Alan Krueger Remembered on Masters in Business (Podcast)

we're further away from the financial crisis. But we discussed his background in economics, the Federal Reserve, his research on minimum wage. I was astonished at what a fantastic conversation he was and and just privileged to spend time with Alan and discussing what he knew best, which was economics. So, with no further ado, my conversation with the late great Alan Krueger from the spring of my guest today is a what can I say about Professor Allan Krueger of Princeton.

He was the chief Economist for the Treasury Department and Assistant Secretary of of Treasury. He was also Chairman of the Council of Economic Advisors under President Obama. Professor Krueger, welcome to Bloomberg my pleasure. So I didn't want to spend too much time waxing eloquent on your curriculum, Vita. But suffice it to say, you've pretty much won just about every award you can come up with, at least in the United States, UH for economics, and you've had

a number of just really incredible UH posts. When both within the government and out in the early nineties, you were chief Economist at the Department of Labor. I was, and and what does the chief economist for um, the Labor Department actually do? That's a good question. Uh. It was a new position. Secretary Rice created it, and I was the second one to hold it. Uh. I was very Who's the first first was my good friend Larry Cats from Harvard. Larry did a brilliant job, and he

left very big shoes to fill. I'll give you an example. One of the reasons why Secretary Rice created the job was he wanted to have involvement with the National Economic Council, which was also Clinton innovation. And the way the NBC was set up at that time, Bob Reuben was chairman, and Treasury Omb Labor Commerce were the members. So this was like a think tank, but with the old government representatives who are they would advised the president and the cabinet.

It was the place that ran the policy process, and it's different from a think tank because it produced proposals that really mattered and it had a direct connection to the president. So the way that Bob Rubin ran this process was very organized. UH budget went through the NYC process, UM trade issues went through, and ANYC was divided into domestic issues and international issues. Other departments had a separate person who would represent them on domestic and international issues.

Larry Katz was so UH skilled that he did both. So I had to fill those issues and do both, which meant being involved in NAFTA as well as UH domestic issues like the minimum wage. So so what were some of the policies that came out of that Economic Council? So NAFTA clearly was a big issue in the nineties. NAFTA was a very big issue the first Clinton budget, which was after UH sorry, before I arrived, which I think put us on a much stronger path in the

early nineteen nineties. The one significant domestic policy that did not come from it was healthcare reform, and I think one of the reasons why healthcare reform in that period UH didn't do as well as it should have was because it didn't come through the NBC process, in other words, the way it was formulated with the thought process of what's the impact, what's the cost, what's the benefit? What? What is the thinking behind how some of these policies

are developed. Well. Economists have I think, very systematic approach

to think about policy. To thinking about policy issues, we think about efficiency, we think about equity, we think about what's gonna user resources most efficiently, and we think about what's fair, and we divide issues quite clearly in that way, and we make trade offs and UM, now it might mean that uh a lot of our proposals are not politically feasible, but I think this is a very coherent framework, and the process that was used for healthcare reform was

UM much more at hoc I would say, not nearly systematic. So there's pretty much an ever going trade off between what's optimal and what's politically feasible and what's financially doable. Is that sort of the factors that that get twisted about. Sometimes you hit the sweet spot and good policy is good politics and it's nice when that works out. Other times you have to make compromises between what's politically feasible and what we'll do the most good for the economy.

And one of the lessons I learned from having served in the government for five years in my career is that, you know, compromises not such a bad thing as long as compromise leads to better policy, to improvement for the American people. We shouldn't let the best be the enemy

of the good. That that's the classic line. So you were at the Labor Department, and the Bureau of Labor Statistics also has a huge group of statisticians, economists, econometric model lers tell for people who may not be quite as wonky as some of us are, tell us what the BLS actually does over the course of any given month or or quarter. The BLS is housed within the Labor Department, but it has a tremendous amount of independence. For example, there's only one employee of the BLS who

is a presidential appointee. That's the UM Commissioner. Everyone else is a career civil servant. The Bureau of list Labor Statistics, together with the Census Bureau, conducts the monthly household Survey, the current Population Survey, which produces the unemployment rate. It also does a survey of establishments. Nearly four hundred thousand

establishments are interviewed on a monthly basis. And what is amazing to me about the BLS those are its two most important products, although it has many others, is that on an ongoing basis, it collects analysis and releases those data every month. And if you think about one, an enormous effort, that is, and to do it as carefully as they do it is quite impressive. And I think they are given a tremendous amount of respect and they've earned a great deal of credibility because they do it

in such a professional way. They collect other data also, I would highlight the Employment Cost Index and I think the employment costs in dex. What exactly is that the e c I Employment Cost Index is a measure of how much it is costing for employers to pay pay their workers, and it includes not only wages, but also

health insurance benefits, pension benefits, vacation time. It's calculated very much like the Consumer Price Index in that the BLS goes back to the same companies quarter after quarter, looks at the same jobs and looks at what's happening to compensation costs within those very narrow categories. We left will earlier talking about UM the Economic Council as chairman of the President's Economic Advisors, that's also part of that council.

Is that? Is that correct? That's right? The chairman of the c e A place an important role within the National Economic Council. So I think people are aware of, UM what the c e A is. They know they're the you as the chairperson is the advisor to the president. But I don't think people have a clue as to how that works either within the White House. Are you guys proactively suggesting policy? Is the President coming to the Council and saying, hey have a question about this, uh,

this minimum wage issue? What does it mean if we raise the minimum How does that work? What's the back and forth with that? It works in both directions. There are instances where the Council of Economic Advisors would make proposals, typically within the NBC process, where they get vetted and reviewed UH and other relevant departments would add to the

analysis and help put together their proposal. UH. And then there are other times where the president says, Look, go back to the drawing board, come up with more suggestions in this area, or uh, you know. The way I think about education is like this, Here's what I think you should develop a proposal on. So it works in both directions. So I was I mentioned the minimum wage earlier and and you have an expertise in not only UH,

labor economics, but you've studied the minimum wage extensively. Let's let's start out with Walmart in February, and then a month later it was Target and t J Max. And then after that McDonald's just announced an increase in in their low wage workers too up the minimum wage. In fact, they want to pay a dollar above the minimum wage. What does this say about the economy today? What does it say about where we are in the economic cycle?

I think it says a couple of things. First of all, when it comes to the labor market, the invisible hand doesn't always work perfectly. Sometimes the invisible hand needs a

little bit of help. In the past, when we're in a situation like we are today, where the economy is getting stronger, the job market is clearly tightening, a minimum wage increase helped the labor market to clear, and what we're seeing from companies like McDonald's and from Walmart is they are stepping in and they're raising their wages across the board. They are stepping into set a minimum wage,

imposing on themselves. That's not only market forces, that's also I think a reflection of the fact that the labor market is a social entity and worker morale is important. I think these companies will find that when they raise when they raise wages, they're going to get greater productivity

from the workers, will have lower turnover. Uh. So I think we're in a situation in the economy now where things are getting tight enough that companies are raising wages, and I think they're doing it in a very interesting way, which is imposing a floor on themselves, which highlights the way the job market works, which is uh, social factors have a role to play in the job market. So there are a couple of interesting things with both Walmart

and McDonald's. Um With Walmart, the data was that two thirds of the are employees already working states that have a significantly higher minimum wage than the federal government, so

this only affected a third of their employees. And with McDonald's it was only a company owned stores, which are of their all the McDonald's in the country, there's there's almost fifteen thousand McDonald's restaurants are are company owned, and so of the stores, and assuming the math holds up, the employees are not necessarily affected by this company owned mandate.

So how significant is what these companies are doing? Does it vitiate the need for the minimum wage, which is still at seven in a quarter and has seemingly been there for decades for there to be an increase in the minimum wage? And then we'll discuss what does raising the minimum wage due to the economy. I think what these companies have done is an important step. I think it's an important symbol. McDonald's, for example, cannot dictate wages

to their franchise e's. Uh, there're separate businesses in the legal sense, So the same way that they can't dictate prices. They always say at participating franchisees, it's the same thing. Now. I hope that many of the franchises follow suit. And do we do we have any history what happens when McDonald's does this do Obviously not every franchise, but you would assume that this sort of leadership is going to drive a little more action amongst the non company owned stores.

We don't really have much experience with this. H This is an unusual step that they've done. I hope it does drive action with franchises. Uh, but it also highlights the need for the federal minimum wage to increase. That was my My next question is, so what would happen if the Feds took the minimum wage up to you know, I've seen three numbers get bantied about, and they're all kind of interesting. At ten dollars an hour, it's a significant increase in the states that haven't read, is the

minimum wage at twelve dollars an hour? Essentially you get the inflation adjusted number from pick your point sixty eight, seventy two, whatever it is, and then fifteen dollars an hour takes a full time person working forty hours a week and pretty much gets them up to a level. And we could talk about Walmart as well as the fast food industry where they're no longer dependent on state

and federal aid. I think doubling or more than doubling the minimum wage, it's a big step at once for companies to absorb what we've seen in the past if the minimum wage went up to the equivalent of ten dollars an hour, that's something that companies mostly can absorb. And in the past when states have raised their minimum wage to that level, after adjusting for inflation, we haven't

seen job losses. In fact, what we've seen is that employees have more money in their pockets than they spend that money in That tends to help the economy over and it's a modest increase in minimum wage or at least keeping up with inflation, isn't a job killer, because

that's always the issue. Right. People always say there was a great study done where there was a change at a border I think was New Jersey and Pennsylvania, and on one side of the border the minimum wage went up, and a mile across the border there was another one.

Describe what happened there, Well, that was the study I did in the early nineteen nineties with my colleague David cart and to our surprise, I thought we were going to find that when New Jersey raised its minimum wage, the fast food restaurants would have grown more slowly, fewer of them would have opened, and in fact we saw the opposite. They grew at least as much probably a little bit more than the fast food restaurants on the

other side of the border. And we also found if you look within the state, within New Jersey, the areas of the state where the minimum wage was already above the new minimum uh and wages didn't rise. Uh, they didn't grow as quickly as the parts of the state where wages were low and wages were boosted by the minimum wage. And I should add Barry that that was study. I think that study was a turning point in research on the minimum wage. Most of the subsequent studies have

reached the same conclusion. And there's been some work, very careful work looking across count knees using government reported data from government tax records, for example, which tends to find the exact same result, UH that at modest levels, the kinds of levels that we've historically seen in the United States, minimum wage increases do not have an adverse effect unemployment.

Let's talk a little bit about the Federal Reserve. What started in the weeks before we recorded this was former Federal Reserve Chairman Ben Bernanke launched a blog, Go figure the Fed Chairman is blogging and kind of got into this epic debate with Lauren Summers, Secretary of the Treasury in the first Obama White House, about the concept of secular stagnation. So, so let's talk about all this stuff. First, what do you think about the FED chief blogging. I

think it's terrific that Ben Bernanke has started a blog. Um, he has I think quite a bit to add to the public debate on these issues. Ben was a colleague of mine at Princeton for two decades. I learned a tremendous amount from him at the university. I worked with him when he was chairman of the FED. So I look forward to reading what he has to say. So and that Princeton Economics department, mur Nankee, Krueger, Krugman, who else?

Who else is in that department? Alan Binder Blind. I mean, that's like the you know, the murders row on the Yankees back in the in the old days. So let's talk secular stagnation. Larry Summer's thesis, and it's been Bill Gross the new normal, and a lot of people have said this is, Hey, We've come off a multi decade period of growth and expansion and now post crisis, it's gonna be ugly for decades. What do you say about that.

I'm skeptical of of that view. I think the US economy historically has managed to grow against a lot of obstacles. I think that will happen again. I think the financial crisis did have a last effect. On the other hand, I put a lot of confidence in the ingenuity of American entrepreneurs. You know, the sensation I always had coming out of the financial crisis that was very nineteen seventies. Like I was a teenager in the seventies and I just the word malaise really sums it up. And people

in the seventies thought America was over. They never regained their mojo. And then the next thing, you know, the eighties hit and everything from technology to semiconductors to the Internet to mobile the universe exploded. And and that it's always been a bad bet, says my pal Lowry Cudlow. Betting against America? Is that a Is that a fair statement?

I think that's absolutely right. I mean, if you go back UH to uh the end of World War Two, there were economists who thought exactly what you just said, that malays would set in. Even Paul Samuelis and thought we would slip back to a recession, and then others said, you know what, we've got very creative entrepreneur oars, they'll figure out new products. There was a lot of pent up demand coming out of the war. Then immigration helped to fuel the US economy, and I think those forces

can can work again. And you know, you go look at the equity markets from y six to nineteen sixty six. That's an epic bull market. That's a huge run, only surpassed by the next malaise at two to two thousand, another epic bull market. So let's turn our attention now to interest rates. Rates are low, they seem to be going lower. They're low around the world. Germany's interest rates are now below Japan's interest rates. If you want to buy bonds um from the Swiss, they will charge you

for the privilege. It's a negative interest rate. We've never really seen an environment where rates are this low, and what does that mean about the economy and what does it say to us about the impact of central banks. This has been an extraordinary period. There's no question. It's hard to believe there aren't sufficient investments that could be taken by private companies or by the government at such low interest rates. That that they would make a lot

of sense. I think we're seeing some big imbalances in the world economy. Uh. This is a point that Ben Bernanke made about the global savings squat, where we have countries which are running up very big current accounts surpluses and that's depressing interest rates. Uh. But I think if you look at countries like say China, there's tremendous amount

of scope for them to increase their domestic consumption. I think as they slow and I think here Larry Summers has done very good work predicting a slowdown in growth rates in in China. Uh. I think they're going to turn more towards domestic consumption to continue to keep people happy, to make them feel like their situation is improving. I've heard the complaint that, oh, it's the Federal Reserve that has driven rates so low around the world. How do

you respond to that. The Federal Reserve has carried out its dual mandate extremely well. It has a dual mandate to try to create maximum employment and stable prices um full so create jobs and reduce inflation and keep inflation steady and shooting for around two percent. It's not too far off of that in the grand scheme of things. So, I think the Federal Reserve has helped the economy tremendously

over the past five years. I think we're in a much stronger position than say, Europe because of the actions are are central back has taken. You have a background in labor economics. You've done a lot of studies, a lot of really interesting things UM with labor. So let's talk a little bit about the labor force this whole recovery. One of the things we hear all the time is, Gee, there's a lot of slack in the labor force. What

does that mean for a lay person? Slack means that we're not using all the resources that we can be using. And the implication of slack is that it put downward pressure on ages, which would then put downward pressure on inflation. Are we coming to the end of the slack period of of the cycle for for labor? Is that the

positive reading this? I think we are. I think what we've seen with the decline in labor force participation is what you would expect giving the aging of the workforce, Given that women's labor force participation peaked in the early two thousands, UM and given that we had so many long term unemployed, it's the natural evolution of the job market that they exit the labor force, and that's what's

been taking place. So so let's describe this. When when we look at the population, you have the total civilian population in the United States is three hundred and ten or so million people. We then have a labor force all the people who were either working or essentially looking for work at a hundred and fifty five or so, where are we Bullpark hundred fifty five million, And then you have people who are leaving the labor force. They basically said either they're retiring or they just kind of

give up on looking for a job. And people have been making a big deal about the declining participation right in the labor force. If I'm hearing you correctly, you're saying some of this is a function of just the aging of the baby boomers. You have sixty people a day retiring, and some of them is just the peak

participation of women. Explained that a little bit. What had been fueling our rise in labor force participation from the nineteen fifties up until two thousand was more and more women joined the labor force that reached a peak in two thousand. The puzzle y labor force participation has since declined.

For women, it declined in the last recovery, so this is not new in the current recovery, and it's declined an approach pretty broad base, well educated women as well as less educated women, women with children, women who were not married and don't have children. So it's been a pretty ubiquitous phenomenon and that had been fueling the rides in labor force participation, and now we're starting to see a little bit of a reversal of that. We've seen a little bit of a reversal over the last decade.

So more recently, the labor force participation rates seemed to stop falling and actually started to increase. Is this just a little noise in the data series, or or perhaps we're seeing that drop come to a halt. I think that's noise. I think at best we could say labor for its participation is stabilized. Maybe some of the young people who left the labor force to go back to school are coming back. I think that's a positive sign.

But that's against the backdrop, as you said, of increasing number of baby boomers reaching the retirement age and retiring. So we've been talking a little bit about baby boomers, and we've been talking about that post War War two era. Let's talk a bit about the middle class, which, based on what we've seen recently, almost appears to be a post War War two phenomena. Following World War Two, yet

everybody come back. You had all these UH servicemen come back on the g I Bill, and it seemed we had this giant, multi decade boom and the middle class just exploded in terms of size and wealth, and that seems to be unwinding. What's really going on with the middle class these days. The middle class has been under a lot of pressure, and we've seen the middle class shrink.

I think that's unhealthy for the economy. I think it's it's one of the reasons why we are facing problems when it comes to aggregate demand, because the middle class tends to spend their income unlike very high income people who have a higher savings rate. And I think it's bad for the country because I think our country works better when we have a broad middle with a common interest. So when we look at the people who are doing best in the country, the top one percent has done

really well. Top ten percent has done pretty well. But when we take the top one percent of the top one percent, the point oh one percent, they've done phenomenally well. What what is behind that? Friends? They've done well in part because uh, there are people there have come up

with new products, very innovative people. In part because there are people who inherited wealth, and increasingly that top tenth of one percent are going to be those who inherited their wealth as opposed to those who were successful entrepreneurs. But also we've seen enormous changes in the bottom nine. You know, if you look along education lines, Uh, I

find the following calculation quite revealing. If you took the top one percent and said we're going to keep their income at the same shares as it was nineteen seventy nine and redistributed that to the bottom nine, if one could, uh, that would raise the average families income by about seven

thousand dollars a year. But if you then compare a family where you have a household headed by a college graduate versus a household headed by a high school graduate, the difference in their earnings since nineteen seventy nine has increased by twenty three thousand dollars over three time times as much. So it's not only the top one percent that's causing the shifts and inequality that we're seeing and

putting pressure on the middle class. You know. One of the fascinating stats I saw related to that was the unemployment rate amongst people with college degrees, and then the unemployment rate amongst people with graduate degrees or science, technology, engineering, and mathematics degrees. It was low, low single digits. Even when the unemployment rate was eight nine percent, it was in the Two's quite amazing that there's such a strong

demand for those sort of employees. Increasingly, the US economy has been demanding workers with higher levels of skills, and you see that really throughout the distribution, not just graduate degrees, but if you compare people who have skills in manufacturing skills and welding, they're doing better than people who have, uh, just a high school degree and not a specific training in an area BLS. One of the things we talked a little bit about the Bureau of Labor Statistics earlier.

I found that any time I had a question about a report or anything that came out, I had the ability to pick up the phone and actually get that economist on the phone who would walk me through what they did. Is this pretty standard operating procedure there? I was astonished by that. BLS is a very transparent organization. They're there to help. They want people to understand what it is that they're doing. They don't want people to

misinterpret their data, so they're very open in that. In that way, what is it like producing the sort of data they crank out every month? How many economists and statisticians work there? And what is the process like creating those models? Well, it's more data than models, you know, it's really more Uh, interviewing households, interviewing businesses for the unemployment report, the Census Bureau on the behalf of the BLS goes door to door to over fifty households. That's

every month, every month. Now, they don't go door to door every month. They go door to door the first time they interview them. Then they say next month is it okay? We call you. But on a rotating basis, they're interviewing over fifty households a month, giving them a short questionnaire, and then they're processing the data h screening out mistakes. Uh uh. If somebody misreported their income, for example, and then producing the unemployment rate and related statistics. This

is all done by career employees. Uh. They don't inform the administration about the results until the night before the data are released to the public. So the so the President gets a phone call, Hey, tomorrow's nonfon payroll. He finds that out twelve hours before everybody else. The President receives a visit from the Chairman of the Council of Economic Advisors with a memo in hand describing what the

next day's report will be. The Chairman of the Federal Reserve receives a one page sheet called the Chairman's Data Sheet with some of the key statistics that are going to come out the next day, also provided by the Chairman of the Council of Economic Advisors, as does the Treasury Secretary. So I picture someone with the briefcase that's handcuffed to the the the secret agent walking into the Federal Reserve, walking into the White House. It's really not

that cloaken dagger, is it. Well, it's a secure facts, a secure facts. Oh that's fascinating and um, one of the things I found fascinating about the BLS was about ten years ago, maybe a little longer, they changed the birth death model and this caused all sorts of of mayhem amongst the tinfoil hat types for people who aren't economic wanks. What is the birth death adjustment? Well, this is really inside baseball, But in the establishment survey that the BLS does every month, they don't do a very

good job bringing in new companies. Where the company has failed, they don't know for sure that it failed. Maybe it just failed to respond. It doesn't mean necessarily it's kind of out of business. So to adjust for the births and the deaths, they have an additive factor. Could be positive, could be negative, And that's based on information that's coming in from payroll tax records, where the b l as could judge how far off it's been in recent months

and use that to make an adjustment. I think the outside world tends to focus a lot on the birth death model as opposed to uh, the data that's coming in and the data that's coming in from the establishments are really much more important than the birth death adjustment. We had terrible news this week with the passing of

the great economist Alan Krueger. It was my privilege of speaking with him in the spring of and this is a continuation of that conversation when we get more in depth and get into the weeds about economics, the Federal Reserve, and the labor markets. My guest today Professor Alan Krueger, not Krugman, not Alan Blinder, Professor Alan Krueger. People get that wrong all the time, don't they all the time? Krugman and I we get each other's mail. True story

about ten years ago. I my office was three Park Avenue. I have a cousin with the same name as me, Barry Riddoltz. He's a lawyer. He was working for Golden Tree Mutual Funds. There's no tea at the end of his name, so he's O l Z. And we're in the same building. We would get each other's male. What are the odds that someone with the same name and it's not, you know, if you're John Smith, statistically right. But it was just always always sort of sort of fun.

So Krueger, not Kruegman. Um, I have so many other things I want to I want to talk to you about before we have to send you on on your way. We talked a lot of a lot of misconceptions, a lot of heras people have what what do you think about economics or the BLS data or whatever. What do you think is the biggest misconception about economics out there? Well,

I don't know if it's a misconception. There's kind of uh paranoia that the BLS is a tool of the administration and is pressured to come up with uh particular results. And you know former I'll say this, former g E CEO Jack Welsh, Right before the November twenty twelve election, there was a fairly decent employment number, and he infamously tweeted out, Hey, those Chicago guys will do anything to win election. They doctored these numbers and and people were

really astonished about it. He ultimately ended up getting pissy with fortune quitting, storming off, how often do you run into Oh, the president is manipulating these numbers? What was unusual about that episode? And I remember it very well. It was October of two thousand twelve. The unaployment rate fell from eight point one to say, and he's not a giant drop, a fairly a healthy full, but not anything ridiculous, So certainly not unprecedented. Look at it with hindsight.

Is now five and a half percent. We were clearly on a path then when the economy was getting better and he was denying it um and I was asked to respond to what he said, and I'll I said then what I'll say today. No serious person doubts the credibility of the Bureau of Labor Statistics. That it's it's a civil sermon group. It's not political appointees. Only one person BLS is a presidential appointee that earlier, the commissioner,

and all these people are just lifetime economist, statisticians and others. Look, the numbers may not be perfect, but it's not some grand the president is telling them. Now, we've to be fair. We've seen massive changes in the way things are done that have had a tendency to have an upward bias. We we talk about the civilian labor force. When you had a chain was it, I don't remember if it

was Korean War or Vietnam vietnamee War. Somebody changed how that was counted to not include military and it had a beneficial effect. There have been tweaks like that. Look, when the Beer of Labor Statistics makes changes, it does it in a very deliberate fashion, usually with an outside group giving it advice. It made a major change when it redesigned the survey, which probably raised the measured unemployment rate.

So uh, it certainly makes changes to try to keep up with changes that are going on in the economy or to improve its measures, but it would not make a change in the middle of an election. And I've noticed that whenever they make a change, there's an there's a footnote six months before we're reviewing this, we're taking

comments about that. Here's the proposed set of changes. I've been critical of the or focus on the BLS number because it's a series and everybody obsesses about each month when you really have to look at the long term trend and you could have a really good number, a really bad number in any given month that's still within that channel and being off of the average very often as just noisy. And as you've mentioned the upward revisions.

So so the most recent non farm payroll UM I believe was a pretty soft number and some of the revisions were kind of negative. Also, now, is that the beginning of the end or does that look just like it's a noisy data series. I thought we were due for a singer and uh, you know, what are the odds that you'd get twelve months in a row over twohund thousand if the true underlying growth was over two dred thousand. It's not all that high. So uh, it's not a surprise to me in a way that we

see one number which is out of line. Um, we get two or three more in a row, Hey, that's a problem. Two or three more aboutnemployment insurance claims start to pick up if some of the other indicators come in. Let me jump in on that, because before in my office we were previewing these numbers and talking about this conversation, and my head of research said, hey, be sure to say to Professor Krueger, see if he's familiar with the fact that we're at some crazy record low for initial

unemployment claims. I think you said, it's back to where we haven't seen lows like this in fifteen years. Is that accurate? Weekly initial claims are very low? Uh. I think we have seen them this low in the in the recovery, but they're at the lowest point that they've been in the recovery. You know one thing I'll add, Barry, when I worked in the administration, I reached the conclusion that the UI claims are very informative, and we haven't changed the information that are coming out with the UI

claims in fifty years. Why don't we try to extract more from it? Which industries are laying off people, what education groups, which age groups, And that's something in which the Labor Department has been looking into into doing so, in other words, take the data and try and slice it a little finer, by by sector, by education level,

by geography. Exactly what else do you look at their Well, those are the main things, and um, they do produce it by geography already, they do that with a weak delay, so that's already available. But I think we could learn a lot from industry because we know that manufacturing and construction tend to be more cyclical industries, and in some sense they're leading indicators. So I think we can extract more from these data. And also knowing about the demographics

I think would be very helpful. So let's talk briefly about the non farm payroll. You know, it's considered a coincidental or lagging indicator. It lags the business cycle. But there are parts of it that I always find fascinating

within within the non farm payroll data. I've always found the numbers for temp help to be very insightful because if companies are un sure about where we are in the economic growth cycle, but they're starting to see a slide uptick in demand, they might hire a bunch of temp workers and hey, if it works out, they become full time workers. I've argued that that's a little bit

of a leading indicator. How wrong am I? I was gonna say, You're pretty much in line with the research, and the research has found that temporary help trends are leading indicator. And then what about hours work? That's another thing. When you start to see the hours tick up, it's always easier to say to somebody who's got twenty or thirty hours, hey, here's a little more time, instead of going out and hiring a brand new person. Well, hours

worked are extremely important for a number of reasons. One because it says how much labor is being utilized in production, and that could be more important. If you have a two tense three tents of an hour increase in weekly hours, that could be more important than the headline jobs number in terms of total labor input. It's also important to people because it affects the income that they're receiving. So

I closely watch hours worked. And one thing I'll mention, which I don't think it's gotten enough attention, is everyone's focused on the slack that's coming from workers who are part time who wanted to be full time. But hours worked are actually reasonably high and back to where they were before the recession. That was a question. So where hours work? Because I remember, oh, nine ten, when you're coming out of the we were in like thirty point

one in that ring. I don't remember if we got below thirty, but it was really the bottom of the thirties. We're we're hours work now they're back to where they were in two thousand and eight, and if you draw crisis pre crisis, uh two thousand seven, they're back to where they were in two thousands. How many is that per week? On average? It's in the thirties bies. Because I normally should know this off the top of my head, and I don't. So he's going for the secret facts

that he got from the labor department. I was we just saw this teen show. I got some blue sheets which had it, but I don't. I'll build up. So but it's a significant improvement, and we're back the signs and it's back to the trend that we were on prior to the crisis. Yes, so we've returned to trend and so that's kind of that's kind of fascinating. So I don't think there's that much hidden slack in terms of work hours. So you had mentioned, um, let's let's

talk a little bit about the FED. You had mentioned you thought the FED had done a really good job. You know what didn't happen this recovery, whether it's the federal Congress or what have you, that would have made it better, faster, stronger. Well, I think Congress made a major mistake with the sequester. We cut back discretionary spending. We did it in an arbitrary way. We should be investing more in research and development, more in infrastructure, more

in education, and Congress cut that back. On top of that, I think Congress could have extended the payroll tax cut into we had it in Uh, why is this still that just mad pursuit of austerity, that misguided pursuit of austerity? Has that argument been laid to rest when you see the austerity put in place by Europe and the much more moderate austerity in the United States. How the two

two regions had recovered. I don't know if it's been put to rest, but I certainly take that as pretty strong evidence that the US is doing better because we pursued a different fiscal policy and a different monetary policy for that matter, but we were pretty in terms of historical fiscal stimulations. You had the stimulus plan, but it was different than previous stimulus plans, and that a big chunk of it was temporary, was temporary tax cuts, it

was temporary unemployment extensions. It wasn't like a massive infrastructure build out, and then you had all these ongoing layoffs at the state and local level. So net net up until only a few months ago, told government meant hiring.

Um has been a drag unemployment absolutely, you know, if you look at the big picture, which is government spending, including state and local together with federal, the stimulus only lasted about three quarters It was just uh the end of two thousand nine early, and since then it's been phasing out. One might have said in two thousand nine that a risk of this stimulus was that it would become permanent, but that hasn't happened. And if you look

at state and local governments. While they were receiving support from the Recovery Act, from the Stimulus Bill, they weren't laying off teachers and firefighters and police. And it was only after that money ran out that we saw layoffs reach really historically high levels in the state and local government sector. Right, And when we look at the two thousand one recovery, that was a huge additive to to what the economy was doing two thousand one and the

early eighties. So only Democrats seem to be uh president when fiscal policy is working against the recovery. Well, well, my argument has long been that the party out of power, and I hope I'm not engaging in any false equivalency here, but the party out of power always complains about budgets and deficits, and you know they're arguing. What they're really doing is arguing against the policy of the opposing party,

and Republicans do it and Democrats do it. It just seems that this time, with this president, it was an effective argument that had gained traction from people who previously were the furthest thing in the world from deficit hawks. You know, if you supported Medicare Section D and unfunded tax cuts, and and a war of choice in Iraq. You're spending a lot of money. I'm not arguing about those policies. You're not a deficit hawk if you're gonna

deficit spend for those things. When the roles reverse, who's in the White House, Suddenly you become very concerned about debt and deficits. It seems a little disingenuous. Oh, it's even worse than that, in that it wasn't only the war that was costing money. It was also adding Medicare Part D prescriptions you without paying for it, and cutting taxes in large measure for high income earners, and also without off setting that with spending cuts elsewhere. So I

guess I'd take a somewhat more partisan view. Having worked for President Clinton and President Obama. You know, President Clinton signed a balanced Budget Act, uh, physically responsible Act. President Obama wanted to address the drivers of our deficit, which is healthcare costs and entitlements. That was part of the Grand Bargain negotiations, along with military spending. Was was a

big issue that had had an impact in the sequester. Right, that's right, um, But military spending is winding down on its own. It's been coming down on its own as we um reduce our engagement in the Middle East. So uh, you know, actually, if you look at the trends, it's quite remarkable because we saw a pretty sharp decline in military spending in two thousand and uh twelve, two thousand and thirteen, and that was the got the economy. Ultimately, I think it's better for those resources to be used

for civilian purposes. Uh. But we haven't really addressed the drivers of the deficit in spite of the emphasis and austerity, because we haven't done much to address the long run entitlement costs and health care costs. So that seems to be a partisan policy debate where the philosophies are so far apart there's almost not a you know, normally you can horse trade a little bit. Back in the days of of Ronald Reagan and Tip O'Neill, there was a lot of back and forth, and they weren't so far

apart that I got something, you've got something. All right, we come up with some a policy that everybody can live with, declare victory and move on to the next thing. As the parties get further and further apart and I don't know if I would argue that both parties aren't moving away from the center at an equal pace. As a former Republican, I could tell you that the right has moved further away from the middle much faster than

the left has. Um, I haven't changed my you know, I grew up a Jacob Javits Republican, which today puts me too far to the left of you know, anybody who's a Democrat in half of the anyone who is a Republican and half of the Democrats. By the way, I just pulled up the BLS data, manufacturing work week decrease at point one hours to forty point nine. Manufacturing work work weeks always longer, and then um total employees on private non front pay rolls thirty four declined point

one to thirty four point five. So but that's still substantially above where we began thirty four and a half as normal, that's about that. That's I would say, that's about where you would predict we should be based on the trend before the recession. Factory over time three point four hours, is that considered substantial? That's high? And you know, the adorable good sector has made a remarkable recrd for you look at the auto sector, it's made a remarkable

recovery in this uh economic climate. Let's let's talk about that because it brings to mind a really fascinating conversation I had with Jonathan Miller, who is UM one of the best known real estate appraisers. He's on all the time with Tom and others. Wherever credit is tight, that sector is doing poorly. And wherever there's loosening of credit, such as automobiles, you know, people are now saying, hey,

we have a subprime problem in automobiles. We're on a pace to sell seventeen million automobiles in the United States. That's a record number, even as total miles driving still I think, are we still below where we were pre crisis? There was a huge dip. We've recovered some of it. I think we're about halfway back, but that's a massive number,

seventeen million. It's remarkable. I mean, it shows how much pent up demand there was, and it also shows I think that our auto companies are doing a better job. They're producing better cars. If you look at Chrysler today, to totally different kind of car and now owned by Fiat instead of H and same thing with GM. When you look at GM. I'm not a GM guy, but I have to tell you the the Catalacs that have come out are really nice. The new Corvette is a

spectacular car. And their competition for the camera and the accord. Um it begins with an al and I'm not accessing that word. No, no, no, that's Chevy Lumina, is it? Maybe it's Lumina. Oh no, it's the um Impala and the new Impala. You think of Impali, think of a giant car, but it's their Camray slash Honda chord competitor. They're winning all sorts of awards. It's amazing how far

the US owner industry has come post bailout. Absolutely. I actually just wrote a new study together with Austin Gulsby, who was my predecessor as chairman of the c e A. I'm the Auto bellout and it has been far more successful than we expected in two thousand nine. UM. I find Austin to be a fascinating guy. Who was on a panel with him in Las Vegas some years ago about the bailouts, and the conversation was, why don't we do for the banks what we had done for GM

and Chrysler. You know, it always seems that when there's a Wall Street person as UM Treasury in the Chief Treasury Department, Wall Street gets treated well. When you get a like you did in the most of the prior century, when you have an industrialist or a manufacturer, somebody from that side of UM the economy, Wall Street doesn't seem to get bailed out. The manufacturers get bailed out. Is that just the nature of people protecting their own industry?

Or asked differently, why did we not treat the banks the way we treated GM and Chrysler. Well, it's a very good question. Uh. First of all, I was involved when Tim Geitner was Secretary, and Tim really is not a Wall Street person. He was a public servant. He spent his whole career at that Treasury or of the I m F for than the New York Fed. But people have accused him as president of the New York Fed being very close to Wall Street. Is that not

an accurate description? You know, I think he should be judged by his actions, and I think he was consistent in the principles that he applied to the bailout to the extent that he could have been he was constrained by the law. UM, I think he did a remarkable job protecting taxpayers. You know, all of the money came back and then some the money that went to the financial sector during the bailout. He protected our system of

the hierarchy for investors and bond investors and senior creditors. Uh. And I think our recovery is a lot stronger because of the very difficult decisions that he he was forced to make. UM. The role of banks, I think it's pretty special in the economy, So I think one could make a case for treating the financial sector differently in the midst of a financial panic. Um, the problems that the auto companies were facing were very long in the making,

and they needed to restructure. It was not just a temporary problem that they were facing because of a run on banks, which was uh, in some sense the issue in the financial sector. So I think one could fault the financial bailout. Personally, I would have liked to have seen us put more restrictions on the banks when it came to lending. I would have liked to have seen some requirements which eventually were put on there We're done. For example, in the small business lending fund to encourage

banks to lend more to small businesses. UM. I would have liked to have seen the executive compensation restrictions last longer. UM. But having said that, UH, I think the stress tests and the um UH use of TARP funds UH did rescue the system, did make it possible for the recovery to begin. So to two bullet points, one observation and then a question. I have to ask you one of I'm an automotive enthusiast. I love cars. My mother will tell you car was literally the first word I ever said.

And one of the sites I used to read all the time, I mean, long before the financial crisis was called The Truth about Cars. And they had a segment called GM Bankruptcy Watch Part one through you know, two hundred and they were saying, here's the math. It's unsustainable. GM can't keep generous pension, generous healthcare, nine levels of executives. They can operate like this, that it's a house of cards. That asked the collapse, and it turned out that was accurate.

But so the restructuring and the bailout and the resurrection of GM and Christ will tend out to be a great thing. For the economy, a great thing for the auto sector. So here's the question I always ask about the banks. Yes, banks are important, banks are special, and that's why we can allow insolvent banks to put the entire system at risk. We can't allow crazy leverage. We can't allow reckless spending and lending and speculation to put

the economy at risk. So here's what the counterfact rule I want to ask is what would have happened early in the financial crisis. If so, let's refresh people's timeline. You had March O eight, You had Bear Stearns go under, and and the Federal Reserve essentially guaranteed to JP Morgan. They would backstop Bears books and it was sold first for two dollars a year, then ten dollars a share. It turned out to be a phenomenal acquisition for JP Morgan,

a huge home run. Then as we worked our way through the summer, things started to get a little dicey. We had issues with Fannie and Freddie and the g s c S. I'm still not convinced that the American taxpayer's been made whole. There were tax waivers given um and offsets, and Fannie and Freddie's have been throwing off a lot of money. I don't know if that's break even. I think a I G is now break even even including the tax benefits they got. I'm not positive about that.

So we're almost but not quite made whole. We certainly didn't get the benefits of that very risky investment. If I was an investor, Hey, here's a billions of dollars one day, I hope to break even on it. Not not what Wall Street typically looks for, but the counter factual is what would have happened if we would have set to City Bank. Okay, you guys have had problems every twenty years, it seems. Let's temporarily put you into receivership with Uncle Sam acting as the debtor, you know,

creditor in possession, the the provider of UM. The creditor acting as UM offering all of the debt funding. During this reorganization, will wipe out the shareholders, will give a haircut to the bond holders, will fire fire that top level of senior management who clearly have driven the bus off the off the road, into the into the lake, and we'll spin them out as a as a brand

new entity. Same thing with Bank of America. The argument I used to say is, we'll clean up Merrill Lynch, We'll get rid of their debt, will spin them out as a free standing anthony. We'll take countrywide the biggest mortgage underwriters, will clean them up, will spend them out there now freestanding debt, free clean company. Will take Bank

of America, same thing. Then we'll take all of this what people are calling toxic debt, which is on toxic assets, which is really a bit that's toxic at hundred cents on the dollar, but there's some price ten fifty cents where that's a good investment, and we'll auction that off and net net will go. We'll tear the band aid off. We'll go through this painful process, but then will be much healthier on the other side. What's wrong with that counterfactual?

I think there are a few things, and fortunately the economy didn't get so bad that that was necessary. There was something. How close will we to that point? Though people have said we were The phrase I heard from Ben Bernanki was we were staring into the abyss. We were staring into the abyss. There's no question we were staring into the abyss. How close did we come. Well,

the turning point was the stress tests. So had the stress tests shown that the city was as insolvent as you uh suggested, I think in different course of action would have been taken. But given that the stress tests helped things to turn around, given that the stress tests provided investors with the information that they needed and the confidence that they had that they can invest, given that city was able to raise money at that time, was able to uh, we'll raise money from the government, or

which which stress test to be talking about? What this stress test was at the March of oh nine, But I'm talking October in October eight, when the when the tarp was first past. If that money didn't go to these banks, if the money go to the banks, the but but had we pursued the strategy that you laid out, uh, taxpayers would have paid much much more instead of actually making money on these TARP investments. They would have lost hundreds of billions of dollars. When I are where would

those losses have come from. The losses would have come from wiping out the debt that you mentioned, from recapitalizing the banks with government money. On top of that, I think you would be looking at at least five years, maybe a decade of having having those companies under government receivership. That long. It's not a twelve month or an eighteen month process, clean them up and then take them public again.

Look at some of the bank failures that we've seen, they've taken they've taken years, and that's banks that are one hundred is large as a city. On top of that, had UH Treasury done what some people were in my view irresponsibly urging the Treasury to do, which was to take over those banks, we would have seen a run on other banks, and it would have made the problem much worse. If you're gonna wipe out the shareholders of city, what are you gonna do. If you're a shareholder Bank

of America, you're gonna sell. That's gonna make Bank of America's problems much worse. Uh, and then so on down the line. So I think we would have seen um a UM a wave of bank failures which would have cost the taxpayers billions of dollars and which would have set the recovery back years. So you think this was the healthier way to proceed. So I only think in retrospect,

there's no question. I mean, you could say, um u that it was a mistake because it costs taxpayers so much money, but it hasn't in the end, well that the taxpayers had a lot of money at risk, and now we know what the benefit of hindsight, all or nearly all, or maybe even a little more than all have has been recovered. So net net, the cost to the taxpayers was not great. The risk to test payer

money was fairly high. So the question I want to ask is, you know, pre crisis we had and I understand Sweden is much smaller in the United States, but we had the Swedish approach, which was throw everybody into receiver ship, clean them up, spin them out. And then we had the Japanese approach, which is, hey, we have these vertically stacked Kurt Susan, you can't kill back of Minsubishi because you have Mitsubishi heavy industries in Mrsubishi Aerospace

and MSUBSI real estate on top of that. And to to go Swedish and the United States would have wiped out Goldman sachs um Macy's general mode it right too. It would have been that sort of collapse. But why did this sort of thing work? In other countries with financial crises. Is it just that Sweden is so much smaller than us, Their financial crisis was just so much more you know, manageable or or what is philosophically different there? I think Sweden had maybe four major banks, you know,

just a totally different scale. And don't delude yourself, taxpayers would have been a tremendous risk if the government would have taken over the major banks in the US. So it's not as if a risky strategy was pursued and it paid off and you got it take into account the cost of the risk. There was risk on either side. So it's it was a choice amongst risky strategies. It was the least bad solution, the least that had solutions. So let's let's go back to the FED a second.

What else should the FED have done? And I have to remind people there were many very creative, very innovative policies put into place. If anybody was going to be the perfect FED chairman, it was the guy who was the student of the Great Depression and who was committed to not repeating those mistakes. So what else could or should the FED have done post crisis? A couple of things. And Uh, first of all, I think the FED could

have done more to prevent the crisis. It could have raised lending standards, and that's something that Ned Gramlck had absolutely within the FED. And I think it had to do with the mindset of the FED, which is probably still there, that the banks could regulate themselves, that it didn't need to be very So let's let's back. Let me interrupt you right here. Ed Gramleck was a FED governor who had gone to Alan Greenspan, who was the FED chairman, and said, we have a problem. We have

a problem with some problem lending. We have a problem with predatory loans. We have banks mending making loans to people who clearly can't pay them back, and when these default, it's going to cause a domino cascade. And and Ed unfortunately passed away before the crisis. But it turned out all of his warnings were tremendously precedent. He was a

hundred percent correct, that's absolutely right. And the FED had it within their preview to say we're gonna require ten percent down payment, and if you had ten percent down payment, the value of a house falls by six seven percent. Owners not underwater and you're in a very different situation than if you have loans with nothing down or one two down. They were actually cash out homeport purchases where you could buy a house and take a second at

the same time. So you walk into the house fifty dollars richer, no skin in the game, and every incentive to walk away. That's right. So I do hold the FED responsible UH for a very core component of the crisis. Not not exclusively, but they certainly were a major factor. Look, I mean if the private sector didn't have the collective delusion that home prices would continue to grow, we wouldn't have had the crisis too. So that there were many

uh factors that led to the crisis. I don't think that one could say there was a single cause on the recovery. UM. I think where I would fault the FED was in prematurely ending UH quantitative easing. You would have extended it further, uh not QUE three, but say q E two, so I would have had a more continuous QUE two. I think they took the photo off the gas a little bit too soon, and that's led to this stop and start in terms of in terms of QWI. So I I know we don't have you

for very much longer. Let let me ask you one more related question on the FED. Bill Gross had an interesting observation about FED rates, and he said, you know, if the FED didn't take rates down to zero, had they stopped at one percent, it would have allowed the

economy to appear a little more normal. It would have allowed them to have a little more flexibility, and then all the screaming about zurup and zero bound and everything else would have gone away, and the process of normalizing of federal reserve policy would have been a little easier. What are your thoughts on that. I find that argument hard to accept, given that the tailor rule says we should have negative rates, so the FED went as far as it could go, and then it actually reinvented the

playbook by going a quantitative easing. So uh, to me, that argument doesn't make much sense. And I think we've seen some countries make that miss stake and then they decided to go all the way down to zero or as close as they can go. So in the final few minutes we have let me ask you um one or two more questions, and and I have my favorite question. I ask everybody first, UM, what shifts do you see coming up? What? What are people not really thinking about

that they really might should be aware of. Well, I'm sure people are thinking about it, but demographic shifts are having a tremendous effect on the US. Slower growth in the working age population, uh, slower rate of immigration to the US. I think, uh, we missed a major opportunity to reform our immigration system. Disappointed that Congress wasn't able to pass the bill. The Senate bill, which was not a perfect bill, would have been a big improvement over

our current system. Um. And I think businesses need to give a lot of thought to how the aging of the US population, the slower UH or decline in labor force participation of women, how that's going to affect their business model. How can they make work more flexible so they can attract more workers? And then my final question I ask everybody the same thing, and I'll ask you this, what do you know about your profession about economics today

that you wish you understood when you first started out? Oh, there are a lot of things, um uh. You know, the economics profession is an amazing, amazing field. Economics for me, it was attractive because it's about people about what matters in people's lives. And I don't think there's anything more important than having a job so you can support a family. Uh So that's why I went into labor economics. Uh. I think we don't have enough diversity of views in economics.

I think people cling very tightly to their views, and maybe that human nature, people are slow to update, to change their mind in spite of evidence. And um, I think it would be healthier for economics if we took a broader view. Just just one very simple area is more economic history. Uh. We tend not to emphasize economic history and graduate education in economics, and the crisis that we lived through had many elements in common with past

financial crisis. And I think one would have done very well to understand Charles Kindle Burger's work, work on manyas and panics and crashes, understand the Great Depression. Uh So I'd like to see economic history become a part of the core and economics. You know, there's there's the old quote Wolf Street. People are notorious about failing to learn from the past. Um, And there are all sorts of variations of that. If someone wanted to find your work, UM,

where would they go. How do they how do they track down things you're producing? I have a web page which has all of my research on it www dot Krueger k are you e G E R dot Princeton dot e du and the link there will will bring people to research. So that was my interview with Alan Krueger from the spring of Earlier this week, we learned some unfortunate news. Uh. He took his own life and we were deeply sinned by the loss. It really was a privilege being able to sit down with him. One

other thing I have to share about Alan Krueger. I was fortunate enough to have lunch with him before my interview with Serena Williams, where he fed me a bunch of of questions. I've only been playing tennis a few years. He's been playing for a lifetime, and he was just so generous with his time and so kind and helpful. Uh. He helped make not only his interview great, but the interview that I did with Serena that much better. Just a charming, generous, wonderful man and he will be greatly missed.

I'm Barry Ritults. You're listening to Masters in Business on Bloomberg Radio. Ex