Surveillance: Big Tech Backlash Brewing, Romer Says

I think from Chicago as well. Paul Romer joins us. Now we're thrilled to have him with us today on technology and what it has done to us. Professor, I want to go back to nine when you stop the economics profession with human capital and growth, and then you went on to the technology inside our system, the and Dodge and this technological change. How do you look at these four, five, six ginormous companies and what they have indogenous lee done to us. Yeah, you know, it's a

very interesting story. Uh uh. The technology, the technological progress has been enormous, better chips, better software, better devices. Um, the the effect on society has been ambiguous. We've had many good things, but also some some bad things. I think that the bad things all traced back to this pivotal decision by Google followed by Facebook to switch to

the advertising model, the targeted advertising model. This has had all kinds of repercussions that we're now living with, like another wave of the pandemic driven by vaccine hesitation that's that's been fostered via social media. So we've combined enormous technological progress with a really bad business model, and we're paying the price. Should we break up these companies? And to be narrow about it, if you can take Amazon with cardboard boxes, the cloud and a burgeoning advertising business

as you mentioned, is it standard oil of New Jersey? Well, you know, I think first I I worked on the government side of the Microsoft case. I actually helped, you know, design the proposed apps Ops breakup of Microsoft, which the judiciary just rejected at the appeals court level. Um, I think it's extremely unlikely that a judiciary that's even more conservative now is going to approve a breakup of any of these firms. I think we just have to be

realistic about that. So what I think we need to do instead of focusing just on breakups or at least government forced breakups. Is to change the incentives to get them to shift away from this targeted advertising, surveillance spying kind of model and to go back to the old fashioned model where people pay to get things, so we could use things like the tax code as I've suggested, to create incentives for firms to stop relying so much on advertising and to rely much more heavily on the

subscriptions the way Netflix does. Paul, is this tech dominance related to the stickiness of the high unemployment rate, of the stickiness of the low participation rate that was currently seeing in the US labor market. Yeah, I don't think so. Um, you know, reasonable people can differ, but I don't think this is the problem. I think fundamentally, we've been in for twenty years now in a mode where the Congress wasn't able to do anything, so all of the work

fell on recovery, fell to the to the Fed. We use very low interest rates is a way to try and recover, but that meant that we ended up not recovering fast enough and far enough, so that we've steadily ratcheted down the key metric I think we should be watching, which is the employment rate for four year olds So what we need to do now and what we seem to be headed towards now is something more like what we saw under Reagan, which is a very aggressive loose

fiscal policy, stimulative fiscal policy, and has needed type monetary policy to keep inflation and check. So I think that we just have to recognize that it takes a long time, it's a slow process to get people back into jobs. We just got to keep pushing on this recovery long enough to get back to where we should be, which

is with a lot more people who are employed. Paul, I want to stay on this point for a minute, because there's been a lot of question around how much the un enhanced unemployment rates UH enhanced unemployment benefits I should say, actually contributed to the stickiness of the participation rate remaining so low. There have a number of studies that have challenged that, other people saying that, look, the ECONO of me has not gotten back on. You still

have people who childcare is still an issue. So what is the main why behind the stickiness right now at this point in the pandemic. Yeah, I mean, if you look back at let's say, the recovery from the recession in the early two thousands. Getting people back into jobs is a slow process. It's very easy to kick people out of jobs. That happens very fast, and then remaking

these matches between employers and employees just takes time. And so we have to be realistic in our expectations about how long that takes and maintain the conditions to keep getting people back into those jobs for as for as long as it will take, and it will take, you know, I think many months UH to recover to the level we need to be at. We just have to be sure we don't give up too soon. There's just all sorts of ways to go here in the limited time we have left. I want you to talk about what

everybody in this pandems going through. And Greg Gillman Yale University talks about it, the interiority of technology. How we're all sitting in our bedrooms, are hunched over our computer doing computer stuff and not being social. Is that the ultimate risk to the United States? Are we going to be as lonely as Tom Keane, John Farrow and Lisa Bramowitz? Yeah? Well, you know that somebody told me that the new the new acronym is UH is fogo, you know, instead of

fomo fear of missing out. Now it's fear of going out. So I think we're all suffering a little bit from this experience. But but I think there's a kind of a realization which is coming, which is that these tech companies have enormously have benefited enormously from our greater reliance on them, and these tech companies are causing the problems we're seeing with vaccine hesitancy. So I think there's a backlash going against these firms. I don't think it's going

to show up through a breakup via anti trust. I do think we're going to see legislation that range them in. I mean, I think, folks, again, this is the book The End of the Myth by Greg Grant and which is just a fabulous Africa can't say enough about the history of this, Professor Romer, is where we are right now like maybe we were with the railroads in I'll

let you choose a technology. But this, this this bouncing off of technology that we're all doing on a week of technology earnings, is that where we are right now as we've been before. Yeah, you know, I'm not sure that there is a good historical um analog for what we're what we're doing with right now. UM, there's a very good story out in New York Times this morning about disinformation for higher. These platforms have created weaponry which is now available for the purchase for anybody who wants

to go out and create disinformation. UM. You know, there are some echoes of the period of yellow journalism here, but but the scale of this and the speed uh that with which uh these new platforms of of propaganda and disinformation can operate is something we've we've just never never encountered before, and I think it's very frightened Paul.

Just to wrap this all together, I'm curious about whether we could see some sort of China like moves in the United States when it comes to regulatory crackdowns on big tech, on control of data. And this is actually something that surprised markets with respect to how ferocious some of these moves and dramatic these moves have been over in China. Is that a purely idiosyncratic move or does this set the stage for the US to take similar I'll be perhaps less dramatic moves. No, I think there's

a very close parallel. Everybody thinks about how different we are from China, but in any ways, our circumstances are very similar. We're on the verge of having platforms and companies that are so powerful and so influential in the political process that they're ungovernable, that they're beyond the rule of law, that the state can't actually get them to comply with the law. China has realized that this poses an existential threat to governance and law, and they've decided

they have to stop it. We haven't gotten there yet in the United States, and I hope we get there soon, because the more influential of these platforms have propagain and to become, the harder it will be for us to reach a political consensus that we have to do something. Professor Fantastic to get your views on this program pulled rama the of n Yu, the Noval laureate and former

World Bank Chief economist. Let's get to Lori Cavassin or obviously Capital Markets head of US Eculity Strategy, And Lori, let's start right there. What are we learning so far from the incoming Guarniggs. So look, I think this is going to be the pivotal week. Right. It's crazy busy with out well over a third of the S and P and some of these including some of these big

tech behemoths. You know, I think what we're learning so far is that the value side of the market, the financials in particular, UM look like they're the weak link at this point in time. So far, we've actually seen some resilient in areas like technology and growth revisions generally, while we really just continue to see continued slippage on the financial side. So I really want to see this week if we're going to get conference confirmation of that trend,

if you're going to maintain that tech resiliency UM. Look, I think in terms of other things that we are learning, you know, one of the fascinating stats over the past week that I saw was that bottom up sm p EPs moved up a couple of bucks, but two stayed flat, and so the growth rate for next year came down a little bit. UM. I want to see if we're really going to continue to see that enthusiasm build on next year. If not, I think we interpret it as

sort of a continued slippage and earning sentiment. We're seeing other things that suggest that that's happening as well. Despite some of these really strong beats that we're getting. Do you think downgrade risk is starting to build? Hey, Laurie looking ahead to next year? I think I think so. I mean, I think the you know, I think the issue right, it's it's a question of the rate of change versus the dollar level, and that rate of change we have very clearly seen for two starting to slip

just a teeny tiny bit. Now, the tech companies could cause that to reverse, but what we've basically got now is peak upward revision. So if you look back in June, the rate of upward revisions in the SMP five hundred was seventy eight percent, and so far in July that has slipped to seventy four percent. So what you have first is a deceleration of upward revisions. You just get fewer and fewer of them, and then it eventually translates

into downward revisions. And those downward revisions may take a little bit of time to come, but it does look to me that we're already in that decelerating upward revision pace, and about half the sectors are contributing to that right now. Floria two part question where the one part answer, and it's the idea that could stocks rise amid slow growth rates come in, really yields come crashing down, and yet

we're supposed to believe that equities rise. And I combine that with a wonderful Jeffrey de graph over Rand Signs who says, look, you can't have momentum unless you have breadths, which is it right now momentum or we need rebuilding breadth. So look, I would say the composition of the market is very, very different than it's been in the past,

and it depends on what causes that chopping nous. Right now, we've got a market that's concerned about slower growth, not an outright recession, and so that's feeding these secular growth trades. It's feeding the tech trade, and the overwhelming market cap bias right now is towards that growth and tech sector. The T I M T space out weighs the cyclicals, and that's not normally the case in the SMP five hundred.

If you were to see an outright growth scare where really something more nefarious has begun to be anticipated and the market wants to flip out of secular growth and into defensive that will drag the market down. But while we're in sort of this purgatory of slowing growth. That's not that bad. You could actually see the market continue to creep up just because of the composition of the market cap right now, So let's talk about the composition

and the idea that growth. You're seeing more earnings for visions upwards, that they are stronger in the growth stocks than you're seeing even in value. Despite the fact that you're seeing this potential rotation, what does this mean to you? So you know, one thing I've noticed on the value side, and we make you when we make the case that sort of the cyclicals are dragging down the revision ratios. It's actually only part of the cyclicals. It's the financials.

The energy companies have still been decently strong, the materials companies have still been decently strong. Um. You know, for us to really say there's a massive problem on that cyclical trade, we'd probably need to see the energy of material sectors start to falter a bit in the industrials as well. We're not seeing that yet, but it's clearly something we've got to keep an eye on. Laurie, great to catch up with you on a massive week ahead.

Going to see you again, Lori Cavastine or obviously Capital Markets head of US Security Strategy Laurie mentioning the composition of this market heavily weighted towards big tech for the United States. Lloyd Minor joins US now to say sus Stanford University and their School of Medicine. Dean barely describes his original research in medicine, and also his academics were

thrilled to Dr Miner could join US today. Dr Minor, a federal judge stood up last week and said Indiana University can force people in some way to get vaccinated. I know it's Stanford. You have a sterling record. I believe it's two hundred and fifty seven illnesses, which is remarkable given the size of Palo Alto. But what is your policy? Are you heading towards where Indiana is? Good morning, Tom,

It's good to be with you. We do have a policy requiring vaccination for all healthcare workers and also for students at Stanford. There are provisions for people to apply for exemptions UH based upon medical or religious reasons, but we strongly encourage people to be vaccinated, and we're seeing a very high number of people in our system who vaccine. That's right where I wanted to go if you have that policy from someone of your reputer frankly Indiana University

as well. Do you see action on the part of the unvaccinated, Yes, we do, roughly of people in our health care delivery system today or vaccinated. Uh, that number may be larger. We're still collecting the data, and that it continues to increase every day. I think vaccine hesitancy is coming down. We're seeing just how effective these vaccines are, and of course, with the emergence of the delta variant,

vaccination is even more important. Dr Minor Our our colleague John Farroll pointed to a headline this morning out of Reuter's an exclusive report by them saying the US will not lift travel restrictions citing this delta variant, saying it is too early. Does this make sense from your perspective base on the science, It's always hard to know when to impose restrictions on the mobility of people or the

active at dese of people. Certainly, the delta variant is more transmissible, but we do know that the vaccines are highly effective at preventing severe disease from the delta variant. You know, over the past several weeks. Over of the deaths in the United States from COVID nineteen have been an unvaccinated people, So while there is still a risk of infection in people who are vaccinated, the disease is typically much less now. Also, we know that masking and

observing social distancing are effective measures as well. I think the decision of when to impose a travel restriction is one of the most difficult decisions our government leaders can make. I think the more we can do to keep track of the pandemic, where it's spreading, where it's receding, will help to inform those decisions. A very diplomatic answer, Dr Minor, there is a question also going forward of what we ought to be tracking in order to understand that we

can open up our borders. We can open up some of these restrictions in full and a comprehensive and frankly united way. Is it fair. Is there a threshold of hospitalizations or death rates that we can look to to signal that perhaps we have the all clear and can go back to life as normal. I think you point out the critical UH point to monitor, and that is hospitalizations.

We know that what happened early in the pandemic the tragedy in New York in April and May of last year that was related to the healthcare delivery systems becoming overwhelmed. Not enough hospital beds, not enough fentilators, in some cases, not enough oxygen. We can't allow that to happen again.

We're going to continue to see mild to moderate illness for weeks months ahead because this pandemic, the virus continues to mutate, their more transmissible forms that emerge, So it's gonna be a long We're gonna be living with COVID for a long time. But we have to make sure

that we don't overwhelm healthcare delivery systems. When I look at the I look Dr Minor at a nation is Tokville talked about, which is an intellectual anti science and I know every other nation has the same challenges as well. Stanford is one of our resources of science. And I mean that in a philosophy sense. How do we shift this philosophy in America? Well, I think there's a big responsibility for those of us who are in science and medicine to be better communicators, and we have been in

the past. When we don't know something, we need to say that we don't know it. We also need to help people understand what the process of gaining evidence is. You know, no one, I think to your very few people two years ago would have predicted that something like COVID nineteen would happen in our time, and it did. And we're still learning about rates of transmission, how the virus changes over time, and what can be done to

prevent it spread. We do know, however, that the vaccine that have been developed and given f DA Emergency use authorization United States are among the most safe and effective vaccines ever to be deployed. We have to leave it there, Dr Minor, Thank you so much. Lloyd Minor with an update, an important update from Stanford University. Let's get to Michael Kushmachawe with more Can Stanley, c IO of Global Fixed

Income My cold. Part of the beauty of these conversations we have on this program sometimes is to get the more can Stanley view and compare and contrast that with another outfit. So let's talk about Goldman. Here's the quote. In the near term, a complete service sector recovery will likely require fully overcoming virus fares and returning to office work patterns. Both now appear likely to take longer than

we anticipated. Goldman go on to deliver a one percentage point downgrade to GDP growth forecast for Q three and Q four. What's the more can Stanley view at the moment, well, our our view in investment management is that a slowdown of some degree is not necessar severally a terrible thing for the economy as a whole, and that we were growing very, very fast, you know, with almost double digit paste in the middle of this year, and it obviously

we can't sustain that. And there's large inflationary pressures which are making it difficult to discern the underlying trends and inflation in terms of how much is temporary, how much is permanent or inflationary, raising inflation expectations, So modest down down down grades and growth a little bit longer time frame in terms of getting back to normal because of the rise of the delta variant, and more uncertainty as to how people are going to behave with this greater uncertainty,

the unwillingness to increase vaccinations um and meaningfully in the in the near term. All presage that that what what was seen in terms of a downgrade in growth expectations in the bond market, with yields falling significantly from where they were at the end of Q one micro cust from this morning. Just to get math, John insisted I do some math just to shut me up, and and and Michael, I did a twenty year regression of the five year real yield. I'm sorry. We have been in

a trend of inflation adjusting ever, ever, ever lower. How do we break the trend? That's absolutely true. It's but a combination of of design policy to bring inflation down over the forty years. I remember Alan Blinder, when he was Vice chairman of the FED, talked about opportunistic disinflation as a way to bring down inflation in the I think they've exceeded beyond their wildest dreams. But there's also been the underlying secular stagnation hypothesis of falling the secular

dynamics of economies bringing down that rate as well. I think what has to happen is that the FED has to has to commit to trying to raise inflation by keeping monetary policy easy when things are good. This is the opposite of opportunistic disinflation mean opportunistic inflation, which means that as the economies do better, we don't respond to it, just as the over responded in the previous periods. But most importantly is that a policy error occurred in the

tooth us in fifteen to two thousand eighteen period. Inflation expectations collapsed, and we need to get at least back to where he works in the two thousand twelve two thirteen levels, which were slowly getting back to. But the bet is will be a challenge with inflation as high as it is today to convince markets they will not revert back to any kind of behavior they had prior to this some pandemic Michael faith and how much the Fed is willing to allow this economy to run hot.

Another way of looking at this is can real yields go more negative? They're already all time lows UH this morning as people look at inflation picking up, supply chain issues not abating, labor shortages not abating, and a FED continuing to be devish and pointing to the delta variant, is this a trend that has more steam? Can we see two percent negative real yields? I think you can if if they remain committed they will not change a

monetary policy. You think about the mathematics of a ten year bond yield, It's an accumulation of of of one year yields one year, this year, one year, next year, one year every they're going forward. So the longer they procrastinate or not raise interest rates, the more eat the more downward pressure there is on long term rates. Today. You know, we estimate that if they fed um one

point six tenure rate would be fair value. If the FED did what they said they were going to, you know, raise rates to the end of two thousand twenty three, If in fact they procrastinate further, where yields are today are not unreasonable. I'm considering if they procrastinated four to

to raising interest rates. So the more they push out with forward guidance and when they're going to and how fast they're going to raise rates, the more heels can stay low and inflation is still high, real yields can continue to remain very low. Can they move a lot lower? I'm not sure about that, because I think inflation is going to peak in the next couple of quarters. Michael Kushkin Stanley is gonna catch up set as always the

CEI of global fixed income. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live week days from seven to two AMI Eastern. I'm Boomberg Radio, and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg