Ryan Avent on The Wealth of Humans, Job Automation, and Globalization

Why developing social capital is crucial for workers in an increasingly digital future.

Ryan Avent is a columnist at The Economist magazine, where he was previously a news editor, economics correspondent, and online economics editor. Ryan joins David on the podcast to discuss the rising economic angst in the United States and abroad and how sound macroeconomic policies might address this; as well as the ideas expressed in his book, The Wealth of Humans which explores the dramatic impact of the Digital Revolution on the economy and everyday life.

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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Ryan, welcome to the show.

Ryan Avent: Thanks for having me, David. It's great to be here.

Beckworth: Yeah, I'm glad you're here with us. Let's begin by asking, how did you get into journalism, particularly economic and finance journalism?

Avent: Well, I studied economics in school, rather than journalism, and didn't really have much of a journalism background when I started working here in Washington, actually first for the Bureau of Labor Statistics, working on inflation numbers, and then doing economic consulting, but I was an early reader of the blogosphere, which was kind of starting to develop in the early 2000s. You had people like Tyler Cowen, Brad DeLong pioneering the medium, but actually my first blogging that I did was not related to economics at all. I was living here in Washington, and I had friends writing for this local news and culture site called DCist, and they asked me if I wanted to review some music shows. I was reviewing local bands, and things like that, but found that I really enjoyed the pace and style of blogging.

Avent: So I ended up starting my own economics blog, writing about the stories of the day, and got to know Megan McArdle, who was at The Economist, started the Free Exchange economics blog there. When she was about to move on to The Atlantic, she was looking for people to step in, and I started doing freelancing for The Economist, and the career kind of took off from there. Once I kind of sunk my claws into The Economist, I made sure they couldn't get rid of me.

Beckworth: So what is it like in the day in the life of an economist columnist? What do you do in the morning? How do you get your news in the morning? How do you think of ideas? Are you given assignments? What is it like?

Avent: Well, at this point, now that I have the column, I have pretty free rein to write about whatever it is that is going on in the world, or that has struck my fancy. I mean, my routine hasn't changed that much from what it was 5, 10 years ago. In the morning I open up Twitter, see what's going on in the world. I usually read EFT and The New York Times, and then I turn to my blog reader, which is Feedly now. It used to be Google reader, and-

Beckworth: Yep, me too.

Avent: Exactly, and see what everyone's been writing about, and kind of what the big economic stories are. The hope is that at some point in the week, I come up with something to write about the next week. Sometimes it has to do with papers that have just been published. Sometimes it has to do with conferences that are going on, and sometimes it's very current events based. What's happening in the world, and what kind of economic angle can I explore related to it? The Economist itself has a really, I think in the world of journalism at least, it's a pretty leisurely schedule. We have a weekly schedule. Each Monday, we have a big editorial meeting in London where we talk about what we're going to do, and that's when people learn what I'm going to write about that week. I usually file on a Tuesday, and it's edited and put to bed on Wednesday, and then I get to start thinking about what I'm going to do the next week.

Beckworth: Very interesting. So what is it like to sit back as a journalist and watch some of the debates that have occurred over the past seven, eight years since the crisis? I mean, there's been some pretty strong discussions back and forth. Is it ever discouraging as a journalist, watching economists go head to head, or you think we've learned something from the past eight years? Are you frustrated? Maybe we haven't learned enough lessons. What is your sense as an observer?

Avent: Well, I mean it's been an amazing time to be writing about these things. As you know, there have been so many issues on which we've had to do kind of a fundamental rethink, and as a journalist, you sort of... On the one hand, because the thinking is changing so dramatically, I think you feel like you have something you can really add because it's not just people working out whether this model or that model is exactly right. It's bigger questions than that. At the same time, you have some of the biggest thinkers in economics arguing about the serious issues, and you have to try to tell your readers who's right, and who's wrong, and these are big questions. I think it's still not clear at all what the big economic lessons are going to be from the crisis. I feel like I've been really fortunate. There have been times when we've been covering the acute phases, 2008, and then when the European crisis flared up, and then with Greece on a rolling basis. Those moments are really exciting, and you're trying to figure out if the world's going to end the next week.

Avent: But at The Economist, we're trying to play the sober mediator, and say, "Here are the things about our fundamental outlook that we need to rethink, but here are the things that we shouldn't throw away just yet, and tear up." I think we've tried to look at the things like nominal GDP targeting, and the rethink of how monetary policy is working, and say to readers, "This is something that people weren't paying attention to or talking about before 2008, that they should be talking about now." And then there are other things, like universal basic income, where we're like, "This is a really interesting idea. It's not ready for primetime. This is not something that the world needs to incorporate now." So it's trying to sift through all these ideas, and it's really fascinating and fun, and then figure out how revolutionary is this period, and what do we need to really start changing.

Beckworth: So as part of your work, you have to travel around a lot. You got to visit interesting people, places, and I imagine from all of that came your new book, the idea for your new book, The Wealth of Humans: Work, Power, and Status in the Twenty-First Century. So can you tell us about your book? Give us kind of a summary, and then we can kind of dig into some of the parts, chapters in it.

“Wealth of Humans”: Adapting to the Digital Revolution

Avent: Sure. So the book came out of all the labor market writing I'd done over the last eight years, trying to figure out what's going on with the world. Why don't labor markets seem to be working like we want them to? Or why doesn’t the economy as a whole seem to be working like we've grown used to? The big overarching theme of the book is that what we really are experiencing now is a transformative economic period, and social period, that's not unlike what we saw in the 19th century with the Industrial Revolution. In a sense, it's not entirely a response to Robert Gordon, but it's basically saying the kind of story that Robert Gordon is telling, that economic change is over, we're entering this new period of slow growth and stasis, is wrong. And actually, we are in a very fundamentally transformative period.

Avent: Then it tries to look at what the big forces affecting economic and political systems are, and how they're playing out, and in doing so, it tries to address a lot of the different questions people have about things like why is wage growth so poor. Why is productivity growth so poor? What's going on with emerging markets, and how they've caught up so rapidly, and now seem to be slowing? And explain each of those different things connected to this broader story.

Beckworth: One of the interesting things you bring out is this idea of the labor glut that is, and maybe more so going to emerge as this transformation occurs, and I really like the fact that you, in my view, take the technological optimistic perspective on matters. The world is changing may be hard to measure and see in real time, another point you bring out. When you're experiencing this exponential growth, it's hard to see in real time. One of the big points I think you make in your book is this idea that this transformation's going to be painful. The transition's not going to be pleasant for everyone, and you talk about a labor glut. Can you explain that to us?

Avent: Right. So I think that of the big forces, the big ways that this revolution is playing out, one of them is to create this incredible glut, or abundance of labor, in a few different ways. One is plain old automation. We can use software to displace people, robots to displace people, and that contributes to this pool of underused labor. I think the Industrial Revolution is, sorry the digital revolution, is a key force in contributing to the hyper globalization that we've seen over the last two decades, which has in turn brought into the global labor market another billion, two billion, three billion workers in places like India and China, and that has added to the pool of labor.

Avent: And then also, there are ways in which new technology is making some workers, some highly skilled workers mostly, much more productive, and contributing to the effective labor that they can add to the economy. The end result is that firms are faced with this enormous pool of underused labor that would like to work, that is seeking jobs, and doesn't at the moment have the means to put them to work in the most productive way possible. So I think that is the key dynamic that we're missing. So when you have this enormous pool of labor that's trying to find work, that needs to work, the consequence is necessarily downward pressure on wages. I think that link, between technology leading to a large amount of effective labor that's available, and the pressure that places on downward wages as the economy tries to absorb it, is responsible for a lot of the weirdness that we see in labor markets today.

Beckworth: You mention in the book that this is a big deal for many people because work gives us meaning in life. It orders our day, gives us structure. It's nice to go to an office, and we know what we're supposed to do. We all like... Many of us like structure, I mean not everyone, like structure in our life. Allocates income, that's where we get means of payment, and then there's social ties to community, so it's very disruptive force, but it's happened before as you mentioned, late 1800s. You also mention in your book that education in the past was a solution, one way to deal with these transformative processes, but I think you've suggested that it may not be as powerful a tool this time around. Why is that?

Avent: The book tries to look back, and draw lessons from the past. A lot of these things that we see today, there are echos of what happened in the Industrial Revolution, and certainly in the Industrial Revolution, there was a lot of displacement of people, and there was a lot of growth in the urban labor forces. People moved in from the countryside, and economies had to find things to do with all these people, to help them contribute and earn a good living. Obviously one of the big ways that they did that was through creating systems of public education, primary education and secondary education. And then in the 20th century, there was the big spread of bachelor's degrees, and university education. It was really those things that enabled the typical worker to seize the opportunities created by all these new technologies.

Avent: But we can't go back and re-enroll everyone in primary education, and have... The low-hanging fruit in Tyler Cowen's phrase, is gone. There are opportunities for us to improve the skill levels that people have. We can send a few more people to grad school, but there's limited scope for that. Just not that many people can go and get graduate degrees in engineering because it's really hard. We can do a lot to improve the preparation that disadvantaged children have entering primary school, and making sure that they make it all the way through to graduate from high school, but the return you get from that economically, for the investment, is much lower than when you grab someone, the typical individual with typical cognitive skills, and put them into a high school setting that they didn't have before.

Avent: I think the big lever that we had to boost the education of the population, and make sure that they could do new work in cities and factories, and earn good wages, isn't there. That means that much more of the adjustment is going to come in other directions. I think that's one reason why the wage effect of this abundance of labor has been so significant, because we haven't been able to move as many people up the ladder as we would have liked.

Beckworth: So is this a transitionary process? Is this going to be a permanent problem do you see, or eventually we'll transition to some new situation, new equilibrium, where people are happy, better off? If that's the case, what happens to these people who are in the glut right now? Are they going to be enjoying more leisure time, or will they find some new meaningful way to work? What does the future hold?

Avent: I mean, it's a really difficult question. As you mentioned, work is not just what we do to earn money. It's something that gives us structure in our day, that gives us a sense of meaning and identity. So I think a lot of utopians say, "Well, that's fine. We'll use the gains from technology to fund a universal basic income, and then people can be free to not work. They can go off and pursue their individual pursuits." That's highly problematic, I think, for a couple reasons. One, if you're one of the people still working and paying taxes, you're not very happy at that outcome. Another is that people who aren't having to work, who are unnecessary, probably aren't going to be happy either. People want a sense that they're contributing to society, that they are responsible for taking care of their family and themselves. They want a sense of agency. The really tricky thing for society is, we have to come up with a system where everyone feels like they're important, and they matter, and they're contributing, both so that they're satisfied, and also so that the people who are contributing a lot to the social safety net don't feel like they're essentially funding loafers.

Avent: I don't think we really have a good idea what that will look like. We can use our imagination, but if we take the perspective of someone in 1850 thinking about what the social safety net might look like 100 years hence, I think they would have thought that things like universal healthcare, or universal pensions, or massive publicly funded systems of public education, all that would have seemed ludicrous. I think getting from point A to point B is going to be really challenging.

Beckworth: But it's going to be a radical transformation, I think, is what you're saying. Right? It's going to be just as radical it was from the person from 1850 to today. Society's going to be that much different for our grandchildren and the generations to come. Do you have any recommendations to help smooth the transition? What can we do as a society that's politically feasible and palatable?

Avent: I think there's low-hanging fruit around. There are ways we can try to make the transition less painful. Some of it is basic stuff, like getting the demand situation right. It doesn't help anyone when you're lingering in this secular stagnation world for a long period of time. We're not doing a lot of easy things we can do to invest in early childhood education, to try to help people adapt. I think that if we could find ways to increase subsidies to low wage workers, and try to coordinate actually, reductions and hours, maybe from 40 hours working per week to 30 hours working per week, that would help.

Avent: That sounds a lot like we're sort of embracing the lump of labor fallacy, and I'm very conscious throughout the book that a lot of this seems sacrilegious in a way, to people who've taken economics, but I think the transitional... There's a difference in the short run and the long run. You want to make sure that in the short run, which can stretch for decades, we don't create a political situation that can't support market capitalism, and prevents us from getting to the long run. I think in the short run, we have to be open to ways of sharing the work and sharing the wealth.

Beckworth: Here's one that's been suggested, in my view maybe a little bit maybe more interventionist, or problematic than I would be comfortable with, but I'd like to hear your thoughts, and that is that the government invests in the stock market so we have worker capitalism, where the government... Maybe the government starts a sovereign wealth fund, issues treasuries to fund itself, but however it does it, it invests in an index fund, say the S&P 500, and then all these gains to capital. Part of the story is that the returns to capital's going to continue to grow rapidly, labor income's going to be struggling for many people, and so tap into that, have the government tap into that, and however it's distributed, everyone gets some little dividend as a citizen of the US. Now there's big problems with that. Right? The government would be a price setter. It might distort markets. But have you thought about that? Did it come across your mind writing this book?

Avent: Yeah, yeah. I mean, there're a few different points within that sort of policy thinking, that are worth consideration. One is the fact that it seems like the share of income flowing to owners of capital is rising, and the share of income flowing to workers is falling, and so one response to that is to try to make sure that more people own capital. Finding ways to encourage that I think would be useful. Is the best way to do that to have the government take huge ownership stakes in lots of things? Probably not. I think that's probably... That creates a number of problems related to management and incentives. I think finding other ways to do that would be better. I think the idea that there is this sort of, a citizens' dividend, to which people in society are entitled, actually does have some merit, some philosophical and economic merit. This is an idea that underlies a lot of the basic income thinking, goes back to Thomas Paine. The idea is that everyone in society is contributing to these institutions that make market economies work, and deserves a share of the social wealth that is created by those market economies. That's something that the book does get at.

Avent: But you have to make that work. I'm not sure what the right way to do that is. I think there is something appealing about sovereign wealth fund, but you don't need a sovereign wealth fund to make all the public investments that haven't been made in the way they ought to have been made over the last 20 years, particularly when governments can borrow it at almost zero percent, or negative in some cases.

Beckworth: Negative, right.

Avent: Yeah.

Beckworth: Germany and Sweden. Let me throw another suggestion out, one that I like a lot, and you won't be surprised when I tell you, because Ryan our guest knows I'm a big fan of nominal GDP targeting, and I think Ryan would say... You are too, right?

Avent: I am, yeah.

Beckworth: So one of the ways to do nominal GDP targeting is proposed by George Selgin. He proposes one called a productivity norm, and basically you stabilize demand, but you allow the price level to fluctuate based on where productivity's going. So in a period of rapid productivity growth, you would have gentle, maybe even mild, deflation, maybe disinflation, but some points you'd get some deflation. So if we go back to the late 1800s, 19th century, when you had that radical transformation when the US went from agricultural based economy to a more industrial one, part of the story is that the workers participated in the real gains through higher real wages, and a lot of that real wage gain was from the falling price level. That wasn't all, you had education and other factors as well, but it seems to me one way you could transmit the real economic gains would be through... Again, this would be the right type of... not 1930s demand class, but stable demand, and rapid productivity growth translating into a gently falling price level. If your nominal wage wasn't growing rapidly, your real wage still would be growing rapidly. Any thoughts on that?

Avent: I think that's an interesting idea. Certainly one thing we would expect to see from a rapid period of technological change are the prices of lots of goods falling. One thing that would be really good now would be to see the price of lots of services falling as well, things like healthcare, and education, and housing. The tricky thing I think for a lot of the labor based services, and that includes things like healthcare and education, is that one person's income is another person's consumption, or the other way around. Basically, if you have falling prices for the services, that in some way needs to translate to falling labor income for someone, and the question is how flexible are people's wages. What you wouldn't want to see are people who, particularly in public service contracts, whose real wages are going up and up and up, and either leading to unaffordable government spending, or to lots of unemployment in private hospitals and things like that. So I think that would be a complication.

Avent: I think there's writing that says that the more volatile the level of inflation, the more people become used to adjusting their wages and prices as a result, and so perhaps we would learn better. I think there is an interesting underlying concept, which is it deflation itself that is a problem, or is it low inflation itself that is a problem? Or is the big problem the low nominal GDP growth, and low inflation's the side effect, and we end up focusing on the wrong thing, and would in fact we have a pretty easy adjustment if we had 5% nominal GDP growth even though prices were falling? I think that's certainly true, but I don't know. It could be that in some future, technology will continue to make wages more flexible, prices more flexible. We'll have a gig economy for everyone. In that case, you really wouldn't have to worry about that issue.

Beckworth: Even if you had those sticky wages, this idea could hold, so for example, a firm becomes more productive. Right? So its per unit production costs fall. If I own a factory, I got one worker. I'm going to keep this real simple. I pay him say 50,000 a year, and I start producing more and more things, let's say I'm making car parts. I pay him the same salary, but his salary now is covering more and more output. So the per unit cost production is falling. I can still pay him the same dollar salary, but my prices on my goods are going down, and if this is an economy wide effect due to these technological advances, in principle at least, the story is that you could see stable nominal wage growth if you had something like a nominal GDP target. Particularly, I think there's institutional reasons you wouldn't see nominal wages fall. There's this money illusion, everything from that to minimum wage. There's structures I think that would prevent that happening. So any event, that's something I might explore myself later, is could we transfer real gains via lower price level? That's speculative, so we don't know.

Social, Cultural, and Political Implications

Beckworth: Let's talk a little bit more about your book. Moving forward, what should an individual do? How should they prepare for this transformation? You're a father. What are you going to tell your children as we prepare for this? It's already going, but it's going to intensify based on what you've argued.

Avent: It's a good question, it's tricky. I think that one of the things that the book emphasizes is the increasing importance of social capital, and social ties, and social knowledge. I think it's going to be important for workers tomorrow to have the individual human capital, to have those skills, being able to write, and code, and crunch numbers, and things like that, but also to be able to fit within productive cultures. That might be firms like the one I work at, or like technology companies. It also means navigating life in big productive cities, which is where a lot of this productive social capital is located. I think from the perspective I have right now, those are the things I would emphasize, but what that really boils down to is a lot of basic people skills, and flexibility, and conscientiousness, which is something Tyler Cowen always talks about, and how that's going to be a huge advantage for people in the future. It's hard to know exactly what people are going to need to know 30 years from now, but the ones who are capable of adapting themselves and learning new skills are going to be the best off, I think.

Beckworth: Can you apply your book to what's going on now in the elections, without getting into endorsing any views? We know we've got two very different perspectives. To me, this election reminds me of Charles Murray's book, Coming Apart.

Avent: Absolutely, yeah.

Beckworth: Your book sort of speaks to this, right? I'm sensing your book is speaking to some of the discontent, the angst that's being experienced.

Avent: I think that's right. The book gets to, or I think has things to say about the election in a few different ways. Part of what we're seeing is the dissatisfaction with not just growth itself, but the distribution of it geographically, and demographically. And that's led to a lot of discontent, and a willingness to consider ideas that we wouldn't have seen in the normal political discussion a decade or two ago. There's a broader idea that the book tries to get at, which is that... when social capital is important, being proximate to good institutions and productive places and productive companies, and it's critical. That is one reason why we've seen big productive places like Silicon Valley, or New York, or London do well. It's a big reason why housing costs in those places have gone up. It's a big reason why people want to immigrate to productive countries like the United States, or like Britain.

Avent: That creates cultural tensions, but it also... I think the fact that the wealth is social in nature means that people are less inclined to share it with others who they don't see as being like them. I think part of what we're seeing, not just in the United States, but around the world in this sort of nativist backlash, is the idea that this is our wealth. We need to share it among ourselves. We don't want you to participate in our social safety nets. So there's this combination of nativism, and also economic dissatisfaction, that is fertile ground for someone like Trump. The question I think that we have to answer is whether there is some other message that can resonate, that can lead to more generous politics. I'm not sure that we're going to see that message this election. I think it'll be won or lost based on how scared people are of the idea of Trump with his finger on the button.

Beckworth: Well that's a nice segue into Brexit. You just recently returned from the United Kingdom where you spent some time there with The Economist magazine doing your work. That was a big shock to many, maybe it was to you.

Avent: It was indeed, it was.

Beckworth: Okay, so tell us about it. What is your take on Brexit, and what does it mean going forward?

Brexit and the European Union

Avent: I think it's a really big deal. It was a surprise. Perhaps it shouldn't have been. In the months leading up to it, the referendum polls showed a lead for leave, but I think a lot of people thought common sense would prevail. The institutions of the European Union have been hugely important in maintaining peace and prosperity in Europe over the last 60-70 years. A lot of that has become less obvious, given the troubles of the Eurozone, which is just one small part of the European Union, and I think people lost sight of the value of EU as a whole. People within Britain are trying to understand why the leavers voted the way they did. I think it's hard for an American who was living in London, which was a place that was very pro Europe, to really understand what those views were.

Avent: A lot of the discussion was about immigration, but the areas that were very pro-leave were not necessarily the places that had a lot of immigration. Immigration tended to go, or I mean tended to concentrate in places like London, which was very pro EU. There was a lot of talk about loss of manufacturing, or the inability to set their own rules and things like that, but this wasn't really rooted in reality. So there's a few different threads there. One was kind of anger at elites in general, and that's kind of a potent argument in the UK, which is so dominated by London, this hub of really rich cosmopolitan elites, that doesn't to a lot of English, or a lot of British, look like the rest of the country. There was this sense of nativism that's there, not just in the Brexit vote, but also you see it in the battle over Scottish independence.

Avent: It's hard to know what was the thing that really resonated most with people, or whether it might have just been a general sense of dissatisfaction. I think it is linked. I think it is linked to the election in America, to electoral developments in places like France, and Italy, and Poland, and Hungary, which is that in this... Over the last 20 years, we've seen both economic trends that leave working people unhappy, but also the development of a recognition that social ties matter, and social capital matters, and we want to protect our share, our group, and kick out others not like us. Whether the critical fault line between the groups was Britains and immigrants, or elites and non-elites, I'm not quite sure, but I think that you can't ignore how important that sense of who belongs and who doesn't belong was.

Beckworth: We had Doug Irwin on a few episodes back, and I asked him about trade in the election. His view is that in general, because you mentioned it's multifaceted. It's not just the US, it's in Europe, it's UK. He thinks it has to do with the slow recovery. Now, there are probably deeper structural issues you just alluded to, but he thinks had there been a more robust recovery in the Eurozone, the UK, the US, some of these issues would be far less consequential, trade, immigration. When you have a good job, and the future looks great, you don't worry as much. You don't find scapegoats for your problems, but we haven't had that. What do you think? How much weight should we put on the slow recovery being a contributor to the putting the blame on immigrants and on trade?

Avent: Yeah. I think in a very clear and direct way, that's right. Right? We know from past experience that really nasty downturns lead to extremist politicians enjoying success, and that happened in the 1930s, and it's happened at other times. It's not actually that surprising. What the tricky question is is, to what extent was the crisis, and the slow recovery that followed, avoidable, or to what extent was it destined to happen at some point anyway? I think when you look at the whole of the last 30 years, we see the concentration of income in the hands of people with low propensity to spend. We see this downward march of interest rates. We see this move into something that looks like a secular stagnation world, which I think made a big crisis something like inevitable, and which also almost guaranteed that the recovery was going to be hard because we were going to hit this zero lower bound. Yes, directly I think the crisis and the slow recovery contributed to it. We could have done more to speed up the recovery, and to reduce these negative developments. At the same time, I think the broader context has been pushing in this direction, and it's not clear that we could have avoided it forever.

Beckworth: Okay. Let's talk about the Eurozone a little bit more then, since we're touching on it. We had the Eurozone crisis. There were two recessions. There was the 2008-2009, and then 2011, and I've been very critical of the European Central Bank for raising interest rates during those periods. Would you attribute the Eurozone crisis to ECB policy? Now I've been very vocal on that front, but is it a deeper problem, the lack of optimal currency area? Is the Eurozone really meet the criteria of an optimal currency area?

Avent: No, I think no one would think that it does, and that's true for a lot of reasons. Even looking at a place like Italy, it's not clear that Italy is an optimal currency area. You've had such long-term divisions between north and south, so to extend it to the Eurozone as a whole, no, absolutely not. I mean, the levels of labor migration within Europe are just far, far lower than they are in the United States, for instance.

Beckworth: Now why is that? Because in principle, they should be able to go anywhere, right?

Avent: They should, yeah. Legally, they have a right to work anywhere, but it's funny. Even across European regions, within the same country, there's less migration than there is across states in the United States.

Beckworth: That's amazing.

Avent: Some of it I think is to do with the cultural issues. Cultural explanations always feel a bit like a cop-out, but I think there is a cultural element to it. I think a lot of it is social policy, and economic policy that encourages people to stay put. At a national level, it's hard to... Pensions and qualifications don't always move across borders. Even if you can get a job in France if you're an Italian, it's not always the case that your qualification as a doctor or whatever is going to allow you to do that job in France, so the return to moving is less significant. Anyway, the upshot of this is no. The Eurozone has never been an optimal currency area, and we could see beforehand, there's a long history of countries like Italy adjusting to difficulties by depreciating the currency, devaluing, and there was no reason to expect things to be different. A lot of people warned against the creation of the Eurozone, but it was as much a political project as an economic project, and it went forward. So I think there was bound to be difficulty. It's surprising, in a way, that it happened so quickly, and-

Beckworth: Wasn't it surprising it's persevered this long, despite the challenges?

Avent: Well that's true, you could look at that... It's amazing in some sense that it has lasted this long.

Beckworth: Yeah, I'm surprised Greece didn't abandon the Eurozone before now, it's...

Avent: You look at the difficulty Greece has had, and they've lost a quarter of their real GDP, saw unemployment rise above 20%, and it's extraordinary that after all this, and this has gone on for years and years and years, they're still extremely keen to stay in the Eurozone, to stay in the European Union, and you know, that says something about how important these institutions are to people across the continent. They don't like Europe, the idea of a unified Europe or an integrated Europe. They like the idea of national identity. At the same time, they recognize how important this integration is for security reasons, for economic reasons, and are really committed to the project, so... That's bad in a way, because it means that people will tolerate a lot of pain, and there probably is more pain to come, I imagine.

Beckworth: Yeah, it doesn't seem very hopeful. Right? We don't expect there to be a true fiscal union anytime soon, so it seems to me this problem will continue to occur. Even if we were to see a jubilee, all the debt was forgiven in the periphery, it seems to me the same problems would eventually emerge. Right? You'd still have these differences in real exchange rates, competitiveness, and we would still have the problems that we had before. In other words, we haven't really resolved anything. Right? We've given a grace period to Greece, and extended their liabilities for longer periods, but we really haven't solved the fundamental problem.

Avent: That's absolutely right. There have been important fixes to kind of... fingers in the dam that prevented the whole thing from coming down. One of them was the fact that the national relationship between bank solvency in the sovereign has been broken because that threatened to kind of blow the whole thing up back in 2012, but no, the broader problems haven't really been dealt with. To some extent, they would have happened, really even without the currency joining them. You have a massive economic area where each country has a huge financial center, and they're deepening their ties with each other. You would expect that there would be concentration of financial activity in one or a few cities, and that places that previously had been financial centers would lose activity, and that national governments wouldn't be happy about that, and the same thing would be true of manufacturing, and technology.

Avent: There was going to be more concentration within regions of the European Union as a whole, and a corresponding loss of activity from other places, but if each country had its own monetary policy and its own exchange rate, it could do a lot more to make that adjustment go more quickly, to help displaced workers find new jobs, and the lack of those cushions has been really, really hard. Yeah, I think we've seen a lot of can kicking, and who knows how long it can continue. I suspect that another big global shock would probably lead one or more countries to leave.

Beckworth: Going back to a point you made earlier, it's surprising that they have persisted as long as they have, particularly Greece, because it's not just the economic pain. It's the history, right? Who is the country they're accountable to more or less? It's Germany. Germany's the one leading the charge. You got to have structural reform. You got to do XYZ, but they also hate the Germans from World War II, so it's surprising to me that the average person on the street in Greece is even... Are they even thinking, "Oh, we value the EU. We value the euro." If I were trying to feed my family, I would be, "Screw them. I'm done. Why are we still here? Why are we still a part of this project?"

Avent: It is amazing, being over there, how fraught, and how present history is everywhere. These people talk about... Sometimes they don't talk about it. In every conversation, the history, the second world war, but going back before that, is there, and these resentments are there. But you know, at the same time, that's a thing that makes people distrustful of each other, that leads to conflict, but it's also one of the reasons why this project was so important, and why...

Avent: So you have these people, the Germans don't like working with the French. The French don't like working with the Germans. Neither of them like working with the Italians. At the same time, it's incredibly important that they continue to work together, both because that makes them richer, and because that avoids the national political conflicts that can lead to really awful outcomes. That's one reason why the prospect of a breakup of the Eurozone or the EU is so scary. There're a lot of problems in the world, and the last thing we want to do is replay the horrors of the last century, so...

Beckworth: Right, right, interesting. Let's move into monetary policy in general. So around the world today, we have inflation targeting, I guess technically it'd be flexible inflation targeting they would say, to be precise, where a country on average, over the next five years or so is supposed to have an average inflation rate near 2%. This is true in Europe, the European Central Bank, the UK I believe something similar, the US, Bank of Canada. Wherever you go in advanced economies, this is kind of the norm, but what has happened, like in the US, and it's particularly clear in Europe, is that 2% really hasn't been a symmetric target. So in the case of the US, I think our listeners are well aware, because I've said this many times on the show, but inflation, the core PC inflation, which is what the Fed prefers, is averaged around 1.5%. If you're truly aiming for a target, the average should be the target. Right? So sometimes you are above the target. Sometimes you're below the target. We haven't seen this in the US. I know with the ECB, the target is just under 2% or so, so this is kind of vague. But even by that center, they're still well below that. Is that correct?

Slow Growth, Disinflation, and Monetary Policy

Avent: Yes, absolutely. They've just now ticked back above zero percent, so yeah, they're not hitting their target.

Beckworth: This is mind blowing. Right? It's frustrating to watch as an economist, and there's always these excuses. Oh, it's energy shock. Oh, it's oil. It's this or... But after seven, eight years of some excuse, in my mind, this represents a systematic pattern. There's a preference. Maybe it's unconscious, even. Maybe it's opportunistic disinflation that they're not even aware what they're doing. But do you think this has been a drag on the global economy, and on the margin that contributed to the secular stagnation that you mentioned earlier?

Avent: Absolutely, I think it absolutely has. Early in the recession and in the recovery I think it was, I think low inflation was a drag because it was making adjustments more difficult, given nominal rigidities, and nominal debt burdens. I think over the longer period of the recovery, it's been a huge drag just because it signals that we're not getting adequate demand. We see that in the nominal GDP numbers as well, but if you're persistently seeing active disinflation, you're not doing what you're supposed to do as a central bank. The question is why. That's the really hard question. Part of it I think is central bankers being naturally conservative, and not wanting to use these unconventional tools in a way that's going to lead something to break, or to perform in a way they hadn't expected.

Avent: That's okay, but the longer this period goes on, the less of an excuse that is. We've had lots of experience with QE now. We know what the effects are. There's less reason to be scared of it. Part of it I think has been excessive optimism on the part of central bankers. We see their forecasts month after month, that show this nice curve with inflation going back to target, and inevitably it doesn't do that, and this keeps getting pushed out. So then one question is, is their mental model of the economy wrong, or are they... What are they missing intellectually that leads them to do this? But then I think there's obviously a behavioral aspect to it. There was this idea in the '70s and '80s that we needed to put natural hawks on central banks' monetary policy boards in order to bring down inflation, and those sort of ideas die hard, I think.

Avent: There's always the concern in the minds of people like Stanley Fischer, who was there when inflation was a huge problem, that unemployment at four or five percent, rising prices, accelerating inflation, are just around the corner, and that's very costly, and we don't want to have to bring that down by inducing a recession. I don't think the world works like that now, but for people who were making policy when it did, that's a very hard thing to shake off.

Beckworth: Yeah, and I think that having low inflation, we've been very successful at it. Inflation targeting was brought in the 1990s as a way to deal with the lack of a nominal anchor. We went off the Bretton Woods system. We tried money supply targeting. We tried a number of things that didn't really work, and so inflation targeting became the go-to approach. In my view, it's kind of emerged on this, but I think we've been so successful, and when I say we, central banks around the world, that it's created an expectation among everybody, the body politic, politicians, households, businesses, that what's normal, what's acceptable, is low inflation, and the more you can get, the better you are. We've kind of worked ourselves into this corner, and I've often called it an inflation targeting straitjacket, that if Janet Yellen did want to temporarily gen up demand, and create inflation that say went 3% for a year, I think that'd be immensely helpful. I want to be clear to my listeners, in a rule-based way, not much of discretion, but there's ways to do this, like a price level target, are a nominal GDP level target. You can do this in a systematic way, but to do that would be very difficult politically.

Avent: Yeah, and I think it's... When Franklin Roosevelt took office, and he was promising to return prices to where they were before, that was a relatively easy thing for him to say he wanted to do, because a lot of the voters that backed him were farmers. People who were selling commodities, who saw directly how higher prices were good for them, so it was not so difficult for him to do that. Now, you go out and you say, "What we really need to do is raise prices," that seems to the non-economist on the street, that seems like a crazy thing. Like why would we want to do that? I think this is one reason why something like nominal GDP, apart from its policy advantages, is so attractive. When I talk about nominal GDP targeting to other journalists, they say, "But this is a pain to explain to people. No one knows what nominal GDP is." But if you can say to someone, "What we want to do is increase nominal income growth," income is something we want to go up. That should be an easy sell, whereas telling people prices need to rise is much more difficult.

Beckworth: Right, and focusing on prices, which is a symptom of the need for more demand, more income, yeah. If we could somehow sell we're going to stabilize your dollar income growth over the next five years at a certain stable path, I think that would be a good sell.

Avent: Who would be against that, right?

Beckworth: Right.

Avent: But then we have to say there're a lot of reasons this kind of approach makes sense. Why haven't central bankers gone for it? And that's tricky, and I think as you say, the success of the inflation targeting approach is one issue. People have seen that this works, and are reluctant to abandon it. Fear of the unknown is another thing, but I think if you talk to central bankers in private, who were there when they were making these decisions, they say that they thought the announcement itself would be destabilizing, that it would lead to loss of confidence, that people wouldn't understand why it was being done. There was a lot of talk in the immediate aftermath of the recession that what we needed was a regime change. Right?

Beckworth: Right.

Avent: That we needed to say to people, "Things are going to be different." But within central banks, that's a very scary idea, and there's a reluctance to do it.

Beckworth: In Bernanke's book, he mentions that very thing, the communication. How would we communicate this? How would we be credible? And those are real tough questions. It's not easy being a central banker, but with that said, in hindsight, it does seem to be a missed opportunity. Christina Romer had that op-ed in The New York Times. Bernanke, it's time for your Paul Volcker moment. It's time for a regime change, and it didn't happen.

Avent: Yeah, well I don't think we've... I think there was a moment early in the recovery, when we could have done it. That moment seems to have passed, but I don't think this is all over, just simply because we've remained in this extremely vulnerable state, where even countries that are growing healthily, and have very low unemployment rates, don't seem to be able to raise interest rates, and so that means that the next time a big shot comes along, we're going to be right back to unconventional policy. There's going to be a lot of talk about how do we get out of this. So I think we're by no stretch of the imagination, have we passed that moment.

Beckworth: Fair point, fair point. Maybe I should rephrase it. The opportunity was there. It was much easier maybe, if the Fed had spent all of its political capital on a regime change as opposed to trying three QEs, and that leads to the last point I want to cover in our conversation, that's interest rates, which you just talked about. The Fed really cannot push interest rates up. The economy needs to push them. We need healthy recovery. So what we've seen around the world is this decline you mentioned earlier. It's been going on for years, but in 2008 it accelerated. Right? We see this trend across the world, safe assets. The yield is going down. Can you explain that? Something that's really been tough for me to wrestle with lately is that we have the yields, the interest rates on safe assets, which we mean you have government bonds from Germany, UK, US going down, but we see the stock market going to the stars. Maybe put that point, the second one, to the side, but kind of summarize for our listeners. What is this safe asset shortage problem?

Safe Asset Shortage Problem

Avent: Right. So I think you have these fortunate sovereigns, like America, like Britain, like Germany, and remarkably to some extent, even like Japan, even though it has a gross stat of 40% GDP, but they're able to issue these securities that people just kind of implicitly trust. They're almost as good as cash. They serve as collateral in financial transactions, that if you're a sovereign like China, and you're looking for a place to stash your three trillion, you turn to these. The excess demand for safe assets has, through this portfolio balance effect, pushed down yields across relatively safe private assets, and on down the chain. That is, I think, a big reason why the real interest rate globally has come down. I think it's not the only reason. There's also been... I think there's an investment demand issue as well, but it looks like this is not going to be a short run issue that's going to go away.

Beckworth: And the Fed's fighting against that. It's one big-

Avent: Yeah, obviously when you talk about something like QE, to what extent is it counterproductive to hoover up these treasuries that might otherwise be-

Beckworth: I mean, also in terms of raising interest rates, right? If the world's interest rates are dropping down long-term, it's a signal that the expected short rates are going to be lower, and the Fed's trying to fight that. That's just to me a no brainer. You're fighting a global bond market. You're just the Fed.

Avent: Yeah, but they seem really reluctant to see... Every time they really talk about pushing up short rates, the yield curve just flattens like a pancake. It should be clear that when you're facing capital that can move anywhere, you simply can't push up your real rate at a level that's much higher than a global rate, but that's not yet sunk in, I think, in a lot of places.

Beckworth: So what do we do? What are the next steps?

Avent: Well, there's a few ways you could tackle this. Okay? One is to create more safe assets, and I think there are a lot of people who would say whether or not you believe in countercyclical fiscal stimulus, not issuing more safe government debt to make public investments that are overdue is just crazy. That's certainly true in Europe, where across northern Europe there is massive need for public investment. Sovereigns like Germany are paying negative interest rates. So yes, more safe government debt would help. There's a question as to whether governments are the only one who can create it. We did run into trouble a bit in the 2000s when we tried to create safe assets privately, but I'm sure there's a little bit more room to do that. That's one thing you could do.

Avent: Another thing you could do is try to raise inflation. If you can't get the real rate up, I'm sorry, if you can't get nominal rates up because the real rate is pinned to zero, you can still do some good by getting nominal rates up by raising inflation, and keeping the real rate where it is. If we thought it was going to be dangerous for the US on a long run basis to have nominal rates sitting at zero because the Fed couldn't then cut in response to things, then the thing to do is to raise the inflation target, and that allows you to raise rates to compensate for the inflation premium, but that's not a very popular idea. There are other possibilities, but those seem like the most straightforward answers to me, and neither seems-

Beckworth: To be getting much...

Avent: Right, right.

Beckworth: You can increase the supply, which is... As a monetarist, I can see the money side of this story. These are safe assets. People use them, institutional investors use them as transaction assets money, and it would ease the demand for them if you increase the supply, but that's not going to happen. The concern, of course, is going to be long-term debt issues. So the supply side's one part of the equation. The other side would be to reduce the demand for them. Better economic growth, where is that going to come from? Another solution I've thought about, that I think is kind of manifesting itself as central banks grope in the dark toward trying to do something, is negative interest rates on the policy side. So the ECB, Japan, countries that are actually going negative... The policymakers may not be doing this consciously, but they're I think responding to this force we just talked about, that rates are going down, and they've got to... Zero lower bound is this idea, is there constraint that's not allowing market prices to go where they need to go. But you're right. Like you, I don't see any room for policy to really do anything.

Avent: Yeah, I think the scope to push rates further into negative territory is very limited for a few reasons. I mean one, you sort of have the hoarding problem that eventually develops, but also it seems like certain important components of the financial system start to break, money markets, and bank bottom lines, if you squeeze them too much. Of course one interesting thing is that banks haven't passed on negative interest rates very much, to consumers. You would get less pressure on bank margins if they were passing it on. On the other hand, if you were passing it on to depositors, they're more likely to take the money and put it under their mattress. I don't think... We're not going to find ourselves in a world, I don't think, where interest rates are negative 5%, in nominal terms, anyway.

Avent: It's possible that we could do things to reduce savings elsewhere in the system, by people who are not just saving for precautionary reasons. It's possible that if we did sensible things to reform the tax system, that people, that companies would be more willing to invest. It's possible that if we transferred income from high saving wealthy individuals to people with higher propensity to spend, less of that money would end up in safe asset vehicles. But none of these things are politically easy. There's no magic wand you can wave. I think the thing that probably ends up breaking first is mobility of capital. If we have the situation where we're transferring very low interest rates, demand drain around the world, through the flow of capital, then eventually you get a-

Beckworth: It's a race to the bottom, right?

Avent: It's a race to the bottom. It sucks more and more people into the zero rate trap. I think eventually you... It's a bit like the 1930s, where you have people say enough, and they leave the system altogether.

Beckworth: So it has to get worse before it gets better? Not to end on a very pessimistic note, but we've talked about labor gluts, painful transformations through technology, and then these negative rates, this downward march of yields. Wow.

Avent: It's not certain that things have to get worse before they get better. It could be that we get... that after the election, there's broad consensus that what we need is a lot of deficit spending, that Europe comes to the same conclusion, that because the ECB can't do everything it ought to do to boost demand, and because it's now doing QE, which is going to hold down government borrowing costs, that the thing to do is to run bigger deficits. You actually do see a bit of that now, with Germany sort of wagging its finger when Spain doesn't hit its deficit target, but not actually taking concrete steps to get it to do that. Maybe the way out is bigger fiscal deficits. That creates other problems down the road, but it's probably better than blowing up the entire global financial system, maybe, I don't know. So that's not exactly a positive note.

Beckworth: Right, I mean either way, I imagine politically it'll be tough too, but maybe so. I read an article recently that both Donald Trump and Hillary Clinton aren't talking about deficit cutting. There's none of that in their language. It's a question of how to take advantage of yield, how to spend it to their own likings, which is interesting change in tone from a few years ago when we had sequester. I guess I want to end with reminding our listeners here, what we're saying is not just reckless government spending. What we're saying is it's a bizarre world. I acknowledge that, but there is a world out there that really wants to hold our treasure securities, and an insatiable appetite for it, and unless we respond, things are actually going to get worse. It's not even a question of government spending. It's a question of providing these safe assets to the world, and one way to do that is through these other mechanisms you've mentioned.

Avent: Yeah, I think that's absolutely right. You have policymakers who are reluctant to think about bold but controlled sensible steps toward more fiscal stimulus, or more aggressive monetary policy. If they're not willing to do that, then you get a big break somewhere, and you do end up with something more radical.

Beckworth: Right, and as you said, the financial system might blow up. That may be what it takes to change the trajectory. Well, our guest today has been Ryan Avent. Ryan, thank you for being on the show.

Avent: Thanks so much for having me.

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.