Thaler's Nobel Win is Great, Hubbard Says

little questions. But we will address the periphery of monetary policy as we can with the extinguished dean of the Columbia Business School, where he was Carson Professor of Finance, Glenn Hubbard. What I know is Eric Johnson's course at Colombia Business School Bight six one nine dash zero zero one Behavioral Economics and decision Making will be a different course as you move forward, and you know you've got them now in two thousand seventeen as well, where does

Richard Taylor fit into Hubbard economics? Well, Taylor is a fabulous choice for a Nobel as a bridge between psychology and economics. In fact, my Freshman textbook is long featured behavioral economics. I think it's central, even at the basics. I have colleagues like Eric Johnson or you mentioned, but also Steve's Elvis who worked to bring behavioral economics into the practice of business with the NBA students. I think

this is a great nobel for the profession. You know that the certitude of the media in the FED parlor game is just that an amateur certitude magna decide Ls writes about Hubrius about a disequilibrium state. How do any chairs, whether chair Yell and Chairman Bernankey, how do they fold behavioral economics into the crystal ball gazing that is so juvenile? Well, I think it's a really important question. Tom. You know

it's going back to the financial crisis. I think ignoring behavioral factors lead the FED astray and many economists astray. I think the key right now for the FED is to ask the question, what's normal? What does that mean? How to basic economic factors and behavioral factors shape that You've written about the need to find somebody to run the FED who can quote, maintain, and explain. You've said

that the personnel is policy. I wonder how much a person individual can shape or reshape the FED, and how much time that takes to do well. No one person, of course, is going to completely remake the FED, but the chair is a very important role. He or she will set a tone I think the idea maintain and explain as you ought to be able to articulate a framework for monetary policy and the lender of last resort, and explain when you deviate. The chair sets that tone.

I think the board will too. The goal I think for President Trump is to appoint an entire Federal Reserve Board essentially that could carry something like that out. Do you feel satisfied that he's well on the way to doing that. Our colleague gena smile like writing a great piece last week for Bloomberg Markets magazine, and when she looked at this imbalance as it stands right now, you've got a board that has a lot of regional presidents and fewer FED governors. How problematic is it to your

mind that we have that imbalanced at this point? And are you satisfied we're going to see that put into some equilibrium here in these next few months? Well confident we'll see the equilibrium. We've already seen very good choices, like Randy Quarrels to be the vice chair of the FED for Financial Supervision. Obviously President Trump will make a decision about chair. There's also a vice chair other governors. I think the team is very focused on that and

it should be. I thought this weekend, which I'm sure we'll be discussed, to call me a business school Dean Hummard is the idea that if you cut corporate taxes there's almost direct extrapolation over to economic growth. Do you buy it? I do. I think the bigger story to tell economically and perhaps politically is the link to wages. You know, when I was a student many years ago, the view was the burden of the corporate tax was born by owners of capital. Economists today, myself included, believe

that a lot of that's actually born by labor. And the reason is that the corporate tax depresses investment and productivity. So yes, there are growth effects and wage effects. And that's where the debate and the debate across Democrat and Republican politics is about the diffusion of technology across the models we learned or with our humility, the models that we're living in the right now. How do you adjust Hubbard economics Given this huge new impulse of technology, we're

living well. I think corporate tax reform will help with that too. It will make sure that more of those gains get shared in productivity and wages with workers. I think the questions you're asking about growth about technology, that's how we ought to be talking about tax reform. And for me, the corporate piece of tax reform is almost

a no brainer. I turned to a paper that you published this summer July tenth with the John Taylor, Kevin Warson, and John Cogan here on that you all can work together outside come back on again, but the prospects for higher economic growth. And on that paper you for stressed that it's important to emphasize the tax reform and spending reductions go hand in hand. From what you've seen from the Big six this nine page document, do you think

they've tackled spending reductions enough? And are you confident you're going forward? We're going to see lawmakers do that as they put some meat on the bones here of this nine page outline. I think it's highly likely that they will be tackling that, probably not on the spending side, but more on revenue neutrality. The budget resolution almost guarantees that, and many Conservatives in the House won't vote for a

budget buster. The bigger point that the John's and Heaven and I were making is that in the long run, if we want a better tax system, we have to get the entitlement state in line, and sadly I don't see any effort there. The joke is Glenn, However, without getting you in trouble with the Fed, is the idea of low rate Janet, And we can certainly say in the sense of the President low rate Donald is the rules based architecture all of the distinguished gentleman from Stanford.

Is that a solution for the political pressure of a low rate model? I don't think so. First of all, it wouldn't give you the answer of low rates probably at the moment. The bigger reason is that we don't really know what the equilibrium interest rate is. You know, I eat the intercept in the rule that you mentioned. I think what's more important is for the FED to articulate the way it thinks about monetary policy, what are the goals and to explain the deviations. And that's where

I fault the FED. It's it's in its ad HOCNAS we go to Cartesian Monday with Glenn Hubbard. Okay, the intercept is clipping at the y axis and out on the right side of the equation? Is the unknown? Is that epsilon which is of such challenge? Taylor would probably say. Richard Taylor would probably say, we have certitude and where we describe the intercept or the slope? How do you balance that in today's really interesting UH economy with completely

fiction interest rates. Well, I mean, let me get more specific. The fed's models, the Federal Reserve Board US model framework that it uses, I don't think capture economic reality, let alone the psychological factors that UH Professor Taylor mentions. So I think there's need for more diversity and economic thinking inside the FED. UH in a real wake up call, the models and the financial crisis alone should have suggested that. I think David was that question we just to Chairman Hubbard.

I think it's worth get one more question, very hard. Four hangs up on us never again. On the subject of research, What did you hear from Janet Yelling a couple of weeks back in Cleveland when she spoke at the name but conference. You talked about inflation modeling and forecasting. Did it stand out to you as a maya culpa, a recognition that there are flaws with the modeling. What

did you hear from the chair a couple of weeks back. Well, I think the bottom line is the chair feels that we have a series of transitory factors one offset you will, that have held inflation down. And I actually agree with that. That's different though from the view of whether we're modeling inflation well, and I don't think we are. It is certainly a very big bet. If you think that they're structural factors holding inflation down, then the whole framework is

in question. But on the bottom line, I would agree with the chair. Glenn terrific sport to come on with this. Many others we greatly appreciated. Dina Hubbard is the Carson Professor of Finance and Economics, Columbia Business School, and just uh, just for a now wonderful for a how just wonderful to happen, I tell you eighty four other people is no,

we can't do that. Glenn Hubbard joining us on our phone lines, eager to have with us here in a political levengry of studios to day Andreas tone Bread, he's a member of the executive board off the Deutch to put his bunk yet here with us, as I said in New York before heading down to Washington for the I m F World Bank meetings, Great to have you here with us. Let's start just with a thirty thousand foot view of the regulatory landscape in Europe at this

point the Bossel taxa continue. What's the status of those negotiations. Yep, you know, we just met last week and um that was on Wednesday and Thursday, regular meeting and uh meeting went well, and we're getting closer and closer together, I must say, But Basil will only be concluded once the governors and heads of supervision degree and when the G

twenty endors So let's see what happens. But um, you know it, when you come together in a meeting like the one last week, you come together to agree and not to disagree. So you you know, you don't fly across the world for no reason and to argue. We're focused on timetables here with regard to your Certainly the timetable for Brexit is one of them. But how about the timetable for this this iteration of basil is it is it proceeding to the pace you'd like to see

it proceeded. If we look back, we wanted to have BATTLED finished by the end of two thousand fifteen. Now we're we're in two thousand seventeen. I must say we're still working on year end of two thousand and fifteen data and numbers by the banks. So if we really go into two thousand and eighteen, I would be worried that we would be working on a two old a set of data. It's a little bit like uh, going with the with the GPS and you know, sailing and

with an old GPS. So we need, you know, if we want to conclude on this basis, I would believe that we would need to conclude this year. Um it would be nice to have, um, you know, a conclusion during the German G twenty presidency, which ends, if end the end of November of this year. But this is not a must. We have to have a good result the drum G twenty presidency. I think the last time we spoke, I was incredibly rude because you were within hours or days of an ECB announcement. I could basically

say nothing. We got a little more wiggle room. Now. I think our listeners across this nation and worldwide, our our world audience has somewhat of an idea of the Bank of England. They've got an idea of the FED, They've got an idea of this that the other and the Bundesbank is an enigma. It is is something we don't understand. Explain the day to day structure of the leadership of the German Central Bank. We are six in the leadership. Our president sits on the board of the ECB.

So whilst in the past um the board of the Buddhist Bank crafting monetary policy for Germany, whilst whilst we still have the Dutch MK, now we are participating through our president in the decision making of the European Central Bank. So we are now have a smaller room than we had before, but for a much bigger game, if you want. How has it changed? I remember visiting with atmar Issing

in brand new Frankfort, a brand new ECB. The tower wasn't actually Professor Hassening showed me the blueprints for the tower when I was in the office a million years ago. How is the Bundesbank relationship with Frankfort change from the beginning to where we are now. Now let's don't forget that the ECB was set up with the Bundesbank as a model. Yes, so the independence of the Buddisbank was you know, taken to the e c B, etcetera, etcetera.

When you give up your monetary policy, your direct influence on monetary policy, of course there you have somewhat of a shock, but you do this for the greater good of things. So I would think that in nine out of or nineteen out of twenty instances, the Bundesbank and the ECB agree on the issues. In maybe in twenty out of twenty instances we have the feeling that we

have the same judgment. But it really depends on how you react, how you implement, what do you do, and then you know, the glass can be held full or half empty. But it's not that we constantly disagree with the CB. I sit on what it's called the Supervisory Board of the CB. So there's the governing Council of the monetary policy is crafted and then there's the bood

of Board of Supervisors. There's a Chinese ball in between, and I sit for Germany on that one, and we also UM very much agree, but we also argue we are not living in a Soviet system where where everybody has to agree all the time and everybody has to collect their heels. But it's only normal that you do that, you do discuss issues. But should there be ever, will be a decision um in the e c B, the

Buddhas Bank will properly execute with that decision. As we watch this Brexit process unfold, companies have made announcements they intend to move more workers to Germany in other places within Europe. How does that change your regulatory responsibilities? In other words, if you have an influx of more commerce or more personnel, has that change the role that your

bank is going to plan. First of all, let me say UM that I personally regret that this Brexit referendum led to what it led, and that I could have lived perfectly with the system as it was as it was, and that but that is you know, we have to face we have to face um reality, which means that a heart Brexit is the scenario the banks are preparing for. It may not be a heart Brexit at the end, but as a scenario that's the most probable and most

likely scenario. So if you prepare for that, which would mean that you would have no free trade agreement really at the end of this two year period. If that is happening, you know many many banks will have to shift part of their business into Europe, which means that they will come to certain cities on the continent. Just Brexit threatened Conrad an Hour's Europe, No, not at all. It is it is a Brexit is a UM. It

is a UM step which was taken. But it does not mean that for example, UM Britain leaves the NATO, Britain leaves the G seven, that Great Britain leaves the G twenty. It means they're leaving a common European Union, which in itself is a pretty problematic issue, but it

still means that we can work very closely together. Not to answer your question, we will have inflows of a broker dealers into Europe also into Frankfort I must say, and we have never really supervised large broker dealers, so there's going to be a challenge to the roles of the supervisors and how do we deal with broker dealers. But we are confident that we can do that. This is not really a financial stability risk. This is coming with a two year time horizon, so the market can

really understand and anticipate what's happening. What it gets your perspective on this moment in central banking or monetary policy. I go back to centrip Portugal, where you had are the leaders of many central banks. They're talking for more communication cooperation pick the word uh, and you know we see here the US trying to unwind QI normalize the balance sheet. Where do things stand as you observe it from from where you sit in Frankfurt? Why is it? UM?

I think that the debate is um. How can we best interpret the pretty strong economic numbers we're having across Europe, the much better situation a UM consumer price inflation, which is UMU at one point five pc, going towards our definition of price stability, a core inflation rate strengthening, with the highest consumer confidence we've had for a long time. UM, Why why are we why are we doing better? Why is eurosclerosis differently away? Yeah? Because first of all, there's

no deflation scenario, if they ever was one. I can actually see UM and we're seeing growth now UM in almost all member states of the U area. We have really bottomed out, and the economic environment is much better, and the political risk we've been debating half a year a year ago no longer is really there. Is it because of business practices which you studied a JP Morgan at Rath Childhood Bank of America are becoming more Anglo American. No,

because the situation is so much better. From an economic point of view, we still have a credit based economy and not yet an Anglo saxon Um capital markets based economy. In that so diplomatically, David, it's just amazing bat that right back over than that. So we're not there yet, And we're not there, you know, and and and and

we're doing we're still doing much better. So now that from a monetary policy perspective, you really have to think, so, what do you make out of this um stronger enemy, better numbers uh more going towards uh the definition of price Deputy, So my question would be what now the Governing Council, and I'm not a member of the Governing Council, would have to debate how to react. Well, I think the goal will be to get Swiss tenure yields under above positive again, that would be a good sir, this

is manager. Can you do this every week and our studios on a weekly basis? That would be a good thing from time to time. Addressed, Thank you very much again, Executive member the Executive Board of the Dutch Bundesbank. Joining us here in a plibical eleven three studios in New York. Yes, great, Evan, you're heading to Washington as well. Like this week, I should mention Tom, it's a rumor I will be there.

It's a it's a rumor right now, be there. No, we've got some wonderful interviews lined up at the I m F meetings. And now joining us the Laureate Robert Schuller Yale University is he celebrates UH the announcement of Richard Taylor to a Nobel Prize Taylor's course of Chicago, out of Case Western and out of the University of Rochester. Bob Schiller inform our audience as to the distinction of Taylor economics versus Schiller economics or Becker economics or the others.

What is distinctive about Richard Taylor. But he UH has helped promote a revolution that in economics, namely behavioral economics, that makes economics more a real world and also that leads to public policies that can be tested and found to work. Uh there has been a tendency to rely too much on abstract models of economic behavior. Uh as if everyone we're paying attention and everyone we're optimizing, but

they're not. So we're coming back to the reality. I know David Gurw wants to jump in here, but very quickly. If you go back to the Carnegie Rochester sessions of eighty two where you were there with Lars Peter Hansen, Jacob Frankel and others. If you go back to the Battle of seventy nine Common Diversity, the Battle of Sailor eighty writing originally the battle that you fought at two, describe to our listeners how the Rational Expectations Crew they

hated you people. What was it like that? Because that's strong where some of them probably did. Although I have to say academia does come across as open minded. There they may have hostile emotions. I once spoke to Eugene Fama, who is you might call him my enemy, how that we won the Nobel But he's not my enemy. He's a thorn in my side. And it's probably good. But he once told me that he has refereed and accepted

many important behavioral economics articles. Uh. I think people in academia are not all that bad, but they do get emotional. That's just human nature. Bob Sla, let me ask you about Richard Taylor, the public intellectual. We've we've seen him in the Big Short playing poker or blackjack or whatever it was, alongside Selina Gomez. We've we've we've heard him lecture to popular audiences, has written books that have been

popularly consumed as well. How much has he made a difference here in popularizing behavioral economics, Well, he has been enormously important. I think, uh As I say it's a revolution. If if you were to summarize what important has happened in economics in the last twenty years or so, I think behavioral economics would come now one. And to me, it's really inspirational to get back to reality because we

have just disrespected in economics. Other social sciences have been quietly working away and coming up with new information about how people really behaved. How could we have ignored that for so wrong? So to me it's refreshing. Someone had to had to call out the fallacy of relying exclusively on rational optimizing models. Finally it's been done. And you know, Dick Taylor was the president of the American Economic Association. He's the profession has come around to appreciate what can

what can what can President Trump learn from Richard Taylor? Okay, Well, you know President Trump himself is a bit of student of psychology, but not such academic psychology. If you read his books, and I think they were not just totally totally goest writain, he had some input into them. He is very aware of human psychology. Uh and uh, well he has Art of the Deal is based on it. But I think Donald Trump has a lot more he could learn from Dick Sailor. Professor Schulder, thank you so much.

Honored to have you with us again. Robert Schiller of Yale University of course, uh not two thousand thirteen Nobel Laureate on his colleague, particularly with great work at NB er with Richard Sailor as well. Um, David, we've had a Sailor's siding. We got a wonderful note from an extremely beliaguered Richard the conference. Yeah, and we will have him later this week, which I think is probably better for our Listen. We've talked about saltwater and freshwater and

brackish water. Is this a high water mark for behavior economics, Tomm you mentioned, Yeah, it was widely presumed that Robert Schiller would win award. But this is a further uh codification of behavioral economics into the canon. David gerin Tom Keenan, New York. This is Bloomberg. We are blessed and that we have just had on the Laureate Robert Schiller on Richard Taylor. Professor Taylor will join us later in the week.

I got a lovely note from him this morning. He's beleaguered, as you can imagine, and we'd much rather do a more thoughtful interview with the Laureate later this week. But now is the most important interview of the day. This is Randall Krosner. You know him as a governor of the Feederal Reserve System. He is without question our premier financial economist of his generation, and he has to work in the behavioral soup of the Fortress Becker every day

at Chicago. Randy Krosner, what is Gary Becker? What is the legacy of the Becker years? Followed on to Richard Taylor, what does behavioral economics mean to your Chicago m hmm. I'm delighted to be here and I'm thrilled to be able to share the excitement that Chicago Boost School business has for Sailor getting the prize. I mean, we have

a pretty broad range of people. I mean, obviously we have Gary Becker, who unfortunately no longer with us, to Wonderable Prize just in two thousand thirteen, Gene Fama of the proponent of efficient markets Wonderable Prize, and Dick Taylor, who, now that's a very different approach of a behavioral economics approach that says, we've got to really think about people as people think about their their foibles, their flaws, and

how they make decisions. And so he takes a very different approach to financial markets and economics overall than they do. But they're all together. To take it back to when you were with Frank Knight in not that all, but to George Stiegler, and to take it back to Frank Knight, are our measurements of risk and uncertainty more uncertain now because of Schiller and Taylor. When you guys are at the FED trying to figure out what to do? Do

you do it with less certainty than we did years ago? Actually, I think um, quite the opposite. It has been helpful in making sure that we have a broader perspective. I think, UM, let's say, you know, Knight certainly introduced very important ideas, UM, but I think people uh working in behavior economics helped to make that a little bit more concrete. Well, what are some of those sources of that? What is it?

What could it be from people's behavioral perspective that might be generating uncertainty or why things might not follow a simple model that we would have had in the past right across. He was asked at the press conference following the announcement of the award this morning about the impact of his work, what he hopes the impact would be or has been, and he said a quote, it's the recognition that economic agents are human and that economic models

have to incorporate that. When you look at the profession written large outside of the narrow niche of behavioral economics, how well incorporated is this line of thinking now into two other veins of economic thought. So I think it is much more so than it used to be. So just in the twenty seven years that I've been at at Chicago, so roughly half of my life, I've seen

an amazing transformation occur. Um. Very few people when I first got here really focused on these these broader issues, and I would say now that a very high fraction of the younger people that we have hired over the last five to ten years, whether it's in economics, finance, or other areas at the school, are focused on these kind of broader issues of trying to introduce humanity into into economics and finding a lot of very rich empirical

UH veins to tap. For example, Sailor has talked a lot about the mental accounting that the way you treat a dollar in your pocket may be different than the way you treat a dollar in your UH, in your in your bank, or in your savings account, and UM economist traditionally said, if you have a dollar, doesn't matter where it is, it's a dollar, the same decisions associated with it. He said, you just think about it. If there's a dollar in your pocket and you want something,

you may go spend that dollar. If that that opportunity is right in front of you. If you had to go down to the bank, withdraw that dollar, you may say, not so sure about that. To take the endowment effect further, does the central bank has any given central bank? And let's pick on the Americans. Do they have an endowment effect of the policies they have? Now? Are they so wedded to their policies that they have to live them

because they're endowed to them? So? Um, I think that's slightly different than the endowment effect, But it is another mental effect that there's sort of a framing effect that comes in if you frame the world through a particular lens or particular set of set of questions and see it that way. And so if you see the world as now subject to a lot of fragility, if you've experienced the financial crisis, you've worked hard to try to fight the financial crisis, you may be more reluctant than

someone from the outside to say, Hey, things have normalized. Now, let's move back to uh, to our normal situation quickly. You may say, Gosh, I've got the scars of the financial crisis on me. I'm going to move much more slowly. Besides,

because I've lived through it. And I think that's some of what we're seeing with central banks that you know, they're very leery of declaring victory because they've they've been in the trenches and they don't want to lose the benefits that they have they feel that they have have gotten over the last few years by undertaking quantitative easing, zero interest rate policies, etcetera. Randy, let's personalize this if

we could. Let's go to south Woodlawn Avenue and I wonder if you can think of a time when you're having a cup of coffee with Taylor or just chatting with him in the halls of the booth school when he said something that made you change or think about what you thought about in the past. And so uh. He he has been a very important intellectual force of UM of really I think opening people up to be

be much broader in the way they approached things. For example, a lot of the work that he's done on let's say UM mutual funds, where you have these closed and mutual funds, which means that it's not like an exchange tredded fund. It's closed in the amount of assets that that are owned, but sometimes that can trade above or below the value of the underlying assets, the so called net asset value and I remember having a discussion with him about that. That was something that had always puzzled

me when I was in graduate school. But he and co authors and students have really kind of fleshed that out. Try to understand that my better to help us to get um measures of um exuberance or pessimism. So gets back to what Tom was talking about before, here's a an example of where rather than just sort of dismissing it as well, that just doesn't make any sense to her. You know, there must be some sort of transaction costs

that's in there. Dick took a different approach and said, well, it's suggestive of either enthusiasm or pessimism, and some people have used that as a way of a thing. Well, this can give us broader market measures of pessimism or enthusiasm. Generous of you to rip up your morning to come on with this. Randy Krasner of the Booth School, Chicago, and celebration of his colleague Richard Taylor. Richard Taylor winning the Nobel Prize. Thanks for listening to the Bloomberg Surveillance podcast.

Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio