Surveillance: Eichengreen on Globalization's New Normal

of course, on the Bloomberg. A few minutes ago, present Elect Donald Trump saying in a statement he intends to nominate Rex Tillerson, the chairman and CEO of x On Mobile, to be Secretary of State, saying he was quote one of the most accomplished business leaders and international dealmakers in the world. And here from some perspective on that is Gideon Rose. He's the editor of Foreign Affairs magazine. Peter G. Peterson, Chair at the Council on Forimulations, getting good to see

you good. Let's start with that with this nomination, this pick to be Secretary of State. I was thinking ahead to what these confirmation hearings will look like and what will be discussed, and it strikes me that for the first time in a long while, they're going to center on business much more probably than the candidate's vision for

foreign policy. Um, well, it'll I think it's the relation between those two which is the question for Tillerson is he has extraordinary business experience and extraordinarily extraordinary skill, How does that apply to foreign policy? And and what is the carryover? Is there a difference between what you do as head of Exxon and a difference in what you do is Secretary of State, and how does that play in? And of course the Russia angle is going to be

a major topic of concern. Let's pull on some of those threads there and first look at the similarities, so much as there are some between running a big multinational company like this and the State Department. We know of the bureaucracy of Washington, how byzantine the State Apartment is, like many other agencies in Washington. How much of a deficit will that be to come into running an organization

having no familiarity with that, with that bureaucracy. Well, on the one hand, running any kind of large organization like that and doing it successfully has a lot of experience that can carry over, and so that's really good compared

to a person taking over who hasn't managed anything. On the other hand, the restrictions on what you can do running a government department as opposed and running an independent foreign service as opposed to running a company in which you are the CEO, UH, you can do a lot less. And I think that even President elect Trump is going to find that, which is that just because your president doesn't mean you're the CEO of the entire country and you get to order everybody in the government to do

what you want. And we just don't know how the independent institutions of the Foreign Service, the armed forces, the civil service, how all how the Trump administration is going to react if those parts of the permanent government and Congress have somewhat different views on policy. Let's look to history as a guide here. How important is this relationship between a president and UH and his secretary of state. It's, first of all, the answer is with all cabinet appointments,

in all relationships, it all depends on the president. Because the president is the ultimate decision maker and gets the the deputies that he wants and runs things the way he wants to run them. So the secretary of State relationship is obviously a crucial and important one. But one of the big things in this administration, I think they we're all going to be looking for is to see what the relationship between the White House and the NSC on the one hand, and the various cabinet departments is.

We've had a concentration of power in the executive in and in the White House in recent years. Will that change in this situation? Will people like Tillerson or General Maddest or Stevution or other people have more autonomy and power than they have had recently? Because right now the White House itself seems to be staffed up less and less impressively than the departments. What is this this decision telegraphed to you about the foreign policy priorities of this

incoming administration. You mentioned Rex Tillerson's ties to Russia. We've seen the photograph of him and Vladimir Putina that he's received this award from the head of of Russia. He's done a lot of business there. Does it give you the sense here that this administration will be, if not fully focused, heavily focused on the relationship with Russia on day one? Well, it does suggest that there's gonna be

a change in the relationship to Russia. And it also suggests that deal making and business skill is something this new president elect takes very seriously. The question is how does that play into existing American farm policy and in Russia in particular. You haven't just been about deal making with Russia, You've been criticizing them, you've been opposing them. And how is that going to play out? And we just again don't know yet. And as the sen some

senators have already said they're going to question this. Um. I think he'll get through ultimately. But how this plays in even to the story about Russian hacking into the election, there's an odd Russia angle to all this that nobody really knows yet how far it goes. Giving Rosa with his Foreign Affairs magazine, I have the new issue in front of me on eight pages. I can't say enough about it. For the price of one of David Gura's artisanal martiniz over in Brooklyn, you can have a year

long subscription and it will make all wiser. I read it cover to cover this issue. Tim Geitner on lessons learned from the Crisis. Robin Niblet of Chatham House on liberalism, and there is a spectacular article from Catherine Newman and Hello Winston on us manufacturing the little shatter all of your preconceived conceptions that are like mine wrong, Gideon, the institutional mix here, the testing, the uncertainty. I hear in your voice there, I guess you don't work in a vacuum.

Who does a Secretary of State turn to in Washington besides the Council on Foreign Relations and to read Foreign Affairs magazine to get wiser faster? Is there a bureaucracy to help him? So this is a great question, Tom, because of course there is a major bureaucracy. You have an intelligent community that is professionally charged with keeping tabs on the world and providing accurate information. You have a foreign service, you have a uniform military, uh, you have

a civil service. And those people are all really superb professionals. By and large, we often derived them as bureaucrats, but the fact is they're often very serious, competent professionals who work very hard behind the scenes to to get things right.

And one of the things that people are worrying about or are looking at with concern is the new the transition at least apparent lack of connect with the professional staff, as it were, of the government, as evidenced by uh, not just the President Alex not getting the intelligence briefings, but also dissing the concerns of the intelligence community when

it comes to things like the Russian hackings. So the professionals who you would think would be the people you're gonna rely on for your staff right now are a little bit concerned how uh they're going to fare in the new administration. If I look up diplomacy in the in Thesaurius, I don't think that deal making would be a word there next to it. Are we right to use these interchangeably? Is deal making the same as diplomacy? Dealmaking is not the same as diplomacy. But it's not

true that dealmaking isn't a part of diplomacy. It often can be. The question is what kinds of deals with whom and what the overall strategy guiding them? So right now, so one of the things that we're not clear about. People don't like uncertainty, and for good reason, right uh. The the things like the call with Taiwan and the question of is our China policy going to be overturned I mean, the US China relationship is the single most

important relationship in the world over the next generation. It could bring untold prosperity to both countries. It could also bring conflict and economic disaster for the world. So messing around with that and not even knowing people, not knowing how much the new administration is messing around with that is kind of an uncertain trumpet at this point. I look, I look to a natural security, national security and natural security,

the issue of client change. You have Rex Taylerson, who has been somewhat ahead out front of that, more so than perhaps that the President elect has been. How big an issue is this going to be for the State Department going forward holding to that agreement that was agreed to in Paris a few months ago. I don't think this is necessarily going to be just a State department issue.

I mean, if you have a head of the e p A who might have different views than to Tilson, and and even the President elect has had different views on the subject on the campaign trail versus what his businesses have said when they're actually uh coming up against things like rising seas. So we just don't know. Gideon, Thank you so much. Gideon rose Um so much to do with foreign affairs at magazine Out of Order, the future of the international UH system. It is their issue

just out. I really can't say enough about the previous issue on populism as well. We're fortunate to be joined by Barry ike and Green, Professor of Economics and Political Science at UC Berkeley, currently a Distinguished visitor at the American Academy in Berlin. Shortly after the show today, he'll be delivering a lecture on the populist turn in American politics implications for Europe. That lecture arranged by the American

Academy in Berlin and the Champeter Seminar at Humboldt University. Barry, I can be great to have you with us. Hi, David, Hi, Tom. We were a few weeks ago. Tom and I were in the audiences that Christine Legard gave a speech here at Bloomberg. She talked about people talking about D globalization. She was worried about the prospects for D globalization. Who in this day and age is making the case for globalization.

I don't think that globalization really has UH business advocates, political advocates hyperglobalization at least of the sort that we experienced prior to the financial crisis. What we're I think settling into as a new normal in terms of globalization, or that would be the best outcome we can hope for. UM. We had hyperglobalization where credeing financial clothes across borders for growing faster than the global economy, but that was driven by China, a story that's over. That was driven by

global supply chains. A story that's over that was driven by financial deregulation, which is over. So I think settling into a new equilibrium where UM, trade, financial clothes, and the global economy are all growing at about the same rate together is a better situation than UH having create trade and international finance outstripped the real economy. We see the tendency here toward looking inward, maybe to rejecting a lot of the multilateralism that we've seen over these last

few years. You've looked at at history, you talk about equilibrium. How cyclical is this? Do you do you expect a period of inwardism followed by then a more multilateral view of the world Again, I think we will suffer through a period of um looking inward if policymakers do not

do a better job at getting economic growth going. So I think UM, faster growth heals a lot of wounds economically and politically, and and and more successful economic growth could lay the basis for a little bit more enthusiasm and support for the multilateral system. So that's assuming a positive outcome. It would be nice if it happened. Barry, help us here with the core I can green knowledge,

which is our exorbitant privilege. I love chapter four of one of your great short books, Global Imbalances and Lessons of Breton Woods Sterling's Past Dollars Future that was written a few years ago. Do you just maintain, within all of our international relations and the president elects daily dynamics,

that the dollar will be our orbitant privilege? The um great advantage Mr Crump has is the same one John Connolly had when he said it's our currency, it's your problem in that there are not viable alternatives to the dollar. So even if there is more uncertainty and instability in the United States, there's really nowhere to UH to flee to UH for the moment. Over time, the Europeans might get their act together, the Chinese might get their act together.

But I think for the time. For the time being, it's all about the dollar. Some would say your most wistful book is the European economies. Buried in the middle of it is towards the Golden Age. Nobody right now berries looking for the Golden Age in Europe. We're doing a ten for one reverse split on unit credit another bank. You know that's been around since you began teaching at Berkeley. It's going down the tubes. Uh the unrest that we've been talking about with you through the morning. Where is

the Golden Age? It's out there somewhere. I know it's about growth. Is it really about technological progress? I think it's partly about technological progress. So Europe's Golden Age was supported by the fact that Europe was starting out behind and it could import technology from the United States and in the third quarter of the twentieth century, and even after that, it was partly a matter of political solidarity.

So Europeans were able to pull together in part because of the Cold War and uh UM wanting to keep the Soviets out as it were. I I think now there are both technological headwinds and political headwinds that Um the Europeans would have to surmount that they're unlikely to surmount. Um so um. Another golden age is not in the cards. We've we've watched this low and slow global growth, and we've seen here the fracturing of a big international trade deal.

Talk if you would, about the relationship between the two things. In other words, is it possible to have an uptick and global growth here if we don't have the kind of robust trading that might lead to it. I I think the robust trading system would be a consequence of better economic growth. There'd be more support for openness as we were talking about a moment ago, rather than being

the engine of UH faster growth. So I think the engine, you know, has to be started at home through UH fixing the financial system in Europe, through a better balance of monitoring fiscal policies, and the trade growth will follow. One of the great moments of my career Bloomberg Folks was enjoying seeing Professor Iken Green battle in Singapore a million years ago? Were there worthy emerging market central bank chief over the future of India. Let me cut to

the chase. Mr Ike and Green got the debate right, got any the other guy didn't. David gerrom My book of the Year, Ken Rogoff, The Curse of Cash. It's a brave book. It's kind of a very Green would have written. And then it talks about cash. He hedges it, he shows the weaknesses of his argument. He brings otmar Issing, the acclaimed German economists into it on page four. And

then there's the thing on negative rates. But you know, we talked to Professor Rogoff even he didn't expect what's occurred in India, right, and we've we've seen a real political backlash there. And Barry, I can Green, I wonder what you make of this of a of of Ken Rogoff's argument and be sort of how it's played out, not exactly how Ken Rogoff prescribed it to take place

in India here over the last couple of weeks. Yeah, I think there's a lot of um distance between Ken's careful book and the not so careful policies that they've adopted now in India. As I understand it, the argument for doing that kind of monetary reform and doing away with big bank bills is to crack down on money launderers and drug traffickers and other people who uh use

hundred dollar bills and five hundred euro notes. What they've done in India is removed so many banknotes as to create hardship for shopkeepers and and and poor people without making other provision for them. These are people who are under banked, not necessarily because they're avading taxes, but simply because they're under banked. And I think that's where the backlash comes from, the that the measure was poorly targeted. Let's take a step back and talk about reform more broadly.

Can talk about that as one facet of reform. You're you're speaking on reform in Europe populism in Europe today? Where do things need to head? As you see when it comes to the banking regulation in Europe. But we we've heard the cries for the removal of the the revision of Dodd Franca in the US. What's the future

of regulation here in the year two thousand seventeen. Well, in Europe, I think they have a problem with the new resolution regime where they make it very hard to uh and check public funds into bad banks and under capitalized banks. And that's part of the reason why progress in resolving the Italian banking problem has been so slow in in the US case, it would obviously be reckless to remove Dodd Frank before you had other ideas about

a substitute for it. So to go back to pre two and seven bank regulation um would not be a solution obviously to any of the unintended consequences of Dodd Frank. So it's easy for populists to object to measures in place and to criticize Dodd Frank. It's much harder to see what they're going to put in its place, and

where we're waiting to find out. I wonder what you've heard in the conversation, the ongoing conversation about the prospects for an infrastructure spending package here in the United States, how that could be most effective, if in fact there there is one, and whether you are cheered by the fact that what's being promoted here it seems as a

sort of public private partnership model. Well, I think what we um want to see is UH infrastructure spending that actually increases the productivity of the economy, not wide elephants, but but productive productive investment UH infrastructure projects. We don't have any evidence that that's what we're we're going to

see going forward. The real question is whether UH infrastructure projects go to the UH states of the president's friends and political allies, or or or or or business partners, or whether they really go to enhance the productivity and efficiency of the economy with dollars strength. Professor I con Green, how close are we to the strong dollar policies of late nineties into two thousand two or to the Plaza Accord world of a lifetime ago. I think we're very

very where. We're a galaxy away from the Plaza Accord. We're not going to get that kind of agreement internationally, especially given the diplomatic and geo political tensions that are are are coming down the road. I don't think it's this administration's policy to support or maintain a strong dollar, but that's what they're getting, obviously from the expectation of

increased deficit spending. I would add to the UH what you asked, Tom, that those of us who worry about protectionism have more reason to worry given the strength of the dollar. Well, thank you so much, Barry. I agree this morning from our studios in Berlin, David Geren, Tom King, worldwide, this is Bloomberg, who you put your trust in matters. Investors have put their trust in independent registered investment advisors to the two and of four trillion dollars. Why they

see their roles to serve, not sell. That's why Charles Schwab is committed to the success over seven thousand independent financial advisors who passionately dedicate themselves to helping people achieve their financial goals. Learn more at find your Independent Advisor dot com. We now turn to what do you actually do in banking? Joining us buying Fortress Diamond at the

absolute Autumn David Harrow, he of Chicago, he of Harris Associates. David, once again congratulations with being out front on ownership of banking shares and it has been a test of Harris Associates and your patients. Do you celebrate this morning the restructure of UniCredit? What does it mean for your portfolio? UM? First of all, we never celebrate in this business. Tom, you should know that UM. The Unit Credit news is good because it shows that some proactivity is finally occurring

in Italy. Uh it is their biggest bank. We do have an Italian bank, but our Italian bank doesn't have any of the issues that that un Credit has. UM un Credit has been selling some assets, which is good. They're raising capital, which is good. They're really fortifying themselves. And if they could get this Montepeche d siana um situation six and get to ntail situation six, they'll be on their way. But our view was a lot of these European banking shares were just selling to low prices.

They were overly reflecting um, the bad news that's in Europe and not reflecting some of the positive things that were happening. And so we we thought it was an opportunity and it took a while for the shares to perk up, but they're finally doing. So Now, what are what are some of those positive things that are happening in Europe? When you we hear we do hear the bad news more often than the good. Well, yeah, first of all, you have the plateau of slowing growth. Growth

seems to be picking up a little bit. Second of all, you have loan losses have actually declined pretty much across Europe, and it's been kind of a source of profit in a way because you're just seeing higher quality credit than what you have seen in Europe. You're actually seeing some credit growth in the low single digits, and you're seeing

banks proactively cut fees. So at the beginning of the year, when everyone was fearing at these low negative rates with smash earnings of banks, we haven't seen bank earnings be smashed. In fact, we've seen some stability or growing. David, I gotta I gotta make some money back because I keep losing embedding against the packers, Uh, David Hero, Should I be acquiring European bank shares this morning? I think they still.

I think there's certain certain banks. Again, as you know, Tom, we're really stock selective, company selective, and I think certain of the high quality banks that are still selling out attractive valuations, being p parabond as I saw paul O

Lloyd's credit suits. These are things which still offer very very good value all for their Each individual UH company has its own reasons, really, but they're selling that low prices, and I believe almost in every one of those cases I mentioned, you're going to continue to see earnings growth. Can you attribute the political stability that we're seeing, I mean, are looking back at that referendum, and it seems now that you do have at leasy say taking more proactive

approach here too, to these banks. Can you attribute that to the referendum and we got the news yesterday that pure Color Pedant will stay on as the finance minister in that country. Are you convinced we're going to have a stable enough environment there to get these reforms done here in the near to medium term. Well, I think there's just really a strong motivation to get these reforms done.

And one of the most important things is in these MTLs is the collateral and enabling the creditors to make a call on the collateral. In Italy this process takes seven, eight, nine, ten, eleven years, and everywhere else in the world it takes one or two years, and that puts that causes those npls to be worth a lower price maybe cents on the dollar verse thirty or forty. And they're working on this.

This this is known, this is a known issue that they have to accelerate um the resolution in process in Italy. And this step alone would be very meaningful because because it would almost increase the price of these mplsh the ones that are selling at twenty cents on the dollar to thirty thirty five, in some cases forty cents on the dollar. And there is a ready market for you see um various financial firms in there buying these npls. We know that the banking secretory is so overbanked in Italy.

How do you position yourself, you know, given there's likely to be some some mergers here in the in the near term. Yeah, this is one of the bits of good news. Spain did this a couple of years ago very successfully, and they basically told all these co op banks the game is over. This is you have to be a for profit entity and if you can't make money and race capital, you're out of business or you're emerging with someone else. Now finally they're doing this in Italy.

Germany also needs for this to happen. The landa spank and these are these regional banks that are kind of stayed owned entities that just don't exist to make profits. So they're they're lacks on credit, they chart, they give too much interest and their non economic hurting the companies like Deutsche Bank, which can't compete well, Italy is ahead of is actually ahead of Germany and trying to get

these co op banks merged. Uh and he kept up with his David Harrow International investment, particularly of a more large cap variety. David Harrow, help me here. I'm on the couch. It's December seven. I gotta reallocate my four oh one K. What is the Harrow attractiveness of US multinationals versus international big cap Yeah, I think you still see a little better value in non US multinationals. Uh. Certainly, there are certain sectors that the US I think offers

very good value. And if you look at the US financials as as just one example, and maybe even some of the U S industrial names I think are looking attractive. What you've really seen are than a geographical bifurcation. You've seen industry sectors, because for about two thirds of the year, you've just had the wave of money going into what was viewed as safe and safety. Uh, in sectors like

industrials and consumer discretionary financials were ignored. And I think these are the sectors that are finally starting to perk up a little bit. The valuation differential differentials or just way too high, and and economic growth is not falling off a cliff as their valuations would have suggested. In fact, one could even argue that we're starting to see in

acceleration and global GDP growth. So this is where you really want to be in these economic sensitive names and financials, industrials, consumer discretionary and um, you know these some of the other areas like utilities and some of the healthcare names, consumer staples. Still you're paying too much for the stability that you get in these things. So I think that's we're investors should look in the economic sensitivity area, whether

it's US or international European. This is where opportunity allies. When you look at things on a sector by sector basis, do you do you subscribe to the belief here that we are seeing a so called Trump rally or was that rotation under way well before the election? You know, it actually did start a little bit before the election. And I think you could go back to post brakesit you had a huge Brexit shock, and then two or three weeks after that you started to see some return

to normalcy in markets. Uh and and unless of this knee jerk rapid response. And so you saw finally maybe in August and September even October a little bit of what I would call a leveling out of these valuation differentials, and then when the election came, it just started to accelerate and I think we're probably in the third or fourth ending. They're still given evaluation differentials. This is the key.

Look at the prices you're paying for businesses, and if something like Daimler is UH eight or nine times earnings and something like Uni levers eighteen or nineteen times earnings, when you see these big gaps between companies that actually grow at not such dissimilar rates, there's an opportunity to be had. Do you see the market becoming more earnings driven here in the near term? Absolutely? I think this this macro obsession which investors have had is perhaps starting

to wane off. And evidence of that would be what happened post the Italian referendum, when it wasn't necessarily good news for the markets, and you really saw a very little reaction. And so maybe investors are beginning to realize that these macro and global political events do not matter as much as a company's ability to grow their earnings and cash flow streams and what they do with them. Yeah, but I would actually prefer at the bottom up value inmester.

I want them to be obsessed with macro because it gives us opportunity. David, one final question. It's been a challenging year for so many people in investment. What's your enthusiasm for the ownership of equities in the next year. It's pretty high, Um, not as high as it was six months ago, just because valuation moved. Yeah, we've moved.

But I still think, especially at much rather being equities and growing earning streams with good yields than in bonds, which are the prices of bonds are going to go down. David Packers super Bowl bound. I don't believe so. Tom. I would love to sit here and tell you yes, but I have to be honest. I still think our defense is suspect. I'm really happy to see Aaron Rodgers coming out of his funk. I mean, the last couple

of games, he looked really good. But the defense is just two week Okay, talker, be sure that goes out on Bloomberg. Attribute that to Packer Packers shareholder, Packers shareholder. He's just you know, if we're interviewing somebody up at Bloomberg Boston, we wouldn't be having this conversation. They'd be like all Tom Brady, David Harrow, Harris Associates in Chicago, and of course the gentleman from Wisconsin, David, I have been remiss. Dal Jones year to date thirteen point six percent,

SMP five double John Tucker double digit. I say ten point four percent. I have to update the four. Oh, I'm just I'm in the triple leverage all cash fun I'm getting killed. NASA up eight point one percent. Nasdack compositive because it's not the retirement next year, thank you. The only retirement plan I have is a surveillance cactus casket castus like cactus. Yeah, the bright orange cast. Thank you. There we are, David, here by the coastline, with a

smell of salt air in the midtown air. John Tucker is going to be cold like Thursdays, like like a Boston would say, wicked cold. You have no idea how one. He is frozen by the Tucker House. Not safe enough to skate on just yet. But yeah, let's get there. Speaking of skating, that takes us to freshwater economics. A breath of freshwater economics just wandered in the room. Charles Plaster is the esteem former president of the Philadelphia Fed,

which carries its own historical baggage with it. But far more importantly, Professor Plaster out of Rochester is known as someone who has looked at the saltwater milieu of the east in the certitude of Chicago to the west, the economics the Bractish economics to the west to note Rochester, Virginia and other freshwater climbs. Professor Plaster joins us, Now, are we heading towards a freshwater fed? Is that really?

Is it? That's an interesting question, and that after the death of the Phillips curve, the lack of inflation, finally we're going to get our Trump reflation. Is it a freshwater moment in economics? It's an interesting way to put it down. But I think not so much. I mean, the UM I think freshwater has so called freshwater economics, has a lot of good things that need that needs

to be implemented at the FED. But the you know, but the economics is the staff mostly the FED and and and they are decidedly UM a big institution, and they're only going to change very slow. Within that is where the I S curve is. What is your perspective of where the real economy is represented by that ancient simple model? Well, uh, I S curve is is the wrong way to think about economic but that's why everybody doesn't. I knew you were going to say that, but the

fact is, that's how business gets done. O MG. The I S curve is terrible. Do something that's modern economics right. Unfortunately, modern economics has been heavily influenced by Kenjian models and versions that somehow the whole world is driven by demand and and it's very difficult to get macro economists in general, but certainly the FED to think outside of that demand

view of the world. And I think it's been illustrated pretty clearly over the crisis and recession that there's a lot more going on here than just lack of demand. And I think that, um uh, you know as well as I do. Tom. I'm I'm an old I'm not an old, I am old, but a real business cycle guy. And I think if you look at a lot of what's happened, it's about productivity, which is really what the

supply side really is all about. What is most concerning to you right now when you look at the health of the U. S economy, Well, I think it's productivity that is the big concern. I mean, if you think of why growth is slow, it's about productivity. And none of our macroeconomic models, generally speaking, not just at the FABIT elsewhere, none of them have a mechanism very easily to build in what happens to productivity why productivity moves

as it does. So if you think, like I do, that much of the productivity slow down is at least or at least partially attributable to sort of a massive shift in sort of the regulatory state, if you will, If you think that has an impact on productivity, the FEDS models never were capable of building that effect in because they're so focused on the demand side of the economy that there's no mechanisms for how a productivity might evolve.

When you bring up the weight of the regulatory and environment looking ahead here to what might have been in two thousand seventeen two th eighteen with regard to regulation, do you see that es potentially changing productivity? We just not know enough about what could what could jump started in the new year. Well, I think we don't know

enough at this point. I do think that there are two things obviously that that have been stress and that is a fiscal policy which would be sort of traditional KNESI and stimulus, which is to stimulate demand, and fiscal policy actions that would focus on enhancing productivity in various ways. Those are very different types of policies, and the question is what will we get? Can I go wonk right now?

I mean, I've got to do this. Kittling and Prescott two thousand and four Nobel Prize winners, many arguably suggested Plaster should have been added to that name. Professor Plaster. When you look at business cycle theory, the modern bringing in the supply side into demand dynamics, and all the Kittling and Prescott did is labor in that model cans put labor front and center in the depression? Can business cycle theory help us understand labor dynamics that leads to

wage increase? Sure? Sure, sure it can, and many and some of those models there is labor now, models of labor behavior and labor supply in particular are uh complicated. They things that we don't understand about some of that. But nonetheless the models can can do that. We're wanted to bring a Charles Plaster, the former president of the Philadelphia Fed, professor plus or there was pushing ten years ago.

I can't believe I'm saying that a fabulous moment at the Dallas fed in honor of John B. Taylor of Stanford University. A bunch of worthies like yourself got together, including Bennett McCollum of Carnegie Mellon, Lawrence Cristiano at a wonderful paper, Rules and Discretion in the simplicity all these other fancy titles about real time data and Botton premiums, just rules and Discretion for our global audience, explain the bait in the heat around it of rules indiscretion? How

long have I got? No? The debate is pretty actually pretty simple, and the debate is a very old one goes back to UM assignments back in the nineteen thirties, and the question is is it better for policy makers to behave in a systematic rule like manner or is it better for them to behave with discretion, which essentially means to make the choices they have at the time and try to do the best thing at the right time,

which is the way that you it's usually put. And the problem with that is that UM for most economists and many economists, that debate was settled a long time ago, and and partly by uh Kitlin Prescott. As you were talking about, but Mike, Mike, I was testifying actually with John Taylor just last week. UM and UM. I think the problem is is that policymakers like discretion and it's hard for them to give that discretion up because they said, well, we need to be able to do the right thing

at the right time. But that also at discretion also means they could do the wrong thing at the wrong time, the wrong thing at the right time, and so you increase volatility and uncertainty about the path of policy with discretion, and that's the problem. Charles Poster, what does this say about the relationship between the Fed Reserve UH and lawmakers on Capitol Hill? There are those on Capitol Hill pushing

for more rules based approach from the Fed. Can anything be done to make that relationship better between the Fed and Congress? To make that relationship better? Well, I'm terribly worried that the direction that some proposals for reform are actually going to result in making the FED more political

rather than more accountable. So I stressed it it's important for the FED to be accountable, but that the path to that isn't through making it more political, And I'm terribly worried about making sure that whatever Congress does, it gets that balance right. So the FED already works with rules. They could be a lot more transparent about what they do do with rules, and and they could head awful out of this debate. But I do think there ought to be pressure on the FED to be more rule like.

Do you think that the regional presidents speak too much, that there is too little unanimity, that that the FED could do better by having a more unified voice. I recall for seeing you with the FEDS one anniversary conference at the Philadelphia FED a few years ago. Now, you gave a speech, and you met with reporters afterward and

gave some comments. FED presidents do talk a lot. Does that somehow dilute the message of the the the the importance perhaps of the Federal Reserve When you have so many different people speaking about what the FED is doing. I wouldn't mind the Federals are becoming less important, actually so, But no, I think that I think that's no, I don't agree with that. I think, in fact, that it's

important that the presidents speak. I actually think would be better if the governor spoke more often expressing their view. I mean at the FED we eat striving for consensus. Everybody agrees, and what that does is lead to poor communications because people don't know what the debates I think and the other. The other thing it is it leads to group think, and you want to not have group think at the fit and the only way to get that is to have people sharing ideas, different ideas to

keep the debate lively and honest. How do policymakers deal with potentiality? I think of the conversations we've been having here about the prospects for infrastructure reform, our infrastructure spending, tax reform, tax cuts. Uh, we're going into a meeting here today and tomorrow. How are they processing what could happen here with a Trump administration in the new year.

Are they thinking about that or they have to sort of think in the vacuum of the Equos building and not give thought to what any potential implications on the economy might be from from laws like those. Well, I think they clearly do have to give it some thoughts, and they will give it some thoughts, And they don't know any more than you and I do about what's

likely to transpire from Congress. And I think I made the point earlier about whether the fiscal decisions made by Congress focus on enhancing productivity versus just stimulating aggregate demand in sort of a Kenzie and naive in kind of sense. And I think it's the effect on the economy is going to be much about which of those paths end up being taken, and we just don't know for sure yet.

Is the Taylor rule still useful in policy? If you were sitting here with Rick Michigan, who's got a different view than Charles Plaster, could the two of you agree that there is efficacy to the Taylor rule? Absolutely? I think Rick and I would would agree wholeheartedly on some of that. I mean, I think I think the there's a difference between saying, you know, we're going to follow the Tailor rule lavishly or what value are rules for policymaking?

And I think Rick Michigan would say this and I have known each other for forty years and he would probably say some of the same things. I'd be saying, there is value to rule like behavior. Now we can get down the weeds and talk about the details of that, but I think we would agree on that. Are we are we at full employment now? From from Charles Ploster standpoint. When you look at the labor market right now, are

you satisfied with where things are? From the statistical point of view, It's hard to argue we're not pretty darn close to full now. That doesn't necessarily say that we ought to be satisfied with that, or they're not other things that can be done, or why is the labor force participation rate so low? Why isn't it higher? But those are not things monetary policy can do anything about very quickly. I talked to Gary Showing the other day about good and bad inflation? Can we have a good

inflation with a Trump reflation? I don't see any inflation as being necessarily good. End of story. Paul Bulker once said, why do you guys have a two percent inflation target? Why not? Why not zero? Remember I remember it, well, this has been fabulous, folks. This is we don't do this too often. That was a wonk fest with Professor plus or send me emails, etcetera. David Gura, John Tucker on Kidling and Prescott and all the other theory, Rick Michigan and John V. Taylor that we spoken. This was

really a specially Professor plus or thank you. Thank you so much, Charles Plaster as a former president of the Philadelphia uh FED. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm out on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio. Who you

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