How Science Can Jumpstart Economy: MIT Economists

To help us kind of dig through some of these issues, we welcome our two guests, Dr Jonathan Gruberg, Professor of economics at the Massachusetts Institute of Technology, and Simon Johnson, professor of Entrepreneurship at m I T and former chief economists at the I m f I. M f I should also say Dr Gruber is also key architect of Obamacare and Romney Care. Dr Gruber, Simon, thank you so

much for joining us. So you guys, let's talk about the book you have written, and we're here to discuss it's entitled jump Starting America, How Breakthrough Science can Revive Economic Growth and the American Dream, which is available now. So with this book, Dr gribber Key findings, what's the kind of the key fundings that you guys came up

with here? I think the key point is that we've forgotten an important lesson from the U S history, which is the in the boom decades post World War Two, what drove US economic growth was a fruitful partnership between the government and the private sector in developing new technologies that that grew the economy. We can get back to that. At the peak, we spent two percent of our entire economy on publicly financed R and D. It's now down

to point seven. We need to get back to investing more R and D the causes growth, but we did do so in a way that involves the whole country, not just a few elite coastal cities that have that have been the major beneficiaries of R and D expenditure in the recent past. Yeah. With that point, Simon, I'm just curious. I think it's a fascinating idea. It's a great idea. Is the is there the political will given the budget deficits we have now to do this? Well,

that's a great, great Christian evince Behind closed doors. We find a lot of agreement across the entire political spectrum on the need to support science and i H, as you know, gets a lot of support from Republicans and from Democrats. More funny for ni AH more initiatives like ni H. I think there's interesting that we're proposing a big, bold way to do it. I agree, but it would be benefit everyone across the country and that matters on Congress.

What does indeed it does indeed especially in an election here coming up. Yes, so Jonathan, kind of how do we get there? What are you? What are something the practical suggestions that you have guys who call up with within your book. So one important practical suggestion is to realize that we have incredible reservoirs of talent all around the country. That while most of the growth in the US has happened in six or eight cities over the

last couple of decades, we have places. In the book we identify a hundred and two places which are large, which have well educated populations, and which have affordable housing, which could become the technology hubs of tomorrow. The other suggestion we make is we need to move to a more ape political process through through sort of a commission that's an a political commission model on the base closing commission, let's make it a technology helb opening commission to help

the side worship with the dollars of tomorrow. That's actually an interesting point and a political confission. Do you think I'm just thinking realistically, with all that we're seeing in Congress right now and the all the battling back and forth, it seems impossible to get coordination across the aisle. But it does if you think about you know, electric cars and the potential to invest in electric charging stations across the country and move towards That spells right, That plays

right into the green deals. I mean, I mean that is an interesting way to get both sides of the aisle on the same page. Because you do you kind of dot every eye in course every take. Well, you could plug various technology visions into the mechanism that we're proposing, So the Green New Deal absolutely could fit there. If you want to promote more life science, if you want to into cure cancer, that could be the priority that gets plugged in. The key point is spend a lot

more on the on the basic science. Privacy is not gonna do that because the private sector can't get and no one company can get all the games. But once you create that scientific information and infrastructure, it can spread and be a catalyst for private sector development. And that can happen absolutely everywhere in the country. Is not This is not a Silicon Valley or Boston promoting book. This is promoting a jump stop for thirty six forty five. Hey,

let's go for fifty American states. So, Jonathan, I mean, when you think about it, the university system of this country has been, you know, are one of the backbones of technological advances over time. Um is that? And it seems like that could be anywhere. That could be anywhere. I mean I think of cities like Austin, Texas, which have become you know, huge tech areas. I mean, uh, my son's at the University of Colorado. There's a tech community out there in Boulder, in Denver. It can really

happen anywhere. But does it? What's again? I'm just kind of wondering. I just don't see the government stepping up with big dollars today. Well, so two points in that. One of one of our favorite examples in the book is or lay To, Florida, home of the Emails not

Mickey Mouse. Forty five minutes east is the center for the US micro computer micro simulation industry and the largest University of America, University of Central Florida, which went from mid sized university to now having the thirteenth rank electrical engineering department in the country. That area, forty five minutes of Orlando, has created a hundred thousand jobs over the past thirty years through a partnership of the government, the university,

and the private sector. And where confident that this can happen. Look, if you want evidence, look at the Republican reaction the Green New Deal largely negative. Accept Lamar Alexander said how much he liked the research and development part of the

Green New Deal. That's where we can get consensus. So interesting, I asked both of you this question is when you when you do this and you move into away from the coastal areas, as you say, we've seen what um, what this has done to Seattle in terms of real estate. We've seen what it's done to San Francisco in terms of homelessness. It seems to me there has to be a really concerned, uh concerted effort with local communities to sure that this doesn't happen in the locals, don't those

who do not participate in this program don't get priced out. Yeah, absolutely, well, thank you to New York for the backlash against Amazon for making that point rather abundantly clear. Of course, it's a priority, absolutely, And you're also right that local communities have to be on board now. And you also know that more than two thirty communities in the United States bid on Amazon h U two. So they want the jobs. The jobs need to come with sustainable growth and and

real estate is a key piece of this. One thing that makes so many parts of the Unit States attractive is real estate is really really cheap. If we say the numbers on air, and I think a lot of your New York based listeners are gonna want to move immediately. But you can buy a house in place like Pittsburgh for less than two thousand dollars a nice house, right, So what you want you don't want to lose that.

You want to understand and appreciate that as part of the package, and you want to use that as a big part of the message, and you don't want to run out of space. So it's very important you think as a community about what kind of zoning you're going to have, what kind of develop you're gonna you're going to allow. People want to live together, they want to cluster, they want to live closer together than in the past. You need to make sure there's enough space for that.

Is there enough trained Does this country have enough trained engineers, technical people to to do this? I mean when I, you know, several years ago when I came out of college, it was everybody on the wall street. Now my kids in our college that they're just all thinking tech and engineering and apps and things like that. Do we have enough technical expertise in this country right now? We have enough skill, we don't have enough technical expertise. I think

that once again, one thing we've fallen behind on. One thing. The government did really well in the decades after World War Two, through things like the National Defense Education Act, was invest in both high school and college education the sciences. We need to get back to that. If we simply increase government investment in science but don't boost the supply of scientists, we're just gonna increase income inequality. We increase

the demand and the supply. That means a large investment with local buying into improved education at both the high school and college levels. Yeah, that's that's an actually a really good point. I will tell you with my my kids who came up with very interesting degrees they wanted to study, and I pushed them all towards technology because it seemed to be the place to be. As you say it, is there a buy in from the university level um to help support that, for instance, make technology

degrees more affordable. That's a kiosk absolutely, And you know who's gonna drive that the young people. The young people want the technology skills they want. I think that it's mixing technology with creative that's the future. That's what the artificial intelligence machines are not going to take away from you. But it has to be affordable. It has to be affordable, and we've got to look at that at the federal level. That after Sputnik seven, that's what we did. We made physics,

math education much more affordable. Spread that around the country. There's a federal piece, but there's also a local and state piece. Right there's gonna be pathways through community colleges and other ways through state schools. We were very good at that in the past, and we've taken our eye off that ball. Frankly interesting, gentlemen, Thank you very much.

Dr Jonathan Gruber, Professor of Economics and m I T and Simon Johnson, Professor Entrepreneurship at m i T discussing their new book, jump Starting America, How Breakthrough Science can revive economic oath and the American Dream. That book is available now. Thank you very much, gentlemen. I am Paul Swingey and we have Vince Cignerella sitting in for Lisa

brahma Witz this morning. I guess taking a look at the f O m C mean minutes from yesterday just kind of confirms what I think the market was already discounting, which is the Fed remains committed to being on the sideline, at least for the near term. To see what that means for the credit markets. We welcome our next guest, r J. Gallas, and your portfolio manager, head of the Municipal Bond Investment Group ahead of the Duration Committee for

Federated Investors. He joined us on the phone from Pittsburgh. R J. Welcome to the show. What did you take away from the f O m C notes and kind of the recent dubbish uh commentary from the Fed, how are you positioning your funds? Well, good morning, thanks for having me. I thought on that that the minutes weren't really necessarily market moving, but that doesn't mean there wasn't there wasn't some revelation in there that that I think

is material first and foremost. Uh. It basically suggested to me the tone of the minutes themselves affirms the FED that is at neutral, that that one remaining dot that ticks up next year on the dot plot. If you look at the medians, um, don't have don't they don't put too much confidence in that dot. They sound like they're equally likely that the next move is an ease as it is a hike. And it's certainly affirmed the view that this year is not likely to see any

move of FED target rates, at least not in twenty nine. Team, We'll see what happens next year. J question for you because this is kind of baffles me. Just a little bit ahead of the Duration committee. This is something I assume you're keen on the balance sheet. We went from prior to the financial crisis, a balance sheet of under a trithlen and now essentially the Fed is saying we need to keep it at three and a half TRISN does does that create any anxiety and us to why

they need to leave that much stimulus in the system. Well, just for background, I used to work on the Fed's open market desk. I was a trader at the New York FED back in the nineties. At the time, the system open market account was seven hundred or eight hundred billion,

you know, a fraction of its size today. And I think over the decades that have that have followed, the implementation of monetary policy changed drastically with all the various iterations of q E and then the development of various programs to manage short rates, you know, target rates, if you will, within the context of a massive amount of

reserves in the banking system. And I think number one, they've shown that that their current framework works, that they can target short term rates even with massive amounts of excess reserves. Paying interest on reserves is another meaningful change that has occurred. Cored about ten or eleven years ago, if I recall correctly, So I don't think they're fed. UM needs to have UH needs to regress, if you will, back to the balance sheet that existed ten twenty years ago.

UM the framework. It works, and I think they've proven that. And since it does, that means they have much more flexibility to leave the balance sheet larger if, in fact, the markets broadly defined suggests they should. Well, one thing that suggests they should leave it larger is the fact that the inter bank market for reserves is functioning fine.

That the demand for cash if you chart on Bloomberg, the currency in circulation on the FED balance sheet, because that's a big liability, right, has surged in the last ten years. Um, So there's there's plenty of reason to have a larger balance sheet even without the reserve markets. That the demand for currency extremely large and it's grown rapidly. So that's one market that's telling you a big balance sheets. Okay, I think another set of markets are also telling you that.

Number One. UH, the confluence of tightening in December and the perception of autopilot, which was fueled by the FED don't communications uh with respect to the balance sheet painted a worrisome picture that rates were still going up, quantitative tightening was was was going to persist, and the FED ran the risk of of overtightening generally speaking, and that had a lot to do with the fourth quarter tumult, the FED reacted to financial conditions which became very adversarial.

They called off the dogs on tightening, and they said, hey, the balance sheet can remain large because the markets are telling us that's what they sort of need. And if the FED is sticking by what share Powell said in his January press conference that his primary goal is to extend the economic expansion. If that's your primary goal, then the balance sheet is a secondary goal, and one primes the other. And I think that as a result, they can have a big balance sheet and they're okay with it.

It doesn't really necessarily worry me per se. What worries me is when people are talking about, you know, modern monetary theory, this idea of there's a free lunch, that the era of the currencies has told us that you can print your own money to as far as the eye can see to fund all kinds of fiscal expansion. I think that worries me. That's reckless. And I wonder if a large balance sheet is misperceived or misunderstood by those proponents of such theories to say, yeah, there's a

free lunch, that that's worrisome. The politics of this get worrisome. So are j just you know, the next three thirty seconds, you know, just give us your sense a kind of economic growth. Obviously, the first quarter GDP a big slow down from the fourth quarter. Are you one of Are you in that campus says we will see accelerating growth in the remainder of nineteen in the US? Yes, yeah,

we are. We are clearly the first quarters slower, uh, you know, maybe a high one handle, maybe two uh, you know, slower than where we've been, but but not terribly so. And we do think that's quite possible that chare Powell and his colleagues on the FOMC uh, there's a reasonable probability they can achieve the soft landing. Word of how Chairman Greenspan did back in the nineties, where

you had an extensive monetary tightening in ninety four. It was very difficult at the time for financial markets, but on net a recession did not result. The Fed stopped tightening and achieved a soft landing, higher monetary policy rates, some tightening without the subsequent recession. That's their stated goal. I think the markets are suggesting they have a reasonable probability of achieving that goal. Of course, they're not the

only variable. What happens in China, it happens in Europe trade policy and all the attenument risks around that are things to consider as well. R J. Gallow will have you back again. Lots to talk about across the FED. R J. Gallo, senior portfolio Managic had the MISS Bond Investment Group and head of the Duration Committee for Federated Investors.

He joined us on the phone from Pittsburgh, Pennsylvania. Well, Theresa May accepted the European Union's offer to extend Brexit to October thirty one and must now sell it to skeptical members of Parliament and a Conservative party losing patients in her leadership. To get the latest, we welcome Leonel Laurent, columnists covering financial markets for Bloomberg Opinion. He calling us from London. Leonel, thank you so much for joining us.

What does this extension mean for Theresa May and her government? So essentially, what this extension does is buy more time and we have to again stress that this is the

second extension granted by EU leaders to the UK. So there is a sense not just of deja but is now an eternal, never ending political impast setting in but as you say, the ball is now in the UK's court and Theresa May is simply you're going to have to try all of her options again, which a bit more time, which includes trying to pass the deal that has been rejected three times by her own parliament, perhaps it may get through a fourth time, or working more

with Jeremy Corbyn, the real enemy of the Conservatives, to get a potentially different deal that would get a different but positive support in Parliament. So there are options, but crucially there is more time to achieve those options. But even with more options, for history tells us, or at least what we've seen in the last two and a half years, that the chances of getting this done by

the thirty one slim to none. What what is concerning me as a as a former trader and the guys I'm talking to on the street, is I'm hearing that this makes the no deal risk gone, that there's a sense of complacency that's come over of the currency markets, and that we can now step in and by Stirling without the worries that preceded it of a deal ending by Friday. How does that feel to you? That that does not feel too good to me? It doesn't feel good to me either. That's why I think I think

he would be right to be cautious. And the reason why it's simply because the next date to bear in

mind is October thirty one, right Halloween. And essentially what you have to bear in mind is if if you see this as you know, obviously it's a cliche to talk about a game of a game of chicken, but the point is, if we get to October thirty one and there is no progress, we have to ask ourselves whether the EU, which by this point will have already had European parliamentary elections which the UK will have had to take part in, will now have to decide whether

it wants the Commission, the Executive arm which is going to have a sort of long term and and a new a whole new you know, a Risman, take a whole new team of people, whether and and they they sit on November one, and he's going to have to decide whether it really wants Brexit to in effect European decision making. And my concern is that the more time goes on, the more preparations for an odeal Brexit will

be finalized. And you know, sadly the accident theory is possible, or even the political will to leave with an nodeal on either side will be there too. So I'm not convinced that the nodial risk has gone well. We can sense even over here in the US the sense of frustration and resignation on the part of you know, obviously

the members of Parliament, but also the British people. Isn't it to the point now or that you know, it's clear that the existing plan isn't going to work, can't work, doesn't have any support, that it's probably worth coming back and trying something new, whether that's a second referendum or something else. Aren't we at that point? We are at that point? We you could say we were at that point a couple of months ago, you could say we were at that point, um, maybe even at the end

of last year. That the problem is that at politics is about other things, and there is a lot of layers of self interest here, um And I think that the concern is that there is just maybe not not not as many incentives to do the right thing by the voters. Then then we might prefer so the self interest is perhaps elected representatives, is that maybe keep their jobs. Maybe they think that they will lose it if they advocate for a second referendum or some kind of new

radical change. And I think on both sides what we are seeing is political reluctance to take responsibility for Brexit. I appreciate up until now it really has been the UK that should have taken responsibility. It hasn't. And I think we're also seeing that you reluctant to do the work for it and take responsibility for the harm of a of a no deal brexit. So right now it is very much a political game rather than doing the

right thing for the country. Any chance of She has said perhaps that she would like to have something done by is to not participate in the EU elections. Sure, these these are all possibilities. And remember that the most hard line Brexit supporters view European elections as absurd, borderline treason. On the other hands, given that she has accepted this potential poet heady first extension, we are now in the

realms of possibility. Everything is now possible. There could be European elections in the UK and maybe they might be a catalyst for change, maybe as the Conservatives do very poorly, maybe if there's a different kind of sentiment in the country, pro labor, pro Europe. All the other way you might see, you might see things change. Lionel, thank you so much. Lion on the rent calmness, covering finance and markets for

Bloomberg Opinion in London. I can actually hear the resignation in his voice, as we can with many other folks. As we discussed this issue well. T Mobile is in the throes of trying to close its proposed acquisition of Sprint and all stock deal currently valued at almost thirty billion dollars, but the regulators aren't so sure. To get the latest on what is going on in the world of wireless in the US, we welcome John Butler. John is a senior telecom analyso Bloomberg Intelligence. He joins us

live in our Bloomberg Interactive Brooker studio here in New York. So, John, it looks like the regulators are a little concerned here. Why so, they're concerned about the aggregation of share that would occur if you get Sprint and T Mobile together together, they'll have over a hundred million retail wireless subs, which will be right on par with for rise in and a T and T, so overnight you would have a market with three big players as opposed to the four

players you have right now. And I think they look at what T Mobile has done in terms of wireless pricing over the past five years. They by the way, have been very aggressive in pricing their wireless plans and have really sort of kept A T and TM Verizon honest if you will. So I think the big concern to sort of close out the question is if suddenly they're on par in terms of size with A T and T and Verizon, are they going to need to really go out with low prices to get subs um

you know, And that's the concern. But is that the question? I mean, it seems to me that they seeing what T Mobile has done, um, they probably just keep continuing to do that to keep trying to gain market share. Because as you said, they're not any bigger than Verizon or a T and T. It just puts them in the same league. So I'm not so sure. I just don't get the d o J response to this. I mean, do they I guess, as you say, they feel like

prices are going to go up from here? Yeah. I mean we think is businessmen and we look at it and we say, you know, g T Mobile has been very successful with this strategy, why would they suddenly back off of it just because they're bigger. I don't think they will. They're a disruptor by nature. I think they're going to continue to do that, exactly. And I don't think and then they can't compete in the streaming business yet either, so they still need something to go after

the two big guys, right exactly. Um, I think the telco's naturally are moving into content distribution, and I really applaud that, by the way. I think it's a good move. It's getting to be a crowded market. But to get back to what we were saying, I don't see T Mobile amending their behavior as a marketer in any way. But I'm not sure the regulators see that or look

at the market from that angle. I'm sure that, you know, the easy thing for the regulators and from an antitrust perspective, as they're just saying, hey, we're going from four to three, that's enough for us to block the deal. I'm sure that that's the simplistic way to look at it. But the reality is, aren't the economics kind of tough in the US wireless business, Like, don't they have to merge otherwise one of these guys is just gonna blow out of the business they do. I mean the it's funny.

Telecom is a scale business with the capital ass I mean really, if you're the big guy in the market, you can really sort of call the shots, so to speak. And if you're a subscale player like T Mobile and to a much greater degree, Sprint, you're in a very disadvantaged position. And then as upgrades happen over time that it requires a lot of capital, you end up as

a subscale player getting further and further behind. So I think ultimately, if this deal doesn't go through, Sprints gonna have to either partner with someone or I thought or

think they will have to become a regional player. Yeah, and Sprint obviously is the one that's the greatest disadvantaged therein um you know, it almost seems like the way you're telling the story, as you say, we think about this as businessman, if it continues to go down this road and Sprint continues to suffer, it almost sounds like T Mobile could come in and rescue them at at

the back end, of this and combine anyway. They really could in a way, because again, the small gets smaller and the big get bigger in a scale market like telecom.

For T Mobile, though, I think if a deal gets denied, you know, ultimately they're going to have to invest more too, because if you look at their their spectrum portfolio, those air waves where they're offering wireless, they have some big gaps there that A T and T and Verizon don't, So I think they're gonna need to step forward and spend a lot of money just to fill those gaps, and then they're going to have the added expense of

rolling out five g on top of it. So you know, uh, even three or five years hence, are they're going to have the capital to come back to the table and try and buy Sprint. I'm not sure on that one. For Sprint, it would make sense for a cable operator to make maybe look at them, because in terms of moving into adjacent markets, the cable guys are now starting

to test the waters and wireless. So I don't think Sprint is out of options in the wake of this deal not going through, But like you, Vince, I started look at it in question what the regulators are thanking. So, John, I know at Blomberg Intelligence, Uh, you guys have the advantage of working with some great experts, including generally who does antitrust? What is Jen saying in terms of the

odds of this and getting approved. So I was chatting with Jenn about that, and we agree that the odds of it not going through are probably in the range of six or so. So fort that it does get it okay. It's a tough one to call. It always comes down to the wire in a case like this, where you know, just as we were talking about, Sprint almost can make the failing firm argument of hey, if

this doesn't go through, we're done. You know, I'm not sure they really are in that position where they're completely done, and so who knows if they'll win the day there. But I think right now we're looking at a forty chance that the deal gets it okay, inserting that's probably not what the companies were envisioning when they announced this deal. Um. Interesting. John Butler, thanks so much for keeping us on top of what is going on with the Sprint T Mobile

deal in the US wireless business. John is a senior telecoms analysts for Bloomberg Intelligence. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyd's I'm on Twitter at Lisa Abram Woit's one before the podcast. You can always catch us worldwide. I'm Bloomberg Radio