I'm hearing you correctly, you're saying, some of this
Speaker 1: is a function of just the aging of the baby boomers.
Speaker 1: You have sixty people a day retiring and some of
Speaker 1: them it is just the peak participation of women. Explained
Speaker 1: that a little bit. What had been fueling our rise
Speaker 1: in labor force participation from the nineteen fifties up until
Speaker 1: two thousand was more and more women join the labor force.
Speaker 1: That reached a peak in two thousand. The puzzle y
Speaker 1: labor force participation has since declined. For women, it declined
Speaker 1: in the last recovery, so this is not new in
Speaker 1: the current recovery. And it's declined an approach pretty broad base,
Speaker 1: well educated women as well as less educated women, women
Speaker 1: with children, women who were not married and don't have children.
Speaker 1: So it's been a pretty ubiquitous phenomenon, and that had
Speaker 1: been fueling the rise in labor force participation, and now
Speaker 1: we're starting to see a little bit of a reversal
Speaker 1: of that. We've seen a little bit of a reversal
Speaker 1: over the last decade. So more recently, the labor force
Speaker 1: participation rates seemed to stop falling and actually started to increase.
Speaker 1: Is this just a little noise in the data series,
Speaker 1: or or perhaps we're seeing that drop come to a halt.
Speaker 1: I think that's noise. I think at best we could
Speaker 1: say labor force participation is stabilized. Maybe some of the
Speaker 1: young people who left the labor force to go back
Speaker 1: to school are coming back. I think that's the positives line.
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, did
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
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 inc 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 trend? 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're
Speaker 1: people who inherited wealth, and increasingly that top tenth of
Speaker 1: one percent are going to be those who inherited their
Speaker 1: wealth as opposed to those who were successful entrepreneurs. But
Speaker 1: also we've seen enormous changes in the bottom. You know,
Speaker 1: if you look along education lines, Uh, I find the
Speaker 1: following calculation quite revealing. If you took the top one
Speaker 1: percent and said we're going to keep their income at
Speaker 1: the same shares it was nineteen seventy nine, and redistributed
Speaker 1: that to the bottom if one could, uh, that would
Speaker 1: raise the average families income by about seven thousand dollars
Speaker 1: a year. But if you then compare a family where
Speaker 1: you have a household headed by a college graduate versus
Speaker 1: a household headed by a high school graduate, the difference
Speaker 1: in the earnings since nineteen seventy nine has increased by
Speaker 1: twenty three thousand dollars, over three times as much. So
Speaker 1: it's not only the top one percent that's causing the
Speaker 1: shifts and inequality that we're seeing and putting pressure on
Speaker 1: the middle class. You know, one of the fascinating stats
Speaker 1: I saw related to that was the unemployment rate amongst
Speaker 1: people with college degrees, and then the unemployment rate amongst
Speaker 1: people with graduate degrees or science, technology, engineering, and mathematics degrees.
Speaker 1: It was low, low single digits. Even when the unemployment
Speaker 1: rate was eight nine, it was in the Two's quite
Speaker 1: amazing that there's such a strong demand for those sort
Speaker 1: of employee ease. Increasingly, the US economy has been demanding
Speaker 1: workers with higher levels of skills, and you see that
Speaker 1: really throughout the distribution, not just graduate degrees, but if
Speaker 1: you compare people who have skills in manufacturing skills and welding,
Speaker 1: they're doing better than people who have, uh, just a
Speaker 1: high school degree and not a specific training in an
Speaker 1: area BLS. One of the things we talked a little
Speaker 1: bit about the Bureau of Labor Statistics earlier. I found
Speaker 1: that anytime I had a question about a report or
Speaker 1: anything that came out, I had the ability to pick
Speaker 1: up the phone and actually get that economist on the
Speaker 1: phone who would walk me through what they did. Is
Speaker 1: this pretty standard operating procedure there. I was astonished by that.
Speaker 1: BLS is a very transparent organization. They're there to help.
Speaker 1: They want people to understand what it is that they're doing.
Speaker 1: They don't want people to misinterpret their data, so they're
Speaker 1: very open in that. In that way, What is it
Speaker 1: like producing the sort of data they crank out every month?
Speaker 1: How many economists and statisticians work there, and what is
Speaker 1: the process like creating those models? Well, it's more data
Speaker 1: than models, you know, it's really more uh, interviewing households,
Speaker 1: interviewing businesses for the unemployment report, the Census Bureau on
Speaker 1: the behalf of the BLS goes door to door to
Speaker 1: over fifty households. That's every month, every month. Now, they
Speaker 1: don't go door to door every month. They go door
Speaker 1: to door the first time they interview them, and then
Speaker 1: they say next month, is it okay if we call you?
Speaker 1: But on a rotating basis, they're interviewing over fifty households
Speaker 1: a month, giving them a short questionnaire, and then they're
Speaker 1: processing the data, uh, screening out mistakes uh uh if
Speaker 1: somebody misreported their income, for example, and then producing the
Speaker 1: unemployment rate and related statistics. This is all done by
Speaker 1: career employees. Uh, they don't inform the administration about the
Speaker 1: results until the night before the data are released to
Speaker 1: the public. So the so the President gets a phone call, Hey,
Speaker 1: tomorrow's non farm payroll a hundred. He finds that out
Speaker 1: twelve hours before everybody else. The President receives a visit
Speaker 1: from the Chairman of the Council of Economic Advisors with
Speaker 1: a memo in hand describing what the next day's report
Speaker 1: will be. The Chairman of the Federal Reserve receives a
Speaker 1: one page sheet called the Chairman's Data Sheet with some
Speaker 1: of the key statistics that are going to come out
Speaker 1: the next day, also provided by the Chairman of the
Speaker 1: Council of Economic Advisors, as does the Treasury Secretary. So
Speaker 1: I picture someone with the briefcase that's handcuffed to the
Speaker 1: the the secret Agent walking into the Federal Reserve, walking
Speaker 1: into the White House. It's really not that cloaken dagger,
Speaker 1: is it. Well, it's a secure facts, a secure facts.
Speaker 1: Oh that's fascinating. And um. One of the things I
Speaker 1: found fascinating about the BLS was about ten years ago,
Speaker 1: maybe a little longer, they changed the birth death model
Speaker 1: and this caused all sorts of of mayhem amongst the
Speaker 1: tinfoil hat types for people who aren't economic wanks. What
Speaker 1: is the birth death adjustment? Well, this is really inside baseball,
Speaker 1: but in the establishment survey that the BLS does every month,
Speaker 1: they don't do a very good job bringing in new companies.
Speaker 1: Where a company has failed, they don't know for sure
Speaker 1: that it failed. Maybe it just failed to respond. It
Speaker 1: doesn't mean necessarily it's gone out of business. So to
Speaker 1: adjust for the births and the deaths, they have an
Speaker 1: additive factor. Could be positive, could be negative, and that's
Speaker 1: based on information that's coming in from payroll tax records,
Speaker 1: where the BLS could judge how far off it's been
Speaker 1: in recent months and use that to make an adjustment.
Speaker 1: I think the outside world tends to focus a lot
Speaker 1: on the birth death model as opposed to, uh, the
Speaker 1: data that's coming in and the data that's coming in
Speaker 1: from the establishments are really much more important than the
Speaker 1: birth death adjustment. Thank you so much for your your time,
Speaker 1: Professor Krueger. We've been speaking with Professor Alan Krueger, former
Speaker 1: Chief Economists at the Treasury Department and chairperson of the
Speaker 1: Council of Economic Advisors to the President. If you enjoy
Speaker 1: this conversation, be sure and check out the full podcast version,
Speaker 1: where we keep chatting about all sorts of fascinating and
Speaker 1: wonky things. Uh, be sure and check out my daily
Speaker 1: column on Bloomberg View dot com or follow me on
Speaker 1: Twitter at rid Holts. I'm Barry Ridholts. You've been listening
Speaker 1: to Masters in Business on Bloomberg Radio. Welcome back to
Speaker 1: the podcast portion of our show. This is Barry Ridholts,
Speaker 1: and you've been listening to Masters in Business on Bloomberg Radio.
Speaker 1: My guest today Professor aller At, Professor Alan Krueger, not Krugman,
Speaker 1: not Alan Blinder, Professor Alan Krueger. People get that wrong
Speaker 1: all the time, don't they all the time? Krugman and
Speaker 1: I we get each other's mail. True story about ten
Speaker 1: years ago. I my office was three Park Avenue. I
Speaker 1: have a cousin with the same name as me, Barry Ridholtz.
Speaker 1: He's a lawyer. He was working for Golden Tree Mutual Funds.
Speaker 1: There's no T at the end of his name, so
Speaker 1: he's O LZ. And we're in the same building. We
Speaker 1: would get each other's male. What are the odds that
Speaker 1: someone with the same name, and it's not, you know,
Speaker 1: if you're John Smith statistically right, but it was just
Speaker 1: always always sort of sort of fun. So Krueger not Krugman. Um.
Speaker 1: I have so many other things I want to I
Speaker 1: want to talk to you about before we have to
Speaker 1: send you on on your way. We talked a lot
Speaker 1: of a lot of misconceptions, a lot of heras people have.
Speaker 1: What do you think about economics or the BLS data
Speaker 1: or whatever. What do you think is the biggest misconception
Speaker 1: about economics out there? Well, I don't know if it's
Speaker 1: a misconception. There's kind of uh paranoia that the BLS
Speaker 1: is a tool of the administration and is pressured to
Speaker 1: come up with uh particular results. And you know, former
Speaker 1: I'll say this, former g E CEO Jack Welsh, Right
Speaker 1: before the November twenty twelve election, there was a fairly
Speaker 1: decent employment number, and he infamously tweeted out, Hey, those
Speaker 1: Chicago guys will do anything to win election. They doctored
Speaker 1: these numbers and and people were really astonished about it.
Speaker 1: He ultimately ended up getting pissy with fortune quitting storming off,
Speaker 1: how often do you run into oh, the president is
Speaker 1: manipulating these numbers. What was unusual about that episode? And
Speaker 1: I remember it very well. It was October of two
Speaker 1: thousand twelve. The unemployment rate fell from eight point one
Speaker 1: to seven point eight percent. And he's not a giant drop,
Speaker 1: a fairly a healthy full, but not anything ridiculous. So
Speaker 1: certainly not on precedented. Look at it with hindsight is
Speaker 1: now five and a half percent. We were clearly on
Speaker 1: a path then when the economy was getting better and
Speaker 1: he was denying it um And I was asked to
Speaker 1: respond to what he said, and I'll I said then
Speaker 1: what I'll say today. No serious person doubts the credibility
Speaker 1: of the Bureau of Labor Statistics. That it's it's a
Speaker 1: civil sermon group. It's not political appointees. Only one person
Speaker 1: BLS is a presidential appointee that earlier the commissioner, and
Speaker 1: 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 VIETNAE 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 over 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: two hundred thousand if the true underlying growth was over
Speaker 1: two hundred thousand. It's not all that high. So, uh,
Speaker 1: it's not a surprise to me in a way that
Speaker 1: we see one number which is out of line. Um,
Speaker 1: we get two or three more in a row. Hey,
Speaker 1: that's a problem. Two or three more of unemployment insurance
Speaker 1: claims start to pick up if some of the other
Speaker 1: indicators come in. Let me jump in on that, because
Speaker 1: before in my office we were previewing these numbers and
Speaker 1: talking about this conversation, and my head of research said, hey,
Speaker 1: be you sure to say to Professor Krueger, see if
Speaker 1: he's familiar with the fact that we're at some crazy
Speaker 1: record low for initial unemployment claims. I think you said
Speaker 1: it's back to where we haven't seen lows like this
Speaker 1: in fifteen years? Is that accurate weekly initial claims are
Speaker 1: very low? Uh, I think we have seen them this
Speaker 1: low in the in the recovery, but they're at the
Speaker 1: lowest point that they've been in the recovery. You know
Speaker 1: one thing I'll add, Barry, When I worked in the administration,
Speaker 1: I reached the conclusion that the UI claims are very informative,
Speaker 1: and we haven't changed the information that are coming out
Speaker 1: with the UI claims in fifty years. Why don't we
Speaker 1: try to extract more from it? Which industries are laying
Speaker 1: off people, what education groups, which age groups, And that's
Speaker 1: something which the Labor Department has been looking into into
Speaker 1: doing so, in other words, take the data and try
Speaker 1: and slice it a little finer, by by sector, by
Speaker 1: education level, by geography. Exactly what else do you look
Speaker 1: at their Well, those are the main things, and um
Speaker 1: they do produce it by geography already, they do that
Speaker 1: with a weak delay, so that's already available. But I
Speaker 1: think we could learn a lot from industry because we
Speaker 1: know that manufacturing and construction tend to be more cyclical industries,
Speaker 1: and in some sense they're leading indicators, So I think
Speaker 1: we can extract more from these data, and also knowing
Speaker 1: about the demographics I think would be very helpful. So
Speaker 1: let's talk briefly about the non farm payroll. You know,
Speaker 1: it's considered a coincidental or lagging indicator. It lags the
Speaker 1: business cycle. But there are parts of it that I
Speaker 1: always find fascinating. Within within the non farm payroll data,
Speaker 1: I've always found the numbers for temp help to be
Speaker 1: very insightful because if companies are unsure about where we
Speaker 1: are in the economic growth cycle, but they're starting to
Speaker 1: see a slide uptick in demand, they might hire a
Speaker 1: bunch of temp workers and hey, if it works out,
Speaker 1: they become full time workers. I've argued that that's a
Speaker 1: little bit of a leading indicator. How wrong am I?
Speaker 1: I was gonna say, you're pretty much in line with
Speaker 1: the research, and the research has found that temporary help
Speaker 1: trends are leading indicator. And then what about hours work?
Speaker 1: That's another thing. When you start to see the hours
Speaker 1: tick up, it's always easier to say to somebody who's
Speaker 1: got twenty or thirty hours, hey, here's a little more time.
Speaker 1: Instead of going out and hiring a brand new person well.
Speaker 1: Hours worked are extremely important for a number of reasons.
Speaker 1: One because it says how much labor is being utilized
Speaker 1: in production, and that could be more important. If you
Speaker 1: have a two tense three tents of an hour increase
Speaker 1: in weekly hours, that could be more important than the
Speaker 1: headline jobs number in terms of total labor input. It's
Speaker 1: also important to people because it affects the income that
Speaker 1: they're receiving. So I closely watched hours worked, and one
Speaker 1: thing I'll mention, which I don't think it's gotten enough attention,
Speaker 1: is everyone's focused on the slack that's coming from workers
Speaker 1: who are part time who want to be full time.
Speaker 1: But hours worked you're actually reasonably high and back to
Speaker 1: where they were before the recession. That was a question,
Speaker 1: So where hours work? Because I remember, oh, nine ten,
Speaker 1: when you're coming out of the we were in like
Speaker 1: thirty point one in that ring. I don't remember if
Speaker 1: we got below thirty, but it was really the bottom
Speaker 1: of the thirties. We're we're hours work now they're back
Speaker 1: to where they were in two thousand and eight, And
Speaker 1: if you draw the crisis pre crisis, uh two thousand seven,
Speaker 1: they're back to where they were in two thousands. How
Speaker 1: many is that per week? On average? It's in the thirties.
Speaker 1: Because I normally should know this off the top of
Speaker 1: my head, and I don't. So he's going for the
Speaker 1: secret facts that he got from the labor Department. We
Speaker 1: just saw this King 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 to and
Speaker 1: it's back to the trend that we were on prior
Speaker 1: to the crisis. It's a yes. So we've returned to trend.
Speaker 1: And so that's kind of that's enough fascinating. So I
Speaker 1: don't think there's that much hidden slack in terms of
Speaker 1: work hours. So you had mentioned, um, let's let's talk
Speaker 1: a little bit about the FED. You had mentioned you
Speaker 1: thought the FED had done a really good job. You
Speaker 1: know what didn't happen this recovery, whether it's the Federal
Speaker 1: Congress or what have you, that would have made it better, faster, stronger. Well,
Speaker 1: I think Congress made a major mistake with the sequester.
Speaker 1: We cut back discretionary spending. We did it in an
Speaker 1: arbitrary way. We should be investing more in research and development,
Speaker 1: more in infrastructure, more in education and Congress cut that back.
Speaker 1: On top of that, I think Congress could have extended
Speaker 1: the payroll tax cut into we had it in Uh,
Speaker 1: Why is this still that just mad pursuit of austerity,
Speaker 1: that misguided pursuit of austerity. Has that argument been laid
Speaker 1: to rest when you see the austerity put in place
Speaker 1: by Europe and the much more moderate austerity in the
Speaker 1: United States, How the two two regions had recovered. H
Speaker 1: I don't know if it's been put to rest, but
Speaker 1: I certainly take that as pretty strong evidence that the
Speaker 1: US is doing better because we pursued a different fiscal
Speaker 1: policy and a different monetary policy for that matter. But
Speaker 1: we were pretty in terms of historical fiscal stimulations. You
Speaker 1: had the stimulus plan, but it was different than previous
Speaker 1: stimulus plans, and that a big chunk of it was temporary,
Speaker 1: was temporary tax cuts, it was temporary unemployment extensions. It
Speaker 1: wasn't like a massive infrastructure build out. And then you
Speaker 1: had all these ongoing layoffs at the state and local level.
Speaker 1: So net net up until only a few months ago,
Speaker 1: total government hiring um has been a dreg unemployment absolutely.
Speaker 1: You know, if you look at the big picture, which
Speaker 1: is government spending, including state and local together with federal.
Speaker 1: The stimulus only lasted about three quarters It was just
Speaker 1: uh the end of two thousand nine early and since
Speaker 1: then it's been phasing out. One might have said in
Speaker 1: two thousand nine that a risk of this stimulus was
Speaker 1: that it would become permanent, but that hasn't happened. And
Speaker 1: if you look at state and local governments, while they
Speaker 1: were receiving support from the Recovery Act, from the stimulus bill,
Speaker 1: they weren't laying off teachers and firefighters and police. And
Speaker 1: it was only after that money ran out that we
Speaker 1: saw layoffs reach really historically high levels in the state
Speaker 1: and local government sector. Right, And when we look at
Speaker 1: the two thousand one recovery, that was a huge additive
Speaker 1: to to what the economy was doing two thousand one
Speaker 1: and the early eighties. So only Democrats seem to be
Speaker 1: UH president 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 it seems a little disingenuous. Oh
Speaker 1: it's even worse than that, in that it wasn't only
Speaker 1: the war that was costing money. It was also adding
Speaker 1: Medicare Part D prescription draws without paying for it, and
Speaker 1: cutting taxes in large measure for high income earners, and
Speaker 1: also without offsetting that with spending cuts elsewhere. So I
Speaker 1: I guess I'd take a somewhat more partisan view. Having
Speaker 1: worked for President Clinton and President Obama. You know, President
Speaker 1: Clinton signed the Balanced Budget Act, uh, physically Responsible Act.
Speaker 1: President Obama wanted to address the drivers of our deficit,
Speaker 1: which is healthcare costs and entitlements. That was part of
Speaker 1: the Grand Bargain negotiations along with military spending. Was was
Speaker 1: a big issue that had had an impact in the sequester. Right,
Speaker 1: that's right, Um, but military spendings winding down on its own.
Speaker 1: It's been coming down on its own as we um
Speaker 1: reduce our engagement in the Middle East. So uh, you know, actually,
Speaker 1: if you look at the trends, it's quite remarkable because
Speaker 1: we saw a pretty sharp decline in military spending in
Speaker 1: two thousand and uh twelve, two thousand and thirteen, and
Speaker 1: that was a drag on the economy. Ultimately, I think
Speaker 1: it's better for those resources to be used for civilian purposes. Uh.
Speaker 1: But we haven't really addressed the drivers of the deficit
Speaker 1: in spite of the emphasis and austerity, because we haven't
Speaker 1: done much to address the long run entitlement costs and
Speaker 1: healthcare costs. So that seems to be a partisan policy
Speaker 1: debate where the philosophies are so far apart. There's almost
Speaker 1: not a you know, normally you can horse trade a
Speaker 1: little bit. Back in the days of of Ronald Reagan
Speaker 1: and Tip O'Neill, there was a lot of back and forth,
Speaker 1: and they weren't so far apart that I got something,
Speaker 1: You've got something. All right, we come up with some
Speaker 1: a policy that everybody can live with, declare victory and
Speaker 1: move on to the next thing. As the parties get
Speaker 1: further and further apart, and I don't know if I
Speaker 1: would argue that both parties aren't moving away from the
Speaker 1: center at an equal pace. As a former Republican, I
Speaker 1: could tell you that the right has moved further away
Speaker 1: from the middle much faster than the left has. Um.
Speaker 1: I haven't changed my you know, I grew up a
Speaker 1: Jacob Javits Republican, which today puts me too far to
Speaker 1: the left of you know, anybody who's a Democrat in
Speaker 1: half of the anyone who's a Republican and half of
Speaker 1: the Democrats. By the way, I just pulled up the
Speaker 1: BLS data. Manufacturing work week decreased at point one hours
Speaker 1: to forty point nine. Manufacturing work work weeks always longer,
Speaker 1: and then um total employees on private non fun pay
Speaker 1: rolls thirty four declined point one to thirty four point five. So,
Speaker 1: but that's still substantially above where we began thirty four
Speaker 1: and a half as normal, that's about that. That's I
Speaker 1: would say, that's about where you would predict we should
Speaker 1: be based on the trend before the recession. Factory over
Speaker 1: time three point four hours, is that considered substantial? That's high.
Speaker 1: And you know, the adorable good sector has made a
Speaker 1: remarkable recovery. You look at the auto sector, it's made
Speaker 1: a remarkable recovery in this uh economic climate. Let's let's
Speaker 1: talk about that because it brings to mind a really
Speaker 1: fascinating conversation I had with Jonathan Miller, who is UM
Speaker 1: one of the best known real estate appraisers. He's on
Speaker 1: all the time with Tom and others. Wherever credit is tight,
Speaker 1: that 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 a
Speaker 1: pre crisis? There was a huge dip. We've recovered some
Speaker 1: of it. I think we're about halfway back, but that's
Speaker 1: a massive number, seventeen million. It's remarkable. I mean it
Speaker 1: shows how much pent up demand there was, and it
Speaker 1: also shows I think that our auto companies are doing
Speaker 1: a better job. They're producing better cars. If you look
Speaker 1: at Chrysler today, it's a totally different kind of car
Speaker 1: and now owned by Fiat instead of and same thing
Speaker 1: with GM when you look at GM. I'm not a
Speaker 1: GM guy, but I have to tell you the the
Speaker 1: catalogs that have come out are really nice. The new
Speaker 1: Corvette is a spectacular car. And their competition for the
Speaker 1: camera and the accord um it begins with an Allen.
Speaker 1: I'm not accessing that word. No, no, no, that's Chevy Lumina,
Speaker 1: is it. Maybe it's Lumina. Oh no, it's the um
Speaker 1: Impala and the new Impala. You think of Impali, think
Speaker 1: of a giant car, but it's their camera slash Honda
Speaker 1: chord competitor. They're winning all sorts of awards. It's amazing
Speaker 1: how far the US owner industry has come post bailout. Absolutely.
Speaker 1: I actually just wrote a new study together with Austin Gulsby,
Speaker 1: who was my predecessor as Chairman of the c e
Speaker 1: A on the Auto bailout, and it has been far
Speaker 1: more successful than we expected. In two thousand nine, UM,
Speaker 1: I find Austin to be a fascinating guy. 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 on 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 Treasury or the i m
Speaker 1: F for then the New York Fed. But people have
Speaker 1: accused him as president in the New York Fed being
Speaker 1: very close to Wall Street. Is that not an accurate description?
Speaker 1: You know. I think he should be judged by his actions,
Speaker 1: and I think he was consistent in the principles that
Speaker 1: he applied to the bailout to the extent that he
Speaker 1: could have been. He was constrained by the law. UM.
Speaker 1: I think he did a remarkable job protecting taxpayers. You know,
Speaker 1: all of the money came back and then some the
Speaker 1: money that went to the financial sector during the bailout.
Speaker 1: He protected our system of the hierarchy for investors and
Speaker 1: bond investors and senior UH creditors UH. And I think
Speaker 1: our recovery is a lot stronger because of the very
Speaker 1: difficult decisions that he he was forced to make. UM.
Speaker 1: The role of banks, I think it's pretty special in
Speaker 1: the economy. So I think one could make a case
Speaker 1: for treating the financial sector differently in the midst of
Speaker 1: a financial panic. UM, the problems that the auto companies
Speaker 1: were facing were very long in the making, and they
Speaker 1: needed to restructure. It was not just a temporary problem
Speaker 1: that they were facing because of a run on banks,
Speaker 1: which was uh in in some sense the issue in
Speaker 1: the financial sector. So I think one could fault the
Speaker 1: financial bailout personally, I would have liked to have seen
Speaker 1: us put more restrictions on the banks when it came
Speaker 1: to lending. I would have liked to have seen some
Speaker 1: requirements which eventually were put on there We're done, for example,
Speaker 1: in the Small Business Lending Fund to encourage banks to
Speaker 1: lend more to small businesses. UH. I would have liked
Speaker 1: 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 use of TARP funds UH did rescue
Speaker 1: the system, did make it possible for the recovery to begin.
Speaker 1: So to to bullet points, one observation and then a question.
Speaker 1: I have to ask you one of I'm an automotive enthusiast.
Speaker 1: I love cars. My mother will tell you car was
Speaker 1: literally the first word I ever said. And one of
Speaker 1: the sites I used to read all the time, I
Speaker 1: mean long before the financial crisis was called The Truth
Speaker 1: about Cars, and they had a segment called GM Bankruptcy
Speaker 1: Watch Part one through you know two hundred, and they
Speaker 1: were saying here's the math. It's unsustainable. GM can't keep
Speaker 1: generous pension, generous healthcare, nine levels of executives. They can
Speaker 1: operate like this. It's a house of cards. That asked
Speaker 1: the collapse, and it turned out that was accurate. But
Speaker 1: so the restructuring and the bailout and the resurrection of
Speaker 1: GM and CHRIST will tend out to be a great
Speaker 1: thing for the economy, a great thing for the auto sector.
Speaker 1: So here's the question I always ask about the banks. Yes,
Speaker 1: banks are important, banks are special, and that's why we
Speaker 1: can't allow insolvent banks to put the entire system at risk.
Speaker 1: We can't allow crazy leverage, we can't allow reckless spending
Speaker 1: and lending and speculation to put the economy at risk.
Speaker 1: So here's what the counterfact rule I want to ask
Speaker 1: is what would have happened early in the financial crisis.
Speaker 1: If so, let's refresh people's timeline. You had March O eight,
Speaker 1: you had Bear Stearns go under, and and the Federal
Speaker 1: Reserve essentially guaranteed to JP Morgan they would backstop Bears
Speaker 1: books and it was sold first for two dollars a year,
Speaker 1: then ten dollars a share. It turned out to be
Speaker 1: a phenomenal acquisition for JP Morgan, a huge home run.
Speaker 1: Then as we worked our way through the summer, things
Speaker 1: started to get a little dicey. We had issues with
Speaker 1: Fannie and Freddie and the G S c S. I'm
Speaker 1: still not convinced that the American taxpayer's men made whole.
Speaker 1: There were tax waivers given UM and off sets, and
Speaker 1: Fannie and Freddie's have been throwing off a lot of money.
Speaker 1: I don't know if that's break even. I think a
Speaker 1: I G is now break even even including the tax
Speaker 1: benefits they got. I'm not positive about that. So we're
Speaker 1: almost but not quite made whole. We certainly didn't get
Speaker 1: the benefits of that very risky investment. If I was
Speaker 1: an investor, Hey, here's a billions of dollars one day,
Speaker 1: I hope to break even on it. Not not what
Speaker 1: Wall Street typically looks for. But the counterfactual is what
Speaker 1: would have happened if we would have set to City Bank. Okay,
Speaker 1: you guys have had problems every twenty years, it seems,
Speaker 1: let's temporarily put you into receivership with Uncle Sam acting
Speaker 1: as the debtor, you know, creditor in possession, the the
Speaker 1: provider of UM the creditor acting as um offering all
Speaker 1: of the debt funding during this reorganization, will wipe out
Speaker 1: the shareholders, will give a haircut to the bond holders,
Speaker 1: will fire fire that top level of senior management who
Speaker 1: clearly have driven the bus off the off the road,
Speaker 1: into the into the lake, and we'll spin them out
Speaker 1: as a as a brand new entity. Same thing with
Speaker 1: Bank of America. The argument I used to say is,
Speaker 1: we'll clean up Merrill Lynch, We'll get rid of their debt,
Speaker 1: will spin them out as a free standing entity, will
Speaker 1: take countrywide the biggest mortgage underwriters, will clean them up,
Speaker 1: will spend them out there now a freestanding debt free,
Speaker 1: clean company. Will take Bank of America. Same thing. Then
Speaker 1: we'll take all of this what people are calling toxic debt,
Speaker 1: which is on toxic assets, which is really a bit
Speaker 1: that's toxic at hundred cents on the dollar, but there's
Speaker 1: some price ten cents where that's a good investment, and
Speaker 1: we'll auction that off and net net will go. We'll
Speaker 1: tear the band aid off. We'll go through this painful process,
Speaker 1: but then we'll be much healthier on the other side.
Speaker 1: What's wrong with that counter factual. I think there are
Speaker 1: a few things, and fortunately the economy didn't get so
Speaker 1: bad that that was necessary. There was something. How close
Speaker 1: will we to that point? Though people have said we
Speaker 1: were The phrase I heard from Ben Bernanki was we
Speaker 1: were staring into the abyss. We were staring into the abyss.
Speaker 1: There's no question we were staring into the abyss. How
Speaker 1: close did we come? Well, the turning point was the
Speaker 1: stress tests. So had the stress tests shown that the
Speaker 1: city was as insolvent as you uh suggested, I think
Speaker 1: in different course of action would have been taken. But
Speaker 1: given that the stress tests helped things to turn around,
Speaker 1: Given that the stress tests provided investors with the information
Speaker 1: that they needed and the confidence that they had that
Speaker 1: they can invest, Given that city was able to raise
Speaker 1: money at that time, was able to uh, we'll raise
Speaker 1: money from the government. Or which which stress tests are
Speaker 1: we talking about? What the stress test was at the
Speaker 1: March of oh nine, But I'm talking October in October
Speaker 1: eight when the when the tarp was first dress. If
Speaker 1: that and he didn't go to these banks, if they
Speaker 1: go to the banks, the but but had we pursued
Speaker 1: the strategy that you laid out, uh, taxpayers would have
Speaker 1: paid much much more instead of actually making money on
Speaker 1: these TARP investments. They would have lost hundreds of billions
Speaker 1: of dollars. When I are where would those losses have
Speaker 1: come from. The losses would have come from wiping out
Speaker 1: the debt that you mentioned, from recapitalizing the banks with
Speaker 1: government money. On top of that, I think you would
Speaker 1: be looking at at least five years, maybe a decade
Speaker 1: of having having those companies under government receivership. That long.
Speaker 1: It's not a twelve month or an eighteen month process,
Speaker 1: clean them up and then take them public again. Look
Speaker 1: at some of the bank failures that we've seen, they've
Speaker 1: taken they've taken years, and that's banks that are one
Speaker 1: hundredth as 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 the problem much worse.
Speaker 1: If you're gonna wipe out the shareholders of city, what
Speaker 1: are you gonna do. If you're a shareholder Bank of America,
Speaker 1: You're gonna sell that's gonna make Bank of Americans problems
Speaker 1: much worse, uh, and then so on down the line.
Speaker 1: So I think we would have seen um a um
Speaker 1: a wave of bank failures which would have cost the
Speaker 1: taxpayers billions of dollars and which would have set the
Speaker 1: recovery back years. So you think this was the healthier
Speaker 1: way to proceed. So I only think in retrospect there's
Speaker 1: no question. I mean, you could say, um u that
Speaker 1: it was a mistake because it costs taxpayers so much money,
Speaker 1: but it hasn't. In the end. Well, the taxpayers had
Speaker 1: a lot of money at risk, and now we know
Speaker 1: what the benefit of hindsight, all or nearly all, or
Speaker 1: maybe even a little more than all have has been recovered.
Speaker 1: So net net, the cost to the taxpayers was not great.
Speaker 1: The risk to test payer money was fairly high. So
Speaker 1: the question I want to ask is, you know, pre
Speaker 1: crisis we had and I understand Sweden as much small
Speaker 1: in the United States, but we had the Swedish approach,
Speaker 1: which was throw everybody into receivership, clean them up, spin
Speaker 1: them out. And then we had the Japanese approach, which is, hey,
Speaker 1: we have these vertically stacked Kurt Susan, you can't kill
Speaker 1: back of Minsubishi because you have Mitsubishi heavy industries in
Speaker 1: Msrsubishi Aerospace and Missubishi real estate on top of that.
Speaker 1: And to to go Swedish and the United States would
Speaker 1: have wiped out Goldman sachs um Macy's general mode. It right,
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: it's just a totally different scale. And don't delude yourself.
Speaker 1: Taxpayers would have been at tremendous risk if the government
Speaker 1: would have taken over the major banks in the US.
Speaker 1: So it's not as if a risky strategy was pursued
Speaker 1: and it paid off and you got to take into
Speaker 1: account the cost of the risk. There was risk on
Speaker 1: either side. So it's it was a choice amongst risky strategies.
Speaker 1: It 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 Gramleck 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 they
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 President 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 percent down. They were actually cash out homeport purchases
Speaker 1: where you could buy a house and take a second
Speaker 1: at the same time, So you walk into the house
Speaker 1: fifty thousand dollars richer, no skin in the game, and
Speaker 1: every incentive to walk away. That's right. So I do
Speaker 1: hold the FED responsible UH for a very core component
Speaker 1: of the crisis. Not not exclusively, but they certainly were
Speaker 1: a major factor. Look, I mean, if the private sector
Speaker 1: didn't have the collective delusion that home prices would continue
Speaker 1: to grow, we wouldn't have had the crisis too. So
Speaker 1: that there were many UH factors that led to the crisis.
Speaker 1: I don't think that one could say there was a
Speaker 1: single cause on the recovery. UM. I think where I
Speaker 1: would fault the FED was in prematurely ending uh quantitative easing.
Speaker 1: You would have extended it further. Uh. Not QUE three,
Speaker 1: but say q E two, so I would have had
Speaker 1: a more continuous QUE two. I think they took the
Speaker 1: photo off the gas a little bit too soon. Uh.
Speaker 1: And that's led to this stop and start in terms
Speaker 1: of in terms of QUI, so I, I know we
Speaker 1: don't have you for very much longer. Let let me
Speaker 1: ask you one more related question on the D before
Speaker 1: we send you off to uh NPR. Bill Gross had
Speaker 1: an 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 zerup and zero bound than 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 mistake and then they decided
Speaker 1: to go all the way down to zero or as
Speaker 1: close as they can go. So in the final few
Speaker 1: minutes we have let me ask you, um, one or
Speaker 1: 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 or decline in labor force
Speaker 1: participation of women, how that's going to affect their business model.
Speaker 1: How can they make work more flexible? So they can
Speaker 1: attract more workers. And then my final question, I ask
Speaker 1: everybody the same thing, and I'll ask you this, what
Speaker 1: do you know about your profession about economics today that
Speaker 1: 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. Uh.
Speaker 1: So that's why I went into labor economics. Uh. I
Speaker 1: 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 uh, 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 manias
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 my research, or just google Alan Krueger and
Speaker 1: you'll find um find more. Thank you so much for
Speaker 1: being so gener us with your time. We've been speaking
Speaker 1: with Professor Allan Krueger of Princeton UM. If you enjoy
Speaker 1: this podcast, be sure and look up an Inch or
Speaker 1: Down an Inch on Apple iTunes and you'll see the
Speaker 1: other forty something podcasts we've been doing. Check out my
Speaker 1: daily column on Bloomberg View dot com or my Twitter
Speaker 1: feed at Ridholts or the blog at Ridholts dot com.
Speaker 1: I'm Barry Ridhults. You've been listening to Masters in Business
Speaker 1: on Bloomberg Radio.