Richard Clarida of Pimco on the New Neutral of Monetary Policy

to various senior people in that administration. What was kind of interesting to me is that a lot of people kind of came through that administration with their reputation a little dinged up, and Clarida really had no such issue. Uh. He went in and came out really highly respected. He is incredibly insightful to things like the fiscal process and how the Federal Reserve interacts with Congress and how their policies,

how monetary policies and fiscal policies affect each other. He has really an amazing understanding of government programs and policies, economics, investment theory, and where they all intersect. It really is not the usual economics conversation. And so the process of looking at the world to finance and looking at investing through that lens really is is makes for for wonderful conversation, and PIMCO has found that it's tremendously helpful uh to

their process. I think you'll really enjoy this conversation. So, with no further ado, my conversation with Richard Clarada of PIMCO. My special guest today is Richard Clarada. He is an economist and Lowell Harris Professor of Economics and International Affairs at the School of Public and International Affairs at Columbia University. He has been the Global Strategic Advisor for PIMCO since

two thousand and six. He is the former Assistant Secretary of the Treasury Department for Economic Policy under George W. Bush. He is the recipient of the Treasury Medal. He earned his BS from University of Illinois and a master's and PhD in economics from Harvard University. Richard Clarada, Welcome to Bloomberg. Wow. Great to be on your show, Barry. I'm a big, big fan, so it's a treat to be in the studio. Well, it's a treat to have you. You and I know each other for a while. I've been a fan of

your work for quite a bit. I know of you from your work in the Treasury Department. Let's begin talking about your tenure as Assistant Secretary to the Treasury for Economic Policy. You were there really as the dot com bust was accelerating, as the recession was starting. What was that like during that period, Well, you know, Barry, was a very eventful time. In fact, interestingly enough, my first day on the job at Treasury was September eleventh, two

thousand and one. So we all know, we all know where we were. But I was just checking out my office, and you may know Peter Fisher. I was in Peter Fisher's office when when the second tower got hit and then we were evacuated at Treasury. Actually saw people streaming out out of the the White House and someone said

the Pentagon has been hit, so we're next. It was actually quite quite scary, and I can imagine, but it was an eventful time economically, um the dot com Of course, we did have the bursting of the dot com bubble. When I arrived in September Barry of two thousand and one, the data was sort of close to indicating a recession. On September t the nb R hadn't called it yet certainly the day after we we thought we were going

into a recession. So in retrospect and everything that's happened since then, it may seem like a pretty, uh, pretty tame and quiet period, but it's pretty eventful. The dot com bubble, we had, the the end Roun World calm accounting scandals, uh and and obviously the financial system seizing up for a while. So yeah, it was a very eventful time. That that's some first day you know, you

mentioned it was nothing like the financial crisis. I believe, if memory serves correctly, that recession began around March of that year, and by the time nine eleven came around, it was almost over. I think we dated in November, is that, But that's of course with the benefit of hindsight. At the time, the nb e R hadn't gotten around. You're right now, we know started marching into November, and you were an economist and researcher for nb e R. I left that out of your your CV. Um what

did you do for them? Well? Nb R is an incredible organization that I think dates back to the the twenties. It's essentially an independent organization for doing applied economic research. Really pioneering work and business cycle analysis. UM. I was fortunate enough to do my graduate work at Harvard in the in the late seventies and early nineteen eighties, right about the time that Marty Feldstein moved the mb e R from New York to Cambridge, and so it's really

an incredible organization. I started as a faculty of research fellow and then now as a research associate and essentially part of a group that publishes applied research in my case and international macro economics. And for people who may not realize, that's the organization that officially dates starts and ends of US recessions exactly, the Business Cycle Dating Committee. And by the way, for people who have never been on the website, there's an enormous amount of of research

of data. It's really a tremendous resource for people who have those fields. Absolutely, so since nine eleven, the immediate response, so I think it was a week or so after that, then FED chairman Allen Greenspan cut rates. He took them at at a rep cutting um period where we were under two percent for two or three years and then at one percent for a full year. What was the impact of those ultra low rates well at the time. Interestingly enough, the time, there was a concern of of

a deflation UH scare UH. The economy was recovering, but the recovery and two thousand and two UH was was was pretty feeble UM and UM, and so as a result, there was also a lot of changes impacting the financial system as well UH, and so we did go through a period of very low rates. I think in that cycle. The FED cut the funds rate to one percent UH in UH in June of two thousand and three and

kept it there for a year. Obviously since that period of time, I must say at the time, I was at Treasure and I would have weekly meetings at the FED as part of that job. You know, I was aware of that policy and was not a critic of it at the time. It did seemed to be UH

an appropriate UH policy. I think since that point some critics of the FED had pointed out that the FED was very slow to begin raising raids in OH four and oh five and six, And of course we also had a housing bubble at the time, and so I guess one can try to make a connection between that policy and the housing bubble, and that may have been a factor, But I think there are a lot of other factors at work as well. Well. Let's discuss that.

That's an interesting issue. I mean, clearly, anything priced in dollars or credit had a big move upwards. And whether it was commodities, gold, or mortgages, what other factors did you think were significant? Then? I think the other thing is we we had what appeared to be and what many including my self thought was a innovation uh in

finance securitization UH. And the fact that in mortgages, as in other parts of the credit market, credits were being securitized and they were no longer on the balance sheets of banks and the FED another thought that made the financial system safer uh. And in theory maybe it did. But obviously in retrospect there were some accesses insecuritization and in derivatives, and I think the system was more fragile than a lot of folks thought at at the time.

And certainly, and I think that was a big part of it. There was a lot of hey, the sausage is only as good as put into it, and we know there was a lot of bed you know, sub prime mortgages that had gone in exactly clearly clearly a factor. I have to ask you. You're the recipient of the Treasury Medal for Distinguished Service. What is this award? What what is it about? That has to be quite a uh well, it was a real thrill um, and it's

not routinely awarded. I think in my case, the recognition reflected the fact that because through the coincidence of timing Berry I arrived, as I mentioned, during our recession. Remember, the prior expansion had lasted ten years, and so a lot of folks had sort of forgotten what does a recession look like? How do we know when we're out

of it? Talk a little bit about monetary policy, and since we were just gusting the financial crisis earlier, what what are your views on how well the Federal Reserve performs during that period? Uh, during coming out of the financial crisis. Yeah, the global financial crisis. Well, I've said many times on a lot on Bloomberg Air, I give the Fed generally very high marks for crisis management under Bernankey. Obviously,

you cut rates as far as you can. The Fed cut the funds rate to zero month or two after Lehman, so you really go to Plan B. And Plan B was doing quantitative easing, and in particular in the first QUI program focused on the mortgage market, so signing up all the as many as much mortgages as possible to

drive rates to drive. And also remember at that time both Fannie and Freddie had been put into conservator ship, and so there was just a huge amount of uncertainty in the financial markets about what the mortgage market would look like without that backstop, and so the FED got in of the mortgage business. I think grudgingly. FED officials have said many times publicly that they're not thrilled to be the biggest holder of mortgages, but but they were

put into that position given the crisis. So so I would give the FED quite high marks during that period oh eight o nine ten uh in in crisis management. I think if we fast forward more recently, if I would have a disagreement with the FED, I think that UM, the Fed's messaging has been inconsistent UM and a little bit hard to follow in terms of normalization for for rates, And in particular, an issue barrier that I look at a lot is this idea that the fedist targeting inflation.

It says that the targets two percent and yet since they became an inflation target or formally in two thousand and twelve, inflation has been below two percent ever every year, and and so the FED sometimes says that that two percent should be an average, but they also said they don't want inflation to go about two percent, which means

the average, of course will be below. So I do think that now that the FED has begun to normalize policy and there and we're at with the FED things of his full employment, UH, that I think it is appropriate to continue that normalization UH in in rates. And obviously the next issue, which I'm sure we'll want to talk about, UH is the Fed's approach to normalizing and shrinking that huge four point five twillion dollar balance sheet. So two points. I have two questions I have to

ask you about. The first, is it sounds like when the FED is on their rate tightening cycle or in this case, normalization, they seem to be a little behind the curve both this cycle and let's call it oh three to oh six UM, seems that they're they'd rather go slowly, too slowly then too fast. Is that a fair well? I think I think it is, and I think I think in both episodes of FED officials have

appealed to to risk management. UM. I think in particular, now, given that you know rates are low and we're in what what what I and others have called a new neutral for monetary policy. So your listeners should remember, before the crisis, there was a pretty broad consensus among central bankers that the Fed's policy rate, the funds rate, should be some number add or above four percent once you

get to full employment. UM And I believe, and I think the evidence shows that for a variety of reasons, there's a new destination for the FED rate, which is gonna be say two or two and a half, not not four. Four is not a realistic number? Well think of think about it now, Think about how you would value equities or any asset class if you were discounting those cash flows at four percent as opposed to to to one or two. And I think when when people ask, well,

why is it a new neutral? I think there are a couple of reasons. One, growth rates have slowed down. When you and I began our careers, growth in the economy and a good year was three and a half sometimes four percent. Productivity growth was two two and a

half percent. Look at in the nineties. And so in a world where theo's growing up four percent, you sort of need a four percent interest rate, but in a world where the real growth in the economy is too In fact, basically, one thing Barry about the last several years that people may not know is that US has been a very stable economy in terms of volatility GDP growth in a good years two point three and a week years one point seven, but very tightly centered around

that two percent number. And so with slow growth, slow productivity growth, and slow labor force growth, uh, the FED needs to normalize, but the destination will be much lower than before. So let's talk about the Fed's balance sheet four and a half trillion. I think that's off of the highs slightly basically at the peak. So here's the question. All these holdings, be the mortgage backed securities or treasuries, they're all dated. None of these are perpetual bonds were

not like the UK, not yet. Why can't the FEDS simply let these roll off as they naturally come up on the maturity dates and gradually allow their book to normalize. And that would be one very plausible scenario. And and I think if you go back and read what FED officials said five or six years ago. That's what they thought they would be doing. They thought that eventually they would just step back, they would stop buying, and there's

the treasuries mature. Uh, that balance sheet would shrank. And there's the mortgages prepay or people move or refinance those mortgages would would would roll off. Um. It's pretty clear now, based upon the Fed minutes that have been released this year, that they are not going to pursue that passive approach. What they're going to do is they're gonna try to smooth the path of balance sheet reduction. Uh. And I think they're doing so for a couple of reasons. When

you say smooth, what do you mean by that? That means not just let them roll off, but but replace some of them as So. For example, what the FED minutes suggested at the last meeting Barry was that in any given month they would set a maximum cap on the amount of treasuries and mortgages that could roll off, and any any additional roll off above that cap, they would then step into the market and buy. So the Fed will be shrinking the balance sheet, but it will

still be buying. Along this normalization path. They want they want to smooth it um and they're also in a situation whereby they made the case, which I agree with that when they did qwi at lowered rates. So if you're reversing, QI is probably gonna raise rates, and they're really unsure by how much. And because they're unsure, they want to really smooth this process out, which means it's going to be very gradual. And I think the other issue that your listeners should know, Barry, is there two

big decisions for the FED to make. How fast do they let it roll off? And then what is the ultimate destination. They haven't really given us much insight on the ultimate destination, and I suspect that this FED may not in the end make a decision on the ultimate side for the balance sheet that maybe for the next

FED chair to figure out. So I would expect that what Yelling and company are likely to do in June or later this year is to lay out, if you will, a glide path or a scenario for balance sheet reduction. They may begin to do that, and then it will be up to the next FED chair to implement as he or she sees fit. Let's talk a little bit about modern economic theory and some interesting and perplexing things

that are taking place. Earlier, you mentioned productivity. It seems that we've sort of hit a productivity slump, and that raises the question do we have a productivity problem or do we have a problem measuring productivity? Great point, and I think the truth is it's probably some of both. Clearly, there are enormous amount of innovation, especially web based innovation, and it's tough to measure that we all we all

know that, um. But I do think that for a variety of reasons, that there is also a real productivity slow down. Part of it may simply be as you move towards a service economy, it's intrinsically hard to measure, even old fashioned you can you can measure, but you can't measure if you subscribe to something on Apple iTunes and you're getting that service exactly music service, how do you actually measure? So I think, I think, I think

there is an element to that. But I but I do think also that we're in a period of relatively slow prot growth in part area because we haven't had a lot of investment in this country really in about a dozen years. Uh and in particular asked capital stock has moved towards equipment that depreciates faster technology becomes obsolete. We probably have more of an investment shortfall than than we're even measuring. Is that at a corporate level, is that at a household level, is at a government level,

or is it across the board? I think it's I think it's across. It's across the board. Also, you know, let's face it, in our system, we have different parts of the tax code that encourage different activities real estate, for example, and we have an abysmal tax when it comes to taxing corporations really in senting them to move to move abroad. So there's a lot we didn't we change recently some of the both under Bush and Obama.

The capital depreciation that's been accelerated fairly rapidly versus you know, you're not writing down a truck over ten years the way there were. There were some elements of that, but I think that they I think a lot of them actually a lot of them actually expired. But getting back to your initial point, um, I think there is a measurement issue with productivity. But I do think apart from the measurement issue, we're in globally a period of pretty

slow growth right now. But as I said, economists don't have a good track record at inflection points, so we can have a big surprise. Perfect example, who would have said ten years ago or even eight years ago that you would see the revolution and fracking and shale that we've seen. That was a technological revolution that's transformed the

entire global energy market. Right. Remember, the thinking was, well, what's the big deal with fracking with oil at a hundred, Well, because of fracking oils at six and not a hundreds, that's a huge impact that ten years ago, fifteen years ago, nobody first and we haven't seen sixty in a long time. When oil, which which kind of brings up the whole

debate about coal. When technology makes natural gas a with the Saudi Arabia of natural gas as well as the Saudi Arabia of coal, but when they make it so accessible and so inexpensive, why move mountains to get cold when it's so easy to pull gas out of the ground. Well, and and also Barry, the fact is because of the l en G technology, we can actually export our natural gas. And ten years ago the talkers we needed important natural gas.

Now we're exportings. I just read the other day an article that said, for the first time, liquid natural gas is a global marketplace. It's not a regional market anymore. And it once was, and it's and you're actually starting to see that gas, which used to be very, very geographically segmented, there's basically now approaching a global market. And gash right, So you you referenced earlier UM the holdings in treasuries and the relative um rarity or or the

limited supply of of of quality sovereign bonds. What are your thoughts on this talk about a fifty or a hundred year bonds here in the United States. Well, you know, there is a there is a an issue which is historically the Treasury is not issued beyond thirty years, no pun intended. UH. There is globally a demand. There's a

certain community. UH. I think insurance companies, think other managers that really have an appetite for very long duration assets on match actuarial tables exactly UM, and so I think there could be a case for for doing so, UH,

in particular long duration inflation index securities. UM. Say that again, long duration and so you have inflation, so we have tips, but they're relatively short again, well, but they go out to thirty years, but beyond beyond that because because essentially, for many individual investors, UH, potentially the biggest risk they face over the life cycle is you you do hall this hard saving, earned some decent returns, and then two or three years of fifteen percent inflation, and of course

your younger listeners are saying, oh, fifteen percent inflation, that can't happen. That was my senior year in college. That was that was me in in grammar school, having to go to the gas. They get guests to mow the lawn, and um, we had, we had rates that we're pretty crazy back. So so I do think Barry that that I think there is a case for it. Apparently the Treasury under Secretary Manuch is exploring this, uh this idea.

I think what gives them some pause is compared to the UK, where there's a voracious appetite for very long duration assets, there may not be so much of one in the US, and so the Treasury doesn't want to get into an area where it's having to offer up a much higher yield to lock in that money for fifty years. So I think it's under discussion. So the fear is that the Treasury is going to overpay to

borrow that money. Yeah, what as if it was tied to something like infrastructure or some other Is that the politics of it or is that the structure of it? No, I think I think it could be tied to It

could surely could be tied to infrastructure. And again I think it's under it's under discussion, But I think ultimately the decision is going to come down to how big is the appetite, Because if there really is an appetite for very long duration instruments, and the Treasury would not have to offer much higher yield in order to to sell those bonds, and I think they're still figuring that out.

Let's talk a little bit about some of the private sector working done, because some of that stuff is really fascinating. You've you've consulted for the likes of JP Morgan, Credit Swiss, the Federal Reserve Bank of New York. What does that work look like, what's that process like? Well, it depends.

I think in the case of Credit Swiss, that was almost twenty years ago, and I was essentially working with their facts team to build them econometric models of the of the currency market and currency evaluation, so they're essentially outsourcing some of that to me. I was actually sort of proud they actually still they were running that model about for about fifteen years or so. They since retired it, but uh so that was a good project. You know,

the New York Fed has a lot of programs. In the case of there, I visited during the summer, worked on some papers, co authored with their staff. Spent some time back in the nineties when Rick Michigan was the director of research at the New York Fed, where he had a little kitchen cabinet of people who would come down every Friday and have have uh lunch. I love that idea of a kitchen cabinet around the New York Is that still going on, I believe so. I have not done it in in in a while, but it's

quite an impressive group. You had. Chris Simms is a Nobel laureate, someone named Ben Bernanke was there every week, Rick Michigan, Mike Woodford, So it was it was a

real treat to be part of that group. If you remember the book from the sixties, The Money Game by Adam Smith was the nomen Yes, he describes a similar sort of kitchen cabinet um that was run by Scarsdale Fats, and it was movers and shakers on Wall Street would get together on a Friday afternoon and discuss what they were doing, what they were looking at, what they were seeing,

and there was all sorts of conspiratorial overtones. Meanwhile, it was just six guys sitting around chewing the fat over what stocks they liked and didn't and they they had far less power than than was ascribed to them. But I like the idea that taking place, UH with with the New York Fed. Speaking of the FED, you did work with a former FED chairman, Paul Volcan. I did, and there was one of the thrills of my professional career.

So so tell Paul Volker, better known as Tall Paul, also known as Paul Volker for many years after he left that I should say, Paul Volkers one of my one of my heroes. You know, you talking about profiles and courage. But what Paul Volker did under enorm us UH pressure and with very high stakes to break the back of inflation UH in the early nineteen eighties and really bequeath really the foundations for a twenty five year bull market and bonds and stocks he gets far less

credit than he showed. Is really the prime market. He's truly a thirty year bull market. And the recovery in both the U S economy and the U S stock market. Yeah, and and all based upon basically making the right decisions in a in a four or five year period. So literally one of the giants of economics. But to answer your question, after he left the FED, he spent many years at something called the Group of Thirty, which is basically an informal organization of former policymakers, and the Group

of thirty commissioned to paper by me. I'm not a member of the Group of thirty. I'm not in that club, but they occasionally commissioned papers uh. And so Paul and his team asked me to write a paper right after the Asia financial crisis on sort of what the what the global UH currency markets would look like in the in the aftermath of that crisis. And so I took it as an opportunity to write along sixty page scholarly paper thinking about the foreign exchange markets after the Asia crisis.

So it's a real, real treat to work, to work with him that that's that's quite fascinating. Yeah. Um, let's talk a little bit about PIMCO. Yeah, you're you're global strategist for them. Yeah, you're a managing partner and right, that's right. Tell us what that that work is like. So I've been with PIMCO for eleven years. It seems just like yesterday. So you've been there through a lot of pre and post here and a lot of indeed a lot of interesting times. And and so what do

I do for Pimco. Well, I I basically work on global macro, focusing on the G ten economies. Given my interest in my research, I spent a lot of time thinking about the FED and other central banks. Obviously central banks are key to value bonds. PIMCO has a lot of clients, especially around the world, who I go see and then more recently, since two thousand and fourteen, the folks that have asked me to oversee our annual Secontar Forum process, which is really an integral part of pimco's

investment process. We've been doing it for thirty six years. We bring an outside speakers three days a year just for the investors and the executives of the firm. To think about what the global economy is going to look like over the next three or five years. So you mentioned the new Normal and one of the earlier segments I talked about the New Neutral. Those are both themes that emerged from our Secontar Forum process, and so that's now essentially my my role is to coordinate that that effort.

That that's fascinating. How do you integrate global monetary and global fiscal policy into ideas of either fixed income investing or any type of investing. Yeah, well, and I think that's obviously that's that's that's crucial for me to add value to to the operation. I think I'll give you I'll give you a concrete um example. Uh, this whole idea that we talked about it a moment ago, about

the new about the new neutral. That is something that I began to think about based on my academic work, uh, working with something that we would call a forward looking version of a tailor rule. Work I did with Mark Gertler and Jardy Galliott at n y U. So we were pretty early on in the in the late nineties and sort of focusing on a rules based monetary policy.

But one of the things about the original tailor rules, it assumed that this neutral policy rate was constant, and I began to be persuaded that, in fact, we're in a world where where neutral is not constant. In fact, it's going to be lower the destination for the funds rate. And so I basically was making the case internally that we needed to factor this in. That became what we call our new neutral thesis, and it's been a really important part of the way that we've been investing for

the last three years. So so let me get you to define this. Yeah, dynamic stochastic general equilibrium modeling. Oh, my mouthful, And that's pretty much the name of one of your papers. Yeah, well, and that's that's the that's the name of the branch of economics that I work in. Uh. That's an example where the jargon is probably relevant to other members of that club, but I think to the

general public is probably not all that important. Essentially, what it means is that you're building a model of the economy which is going to be modeling the economy over time, so it's dynamic over time, but it also allows for stuff to happen. Stuff happened, so shocks to happen, so you want to know how the economy evolves when it's hit by shocks, you know, oil shocks, supply shocks, fiscal shocks,

and so that's the stochastic part of the equation. It's um it's in Otherwise it sounds much worse than it really yah, than it really is exactly. UM. I previously had your PIMCO colleague Paul McCulley on. He's somebody I met fishing in Maine, of all places, and he is a big Himan Minsky fan who was infamous for saying um stability breeds instability. Do you think that's true? And given this period of stability we've seen, are we potentially

breeding a more instability? Well, first of all, just since you mentioned Paul, just to know he's teaching at Cornel. Just just mentioned I. One of the real high points of of my time at PEMCA was a chance to work very closely with Paul for six, seven or eight years uh. And I learned so much from him. Uh. And in particular when when I got there and oh six, he was already on the Minsky uh soapbox. And I must admit at that time I had some vague recollection

of reading miss Minsky and graduate school. But but obviously that was a very very prescient call on On on his part to your broader question. Clearly in retrospect, and believe me, Barry, I did not have a crystal ball in oh five and oh six, but but clearly in retrospect, Uh, the stability of the of the two thousands did breed instability through as we mentioned, the securitization and the credit derivatives and all of that, on all of that stuff.

So what I'd like to say is, I think general the old saying is, you know, generals are good at fighting the last war. So I'm very convinced, Barry that two things, there will be another financial crisis, and I'm convinced of the other thing is it will not look like the last crisis. Is We're always quite good at

making sure the next crisis looks different. And that's where I think the real power of Ryan Harton Rogoff is is we keep persuading ourselves that things are different because we're not going to have another you know, subprime meltdown, but it will show up somewhere else. You know, greed is a constant fact of life. And I think in some ways the system still is fragile because of the interconnectedness Now globally, it's no longer a US market or a French market. What happens in Beijing or ri Odd

impacts all of our markets as well. Ow uh So, I think one thing that we do know is the big global huge banks have much more capital uh than they did before, and as we mentioned, they have more liquid assets. But that just means I think the risk migration is somewhere else in the system, and I think we know less about that. Frankly, we have been speaking with Professor Richard Clarida, global strategist for Pimco and professor at Columbia University. Be sure and check out my daily

column on Bloomberg View dot com. You can follow me on Twitter at rihlts. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. I'm Barry Hults. You've been listening to Masters in Business on Bloomberg Radio. People think that when you are a refugee in very seculated to America, they know your problems and that they don't understand that that's the beginning of everything. I was not born a refuge I was made one learn More and Embrace Refugees dot org,

brought to you by the AD Council. Welcome to the podcast, Richard. Thank you so much for doing this. This is fascinating And um you were on my my shortlist of people to reach out to, so I'm glad we managed to get together. Yeah, there are a bunch of things I want to get to before I get to my standard questions. This is me going through all my pages. I hate when it gets printed two sided because I can't find stuff. Um, I asked about dynamic stochastic general equilibrium modeling. You went

You went right into academia straight out of college. Is that always the plan? Well, it was so I went straight from the University of Illinois, where I must say I got an incredible education, one of the great land grant universities and was an economics major land grant universities. What is that that? That was a program that started under Abraham Lincoln and the idea was that there would be federal land given to states if they would build universities.

UM on it and there were some support. Yeah, so very very much public private partnership. You know. Alexander Hamilton's approach yes, and so University of Illinois, Michigan. They're called the Land Grant UH Universities UM, and I think tuitioning was six d dollars a term or a year in incredible education. And then was an econ major UH and applied to graduate school and in one of the huge surprises and life changing events of my life, actually got

into Harvard. No, no expectation that would happen. And so which was where were you expecting to go? Well, I applied to some other good, good schools, but you know, kids from coal mining towns and downstate Illinois UH didn't didn't go to Harvard. But but but I was admitted and went there. And then in those days you could get a PhD in four years. Typically now it takes

five or six. And so that I went straight from college to Harvard, and then I went straight from Harvard to my first job as an assistant professor at at Yale back in not not a bad set of affiliations, and my office was right next to someone named Jim Tobin. So talk about talk about an eye opening experience as a twenty six year old assistant professor. And the fellow next door is Nobel laureate and legend Jim Toe. Did you get to interact with you very much? Absolutely? Yeah.

It's funny because as I speak with people over the course of the show, it's always fascinating when you find out Mayer Stateman, the professor at Santa Clara, his thesis advisor was Peter Bernstein. Yeah, like just crazy. I really had no idea he was an academic. That just that. That's fascinating. So so that was the plan. Yes, right, so and then him yell, you've been since nine almost thirty years. How have students changed over that period? Wow,

that's a great question. I would make the following observations. First of all, there's a lot more interest in economics now than thirty years ago. So the number of economics majors at places like Columbia University of Illinois is double or triple what it was one of your thirty years at whose expense? Is it that much less frenchise or they're coming up coming out of somewhere. I won't I

won't speculate where, but they're coming into economics. Given the given the cost of colleges, one would think that a move towards is this going to help me get a job and paying off these loans might be driving something that that could that could well that could well be so I the other the other things. Certainly when I'm now talking about maybe in the graduate program, is it is truly now a global market for students who are

applying to graduate school. So when I was a graduate student, I think in my class at Harvard, of the twenty five students who I entered with, I think twenty one were educated in US UH colleges um and I think in the typical US pH d program now a fewer than half the students are US students because there's a global market from people in Europe, South America, Asia, and so the number of applications to US pH d programs from around the world has just gone up by leaps.

And also it's a very international student body. You know. I've seen data that says half of the sea level Silicon Valley UM executives are farm born. Come here and say, hey, we like it here, let's be let's build a company. Are you seeing these students staying here, getting jobs, staying in America or do they take this knowledge and go back to wherever it It depends? I think many of them desire to stay here, uh if if they can,

but certainly there are global opportunities as well. But I think the third thing I would mention, and now I'm gonna maybe a little bit of an odd thing to say, um, but I think the amount that the mathematical background now of students in US PhD programs, um it is really off the charts. So programs do now do a very good job of sorting students by pure math ability. UM.

I don't know if that's necessarily an unallied positive. I think there's more to economics than math, and I think in some ways that maybe dates my vintage of people. So for me, economics is always about understanding the economy and tutorly, and then the math was sort of a tool to to get at it. But I do think now that there is the pendulum is definitely swung towards beginning with the math and sort of reverse engineering the economics,

which always makes me uncomfortable. So even when I teach a PhD course, before I launch into the math, I try to do the intuitive version, and so I may be the last generation of people who still do it that that way, where you start with the economics and then you do the math later. Your your Columbia colleague,

Emmanuel Derman. Yeah, this financial engineering school. And he was telling me that he's just watched over twenty years it go from more mostly Americans with a smattering of um foreign born students to more and more farign born students. And he said, the quality of the math skills of kids coming in these are all PhD level, brilliant students. And that's just the cost of entry. If you build

from there, it's quite it's quite fascinating. Um So, let's let's go over a couple of other questions I missed. I want to see what I didn't get to that I thought was important. Oh so we we talked about the financial crisis. What do you think are some of the bigger misconceptions about monetary and fiscal policy? And following the crisis, we we had a huge monetary response but not much of a fiscal response. What what do you what was the impact of that. Well, let's let's start

with with the second part of your question. Uh. There, um So, I think the consensus among academic and economist and policymakers going into the crisis was that in practice in the US fiscal policy UH is not a particularly effective tool because of the lags and implementation and the politics involved in getting bills through. In the view as you should really just have monetary policy focusing on counter

cyclical objectives. You know, as rates have gone to zero, we've gone into quantitative easing, and the year if they've gone to negative rates, I think certainly the profession is more receptive to thinking about fiscal UH. Fiscal policy. You know, Barry, we did have a big fiscal response in two thousand and nine. We had a one trillion dollar deficit that year. So but but you're right that we went actually from stimulus and O nine to a period of a fiscal

austeria D after two thousand and ten or or or so. UH. And and and I think I think as a practical matter, UH most of commers would agree that there are a lot there's a lot of positive that fiscal policy can do in terms of infrastructure, in terms of encouraging investment and the like. But I think in terms of being a supple tool for countercyclical UH uses it it has a lot of problems. How how long of a lag do we typically see with monetary policies implementation, How soon

as it felt well the old Yeah, exactly. So there's no implementation lag of monetary policy. In fact, the Fed doesn't even have to wait for a meeting if if the situation calls that you can have an intermeding move as we know. So there's no there's no implementation lag of monetary policy. But there is a lag from when policy impacts the real economy. You know. Milton Friedman famously said at one time that you know, monetary policy operates

with long and variable lags. I think more recent research is indicated that the lags perhaps because the economy has become more financialized, the lags that perhaps not so uh, not so long. And in particular now FED officials like Bill Dudley, who I think does a great job, talk

about financial conditions as being an input into the FEDS calculation. Um. I think the best example of the challenges with counter circle fiscal policy as you look back in the President Obama administration when we had a big recession, they wanted to do kind of circle policy. Uh, there's some talk about doing infrastructure. I think you can look it up on Google. President already yeah, he said, I found the herd out the hard way. There aren't a lot of

shovel ready projects. So that's sort of an example of the implementation. But if you think about it, coming out of a financial crisis, you don't want shovel ready products projects. You want long scale things that will put people back to work. Start that. You know, if you're really dealing with a keensie stimulus to replace the private sector shortfall, well why not have a two three four year post crisis project instead of all right, we're going to repay

a few roads and then we're done. Yeah, yeah, no, I I agree, and I and I think that that We'll see what comes out of the discussions in Washington on on on infrastructure. But I think clearly the economy needs better and more infrastructure. But but so far there's a staleman about putting more in place. Is it is it the spending aspect of it is or is it a lack of consensus on what needs to be spent upon.

I think it's all the above. I mean, infra infrastructure, if it's done appropriately, UH should generate future tax revenues with more economic growth, I think. I think so that needs to be factored in. I think the element is how you select projects and how you prioritize obviously, you know that that sometimes is also a bottleneck in these

uh in these things. Yeah. So, but by the way, here are my my standard questions, and I'm holding them off because I know so many of these we we blew through because as we were chatting, Um, each of your comments led to a different question, and so I really, I really hardly used my my usual questions, UM, new normal, no signs inflation? Uh, okay, so we could talk next question. So I referenced the FED as as being the only game in town when there was monetary policy but not

fiscal policy. Is that still the case today because we haven't seen a whole we were expecting a wall, We were expecting some infrastructure respecting a lot of things. Hey, we're kinda you know, it's it's we're halfway through the first year. We really haven't seen a lot of motion on any of these things. Yeah, well, exactly so. And I think the economy right now East, according to the FED, is close to full uh employment. So you're we're probably not at a point bearer where we need, you know,

a lot of counter cyclical policy. But you're right, there had been some view coming out of the election. By now we would have some tax reform, infrastructure and uh the like patriation of which could be which could be used. And I mentioned in an earlier segment, you know, our our corporate tax code is really an abomination. It doesn't raise a whole lot of money, and it encourages multinational companies to locate abroad. So there's a lot that we

can do there. But but I think really the mode that we're in now is, you know, the FED wants to normalize. I think a point I've made uh many times on on Bloomberg and other places is I think right now we have to think of the FED with the funds rate at less than a percent, with inflation around two, policy is now still very accommodative in the US. So I prefer not to call the Fed as as necessarily tightening rates. I think I think here Yelling's correct.

I think the Fed is removing accommodation. I think as we remove a common addation, we get to a point, perhaps uh into into team where you can think of policy as being tight. But with a fully employed economy and inflation around too and the federal funds rate at ninety basis points, this is not a tight monetary policy. You've used the phrase normalization. We're moving from a emergency footing, yeah, back to a more normal rate, and the emergency is over.

That's the emergency is over. So so I have to go to the abomination that is the tax code. This is very much a series of Christmas ornaments, unrelated, all hung on on the tax code as as responses to specific lobbying by specific things. Let's talk about what the US corporate tax code should look like. So what do you think would make the most amount of sense if you had if you got tagged by this White House and they said, give us five things we should do.

What would your response base? Well, I would I would make a couple of points with a proviso that I'm not a tax expert, but but what I would say is we need lower rate, lower rates and a broader base, and we need a code. I would go through the code with a magnifying glass and a microscope to get rid of anything that would encourage a US company to locate production abroad when it could do that production in in the US. UM. And there are different ways to

do that, UM. But I, to me, my principle would be lower rates because we do have very high rates now a base actual rates effectively there about but effectively because of all the especially for multinational companies, and if you're a US based company, you more or lesser paying close to that rate. So multinationals I would really go I guess my bottom principle be lower rates, a broader base, and really go through with a magnifying glass and a microscope.

Any item in the code that actively encourages a company to locate abroad, and we have a out of those now, so what what about the repatriated earnings? For example? Those are sitting abroad doing doing, doing nothing, um. And the reason they're broad is our code is said, if you quote keep your form profits abroad, you know you're not facing a US level of tensation. So I think any deal that we do see in Washington will have you know, a levy on those overseas profits brought into the US.

And then going forward, we really need a code that doesn't encourage companies to do that in the first place. What's a reasonable rate for corporate taxes? Trump wants. The number we've been hearing from from people in the House has been what what do you think is both reasonable economically and politically feasible. I don't put you on the spot, No,

I understood. I I think. I think if you actually do a real reform all a Reagan in eighties six, uh, when you're doing when you are broadening the base, uh, and you could afford much lower rates, certainly some in the range of in a serious tax reform I think would be would be feasible and appropriate and would make us competitive. And then the conversation that's come out of Paul Ryan's office was making small businesses theoretically one of the prime economic engines of growth, and he wants to

make the LLC rate the small companies, partnerships, etcetera. Wants that rate to be the equivalent of the corporate rates. Is that a realistic possibility? Well, I think, I think, And again with the proviser that I I focus on

money and not taxes. My understanding of that issue, um, is that it would have to be structured in a very careful way, or otherwise you open up a big gap between the personal rate and the corporate because, as you know, a lot of those LLCs are now probably familiar with that pay at the personal rate, and so um and so um it would it would not be

ample to go down that road. I'm not saying it couldn't happen, but but it would have to be structured in a way that you're not essentially uh, you know, eliminating tax at the individual as individuals, we can all become corporations to lower at tax rates. Partnerships so so so the rate the base. What about all those favored UM one office and and specific UH special interest lobbied UH breaks for in the tax code. Is it possible to get rid of those in exchange for a lower

rate or is that just not realistic? You know, doing Barry doing true tax reform UH is actually hard. The last time we really did in the US was was thirty plus years ago. UH. So I think that the most likely scenario, based on history, UM, is that we do get a reduction in corporate race, we get some base broadening UM potentially some movement on infrastructure. But but I think that it's a pretty much of a large shot now that we get a true tax reform UH

in this process. I hope I'm wrong. I'd love to see it. But but is that a function of just a loss of momentum and other politics or is it. It's so complex, and I have to I think the eighties six episodes instructive and so of my some of my friends get bored when I say this, but well, it was instructive about that episode. And I should mention that that I had the good fortune early in my career to work at the Counts of Economic Advisors in

the Reagan administration. So on my wall is a picture with me and the Oval President Reagan UM and so I was there in eighties six as a junior economist, and so it was a vivid impression on me. And what people have to remember about that is that that process was bipartisan from the get go. Bill Bradley, you know, hall of fame basketball player and legendary senator from New Jersey,

was a big proponative doing tax form. Dick Geppard in the House, Dan Rostenkowski, you know, the kingmaker from Illinois, were big parts of of that. So I think the long shot now is, at least as of June two seventeen, we don't see a lot of bipartisan consensus on tax reform like we did in eighty six. And was Jack Kemp around that point is we're just getting just getting

started in the House. Yeah, so that that's you're describing what is essentially a different era, different both economics, tax policy, and politics. And when that bill passed, I don't have the exact numbers in front of me, but I as I recall when it did pass the Senate, it was with well over sixty votes and and so yeah, it was definitely a bipartisan bill. So I have a friend who will go nameless, but he's involved in the Trump

administration and he knows that fiscally, I'm fairly conservative. Socially, I'm much more liberal than than Trump is. And when the travel Band first came out the direct messages back and forth, I said, listen, you have a narrow window to get some corporate tax reform through. I know he doesn't like to take counsel from other people. You gotta get this nonsense to stop, because this window isn't gonna be open forever. And this is really the single most

important thing facing the U. S. Economy. If you could get a major corporate of corporate tax reform, a lower rate of broader brace, and repatriate a few turillion dollars overseas, you're teeing up the next two or three decades of economics. So stop messing around with a travel ban, and you think this window is gonna be open forever. It's not. And what I'm hearing from you is a sense that that window is closing. Well it it. I hope I'm wrong. I hope we're wrong, but right now it appears to

be the The other thing. Remember Barry about the way Washington works, and again I spent most of my career outside of Washington, but a couple of tours of duty there is We think about a president having a four year term, but if you to people who have actually done it. I've gotten to know some former chiefs of staff. For example, when you're in the White House, you don't

think you've got four years. You're thinking you've maybe got fourteen months because basically you've got the midterm elections and your popularity. And at that point we'll determine whether the coomass gritters are gonna either be accommodative or are going

to run away from you in the next day. And then you might say, well, but then in year three you get past the midterm elections, well, then in year three that we're all speculating on what the next presidential election is gonna look like so it's fourteen an eight year president maybe has twenty four months. That's amazing to actually get stuff done. Reagan was the exception because he got a lot done at the end of his second term. But but in his popularity also people forget his popularity

then was through the roof. I mean, if you look at the past couple of presidents, Bush had a huge popularity surgeon, you know, one and eleven, and that gradually faded. And Obama's popularity really was the last six last year of his presidency and beyond he was most popular out of office. And I'm not saying that sarcastically. If you really only have fourteen months, that really changes the dynamic

of what can be accomplished. Reagan really is the except, I guess to some degree, Clinton Clinton got a lot done as well, not counting notwithstanding the impeachment and and and by the way, in both cases, it helps to have a booming economy and seven of your you know, Clinton's economy and Reagan's economy were a lot of ways

very similar, and that they had legs. They had strong growth in year seven, year year eight, and very much technology driven a whole lot of new industrial about absolutely and to our earlier point, both enjoying the fruits of Paul Wolkers. Thank you, thank you, Paul my hero. So on that note, let's jump to some of our favorite questions.

So the standard questions I ask all of my guests, some of which I created, some of which actually came from listeners, including uh no, this question is my question, which is tell us something that people don't know about your background. Well, very I'll tell I'll tell you something. A lot of people to know my background. I am a very avid amateur musician, and I've recorded my first CD.

I have a copy for you and all original tunes and which absolutely recorded with some of the best session players on the planet, and two of the tracks were recorded at Abbey Road Studios for those of us Studio studio. So that's a little present for you and I. Well, I play a little acoustic guitar and some bass. But my real my real realization is I'm at a point now where if I hear a song, I am able to work top session players through this technology, send them

my song files. They overdubbed their parts and I mixed them in my home studio on Connecticut. Yeah, so that's how um Ben Gibbert of of Deathcap for Cuties created Postal Service, the name of the now today you do it electronically. The name Postal Service comes from them mailing tapes back and forth up from I think it was California to Seattle and back. So you're doing this all digitally online and you're you're, yeah, working with tops in anyway.

It's available on iTunes. Richard Clarena. The album is called Time No Changes. So that's that's amazing. And we were talking earlier about Lawrence Juber. Yeah, go to YouTube search for for Lawrence Juber Beatles. I mean he has a whole universe of his own original recordings, which if you're

at all a guitarist you'll find. Yeah, but the Beatles stuff is back back to Derrick Thompson's comment, it's familiar enough that it catches your ear, but it's different enough that it it throws you off step and and that Um, I'm trying to remember who the graphic designer was an engine architect in the thirties who called it um most advanced yet acceptable. Maya was Musically, it's how far away can you get? From what you're familiar with and yet

still have enough recognition that it's accessible. And that's one of the reasons I find the Juber Beatles and McCartney stuff. It's it's clearly, oh I know this song, I know this melody, but it's such a different arrangement that it stands. It's not just a cover. I mean, when you hear Beatles covers, they're either too similar or two different. It's very tough to cover the Beatles. Believe me, I tried it earlier. When when you hear Juber stuff, you can say, oh,

that is the sweet spot. Beat mean, the melody is note for note perfectly, the arrangement is so and there's no overdubs or electronics. It's just him plants remarkable, Um cutting room this week you should use definitely, and I it's an early show. It's like seven thirty that I was gonna say for an early rising is great. So thank you for the c D. I will definitely uh reference that uh and and listen to it this weekend. Um, you mentioned James Tobin. Tell us about some of your

early mentors. Well, I would list three. Um. I was very lucky in college to have a mentor professor University of Illinois, gentleman who I'm still great professors at Georgetown now, guy named Matthew CANZONERI and went to Matt's office as a sophomore, and I basically said, I've taken your course, So what does someone have to do to actually become an economics professor? Like what is how do you actually

go from being an undergraduate and economics professor? And he took out a legal pat and he said, you need to take these courses and you need to do have this math and this preparation. And he basically gave me a template that I followed. And so that mentorship and that support as a ninth year old, twenty year old undergraduate was was incredibly viable for me. And I'll be forever grateful. And we're still friends and I we still

you know, with each other. At Harvard, I had the good fortune to work with a guy named Benjamin Friedman. Ben is an incredible economist, and one thing I learned from Ben is Ben always thought good economics was about the questions that we asked, not about the methodology we use. And I've always tried to remember that because economics can get our Kane in mathematical So in my own work, I always try to start with with an interesting question and then let the methodology work out as it will.

And I learned that from from Ben. So I think i'd name those those two. That's that's that's really quite fascinating. You knew it nineteen exactly what you wanted to do. Yeah, I know it was clear. I mean not everybody that that's quite I actually lived. I I knew at eighteen because I took principles of economy much at the University of Illinois from a very dynamic professor, and I just said, that's that's what I'm doing. I want to be an economics professor. Yeah, I won't tell you what my first

economics course was like, not have made any sense to me. Wait, humans are rational profit um so, so what about investors? What investors out there have influenced the way you look at markets and the economy. Yeah, I think I would. I would name you mentioned him in an earlier segment.

I bring it up again, Paul McAuley. I think given that my background is in macro economics, I tend to be influenced by people who try to use macro to think about markets, and I think I think Paul is a genius in that he's very creative, he's not tethered to convention or custom, and has got a great gut for macro and markets. So I probably mentioned Paul very much in that in that category. Now he's gonna come to me and said, you know, Clara said I was a genius. I have to listen to that. When I do,

it's like, now, now you pay corner. Let me give you an anecdote. So I did a paper for a Boston FED conference in two thousand and ten on the financial crisis, and so in researching that, I went back and read all of the people who claimed they had called the financial crisis uh, and I basically concluded that there are only two people who basically not only got it right, but got the reasoning right. And McCauley was one, and Rogy Roger and mcgreing rog And at Chicago was

the other. So a lot of people are saying we could have a crisis, but they got the reasons wrong. The other the people who actually saw the fragility in the financial system and the Minsky stability creating instability, really McCulley and to some extent roging. That's that's fascinating. If I remember Rajin spoke at Jackson Hall in seven, very

people like what is this guy talking? Yeah, it was very much not only prescient, but timely, because there have been people who have been calling the calling for the crisis every year for the past twenty years. They don't they don't get credit exactly, but oh seven, yeah, August of seven. That's a good call. That's a really good call. Let's talk about books. This is very often listeners favorite UM segment. What what sort of books do you read? What?

What have you enjoyed? What do you recommend? Well, I'll I'll just give you ones that have made an impact on me as opposed to what's on my nightstand now I named I name three UM. I would start with, I think a classic in both its scholarship and influences, a book that some of your listeners may or may not know, called The Best and the Brightest by David Howiebert Stam, which is a model of how to do concise biographies of a number of individuals who were all interacting.

So there's been so much mythology about the Kennedy administration, but Halbert Stam is of course passed away brilliant writer and reporter and just goes these wonderful character sketches of all the people from different backgrounds McNamara, the Kennedy's, the Bundyes and Hall the how they all led to this what we now know group think in crisis collapse over Vietnam.

So I name that. I would also name a book that's been very often cited but had a big impact on me, Jared Diamonds, Guns, Germs and Steel, as a model of how to What's great about him is that he spans multiple disciplines, and so academics oftentimes focus very narrowly on one little thing, and his understanding and breadth of pulling in different disciplines history and sociology and anthropology is really uh remarkable in that Another one which very popular but I thought was a model of of being

both clever and well thought through as the Gladwell tipping point argument, which I remember from an essay he did in The New Yorker and then turned that into a book and now in an industry. Uh So, those those would be three that I would that that I would mention in terms of recently, again getting back to the muse Element. There's a wonderful, uh exhaustive biography of the Beatles by Mark Lewison called uh all those Years. Uh. He's spent eleven years just doing the period from nineteen

fifty five to sixty two. It's come out in two versions. One is the version that that's about four hundred pages that you can get, you know, at any place. And then in the UK they released actually the first manuscript he submitted, which is fourteen hundred pages. And so if if you want to know everything on every day, what newspaper they were reading, and how much they paid for a beer at the pub in ninety six, then you want you want the original manuscript version of have you

seen the Black Um Black Covered Beatles Book? I think Spitzer Spit Bob Spitz that one too. I haven't gotten to it yet, but it's like also almost a thousand pages. It's monstrous, and people who have plowed through it said it's wonderful. It is, but it's just an intimidating but but but Louis but Lewison is the is the gold stand. Give me one more that you're reading recently or currently. Um,

I'm I'm I'm trying to keep up on um. I'm trying to keep up on on geopolitics and China actually, and for for the most part, books are not as useful. So I'm trying to get step I'm trying to get steeped because I think what's going on now Barry is a remarkable transition. And the thing about China is one of my friends told me a guy named Dave Smick. I don't know if you know Dave Spick, but by the way, would be a great guest recommend Dave. Dave is a fascinating fellow. And in Dave's line on on

China was um thing he said, Rich. The thing about China is that they're billion people, but they're only six who know what's going on, and they're not and they're not talking. So I think we're all we're sort of all on the fly with with China. But what's going on there, both economically and now the transition potentially geopolitically and militarily, it's really going to transform the next ten years. And so anything I can get on China by and

for I guess of those Kissingers probably the best. So Kissingers written really written a book on China that is a must must read. I've been the CFRs regular updates on China are they have boots on the ground. They're fascinating, and the thought of any sort of book is immediately dated because seen stuff seems to be changing so rapid. But that that's scenario where the Internet and having networks of people either directly or indirectly can be very valuable

because you know, we can assemble things now. Uh, you know on our computer screens that twenty years ago would have been possible, it would have been impossible. So on China, I'm doing it sort of on the fly. Yeah, So let's talk about what's changed since you became an economist.

What is different in the industry today versus ten years ago. Well, as I said, I think the preparation, I think the sorting in terms of getting into graduate programs is is very effective at word, getting in people with like six sigma math skills. I guess I'm a bit of a bit of a skeptic that that's all you need to do economics. So that would be one thing. The other thing,

of course, is big data. That's the buzzword now. But I think about my early efforts as an empirical macro economist, and how what a big deal it was, you know, to get a data set and to clean a data set, and we just now take it for granted because on our Bloomberg term. I mean still I'm not that Bloomberg needs the plug, but I'm a kid in the candy store in a Bloomberg terminal. I mean, the amount of data available is just astonishing. It's astonishing, and your ability

to to sort it and compare and into it. So so I think we're just at the infancy, you know, in the sort of baseball analogy. We're not even out of the first ending in terms of what big data is going to do. The challenge a big data, of course, is there's gonna be a lot of a lot of

dead ends and a lot of false promises. But I'm absolutely convinced in next ten years, someone or some group of entrepreneurs are going to get big data right, and it's gonna it's to transform economics and probably every other social science. I read the policy I read not too long ago. Steve Balmer, former CEO and Microsoft, has been assembling and releasing these giant data sets for people to play.

You know, for example, earlier we talked about now casting the idea that instead of forecasting the future, you're trying to track the present. Uh And now casting is all about about big data. And we could be at a point in ten years where when by the time the GDP numbers come out, nobody even really cares because we

will have processed all of that on our Bloomberg terminal. Now, don't you think day to day, week to week, month and month GDP activity is so volatile, Not that it's volatile in a negative way, but the weekly and monthly cycle is so all over the map that it's very hard to extract a credible because so far, I think it's the Atlanta and the New York beds have the GDP now exactly, and neither of them have been especially active well, and in it shows you how hard it

is to look. US economy makes seventeen trillion dollars worth of stuff every year, and that doesn't even count all the churning of existing assets. So it is a complex beast. But but I but I think that there are there are things we're learning from from this that are going to be useful. And I am Barry I can tell you I definitely see it in financial markets look, for example, the Bloomberg surprise index. So this whole idea instead of is the data stronger weak? Is the data stronger weaker

than expected? That's that's revolutionizing the way people think about everything. Every everything's relative expectation. When people before, folks like Bloomberg archive that you sort of knew it, but there was no data set on primet. We used to see it with quotaly earning surprise and sometimes you'd have a good number in the market, stock would sell off, and sometimes you'd have a lousy number and it would rally. And really the question isn't what are the earnings, it's exactly

what you reference. What are the earnings relative to expectations? Is this an upside or downside surprise? A negative number could be an upside surprise, and positive number could be a downside. It's very countintuitive until you start realized thinking about what's already reflecting. But that's an area where the data is now available, and even fifteen years ago it wasn't that that that's quite fascinating. What do you so big data? What do you see as the next major

shifts in economics? Well, everyone says behavioral and I don't want to reign too much on the behavioral parade. I think that already had well. I think behavioral economics is very important. Here's what the stumbling block is. The stumbling block is we have very good insights into individual behavioral um departures from rationality, and we focus on this a lot of pin power. Our c I. O. Dan Iverson

is very interested in this. In fact that our form we had a speaker, a woman named talently share It, who, by the way, with beating on optimism bias. Yes, yes, and so she does the neuroscience. Our brains are wired to be optimists, dig and it's pretty neat stop. So, by the way, there's an evolutionary reason for that, and that's her argument. If you're not optimistic, so ten of us are going to go down and were kill a mammoth. And if we're successful, hey, the group will have meat

well winter. Yeah, a few of us may not make it back, but the species you've you've nailed. And so we actually had her at our forum and may talking about optimism bias to a bunch of bond traders. So so so behavior is very relevant the the area that it's either going to be a stumbling block or will be a breakthrough is to put behavioral economics in general equilibrium with markets. Right, So, yes, you know you've done

this very successfully as an investor. You know that there's momentum, there's pessimism, optimism, and markets there there's a psychology in markets um. But at some point people are buying and selling and it's got to add up. So I think we're still falling short of having a general equilibrium model of how different behaviors interact. Uh, But that would be the next big thing if we could get what I

would call a general equilibrium of behavioral economics. You know, I'm in the middle of a I'm reluctant to call it a debate. It's really an argument within this seemed to lab about the issue of how we perceive or misperceived risk. And I think when you look at the actual numbers of a total number of deaths relative to things like heart disease, cancer, falling out of bed, more many more people diets, you you're falling out of bed or in the shower, that that that are killed by terrorists.

But but his argument is, well, you're looking at it in a normal distribution. It's really a fat tail event. And if a terrorist gets a biological weapon or a nuclear weapon and the numbers are just throw those all out, it's millions. And part of me is I understand the fat tail to the guy who wrote the black swan, though,

does everything begin to look like a fat tail? And are we being pessimistic and fearful and giving into a worst things which is kind of how terrorists operate and they want to and and Barry, I have to tell you that certainly, one thing that I've observed and that we've noticed again compared when we began our career, if you had told us in the nineteen late eighties or early nineties, fast forward in the seventeen there will be five, six or seven wars in the Middle East. They're all

shooting each other. Everybody's blowing each other up. Oh. And by the way, North Korea has got a nuclear warhead, and and I see BM Oh and by the way, someone full plane into the World Trade Center. You would basically say, you know, the SMP will be down right. So we're in a world where there is this overlay of all the stuff that can happen, all these black swarms that can happen, and you have financial markets you know,

move on. So I the one way to look at that is to say the market has looked at it discounted the likely possibility of that occurring, and is looking at the probabilities that although the that that something awful isn't gonna happen. And then the counter argument as well, the markets seem to think the same thing around oh seven and look what happened. Man. So it's really a fascinating um question. Let's let's talk about failure. Tell us about a time something you try to do uh and failed.

What was that? Why? What did you learn from the experience of something not working out as expected? Well, I think what I would I would say early in my career I made a misjudgment of failure to think that I was going to be a mathematical economist and make my breakthrough by sitting in a room with equations and some and reveal some ultimate mathematical truth. And I spent about five years doing that, not very successfully to myself

for others. And I really realized that what I got into economics was to actually be trying to understand the world the way it was, not the way it fit into a model. So I had to shift gears away from thinking of myself as an abstract mathematician to someone who began to think of himself as doing empirical work too, more or less understand the world as messy as it was.

And I get back to the point I made about Ben Freedman, give me the advice, which is economics is about the questions we asked, not about the methodology that that we use. But it took me about five years to to sort of realize that that that's really interesting. It was I don't I don't picture you as a

equation guy. I was a question. I was, um, tell us about something you do outside of the office, What do you do to keep I already I already plugged the plug to c D. So that's the relax Oh, absolutely, a method of unwinding. Well. It also helps me to commute because I live in Connecticut, so I spend you know, two and a half hours plus a day on Metro North and through the wonders of technology. Thank you, Steve Jobs.

You know, I have a lot of my musical projects on my iPad, so I can do editing and stuff on the train. In terms of away from that, I'm sort of a weekend golfer with my boys. Uh, they're much better than I am. So it's it counts as both some golf time and family time. And you know, in my forties I took up downhill skiing and I'll never be great, but one week a year I go skiing and I love it. So that's sort of my sort of my outside the office. And I love to

go for walks with my wife in eectiquette. Yeah, where do you go skiing? Well, that's the great thing. We've been skiing a lot of people. So we've been to Europe, We've been to the Dolomines in Italy, we've been to to the Swiss Alps, we've been out to Deer Valley, to Taws and so you get to see different parts of the world that way. One week a year, yeah,

maybe two. Yeah, that's all I can afford. So so quick footnote in grad school, my best friends undergrad had been Dartmouth and he had been on the ski team and I used to go to Hunter another local mountains and I thought I was okay, and he suggested we join a ski group in our last year of grad school where we would take a bunch of college kids on some ski tour group and this way, broke grad students would get transportation, lift tickets, food housing. And so

we did that and he was just amazing. And all I would do is try and keep up with him and not hit a tree. Those were my two goals. And you really it's one of those things I mentioned done in Kruger earlier. It's one of those things where you quickly are disabused of any false impression that you have some sort of skills in that area. It's like, oh, I can make it down the mountain without falling down. He's plowing through moguls at sixty and just blowing my mind.

But that's what four years at Dartmouth will get you into a decent grad school and and great uh skiing skills. Um. So you work with a lot of students, you work with millennials. What sort of advice would you give to someone who was just starting their care year or thinking about starting a career in economics. Well, I've been doing some thinking on that and and I guess the one thing I would mentioned in this regard because I think relative to when when we were coming up, it's students

have more of a choice now. Um, And I think that a lot of students starting out are attracted uh naturally to you know, being the next Mark Zuckerberg or or you know, or Bill Gates, and you know, sort of you sort of immediately go into an entrepreneurial wage or not an organization, and obviously that worked out great

for them. I guess the thing that I observe is, I think I've always been part of organizations that I've been proud of, I've learned enormously, and obviously you know I So I'm a big believer that if you have some choices in your career, aligning yourself with quality organizations is a positive. You know, we think of negatives in this corporate politics and there's back stepping and all that stuff, but that's also true in the entrepreneurial world as well.

So I think I think a career path where you if you have some choice both working within and learning within quality organizations and and also doing the entrepreneurial path at some point makes sense. But I think some folks immediately go from college, eating without college, right into that I'm going to be the next Mark Zuckerberg, And I don't know if that's necessarily going to serve them well. You need the skill set that you can only learn learning an organization. As a kid, I used to hear

people want to become the next Michael Jordan's. The odds of that are just so hard, so long. And think he played in North Carolina, which is a very good organization. That's why I went right from high school to the NBA.

That's why in a good organization. So so there are things to be garnered from from quality um UH surroundings And and our final question, and one of my favorites, what is it that you know about the world of economic ex global macroeconomics, investing today that you wish you knew years Yeah, And and I think to me the financial crisis UH was a real eye opener on this.

I you know, I think the one thing that at least I and I think a lot of us understand now about global the global financial system UM is that, in some very important respects UM, it only operates with a level of transparency and oversight and regulation UM because in the absence of that, there are just too many incentives and there's too much money floating around. And I'm

talking about things that are illegal. But I'm saying that I think a lot of the global financial system before the crisis was essentially priced and traded on a view that there was an implicit put option to some central bank somewhere the Greenspan put well as it had been alluded to um and and I think the failure to

recognize that was was very was very costly. So now whenever I look at global macro, anything involving credit, or anything involving lending and borrowing, the first question I asked, how who do Marcus think has got the put option on this? And how and how is it priced? And I think a lot of a lot of mistakes and finance are about either opaque or miss price put options to central banks or governments. We have been speaking with Professor Richard Clarida. Richard, thank you so much for being

so generous with your time. If you want to find more of Professor Clarda's writings, you can go to the NBER website. You have a page at Columbia University. And where else can they find information about your c D or anything else? Well, this the the CD is on iTunes and on Apple Music. So you just type in Richard Clarida and the name is Time no changes. It

will pop right up. Fantastic. If you enjoyed this conversation, be sure and look up an Inch or down an inch on Apple iTunes or SoundCloud overcast Bloomberg dot com and you can see any of the other hundred plus g We're coming up on a hundred and fifty other such conversations. I would be remiss if I did not thank my engineer uh Medina Parwana, my booker and producer Taylor Riggs, and my head of research Michael bat Nick, for all of their assistance in putting these questions and

interviews together. We love your comments, feedback and suggestions right to me at m IB podcast at Bloomberg dot net. I'm Barry Ridholts. You've been listening to Masters in Business on Bloomberg Radio.