On December 3, 2024, more than 600 Chicago Booth alumni, students, and business community members gathered to hear a discussion between Randall S. Kroszner, the Norman R. Bobins Professor of Economics; Yueran Ma, professor of finance and Fama Faculty Fellow; and Raghuram Rajan, the Katherine Dusak Miller Distinguished Service Professor of Finance.
After opening remarks by Madhav Rajan, dean and George Pratt Shultz Professor of Accounting, the program was turned over to Kathleen Hays, founder and editor-in-chief of Central Bank Central. Hays moderated a conversation between the panel of Booth experts on topics such as the incoming US administration, AI, tariffs, and more. Selected highlights of their discussion are below.
Hays began by asking panelists about the potential impact of proposed tariffs by the incoming US administration, noting that tariffs are commonly viewed as inflationary and detrimental to trade.
Professor Kroszner said he thought the incoming administration was serious about using trade policy strategically and to raise revenue in anticipation of tax cuts.
“Although the United States is an enormous trading partner, as a percentage of US GDP, trade is relatively small. For Canada, it’s very large. For Mexico, it’s very large. So although there could be some issues for the United States, it’s going to be much more painful for other countries,” Kroszner said.
Professor Ma agreed with Kroszner that the proposed tariffs would be used for political purposes and speculated on the political ramifications in countries like China.
“China in the past liberalized in the context of relatively friendly global environments,” Ma said. “The rewards for economic reforms were fairly high. However, given the stance the United States has taken, the rewards for continuing reforms for China are probably much more limited.” Ma went on to say that the tariffs may have implications not only for US consumer prices but for geopolitical relations with China.
“We’re rediscovering mercantilism, right?” said Professor Rajan at the beginning of his response. “Country after country is rediscovering mercantilism, which will be bad for their citizens.”
“There is a sense that we lose American jobs when we import,” Rajan continued. “The problem is, with automation, precious few jobs are going to come back. You don’t pay for someone to sit soldering in an assembly line in the United States. It’s too costly. You bring jobs back that can be done by machines and robots. You need skilled technicians to fix the machines when they break down. The notion that the new mercantilism is going to lead to new jobs for the moderately skilled is going to result in heartbreak,” he said.
Rajan added, though, that if the tariffs were temporary, targeted measures—similar to the tariffs the United States levied against Japan in the 1980s—those could possibly spur business investment and reform in America.
"We're rediscovering mercantilism, right? Country after country is rediscovering mercantilism, which will be bad for their citizens."
Given the prospect of a higher deficit due to proposed tax cuts by the incoming administration, Kathleen Hays asked the panel if the newly created Department of Government Efficiency (DOGE) could help offset the decrease in government revenue.
Professor Ma began her response by contrasting the design of private organizations with that of governmental organizations.
“The bases of efficiency for private sector organizations, under the Chicago Doctrine, are clear, singular objectives and high-powered incentives for delivering those objectives,” she said. “Governments by design are counter to those principles, because governments have mandates that are more multidimensional. In particular, there’s more mandates for fairness, so there’s more forms and red tape to ensure there’s fairness and procurement … It’s also by design more difficult to implement incentives for performance.”
“If one wants to enhance efficiency, the administration could choose to prioritize some objectives over others … Then the performance of the government, by design, will be more sensitive to what objective the leader chooses,” Ma continued.
Ma cautioned that the methods DOGE uses to enhance efficiency might look like what many people fear from the incoming administration—namely, large-scale layoffs of public employees.
“On the positive side,” Professor Rajan said, “there is a sense that the economy has become over regulated, and we need to reduce regulations in a number of areas. That’s one area where the United States is far better than Europe: taking risks in order to grow and innovate.”
However, Professor Rajan warned that simply cutting government employees while still keeping the same regulations may actually cause more challenges.
“If you don’t have people looking at your visa applications or you don’t have people looking at your permit, it’s going to take longer,” Rajan said. “This has to be done in a systematic way by serious people. Just doing it blindly may actually disrupt things more.”
Hays asked the panel whether deportations that have been promised by the incoming administration could affect job openings and wage growth.
“People don’t feel particularly secure in their jobs,” Kroszner said. “I think there was a fundamental destruction of trust that came with the high inflation. People were working hard, but felt like they were getting left behind [by high prices and stagnant wages].”
“The question is, how much of an impact might the deportations have? … If you have a tighter labor market, you’re going to have more wage growth. If you don’t have higher productivity, then that wage growth is going to lead to higher prices. If you can get the higher productivity growth, you can avoid that. I believe the incoming administration is hoping that reducing regulation and improving government efficiency will achieve that productivity growth,” Kroszner said.
Professor Ma added that she hoped certain parts of immigration that benefit the US economy would be kept intact.
“The practical solution one would hope for is that the new administration creates the perception of being tough on immigration but for the part of immigration that’s actually important for the US economy, that can still be preserved,” Ma said.
"I think there was a fundamental destruction of trust that came with high inflation. People were working hard, but felt like they were getting left behind."
Hays asked Professor Rajan what effect he thought AI would have on the job market—specifically, service sector jobs in India.
“I think anyone who says they know how AI will develop and how soon is speculating. I think the jury is still out,” Rajan said. “Almost surely, AI will do what every new technology does—it’ll displace a few people, it’ll help people do some jobs more easily, and it will create new jobs. We don’t know how much of each.”
Rajan gave a couple examples of the positive effect AI technology has had, including on his own research: In a recent study he was conducting, Rajan said he was able to sift through thousands of annual shareholders reports using ChatGPT4, something he would never have been able to do before. Rajan also mentioned that coding has become cheaper and more accessible because of AI.
Professor Ma similarly was skeptical that AI would displace human workers in a dramatic way.
Noting the shortcomings of AI, Ma said, “The bottleneck with AI is not the standalone tasks, but tasks that involve coordination, negotiating with people, and contextual information.”
“For the issue of displacement,” Ma continued, “look at previous waves of new technology. When machines were introduced to agriculture, people moved to manufacturing, and when manufacturing became automated, we moved on to services, and now when services become automated, we’ll move on to something else.”
Ma concluded, “It’s possible that the perception of the risk of displacement is always stronger than what ends up happening. But it probably matters what types of people are displaced.”
"When machines were introduced to agriculture, people moved to manufacturing, and when manufacturing became automated, we moved on to services, and now when services become automated, we'll move on to something else."
Looking toward an anticipated decision point later in December,* Hays concluded the discussion by asking panelists if they thought the Fed would cut interest rates again before the new administration took over and what the Fed’s future strategy may be.
“The amount of investment that’s going on even at high interest rates is substantial,” Professor Kroszner said. “I think that’s helpful to the Fed. This optimism about AI has helped make the landing much softer than it otherwise would be.”
“I think the Fed will be likely to cut at the next meeting and then hold for a bit,” Kroszner continued, “because they will still be in a restrictive stance.”
Professor Rajan disputed the idea that the current interest rate levels were actually restrictive.
“It’s still a strong economy,” Professor Rajan said. “Pretty much everybody who wants a job has a job. Spending is strong. Profitability is reasonable for corporations. So what is the Fed restricting? Housing hasn’t come back up. That has been restricted. But if you look at auto purchases, it’s not bad. Firms aren’t laying off. They aren’t hiring as much as they used to, but they aren’t laying as much as one would expect if things were really restrictive.”
“If I were in that seat, I would say we need to see more. I would not cut rates. Because I would not be convinced that we are strongly restrictive at this point,” Rajan concluded.
Professor Ma noted that the relative freedom with which the Fed operates, as well as its limited access to foreign intelligence, makes it difficult to predict its actions in the current geopolitical climate.
“If the Fed operates with variable lags, it can make their jobs much more difficult with policy uncertainty and geopolitical uncertainty. They are one agency with not so many clear rules of how they’re supposed to operate. So that opens up space for intervention or political pressure, and we will see how that plays out in the incoming administration,” Ma said.
*The Federal Reserve cut interest rates by a quarter point on December 18, 2024.
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