How Will Big Tech and Trade Affect the US Economy in 2020?

Madhav Rajan: Today we look forward to hearing what’s on the minds of our incredible set of panelists so I’m gonna introduce each of them to you, starting with Austan.

Our first panelist is Austan Goolsbee, who is the Robert Gwinn Professor of Economics at Chicago Booth. Austan, of course, served in Washington as chairman of the Council of Economic Advisers and a member of the president’s cabinet. Before Washington, his research earned him recognition as a Fulbright scholar and a Sloan fellow. And he has been named one of the hundred global leaders of tomorrow by the World Economic Forum. Austan serves on the economic advisory panel to the Federal Reserve Bank of New York and has also served previously on the panel of economic advisors to the Congressional Budget office, the US Census Advisory Commission and as a consultant for internet policy to the Antitrust Division of the Department of Justice. And, of course, in 2009 he was voted DC’s funniest celebrity. So please welcome Austan for returning to EO this year.

(applause)

So I’m gonna go to the left here to Randy Kroszner, who’s the Norman R. Bobins Professor of Economics and deputy dean for Executive Programs at Booth. Randy served as a governor of the Federal Reserve System from March 2006 to January 2009, where he chaired the Committee on Supervision and Regulation of Banking Institutions and the Committee on Consumer and Community Affairs. He currently chairs the Federal Research Advisory Committee to the US Treasury’s Office of Financial Research.

So Randy took a leading role in developing responses to the financial crisis and new initiatives to improve consumer protection and disclosure, including roles related to home mortgages and credit cards. Randy also served in the White House as a member of the president’s Council of Economic Advisers from 2001 to 2003. Randy is a frequent commentator to the international media and provides advice to financial institutions, government organizations and central banks around the world. Please welcome Randy Kroszner. Thank you for being here. (applause)

And our third panelist, Raghuram Rajan, who is the Katherine Dusak Miller Distinguished Service Professor at Chicago Booth. Raghu served as the 23rd Governor of the Reserve Bank of India from September 2013 to September 2016. And between 2003 and 2006, he was chief economist and director of research at the IMF.

So Raghu’s research interests are in banking, corporate finance, and economic development—and, in particular, the role that finance played in those. Raghu’s latest book, The Third Pillar: How Markets and the State Leave Communities Behind, came out in 2019 and was a finalist for the Financial Times’ Best Business Book of the Year award. Please thank Raghu for being with us today.

(applause)

And finally, we are very pleased to have as our moderator Kathleen Hays, global economics and policy editor for Bloomberg Television and Radio. Kathleen has covered the US economy and the federal reserve for the past 30 years now. And for the past few years she has broadened her coverage to include the economies of Central Asia and has been doing a lot of work there and traveling to Japan quite frequently. Hopefully, not on private jets.

Kathleen Hays: Ooh, ooh, ooh, I wish.

Madhav Rajan: Sorry, little Nissan joke there.

(Hays laughing)

So I want to thank Kathleen for moderating the panel today, and please take it away, Kathleen.

Kathleen Hays: Thank you. (applause)

And thank you for inviting me back. As I learned last year, this is not only an informative event with value-added insights, it’s also really fun, and I’ve always been a big fan of saying, “You can have fun with serious stuff.” So it’s great to be back with the dream team, as they were just referred to. And I just say, when I listen to him talking aboutall these new programs, all this makes me want to go back to school, doesn’t it? It would be so much fun. So maybe this is the next best thing.

And this year, and it’s only my second year, don’t make it sound like we’ve been doing this for 20 years and here’s what we’re doing now. We’re gonna start with a look at tech. And there’s so many aspects of this we can talk about, but we’re gonna really focus a lot on big tech, where we’re going, especially what it means for the financial system. Then we’re gonna move a little bit more broadly into our economic outlook.

But one of the reasons we want to talk about this is more and more, over time, the developments in tech—in big tech, small tech, whatever it is, US, China, doesn’t matter where you go—is having more and more of a potential impact or actual impact on where the economy is going.

So Randy, I want to start with you. The nonbank system, big tech, moving more and more into the banking system. Now in some ways, I think, particularly starting in the financial crisis, it was pretty clear that a lot of these big banks are ripe for disruption. So where are we now? Is this a risk or is this something that is inevitably gonna happen and maybe even make the financial system more efficient?

Randall Kroszner: There are a lot of challenges and potential risks, but what’s kind of amusing is that many of my friends in the banking community say, well, thank God for your former colleagues, it’s bank regulation that keeps those big tech firms out because nobody wants to be regulated as a commercial bank. And so it’s much more difficult for entry to come in here than it is, for example, in China, where you have some of the tech firms becoming some of the largest financial institutions there. Because in some sense it’s very natural if you’re on your mobile phone and you’re thinking of buying some product, Alibaba, Tencent, someone else, and they know everything about you and so they know what your appropriate interest rate would be and so they can just offer it to you right there. If you want to buy a refrigerator, you click one button to pay full price now or you just click another button and pay over the next few years.

That’s a totally natural combination of things that in the US and actually much of Western Europe, there’s a lot of regulation that makes that very difficult. Now part of the motivation for that is a concern about, now we talk about big tech, but, of course, there had been a lot of discussion of the big banks and big finance sort of taking things over. We have a long history in the United States going back to the Jacksonians and the populous sort of rising up against the banking and financial system, in particular, killing the, what was the prototype for the, what’s called the second bank of the United States, which is a prototype for the Fed.

And so it’s interesting that we now see tech kind of taking on that big tech role. People are very concerned about it, but in some sense there’s an unintended piece here that banking regulation is keeping some of them out, some of the tech players out, but certainly we see that in other areas that don’t have that a lot of entry.

Kathleen Hays: OK, well, we’re getting Raghu’s mike straightened out. So meanwhile, we’re gonna let Austan jump in on this. What do you think? When you step back and look at the economy and the interaction of big banks and credit and all this, do you see this as a big trend when you’re looking at—

Austan Goolsbee: For sure, for sure, it’s a huge trend, not just in finance, in many things. I think that the lesson of China and the financial payment system, it’s kind of a sobering lesson. I think there’s a major component of people who feel good that either because of antitrust or because of financial regulation, we’ve kept that consolidation of the biggest retailer, the biggest payment system and the private space all being one in the same. I think it’s natural that they will find inefficiencies in the current financial system. And improve them, and that part is good.

I think the fintech universe is maybe less concerned about financial stability as traditional financial institutions so that’s a little more worrisome, I think. And, I think in many of these if not a natural monopoly, they’re big economies of scale so it probably will be that once this system rolls out it will look like the Chinese system or others in that there will be a small number of very big players, and then fintech will be in exactly the same hot water and messy space that all the other big tech firms are.

Where we’re looking, we can’t help but say, look at how much power they have and should they be broken up? And how can they be controlled? And I think we’ll have a bunch of important decisions to be made it’s just they’re just a couple of years away.

Kathleen Hays: But I think that’s one of the big concerns, right? Because we know, so Raghu, you jump on this—you can all jump in on it—that the government, understandably, the congress, has a hard time not bailing out any kind of financial firm. I don’t care if they’re nonbank, fintech, whatever, that seems to me the concern that they’re saying, yeah, they might take on more risk and they kind of evade the rules. But are we just setting ourselves up for another, some kind of access and China’s had plenty of those, that we’re gonna have to pay for?

Raghuram Rajan: Yeah, that’s a very big worry. I think this is a new beast. It brings together data. It brings together networks. And, of course, that together with all the other stuff they’re doing, creates an enormous amount of power. That’s what Austan was talking about. We can get to that but on the fintech side, I think the big concern is many aspects of fintech are trying to bring value to a place where there are economic rents. And one of the concerns is when the rents dissipate, are they still gonna be able to make money? Or are they gonna engage in this ruthless competition, which drives profits down? In which case, you may get the excesses that you’re talking about.

Let me give you an example. There are hundreds of people trying to get into remittance because—remittances, where you see Western Union charging an arm and a leg for transferring money across border. Well, we’ll get it there. We’ll charge half the price, and we’ll still be plenty rich. The problem is once you get in there, Western Union is gonna cut its prices, and you’re gonna compete with five other people doing exactly the same thing. So they’re not thinking beyond that first step when they disrupt industry and then they have to compete for new business.

And this is where I think I want to believe the marriage of big banks with fintech would be better than fintech alone or big banks alone. The problem, of course, is there are cultures which don’t necessarily mesh, and so they don’t necessarily come up with the right products when you get fintech and the banks.

But the banks that can figure out, here are some real problems we haven’t succeeded in dealing with, when we bring fintech to this problem, we can reduce transaction costs tremendously .We can make it much easier for the customer, therefore, there’s big value here. Those are the guys who are really gonna benefit from the banking side on doing this and, of course, there will be fintech, who will figure it out on the other side.

Austan Goolsbee: You know the thing is, like with the accelerated attention paid to artificial intelligence, there are examples of where A.I. and fintech are improving things a lot. But thus far, it’s still much more promise than has been reality. And if you go look at Bitcoin, for example, it’s not even reducing the transaction fees. The transaction fees are actually still enormously large and in my favorite example, they headed the big Bitcoin convention and they refused to accept bitcoin as payment for the convention because they said the fees are too high. They would charge 25 percent.

So I still think we’re a few years away. It could be a big thing, but I still think we’re a few years away.

Randall Kroszner: Yeah, and I think exactly as Raghu was saying, so far the major financial institutions have not been able to take advantage of their natural advantages. So the large banks know an enormous amount about you. If you have your mortgage with them, you have your credit card with them. You have your bank account with them. So in some sense, that’s the data that all the fintechs would love to have, but the banks get this naturally in doing these other functions. They haven’t been able to marshal that to be able to say, ah, and here’s the right product, or here’s the thing that we should be offering to a particular customer, and I’ve talked to a lot of the banks and boards about this because they want to get there, but their cultures just don’t mesh.

So what they do is they hire all these people with like plaid shirts and wooly caps and long beards and they get on the elevator with Jaime Dimon and they can’t stand being on the elevator with Jaime Dimon because he’s there in his suit, kind of dressed like we are, and so they go into the office, they do that for a year or two, then they leave and they do their own startup and sell that to Jaime Dimon.

But the big banks haven’t been able to take advantage of that yet. It’s really quite amazing. Their IT systems are so poorly structured that they can’t do this. And, actually, part of this is the long legs of banking venture relation. I think I’ve mentioned to this group before, we start these completely crazy laws that made it very difficult for banks to branch and so especially in the old days when you didn’t have markets where you can diversify, the only way you can try to diversify is geographically. So it’s like someone read a book on finance and said, OK, how can we make the banks as risky as possible, make them put all their eggs in one basket?

Well, we eventually got rid of these laws, and so all of our major financial institutions have become in some sense like Frankenstein’s monsters of these mergers—which, I shouldn’t call them Frankenstein monsters: it makes sense to put them all together. But one of the things that I think the regulators didn’t think about—this was long before I was at the Fed—was we should’ve required that they integrate their IT systems and said, that’s great, you’re making a more efficient structure, didn’t make sense to have 20,000 banks in the United States. We still have about 5- or 6,000 banks in the United States, which is a lot. What they should have done is say, that’s great, merge, but we won’t let you do the next major merger until you’ve integrated your IT systems. And we haven’t done that, and so they’re still struggling. And I also think that sets up for a lot of potential cyber risks at these organizations.

Raghuram Rajan: There’s another aspect of legal risk, especially with the A.I. We heard Dean Rajan talk about [Chicago Booth’s] Sendhil’s [Mullainathan] work, which indicated bias in some of the A.I. systems. Well, one of the worries for big banks is that when you actually run some of these systems, there is bias that you didn’t figure out. There’s some proxy for race or there’s some proxy for gender, which doesn’t show up, but once you use it, you tend to bias your lending. And then you get the lawsuits and then you have so much liability. These fintechs don’t have to worry about so much, that’s one.

Second concern I have about fintech is we haven’t been through a down cycle yet, and have we optimized for just the up cycle and not optimized for the down cycle, and what happens then? Can they actually collect the money when people’s incomes no longer are sufficient to make payments. So that’s another thing we should be worried about.

Regulators worry; fintech less so.

Austan Goolsbee: The thing in the financial sector is it’s fundamentally about trust in your financial institutions. That’s the strength of any bank is it’s reputation, and the payment systems now, it’s gone bonkers. If you’ve got a teenage kid, they will tell you, we want you on Venmo. So I start looking at Venmo, and every payment you make is public knowledge. It’s a social network. And there is among young people a level of trust in these startup companies, or maybe they haven’t thought about the issues of distrust. Should they be distrustful? If there is a downturn, I wonder if a whole generation of people are gonna discover, wait, what happened to my money? What do you mean?

Kathleen Hays: Yeah, but everybody’s too trustful in tech. Look at the big, they run together in my head. Just in the last week, there was a huge hack in the cloud. Big, big companies have been just, you know, everything taken over. I don’t know. Clouds are huge. People keep going there, and I wonder if some day, I’m gonna be extreme here, we’re gonna go back to everybody having servers and not having their stuff up there because it just not as safe as it looks.

I want to quickly say to the audience—and you’re such a lovely audience. When I walked in I felt I was going to a football game or something, so exciting, so buzzy.

Your sending out questions, I’m writing them down because I want to get through a few things. As the moderator,

I can selfishly make sure I get to ask questions I want to hear answered, but we’re gonna start bringing in your questions, and we have plenty of time to run through a lot of them.

And another thing I want to ask you guys about, in the academic world, I love things like this, where you have someone like Mark Carney. He’s suave. He’s smart. He’s been the head of the Bank of England. He’s leaving, saying, giving this kind of surprising speech, was it three months ago, where he talked about digital currency, how they need to be developed. Forget the dollar, this is gonna be more secure, more something. And then I love that just a few days ago, Gita Gopinath—she’s now working for Christine Lagarde, very, very prominently—

Randall Kroszner: She’s a former Booth facu—.

Austan Goolsbee: Started her career at Booth. That’s right.

Kathleen Hays: Yes, yes, yes, yes. In an oped in the Financial Times: Oh, come on, central banks develop digital currencies—are you kidding? Dollars, all kinds of reasons why it’s the world’s reserve currency. So I want you to start on this, Raghu. Where do you stand on this question?

Raghuram Rajan: So I think she was reacting to the notion that somehow others will develop a digital currency which will take over the role of the dollar. And I think that may have been the thrust of Mark’s speech, though I’ve only read reports of it. And I think she was coming at it from the perspective of her research, which is the dollar is really dominant. There’s a lot of pricing of exports in the dollar. One of the reasons people trust the dollar, and 60 percent of pretty much every transaction of finance is in dollars, is because it is a deep open market, and the US historically, until very recently, didn’t try to use finance as a means of pressurizing countries.

One of the concerns is that this politicization of the dollar now may, in fact, turn people to turn away. One example is Russia, which has moved away from holding its reserve in dollars, at least to the extent that it did. And you can imagine that could expand if the dollar’s used as a weapon.

But a broader point was more about the view that the dollar would be replaced. And I don’t think we need to go there to argue that digital currencies could have a strong future. The question is, will it be central banks that will issue them or will it be a Libra or something like that? Again, it’s the power of networks. It’s the power of information. One of the big concerns that central banks have about Libra is first, this is not a company that is well known for protecting your information. It’s also a huge monopoly in its own right. So add to it a payments monopoly and what else can that lead to? That’s certainly a concern across the world. And certainly from the perspective of small countries, a very big fear is Libra will displace their own currencies because it’s so much easier to use and if you can get in and out easily, why would you hold a depreciating currency in a small sort of developing country rather move into the Libra?

So these are concerns that need to be addressed. I think one of the big concerns Libra’s always had is they have to persuade the regulators, and I have to say right now the regulators have not yet been persuaded.

Austan Goolsbee: And look, just think about every country of the world. I kind of don’t understand how or what the circumstance Facebook would want to get into this, in that any illegal activity, if you go look at Bitcoin, a vast chunk of the transactions are obviously . . . they’re not good. We had a woman came and gave a paper that analyzed the whole blockchain as of, I think her data went up to 2017 or something, and she said, well, 25 percent of these transactions are money laundering and then the audience, we were like, how do you know that? And she said, well, there are people coming to or coming from the site, moneylaundering.com, launderyourbitcoin.com. I was like, what?

So imagine now Libra becomes the big currency, and somebody makes a payment, somebody buys whatever, sends you a payment for a terrorist action, or I buy drugs. Every country of the world is gonna view that as a massive threat to their sovereignty, and they’re not wrong, and they’re gonna try to hold Facebook accountable in their country for facilitating criminal transactions. And they’re not wrong to do that. They’re gonna say Facebook should go put some regulator and govern what’s happening in the transactions the way banks do, and then once that happens, they’re in the regulated world.

Raghuram Rajan: Austan, just on that point. It is true that Bitcoin would be used largely for laundering, otherwise the transaction costs are not worth it. If you want to make a payment for your coffee, you’re not gonna use bitcoin precisely because of the cost that you pointed out. But, it is possible that something like Libra could be so easy to use that the vast majority of the transactions are legal and some small minority are illegal, as true of money also. But you’re absolutely right that they have a huge amount of reputational risk, and they will have to convince central bankers, one, that they will be able to control the loyal customer problem, but also, I guess, that they will not misuse the information and the networks that they obtain as a result.

Austan Goolsbee: But you know they will misuse it.

Randall Kroszner: But this is the interesting thing. They really know their customer. (laughing) There’s nobody else who knows their customer like some of these big tech firms.

But it’s very interesting to see this sort of back and forth about whether central banks should be issuing a currency or not digitally. And there’s been a lot of discussion about whether China’s gonna do that because the Chinese central bank and the Chinese system works rather centrally, and so if they want to eliminate currency and if people object, the objectors are not gonna get very far. They will be able to execute on that. And it’s gonna be very interesting to see if they do something like this ’cause, again, it could be a very interesting test case for how things would operate. Because obviously it would be all centrally controlled. Every single transaction would be monitored. Many of the transactions are already monitored through the large fintech firms, but this would make it complete, and in some sense, it’s very interesting to see the different models around the world.

You have GDPR [General Data Protection Regulation] in Europe, which is a lot of data protection, privacy issues, so a lot of fragmentation of data. China’s the opposite, where everything kind of goes into the central government’s computer and they can monitor everything. And we’re sort of somewhere in between.

And it’s gonna be very interesting to see how that develops. Is that something that’s gonna be a strength for China? Is it gonna be difficult for the West to compete with? Or is it something that’s gonna lead to more problems because people become outraged in China that the extent of this monitoring and rise up against it?

I think that’s one of the big political economy questions that come out of these big tech issues.

Kathleen Hays: OK, I want to just put a very broad question on the table in terms of technology, innovations. For each one of you, what’s the biggest plus and minus? Because it’s great to see things, many things disrupted. They do get more efficient, new things happen, and at the same time, some people read about some concentration developing in the economy. Competition, innovation, equality. What, for each one of you, is the big question right now?

Raghuram Rajan: For me it’s what do we do about the jobs that are lost due to automation? That’s gonna continue. That’s gonna possibly going to increase. How do we find ways in which people can rediscover good work? And, I think the first thing is, obviously, as people lose jobs and wages fall, the market will react to some extent. But the question is, can we prepare them better for the kinds of jobs that are emerging so that some combination of tech and human will emerge again to do a better job than tech alone or human alone? And I don’t think we’re thinking very hard about it.

We throw out education as something that’s necessary, but what kind of education? And how do you get education to the places that are being left behind? What do we do in those places? What should those places do, and how do we facilitate their doing it? We haven’t had that conversation. And I think this is the central conversation that we should be having because this is a source of political fracture in a number of industrial countries, and if the reaction to that political fracture is to actually put enormous constraints on markets, on corporations, etc., we will eliminate our ability to actually react to the problem.

Randall Kroszner: What’s interesting is I think it’s more the fear of that than the actuality of that because if you look over the . . . we just got the jobs report this morning, and it’s astonishing that we had basically more than 20 million jobs created over the last decade. The unemployment rate of 3.5 percent, and what’s interesting is that there’s been more job growth at the low-skilled sector. The reduction of the unemployment rate has been greater there. The growth of jobs has been greater there. So we actually haven’t seen this yet, but I think it’s an issue because people fear that. But it actually hasn’t happened yet.

Raghuram Rajan: Well, what has happened is the jobs that paid at the middle level have disappeared, and you’re getting many more jobs at the lower level and some jobs at the upper level, but there’s a gap in between. Now whether those were protected by strong unions and there were rents there or they were truly well-paid jobs, the reality is the middle is much thinner than it used to be, and this is across industrial countries. So today, to get one of those really good jobs, the leap you have to make in terms of your skilling, your education, is much higher than it used to be in the past. Where with a high-school job, you get a good job at GM, and that’s, you’re made for life.

So I think you’re absolutely right. We’re talking about jobs in a period where unemployment is really, really low, and so we need to ask, what jobs are we talking about? Well, not the kind of jobs which put an earpiece in your ear and tell you which bin to go to next to pick up the stuff that you put together and pack it and send for Amazon.

Austan Goolsbee: And not to add a potentially depressing component to that, if the economy’s doing well and the unemployment rate is this low and people are already so angry about wages and immigration and blah, blah, blah, imagine what happens during the next recession. It seems like this could be a dark path in a way—

Randall Kroszner: And I see this in the UK. Because the UK has near record-low unemployment, a very high labor force participation, and part of the Brexit support is exactly on these labor issues, where it’s sort of hard to see . . . It’s very hard to make an argument that people are losing out on their jobs because of competition from immigrants because the unemployment rate is so low and labor-force participation is high. So I think that’s one of the big things that will come with the next downturn. Not just what will happen with the risk models and fintech, but exactly as Austan said, if people are upset already when the unemployment rate is at record low in so many countries, what’s gonna happen when the unemployment rate goes up?

Kathleen Hays: So let’s look at what’s gonna happen this year because one of the things that’s interesting about the job’s report this morning, the payroll growth did slow down. It was only 145,000 new jobs, down from 266,000. That can be kind of volatile.

But I think one of the most interesting numbers was our average hourly earnings, basically a measure of wages, because it was only up 2.9 percent year over year, and it’s never gotten that high since the Great Recession. It was up to maybe 3.5 percent year over year one month, but it used to be a lot faster, and that’s with not only the U-3 unemployment rate staying at a 50-year low but the U-6, a newer number, that brings in people working part time ’cause they can’t find another job. It got to an all-time low, and then in an environment like this, wages can’t rise.

Where are we, guys? What’s happening in the year ahead? Let’s start with that aspect of it. The labor market, where it’s going. And, is it finally gonna get tight enough for people to start making some more money—because they’re getting more jobs—and put us on another course, or a faster course?

Go ahead, Austan.

(audience chuckles)

Randall Kroszner: Make a joke!

Austan Goolsbee: Look, I think if you’re of the view that you think the job market’s about to get really hot and wages are gonna start going upward, you’re in the camp of the inflation hawks, and the problem there is they’ve cried wolf for 9, 10 straight years. In 2010, they said we’re about to unleash the wage price inflation spiral, and in 11, to be 12, 13, 14, etc. Now they’re saying, look, now it’s 3.5 percent. It’s about to go up, and that might be true, but I guess I just find it implausible just because it’s been wrong so many times before.

I think in the jobs numbers today is just a microcosm of this weird thing, which is we basically have two economies. Anything that deals with the consumer and the job market looks excellent. And anything that’s on business, investment, or manufacturing, manufacturing’s actually been in decline for several months. Manufacturing jobs were down 12,000 in the latest report. We’re down a bunch, and that’s why I say that’s in microcosm. And, overall GDP growth has been mediocre and slow, so what we can’t figure out is, which of these is right? Is one of those a leading indicator of the other one, but we just don’t know which. Am I in front of the line? No, you’re in front. We’re in a circle.

Raghuram Rajan: So what’s difficult to understand is you get into a room with businesspeople and you ask them, how’s it hiring? They say impossible. I can’t find the right people. I’m willing to pay. I’m paying a lot, and I still can’t find people. This is a very tight labor market. So that would say the old forces that we thought about, higher wages, should show up some time. We should see greater inflation, but there are many steps here which have to play out. One, your hiring at the entry level may not translate into an across-the-board wage hike, especially if a lot of older people at higher salaries are retiring and your average wages don’t move up that much.

That used to be the Japanese phenomenon and with the retirement of the baby boomers, it’s possibly something that’s happening in the US also. So looking at the details of the labor force in your firm is actually very important.

The other thing that seems to be happening is the usual, a lot more automation when you find people hard to find. A lot more up training within the company of entry-level people to do a higher jobs when you find you can’t find those people. So companies are reacting. So as yet it doesn’t seem to show up in generalized inflation of the kind we saw in the past. Some of that is possibly also because expectations are reasonably anchored. People aren’t saying it’s gonna be 10 percent higher next year. They’re not demanding that kind of wage increase.

However, I think the hawks are wrong. It’s not gonna happen tomorrow that we suddenly have an outburst of inflation, but at the same time the doves are also wrong in the sense that this is never gonna happen. I think what we’ll see is a steady increase in the cyclical component of inflation, even though some of the longer-term trends, especially stemming from population, go the other way. So we will see a steady rise in inflation, if monetary policy stays on hold.

But this is where the Fed has been thumping on the table and saying, we don’t care if it goes up a little higher. We’re willing to watch it. We’re not gonna be preemptive. So interest rate increases for the foreseeable future until we see inflation really pick up are off the table.

Kathleen Hays: So Randy, put yourself back at 20th and Constitution, and you’re sitting at the table with the other FOMC members, where would you be right now? I think a lot of them . . . you guys follow the dots? The Fed every three months updates its view of the GDP, unemployment, and inflation, and last dots were there were 13 out of 17 who see no rate changes this year. Only three that do, maybe one, where would Randy Kroszner be right now? Where do you see the economy going, particularly when you look at what we saw in the jobs report from December?

Randall Kroszner: I feel like saying I am not a dot. Like, I am not a crook; I am not a dot. So, actually, I wanted to build on one of the things that Raghu said because I think the data on the wage growth, we have to adjust it because what he was saying was one part of it, that you have a lot of retirements of relatively high-wage people, and also the other piece of it is what I was saying that you’ve had this disproportionate growth in the lower-skilled sector, so when you look at the average, that’s gonna understate where wage growth is. So it actually is a bit higher. The San Francisco Fed has been doing some adjustments of this. It’s not dramatically higher, but it’s not quite as low as it seems. And the Fed certainly looks at those kinds of things. They’re thinking about: Where are the wage trends? Where’s the pressure?

I think the thing that’s very much weighing on the dots and keeping them low is the specter of Japan. Because Japan got into a very difficult situation, and is still in that difficult situation, where they acted a little bit too quickly when inflation started to come up because they were in a deflation situation and came up basically to zero and then they started raising rates because they said, we’re worried that the tight markets, tight labor markets in our growth is gonna lead to high inflation. Well, that lead to a situation that people no longer believe the central bank was very credible and very committed to fighting inflation. And despite incredible amounts of asset purchases, they now have a central bank balance sheet more than 100 percent of GDP. Despite Abe, when he was elected, making this super salient publicly, and this is one of the three arrows of Abenomics, which is to fight deflation, despite putting in someone whose whole reputation was that the central bank could do more and had no limit and be able to fight deflation, they still haven’t been able to get anywhere near 2 percent.

So I think the Fed is very worried about getting ahead of things and is worried that since they can barely get to 2 percent even in this situation, they’re gonna hold back. And I think that’s from their risk-management point of view that weighs on them very heavily, and I think that’s a perfectly reasonable thing that’s gonna leave them waiting for the inflation to come. Also, they’re doing a bigger rethink of their fundamental model, and so they’ve had, since 2012, a 2 percent inflation target. Well, they’ve been under it for every year for the last seven years since they’ve had it, and so probably the new regime will say we’ve been under it for seven years, we’ll be comfortable for being over it for seven years or get the average to 2 percent. And so that again is trying to get people to expect, ah, the Fed is not gonna stop when they get to two and so that you don’t get into a Japan-like situation.

Kathleen Hays: Even Eric Rosengren, Boston Fed, who’s pretty hawkish, I think, signaled the willingness to see the inflation rate in range, etc. So I want to bring in a very simple, smart audience question, you know, because we’re looking about where we’re going. And the longer the expansion gets, the more people think, gee, are we going to have a recession?

Now I look out and I don’t really see any big recession risk right now, but Austan, I know you’re worried about manufacturing. We’re talking about the Fed, are you sitting there thinking, yeah, yeah, yeah, whatever, we need more, but you’re worried about manufacturing being weak? You’re worried about those other things? Is that somehow where a recession’s gonna come from? Or are we gonna get like Australia? They haven’t had two quarters of negative growth in 30 years.

Austan Goolsbee: I think that these comments are all spot on, and the Fed, it was barely a year ago . . . You remember our discussion last year was coming out the previous December, the Fed was saying they were confident they were gonna raise rates four times in 2019, and some people were saying, they’re being conservative. They’re gonna raise it six times in 2019. And instead, we end up cutting rates because this same dynamic that it’s really hard to get out of. You have a financial crisis. It’s a struggle. You gotta change. You’ve got asset bubbles pop. You gotta change the focus of what they’re doing. My advice to you is: don’t get overoptimistic.

It again sounds like people are, we made it through that risk of recession, now it’s not there. I still think if you look at the 15 recessions or 14, depends how you want to count them, post–World War II in the United States, Fed interest rate raising or keeping high is by far the biggest cause of recession. It’s about two-thirds of the recessions. Popping asset bubbles is the No. 2 cause, and rising oil prices is the third. Now, rising oil prices is not as big of a risk, but of the two major causes, you at least gotta say there’s a yellow light there. And that the last five years of policy decision and stated understanding of the economy hasn’t been that great for the Fed’s model. It’s good that they’re reevaluating the model because the model’s been wrong 37 quarters in a row in the same direction the same way.

Kathleen Hays: Some people have been arguing lately, here and there, that it’s been wrong to always say we’ve got to keep the expansion going. We’re gonna avoid recession. At some point, recessions are healthy because they clean out excesses. They clean out things that have developed that shouldn’t be there.

Oh, look at Austan, you don’t agree.

Austan Goolsbee: I would just say, I’ll take the jury trial on that one. Your advertisement is, let’s embrace a recession. It’s gonna be good for us.

Raghuram Rajan: Right. I think the better way of saying that is not so much to create a recession but to be wary that as the expansion proceeds, the risk builds up. Now, the two traditional risks were inflation. As the labor market gets tight, inflation pops up. We just talked about it. Not that big a risk, and it’s probably gonna be more gentle than in the past. The second big risk is not so much asset bubbles as credit, because that’s the greater danger we’ve seen. And credit is getting a little iffy. Periods of extended liquidity, especially combined with a stronger sense that the Fed is there to back you up if things go south, which has been reinforced this year after the Fed’s about turn in December, means people are willing to take more risks.

And where are the risks? You see it in private equity. You see it in a variety of other places that credit has expanded. A lot of people sitting in Baa instruments. What if it gets downgraded because of a downturn in the economy? This will be a lot of crowded trades around there. Lots of pension funds and insurance companies have gone out in the risk spectrum because they’re searching for yield. A lot of this is predicated on interest rates remaining low.

So to the extent the Fed stays put, not as much of a worry. To the extent that the Fed is forced in some way to raise interest rates, perhaps more of a worry. Worry for term spreads, for credit spreads, all those could expand if they tightened a lot, and higher interest rates would create that asset bubble collapse.

So the reason I think at least some of us on this panel are a little more sanguine is we don’t really see that pop up in interest rates any time soon. It’s not a reason not to be worried that the fragilities are building up.

Kathleen Hays: OK, I want to just throw out a couple more things on the table and I’m gonna continue to start working in more of our lovely audience questions. We’ve had from, gosh, what’s today? It’s Friday, just over a week ago, we’ve had all of a sudden a huge increase in geopolitical risk, and one of these that brought it back to mind was Raghu just mentioning oil prices aren’t going to too high, and we have interviewed tons of people last week, strategists, economists, what the risk is. Oh well, as long as oil, and actually there’s tons of supplies, so supposedly very hard for oil to move above 70 bucks a barrel right now. Does this change affect the economic outlook for this year at all?

Austan Goolsbee: I don’t think it does. Let me just say the reason I said that about oil prices is the danger. Three things happened. One, we became a huge oil producer. So if the price of oil goes up, there will at least be some significant part of the US economy and manufacturing economy that benefits, not goes down. Prices haven’t moved that much, and the US economy has gotten a lot more energy-efficient per dollar of GDP than they were in the ’70s and ’80s. So it could be tumultuous in oil markets if things go a certain way, but I just don’t think that that has the same economic impact that it used to.

Raghuram Rajan: Well, I differ from you a little bit here because I think sentiment matters. And, one of the things the Iranians showed us earlier last year was that they could essentially target all of Saudi Arabia’s oil facilities. What happened that time is it didn’t make a big difference to the oil market because there’s a lot spare capacity, which came back on at that time. But the repairs are still going on because they were pinpoint in how they targeted the Saudi Arabian facilities.

I can’t believe that the Iranian reaction to what happened to their general, it has ended. I have to believe there is another shoe or whatever waiting to drop, and there will be more back and forth. I hope that it is mild. It doesn’t provoke a reaction from the United States. The United States doesn’t feel it needs to react, but I think geopolitical risk is certainly on the calendar and I’m not sure there’s that much spare capacity in the oil markets if the Saudi facilities or the UAE facilities are targeted in a very careful way.

That’s one. the other thing I think we should pay attention to is trade risks. That we’re, again, banking a lot on China and the US coming together with this interim deal. My worry is, first, it’s taking a long time to iron it out because it’s very complex to get even to first base. But there’s a lot more to be done here, and how does this play out? How does the trade frictions with Europe play out? We have a president who is not very predictable. And my worry is that this could be a source of risk as we go on into the next year, into this year.

(applause)

Randall Kroszner: But trade has actually had very little impact, very little negative impact on the US. It’s a small part of GDP. Even with these high-sounding tariffs on China, that’s just trivial for the overall economy. It’s very painful in the particular areas that it’s hitting, so I don’t want to suggest otherwise. But overall, it’s had very little impact. The CBO has estimated very small impact on GDP of all these trade issues. So I think it has much bigger impact than China. I think that’s why the president picks that because it’s something he feels he can put more pain on an opponent than on ourselves.

But I very much agree that I don’t think this is over. It’s not even clear that the deal’s gonna be signed on the 15th because we now hear the president say, well, maybe it’s 15th, or soon after.

Austan Goolsbee: And the deal is trivial.

Randall Kroszner: It’s on a few soybeans and a few cars. That really isn’t gonna matter. It’s not a hill of soybeans. It’s not gonna matter all that much. Whether we have it or not, it’s not gonna matter very much for US GDP. But the issue is gonna continue to be there. And I think the issue gets back to something that Raghu had said about sentiment, and I think all of these things are . . . whether it’s geopolitical risk, the oil markets, or other things, it’s about sentiments because there’s something that we don’t fully understand about why investment has been so low. Because you’ve had this astonishing recovery. You’ve had over a very long period of time, in a large number of countries, you’ve had unemployment rates at very low levels. You’ve had promises from central banks to keep interest rates low for an extended period of time, and they have, and many central banks have made them negative. Well, that makes a lot of investment projects look pretty good when you’ve got negative interest rates, but no one’s taking the bait.

The concern had always been, well, we go negative, and all of these crazy investment projects come up because who can’t beat a negative hurdle rate?

Well, people aren’t doing that. And that’s something that I don’t fully understand, and I don’t know if you guys have a good explanation for that, but that’s a thing that worries me about the length of the recovery because as you know, last year, even though the stock market was down, I was relatively optimistic because I didn’t see in the fundamentals of the data things going south, and I think we had a reasonably good year.

But my concern is that, to sustain the recovery, at some point you’re gonna need investment. And if you have some of these risks, whether they are perceptions about trade—even if it’s not the actuality of trade but it’s perceptions about what’s going on in the Middle East—we have even less investment. I think it then becomes harder to maintain growth.

Kathleen Hays: What do you hear in China? You’ve been going to China a lot. That’s the other side of it. If this is a trivial phase-one deal, I get it. China can say, we showed them. We knew Trump would step back. I’m not convinced he’s really stepped back. I don’t know, with so much going on, if he’s really gonna push hard for phase two. And of course, many people say, ah, forget it. They won’t stop subsidizing their small- and medium-sized businesses. They can’t and they won’t. And when it comes to intellectual property, they’re never really gonna do anything there. At some point, does everybody just move on? And do we need it? Should we care? I mean, one of our audience questions is asking about how much of the weakness in manufacturing has been caused by the tariffs? Could there be other things that are causing manufacturing weakness, like not enough skilled manufacturing workers?

But I think that’s a decent question. Are we paying a price from this? You seem to think not so much. Is there a risk if we do let it go? Is there a risk if the president keeps pushing?

Raghuram Rajan: Well, more than trade, I think, is the issue of investment and global supply chains. What this conflict has done is thrown a lot of uncertainty. If I produce in China, will I be able to supply my factories in the US, because something might come in the way? Will I be forced to excise a Chinese company from my supply chain, because either we increase tariffs or because we ban that company from supplying?

So there’s a lot of uncertainty about this, and the natural reaction over time is, let me separate myself from China. Let me make sure that my supply chain goes through friendlier countries that are not gonna be influenced by this, and that same logic is playing out in China. Am I gonna have enormous exposure to the US market? Am I gonna buy a lot of chips from US companies when I know that ban can emerge? So they are, in a sense, trying to innovate to find their way out of this.

Expect in the next five years they will be far less dependent on some of the key US products that they buy today. China, by the way, has made enormous strides in innovation. So at some point, this has been a fact of history. When countries innovate themselves, they strengthen property rights because they want to protect their intellectual property, get innovation. China’s getting to that point, so I wouldn’t be too pessimistic about China protecting intellectual property, but what I would say is they’re much stronger competitors now in some areas. Not all, but in some areas than they used to be, and that’s the reason they’re protecting property. Not because they don’t want to steal anymore.

Kathleen Hays: Well, I think that’s a good point, actually. And they did even set up a couple of intellectual property courts, was it last year, and I don’t know how much—

Raghuram Rajan: They made enormous improvements there, enormous improvements.

Kathleen Hays: Well, let’s ask a bit about something from one of our minds out here in the audience and something that you touched on, Raghu, and that is more about, turning more toward Europe, and how that comes out globally. Brexit, something’s gonna happen now, Boris Johnson’s gonna get—

Randall Kroszner: You think so? (laughs)

Kathleen Hays: Something’s gonna go through. Poor Theresa May, nobody supported her. That’s a whole other story, and so Boris has stepped in and is going to build on all the progress she made. And there’s this question of trade with the US and Europe, and there’s this question of Germany still being pretty weak, and it’s in large part because China slowed down, because isn’t Germany the most export-dependent country in the world?

Randall Kroszner: One of the most, yeah.

Kathleen Hays: Even more than China. Exactly. So when we look at the outlook for this year, it’s a big story. It’s very important, but does it really affect the US economic outlook for the next year?

Randall Kroszner: Well, certainly, there are a lot of challenges in Europe, as you’re describing, and it’s no accident that the Europeans picked Christine Lagarde to be head of the ECB. She’s a person who’s been a finance minister. She was actually head of a law office here in Chicago. And the Bears are one of her favorite teams in the world, as I found out because I wasn’t following very closely when I was in Washington. When I first met her she said—I’m from Chicago—she said, “How are my Bears doing?” I said, “I don’t know.” (laughing) I’m in the middle of the financial crisis. I’m not worried about the Bears.

Austan Goolsbee: They were 2 and 14 at that moment.

Randall Kroszner: So was the economy.

(laughing)

- So she’s a finance minister. She’s head of the IMF, and as Raghu and others well know, people often joke that IMF stands for “It’s mostly fiscal,” and so they put someone who’s focused on fiscal policy as head of their monetary, the ECB, the monetary institution. And I think the reason for that is precisely because Europe is trying to get more fiscal easing from Germany. Germans, of course, didn’t want this, but the French and Macron’s been very skillful in getting people into the key EU positions that he wants to be credible to able to convince the Germans that they need to use fiscal policy because they’ve been running an extraordinarily tight policy. And in her first speech as ECB governor, she talked more about fiscal policy than she did about monetary policy. And the Germans are now actually talking about fiscal expansion, which just had been seen as complete anathema before.

So you’re gonna get more fiscal expansion, and I think that’s gonna help Europe, at least in the short run, to survive this next year. They are very dependent on China. That’s why US tariff policy on China has much more of an impact on Germany than it does on the US.

Kathleen Hays: Interesting. Of course, Germany’s not the only one. In Australia, which has been beset by these awful bush fires and they’re still going, their government, which has a surplus is . . . Things have been slowing down. The head of the Reserve Bank of Australia, Philip Lowe, would really love not to even think about starting a quantitative easing, bond-purchase program against negative rates, even as they’ve got all this money they could spend. Up until now, they’ve been very, very reluctant to do any fiscal spending at all. Maybe it’s gonna change more, but the last couple of times I’ve interviewed [treasurer of Australia] Josh Frydenberg as recently as October at the IMF, No, no, no. No, no, no. We promised the people a surplus.

But this seems this is the problem around the world, or maybe it’s not a problem if you want a surplus. Resist, resist. But then it seems to me the tough part is that it puts so much of onus on central banks when things slow down. Do you want negative rates? A lot of people think they’re a really bad idea. But it puts central banks in a position at some point where that’s all they can do. They can buy more bonds. They can shove liquidity in. They can increase people reaching for yield when they have negative rates. Is that, maybe not in the US . . . Austan’s frowning. But I mean, Is that kind of—

Austan Goolsbee: No, I don’t have a strong—

Kathleen Hays: Yeah, but think about it.

Raghuram Rajan: So my concern is that . . . so we’ve had three forces. We have this crisis that Randy talked about. We have the cycle, which we’ve been talking about, and the third is the structural transformation. As a result of aging, etc., of our economies, our economies are changing day by day. There’s that transformation. There’s also the place-based transformation. Some places doing extremely well, the big cities; some places doing extremely poorly, the semi-urban areas, which lost big employers.

So I think we focused a lot on the recovery from the crisis, which was really good, and since then we’ve been really focused on the cyclical component. How do we get this back up? But we’re not able to distinguish the structural, that, in fact, we have aging populations. We have development needs in part of the country. How do we fix those? So whenever the talk gets to fiscal, it’s always loosely the Keynesian fiscal. Let’s dig holes and fill them up again. Without specifics. What are we going to do with the fiscal? And when you get to what are we gonna do, it becomes much harder because these are deep problems which we need to tackle. We should have been tackling them right from the get-go.

But if we are to do it now, it requires design. And nobody’s talking about design. How do we get money to Janesville, for example? How do we get Janesville to pick itself up because the GM factory has closed there? That’s the kind of thing we should be thinking about. We’re really, again, just talking about fiscal in a very airy-fairy way that it will fix the cycle.

But unemployment is not the problem. The nature of employment is the problem. That’s a structural problem. It’s not a cyclical problem.

Randall Kroszner: I agree. It’s all about, whether it’s government invested or private invested, we just haven’t been seeing the investment. So thinking about using . . . If there are countries that have relatively low amounts of debt outstanding and interest rates are astonishingly low, are there ways that you could build infrastructure or reduce some bottlenecks or do something that will help to catalyze private-sector investment?

And I totally agree with you that it has not been the focus, and it should be the focus. There’s a lot of discussion about every city want to open its own incubator, and so everywhere you go—and I’ve been doing a lot of traveling around Europe and the Middle East and Africa to visit a lot of our alums there—they always want to bring me to the incubator, but a lot of that is not helpful. If every city is building an incubator, you’re just competing with each other for that. That’s not actually, necessarily, helping the growth of innovation.

And so I think we’re not using the fiscal resources appropriately. I think a carefully-thought-through plan, where you are focusing on bottlenecks, we’re focusing on high returns, and doing things that can catalyze private-sector investment, that makes sense. But I totally agree, spending money for spending money’s sake doesn’t make sense.

Austan Goolsbee: Also Randy’s admonition before about the haunting nature of Japan on the dot blot also haunts this discussion because that was their thinking: We’ll engage in massive infrastructure spending. We’ll engage in massive public spending of various forms, and it hasn’t gotten . . . it didn’t increase the natural growth rate of the economy. And you can look and say, well, maybe they chose the wrong things, but it does haunt us, I think, trying to increase that.

Kathleen Hays: Well, I want to thread in an audience question now because we’ve got haunting. We’ve got this. I’m a journalist. I’m always gonna ask those “oh my God” questions. Everything seems to be a challenge. Is there anything you guys are excited about looking into the next year, three to five years? What like, yes, I’m so . . that’s gonna make such a difference. This is gonna be great?

Randall Kroszner: The opening of the London campus this fall. (laughing) Come visit.

Raghuram Rajan: You have to look at the technology that’s coming and say, we can do so much more. So technology has to be the source of optimism. Even though there is a lot of pessimism about the way we’re using it now, but the possibilities it affords us are so enormous—whether it’s in energy, whether it’s in fintech that we talked about. I mean, every area’s gonna get disrupted.

There was a question earlier about which industry do you think is most ripe for disruption? Education. We still teach in the classroom the way we taught 3,000 years ago. You guys come to the classroom, some of you guys I know some of my students are here, and you listen to us drone on in front of the classroom. That’s the way it’s been for 3,000 years. But that could get disrupted, and how much better it would be for people around the globe if they could get the best teachers at relatively low cost and they could learn fast. We have all these possibilities. So I’m optimistic we’ll figure out the way so long as we don’t put roadblocks in the middle.

Austan Goolsbee: I mean, and one, you’re kind of thinking long term and what are the grand things, but I think in the just nitty-gritty of, since the financial crisis, we recovered in the United States better than anybody else, and let’s pat ourselves on the back, and some of it, we did a bunch of things right. The unemployment rate is remarkably low, and like I say, anything having to do with the job market and consumer has been both very strong and pretty sustainable. It wasn’t fueled, in the mid-2000s, much of that expansion was fueled by falling and falling savings. So the savings rate for the United States literally got to 0 percent. The savings rate has remained 5 percent plus in the US since the financial crisis. So this is, on some measures, as good as any time for that, and it’s coming out of what was a very difficult and could have been and has been in other places very persistent problem that we didn’t have, so I think we should view that positively, even in the short run.

Randall Kroszner: We’ve made a lot of progress on health around the world. It’s been incredible improvements there, and I see that, a continuing trend on that. Whether it’s just like basic things about mosquito nets so that people don’t get bitten with mosquitoes that have particular diseases. Innovations in all sorts of areas of medicine.

Progress may be a little bit slower in the US than it has been, but if you look globally, a lot of people’s lives are much, much better than they had been, and I think that trend is certainly going to continue because there’s just been incredible innovation there.

Kathleen Hays: OK. Since you mentioned education, one of the audience questions was about student debt. How that affects where the economy is and where it is going. There are some who are running for office who say, yeah, just forgive all student debt. There are others who say, we should at least means test this a little bit. To me, it’s just . . . there’s a lot of questions about how people ever took on that much debt. Anyway, what’s the, I don’t even know what question to ask you about it, but what’s the answer? What’s important here? Is there something that should be done? Something that shouldn’t be done?

Austan Goolsbee: I would make three points on student debt that you didn’t have a specific question so I’ll give you three.

Kathleen Hays: Thank you. Save me. (laughing)

Austan Goolsbee: There are three way to think about it. The first is you will hear some people say, there’s $1.2 trillion–$1.5 trillion of student debt. And they will say, is that the next subprime housing bubble? I think that’s a wrong way to think about student debt. Because the thing about the subprime housing and others, fundamentally what happens is you got a lot of debt and then the value of the asset went down and so there were a bunch of people under water, and that was the nature of the crisis.

Here the underlying asset, if you want to call it the asset, of human capital has never been more valuable. There is no sense in which the asset went down. It is still . . . there’s still a lot of debt, and if you look at where the debt is versus where the defaults are, they aren’t exactly the same. The biggest student debts are people—the dean is gonna get mad at me—they’re people who go to professional schools. If you look at law schools, business schools, medical schools, they have the largest amount of debt. But they have very high payback rates. That’s not where the default is.

On the default side, the crisis is not entirely but is predominantly people who are starting programs and dropping out and not finishing the programs. So they get a bunch of debt but they don’t get the degree, and the for-profit education sector is about 5 percent of the students and 50 percent of the defaults on student debt. And so I think that that space needs a deep reexamination because what is happening is at the same time, the payoff for community colleges is the highest it’s ever been. They’re the most starved for resources that they’ve ever been. All the states are saying, we don’t have any money. Yes, there’s huge benefits, but we can’t you give the money. So their enrollments are shrinking, and that’s pushing more people into more expensive programs in the for-profit sector, which when they drop out, then they have this debt.

I think it’s centered there, and that means life is gonna be very difficult for people who are in that space, but that’s something different than, is that a threat to the financial system? Which I don’t think it is.

Kathleen Hays: OK, another question broadly along these lines. One of the audience questions was an interesting one saying, does deflation or very low inflation in the United States relate in any way to large debts and deficits? Thinking sort of Reinhart-Rogoff, this time is different. Maybe there isn’t. It’s OK if they say no, there’s no link. Don’t worry. Does that somehow tie in to why we don’t see prices rising?

Randall Kroszner: I don’t see a direct link between the two. Certainly you can find some examples of that, but I don’t think there’s systematic evidence of that.

Now, the challenge is I’m not giving you a good alternative explanation, and I think as Austan and Raghu were also saying that we’re not quite sure why we’re having such low inflation.

Kathleen Hays: But isn’t it partly because we have technology, which puts all kinds of prices out there? Makes it much clearer how much goods cost, maybe how much services cost, so maybe how much you’re worth. Does it have something to do that it started years ago with China, many, many years ago, when they pegged their currency to the dollar? And so they’ve had very low wages. Don’t low wages in overseas countries have some impact on wages domestically? Now you can say, well Kathleen, that’s only in comparable industries—

Austan Goolsbee: Maybe. The only complication—

Kathleen Hays: But aren’t there a lot of things that are holding prices down and holding wages down?

Austan Goolsbee: Maybe, but just remember, most of the US economy, as Randy said before, doesn’t face foreign competition. We’re mostly domestic.

Kathleen Hays: True. But all the technology has had a huge impact. That’s one reason why we’ve lost a lot of middle-class jobs, because all those middle-manager jobs started being outsourced years ago, the more we had technology coming in, so you don’t need somebody to do that job.

Raghuram Rajan: But Kathy. That’s absolutely right that the labor market expanded to being a world labor market, and that put pressure on wages for a long time. But with unemployment where it is, there is wage pressure building. If, in fact, the world was so comparative, we should see some of that demonstrated in higher prices, because you’re saying people have very little margin. Instead, the talk today is they’re absorbing some of these wage increases in their margins—

Kathleen Hays: Exactly. Yes, yes.

Raghuram Rajan: And that would suggest it’s less competitive, at least at the firm level. I think I would echo Randy. We don’t really understand what’s going on very well. And I think we need to understand better. Role for research.

Kathleen Hays: OK. A couple of other questions, oops, one just moved down. I won’t be able to ask it. Do you feel tech giants are subject to a sufficient amount of antitrust regulation today? And I think that goes directly to Elizabeth Warren’s push to say, no, you have to break them up. And interestingly, I don’t know if you guys know who Roger McNamee. He’s at Elevation Partners. He invested with Bono years ago and Uber and so many companies. Roger has written a whole book called Zucked, and he’s totally behind this.

So someone who’s been in Silicon Valley for a long time—he actually started as a mutual-fund manager—feels that this is a big issue. As economists, as professors, what do you guys think?

Austan Goolsbee: I don’t think there has been enough antitrust scrutiny of purchases of small companies that could be potential competitors. I’ve been more on the side of a more muscular and aggressive posture toward the big tech companies. That said, I think the knee jerk, well, let’s break them up, is kind of . . . doesn’t really make sense. And if you start thinking through situations where there are network externalities, breaking up Microsoft in the old days into two separate operating system companies would just lead very rapidly to one of those becoming a dominant operating system again because of the economics.

But I was tempted to give it as the answer when you asked, well, what’s some big thing that’s pressing right now that we should think about. I think it’s worth remembering the last time there was this much disruptive technological change, in the Industrial Revolution at the turn of the century, how much it changed politics, and that it was precisely in response to the feeling that the government is not doing anything that they literally changed the Constitution multiple times. They made senators directly elected. Women got the vote. They instituted all of antitrust policy. They changed the Constitution to allow an income tax where it never existed before.

If you just keep stuffing that under the rug, eventually the piles of dirt get so big that everyone starts tripping on it, and I wonder if we’re approaching that environment, and as some of the questions have been going by here, some have been about Bernie Sanders. It must drive Bernie Sanders bonkers that a billionaire, Tom Steyer, has spent 10 times more on television advertisements and a 100 times more on campaign expenses. And he, I don’t know if you saw, in the latest poll in South Carolina, I think Tom Steyer just passed Bernie Sanders in support. And a world in which billionaires are competing in the same primary with populists who are saying, let’s burn it down and break them up is a strange world. And that’s the one we’re in.

Raghuram Rajan: I think on tech we have to be careful. I think the old ways of regulation may not work, but we have to recognize the old concerns in regulation. About excess power, for example, the Brandeisian view still is there, which is why Austan says we should probably think about this before it overwhelms us.

There are alternatives to breaking them up. For example, if the big concern is networks and data, on networks, interoperability. Everybody says it can’t be done, but if that could be achieved, that would give smaller guys a much bigger leg up because now they can access the same network that the big platform has and they can reach everybody. So that might be another way rather than breaking up.

The second is data. There’s a lot of data being captured and monopolized. Should that be captured and monopolized? Are there ways of sharing it so that everybody has a level playing field?

The reality is these are companies that are giving a very good service to the ordinary consumer, but that can’t be our only metric. Our metric has to be what else is going on? Who else is paying for this? Because there’s no such thing as a free lunch. And it could be we’re paying today through the high cost of . . . through the advertisers paying them. It could we’re paying tomorrow because of lower innovation. So the question is how do we fix these? Maybe a different antitrust than the past.

Randall Kroszner: I mean, the example that Austan gave of the attempt to break up Microsoft because of this dominant operating system. That’s laughable today. That’s what was killing them because they were trying to stick to just what they were doing in the past, and it’s Satya Nadella, who’s a Booth graduate, who saw that we should do. . . . Microsoft should do something completely different, should effectively compete with what it was doing, should acknowledge that people are not buying as many laptops, and go to the cloud, and do other sorts of things. So to have broken up Microsoft, that would just be completely irrelevant and crazy today. So I think it shows those kinds of structural remedies may seem very sensible today, but in five years from now, they may seem kind of crazy.

So I very much agree that we need to rethink, what is it that’s an issue? It used to be one of the key things for antitrust was power over price, but now so much of what occurs is free. The power is precisely because they’re not charging—

Austan Goolsbee: Ah, but it’s never free, is it?

(laughing)

Randall Kroszner: Yeah, exactly, the voice of God. It appears to be free. Obviously you’re paying with . . . there’s a reason they’re giving something to you, but in terms of the traditional price, it’s not a price mechanism, a traditional price mechanism. It’s a data mechanism. It’s a services mechanism. It’s an information mechanism. It’s something that’s very different.

And because so much of our antitrust law is about traditional markets where power over price was a reasonable metric, we have to think of new metrics when price isn’t really the relevant issue. And we’re not there yet.

Kathleen Hays: OK. Really quickly, I’m just asking each one final question because I think we’ve just about run out of time. So when you guys look out over this year, you kind of mentioned this, but each one of you when you speak to our audience, what’s the No. 1 thing you’re watching this year? When you’re watching the economy, what’s important, oh boy, that made the difference for better or for worse. What is it? You can think for a second, like 10 seconds maybe. It’s a big question.

Randall Kroszner: So the thing that is the biggest risk would be or concern that I have that we’re not well prepared for would be cyber risks. So if you think, because all of our discussions about big tech and about data, just think if someone were to . . . and these things are usually not just a bad actor from the outside somehow getting into a system and disrupting things. Usually, it’s someone who is a disgruntled employee who has the keys and then may work with some bad actor, but let’s say you have some disgruntled employee of a large financial institution who helped some bad actors to get in, and let’s say the large financial institution becomes somewhat uncertain about how much is in everybody’s account. What happens to the payment system? It completely grinds to a halt.

Now maybe the Fed could step in say, we’ll make good on all those accounts. It’s possible they can do that, but that’s something they’re not ready to do. They don’t have the information for. And that could be extraordinarily disruptive. And so I think it fits with this big-tech issue, and I think that’s something we’re just not well prepared for.

Kathleen Hays: OK.

Raghuram Rajan: He’s taken cyber, so I have to look elsewhere. I would say geopolitical. I’m very worried that the world has too many strong men and they’re really most of them men—

(audience applause)

—who have very sharp elbows and seem to have very thin egos. And I worry that gets us into a situation where people are unable to back off.

We’ve seen that in the China-US . . . I’m glad that we seem to be finding at least a pause, but there are so many areas around the world of potential conflict. We haven’t talked about North Korea. We certainly haven’t talked about the various people in the Middle East. Russia’s another potential area. So I don’t see, I mean, we do need to recreate a new world order. We’ve just thrown the other, the previous one out of the window, but I don’t see momentum behind that. And to my mind, this is a process of the next decade before we feel safe again.

Austan Goolsbee: For me I’d say, let’s ask, at our meeting next year, what will be the biggest change? And then, if we were still meeting here 10 years from now, what’s the thing to be watching? For next year, I think what happens in the election in the United States is gonna have the biggest impact on policy, and that’s all we’re gonna be talking about next year is, what does this mean? So I would keep an eye on that. And don’t necessarily believe the information if you’re reading it on Facebook, because they’re allowed to change it however they want.

Over the longer term, I think the thing that you should keep your eye on is the productivity growth rate, especially in the United States, but everywhere. Because we, the economists, have always said that is where our standard of living comes from, and in the last five to 10 years, for reasons mostly we don’t understand, it slowed way down, and that might explain why wages haven’t been rising for some time. It might explain a bunch of things.

And when we come back in 10 years, let’s hope we’ve gotten it back going to something like historical trends, otherwise I fear it’s gonna be even nastier, and people are gonna be even angrier.

Kathleen Hays: OK, well, we’re all set up for next year. This is great. I want to thank the University of Chicago Booth School of Business for inviting me back and the panelists because if they didn’t approve, I would not be here. Working with Jane Rodriguez and Sam Jemielity, and they’ve been great, and it’s always great to see you guys. Like I say, the room was just buzzing today. It’s always fun to come here. Thank you so much for having me.

(applause)