Dallas Fed Global Perspectives with John B. Taylor

good evening ladies and gentlemen and welcome to this evening's installment of our global perspective speaker series my name is mark winn i'm a vice president in the international group here at the dallas fed and director of the bank's globalization institute which organizes these events our guest this evening is john taylor who is currently the mary and robert raymond professor of economics at stanford university and also the george p schultz senior fellow at the hoover institution john is one of the most distinguished monetary economists of his generation and is the author of the famous taylor rule which is widely used to guide and evaluate central bank performance this public service includes terms on the president's council of economic advisers as a senior economist in 1976-77 and as a member in 1989-91 he also served as under secretary of the treasury for international affairs between 2001 and 2005. indeed it was in this capacity that i believe john first visited the dallas fed to speak at a conference on sovereign debt that carlos zarazaga and i organized in 2003. john is the recipient of numerous awards including the alexander hamilton award and the treasury distinguished service award at the us treasury the medal of the republic of uruguay for his work on resolving the 2002 financial crisis the truman medal for economic policy for extraordinary policy contributions and the bradley prize for economic research and policy achievements he was also awarded the hayek prize for his book first principles and adam smith awards from the national association of for business economics and the associate association for private enterprise education john will participate in a moderated conversation with rob kaplan who is the current president and ceo of the dallas fed before joining the fed rob was professor and senior associate dean at the harvard business school which he joined after a long business tour at goldman sachs we will be taking audience questions during the event and we'd love to hear from you if you would like to ask the speakers a live question please click the raise hand icon on the bottom of the control bar to enter the queue if you would prefer to submit a written question use the q a button on the bottom of the control bar to submit your question we'll try to get to as many questions as possible and also try to address questions in the order in which they are received we apologize in advance if we do not get to your question with that i will turn the floor over to rob rob thank you mark and it's great to have everybody here and it's particularly great to have john taylor at the dallas fed uh john has been a great friend and a coach and mentor to me but he's been a longtime friend of the dallas fed and so uh it's a real honor to have you here and for those in the audience mark wynn alluded to this but john is one of the the giants of the economics field and the monetary policy field and so we're we're we're thrilled to to have a great relationship with them and to have them here and so john i'm going to start just to give a little bit of for those who don't know you a little bit of your background you went to princeton got your phd at stanford and uh and then you went on uh to be professor at columbia princeton and then you been a long time professor at stanford starting in 84. what made you become an economist well i made you think and by the way rob this is terrific thank you for having me on it's a real pleasure to be back in dallas so to speak i i got interested in economics as an undergraduate i was originally interested in kind of math and physics but took an economics course and just kind of loved what was going on applying these techniques to ideas which i think were important and uh did a a senior thesis with some talented people uh who got me thinking about models and uh stochastic processes and uh dynamics and believe it or not i started working on policy rules back then it's it's believe it or not 53 years ago and uh with my first policy rules uh they were not the most sophisticated but it was the beginning and i liked the idea of thinking about policy as a system as a strategy and it just was appealing to me basically i think because of the models that people showed me at the time and over the years you've had a lot of folks from the fed have been your students and you've mentored many people who've gone into central banking around the world have you always liked teaching students and mentoring and coaching people oh yeah no i like teaching at all levels uh maybe the most rewarding is at the phd level they're thinking about new ideas and as you mentioned have very talented students over time but i think it's it's at all levels in fact one of the one of the i've gone back and forth uh from public policy to academia quite a few times including one which was not quite mentors the military i was served in the military and i was in the middle of graduate school and then came back but each time you had a sense of uh applying real world things to for students and that challenge i think has always been one which fascinated me how do you tell students about fiscal policy or monetary policy or or international strategy and how do you explain it and students uh are a big part of my life so you you alluded to this but your first uh time going into uh the government was in yeah two stints at the council of economic advisors one from 76 and 77 and then once from 1989 to 1991. did you always know you wanted to do public service and how did you come to go to the council of economic advisors no i didn't know it i did know the idea of applying i want to apply things and as you know very well applying things if you're involved in it in some sense is an advantage so i had an opportunity uh i was a professor at columbia phil kagan was a colleague and he knew people like uh alan greenspan and and others and so if calls hey taylor might be interested and so i went and did it and it was the first which uh was in the uh ford administration and greenspan was the chair and then we stayed on uh carter administration it was a turnover but that itself was a fascinating thing to see how the politics change the economics didn't change as much as the politics is always something to keep in mind but i i learned a lot about uh what was what was applicable what what could you actually bring from the from the public policy arena and make it useful in to study and then come back again that back and forth i think is is usually important in terms of finding ideas that are you know there's so many ideas we could work on those help focus on what the important ideas are so your second stint at the cea was 1991 and then you went back to stanford and resumed uh being a professor and it was during that time before your next stint in the government you came up with the taylor rule and for those in the audience some are familiar with this but and mark wynn alluded to it uh probably in it before every fomc meeting we go through a calculation here with our team at the dallas fed and i bet a lot of fed presidents do the same thing where we look at the original taylor rule and we look at derivations of the taylor rule and it basically uh well i'll let you explain it what made you come up with the taylor rule and uh and uh what was the genesis of it so it actually goes back a long time i have to say the models that i used were models they were dynamic they changed over time it wasn't a static thing sometimes you teach students something to supply and demand is stationary but this was moving and so you had to have a strategy or i was a rule to deal with it so it goes way back uh 50 years but then was what is the best way to do this you know milton friedman talked about money growth rules and there were alternatives but what struck me as more most suitable and most realistic and most useful was a role where the interest rate was the instrument and so then you had to think well what are the key factors and so huge numbers of model simulations experiments what's realistic and came up with this idea that well we can make it pretty simple if the interest rate rises by a certain amount when inflation rises and it declines by a certain amount when the economy is in a recession and hey to make it simple let's leave everything else out obviously everything is it can't be left out completely but that that was a simple thing and uh it caught people's eyes and imagination very quickly so i was i was pleased by that and that caused a lot of discussion and what's wrong with it or what's good about it uh how does it apply to other countries which was which was quite a surprise because i wasn't thinking about other countries at the time so for for those in the audience every six weeks uh uh the federal open market committee meets and a lot of the publicity is about a number of things we do but one of them how do we do we increase decrease or keep the same the fed funds rate and this rule that john is describing is a is a guide uh based on the level of inflation and whether it's high or low versus target and the out so-called output gap if we're weaker or stronger in the economy and that helps it's a reality check for practitioners like like me now back when you first did it the the neutral rate the kind of equilibrium interest rate was much higher than it is today and we can go into later why that is have you adapted that rule in the years that followed well it wasn't easy to decide what the right rate should be back then you know no one had done this before so i chose uh two percent real it was based on some history and some thinking but it and it was pretty close and also a target inflation rate of two which was long before the fed had two out there but people had begun to talk about it so so two real plus two inflation gave you a nominal of four and that's how it was originally which you know interest rates were higher than that coming into it we were still getting rid of inflation but that that seemed to be to work pretty well and then your question is how that changed over time well it it's pretty simple in a way you just change the two to one and a half or to one and everything else is the same you know why why change the degree to which the interest rate should change when inflation changes just because the normal rate is lower so that's how i've always struck this issue and quite frankly the the two percent was you know was not rocket science in the first place so the the you know people came up and questioned it i think probably i was more resistant than i deserved to be but uh there's some value to having a number that people can remember and and that it comes from some analysis of some kind all right and we're going to we're going to come back to that in a moment you then did a stint at the treasury under secretary of the treasury for international affairs for four years how different and that was a much broader experience than just economics you dealt with a lot of things how different experience was that it was much different for one thing 911 happened soon after i got there and so that changed everything you know you're i was traveling to iraq and afghanistan trying to get people together for this very unusual activity which we had to engage in many many meetings in the situation room hundreds of meetings in the situation room i think it was the idea for me looking back on it was to bring some economics into our foreign policy which frequently gets forgotten and still gets forgotten but we had the defense we had the diplomacy the state department but the economics were i think a big part of everything we did and so that was to me a big part of what i was doing i think we were pretty successful we you know had a terrible damage i was in japan when 9 11 happened i remember coming back to the u.s uh on a huge military plane the skies were vacant nobody was there and we had to sort of get get going at the time it was really starting from scratch and i i think the fed did a good job at that point out greenspan was still the chair and uh but but it was really quite a remarkable experience and then after that of course you know what do you do next and there were some international reforms on the development side i think we needed to do more for uh for poorer countries and we tried to do more of that so it was a multi-faceted job the you know international job of the jersey one of the best jobs i've ever had quite and the time maybe the time made a difference to it so so rolling forward uh we had the financial crisis obviously the great recession and uh in the height of it 08 and 09. i think you have frequently cited and this comes back to the taylor rule that maybe the fed left rates too low for too long and it was one of the causes of the global financial crisis and and and you might just talk about what are what were the risks of keeping rates too low for too long and how that how might that have led to that crisis well the the taylor roll and more general ways to think about did suggest rates were quite low uh in the period before the financial crisis and i think to some extent that you know people at the fed knew that they were saying well we need to be extra low there's a danger of deflation like japan we can't beat japan so i think there was a purposeful risk-taking if you like where the rate was lower and so that worried me at the time because the evidence was that this this rule would work pretty well actually it was one of the reasons why they we had this uh great moderation in the economy it was very good and so it began to worry me and i wrote about it in advance of the crisis this was dangerous and what happened is the the low rate causes a search for yield it causes too much risk taking and of course there was a lot of that right a lot of a lot of over extension in the financial sector and then when it eventually crashed it was a big crash so i i think it uh the lesson there was very clear it wasn't that something that many people wanted to hear at the time but uh i think it was important to get out there and in retrospect it was i think a very very important aspect of what we did wrong and i i hope that i hoped at the time that that wouldn't happen again so but anyway that was it was an example where basic economics uh is simplified of course by a rule but there's many other ways to look at it uh suggested that we were taking some extra risks at the time even though people in charge thought that wasn't the case so roll forward from the crisis one of the reforms in the aftermath of the crisis was much tougher capital requirements stress testing for the banks uh because the big problem in the crisis obviously was risk taking leverage at the banks um did the reforms um the reforms with the banking system did you do you think they went far enough did they do enough to help mitigate some of the risks you were worried about from keeping rates for too long too low for too long no i think they basically went in the in the right direction and of course the debate about the rates was always there but it wasn't just the rates you know at that point there were serious problems in the in the financial system i had hoped at the time there would be some reform of the bankruptcy code too that never took place it was quite close there was a lot of interest in that so that you wouldn't have the bailout and you wouldn't have the problem of bailouts which was still there of course and there's lots of debate about it but that was one thing i wish there had been more at the time that had been done is this because you're worried it encouraged risk taking yeah yes it was and also a risk of the government i mean there's another aspect of which the government would have to bail out if the if the situation got very dire but if you had a a resolution process which is what we proposed the creditors would work it out and you wouldn't have to have a big bailout from the government so the creditors would work it out in in a way which was is actually not that uncommon in many other situations but it would even apply to large firms and i think that you know when things got very tough it was hard to make those decisions at the fed and elsewhere about the bailouts and we wanted to take that difficulty away so there'd be a more it's actually more rule-like more systematic approach to how you would handle future situations like that so let's roll forward took us uh eight or nine years but before not was until 2015 we finally increase rates i know for those first couple of three years when you look at the taylor rule and i i know you felt we probably should have gotten to move on a little faster than we did but i think we eventually caught up or started to catch up to where maybe you thought rates should appropriately be and then then going into this year we've got the covet situation uh and and obviously the extraordinary actions of what would be your critique or your assessment of how the fed is done what we've done well and maybe we need to be worried about in our response to covet well i think it was the quick response was good and the actions taken were good and at the time knew it no one knew exactly what was happening i think there was some problems in the financial markets not working markets were effectively closed so this opened them and created more action in the markets the fed provided that so i think that was that was good and it's i would say if you're asking for a critique it's really where we go from here and maybe it's time to stipulate a little bit more about what's next there's still a lot of purchases that are going on we don't know how long the rate will be near zero uh so i i would say it's time to to get back to a rule it's time to describe what's happening i think there is work going on that uh i wish there were a little more and i'd say one other thing which i didn't think need to happen for starting in 2017 as you know they it was part of the annual monetary report which included a whole section on policy rules and that the taylor role and modifications of it and various things and i think jay powell as chair began to talk about policy compared to that it began with janet yellen but i think that was very promising i wrote a lot about it but then it just disappeared it just disappeared in the latest one i hope it comes back but it's an indication well you know we've got other things to worry about now you do but i think focusing on this on the strategy going forward would be beneficial doesn't mean you go there right away but you have a sense of where things will go very important so we have this conversation a lot and you and i have talked about this a lot so what's the what's the problem if we're too accommodative or too accommodative for too long what's so what you know uh i wouldn't say so what but maybe some people say so what it doesn't doesn't feel you know uh like a bad thing uh what's what's the risk well the the risk that people refer to which is not really there much now is inflation inflation will come up you don't eventually adjust and uh that doesn't mean right now but it means later next year the year after but i think more important now is that the extra uh search for yield that occurs the extra risk taking the confusion in financial markets about what the re what the interest rate is what's determining the interest rate what's the role of the fed and and affecting the interest rate so those those cause uncertainty it'd be better i think experience shows it better if the market was was there more than it is now when there's such an intervention by the fed so i think that you know experience has shown and it goes back a long time that when you deviate from a strategy or rule and there's you know some bad times and george schultz and i just finished a book re reminding people what happened in the 70s which there was no sense of a rule or strategy and your predecessors got off track big time but then you know volcker came in and changed things and it got back to i think a more reasonable policy and it worked pretty well uh and uh and so that's that's one experience you have other countries it's the same kind of thing and you know it just makes sense to have a sense of where we're going what the strategy is what's wrong sometimes i say it's good to have a target for inflation it's good to have some notion of what unemployment is but the strategy is maybe more important than both you know if you don't have a sense of what you do with the interest rate say or even purchases in response you're not really describing what the policy is very much and it's just again this goes back many many years for me if you have a dynamic economy which is moving over time especially in this international world where there's many many central banks you're much better off describing as close as you can that what the strategy is rather than just decide uh on the fly okay and that means strategy in this case means what under what conditions what types of actions would you take under various different uh economic conditions yes yes it doesn't have to be as precise i think that's one thing which um people have trouble with you know how precise does it have to be and i think it doesn't have to be as precise as people uh sometimes think it the so-called taylor rule is a mathematical formula you can write it down you can look at it you can debate it actually that's one of the attractive features just in you know there's been work at the board and elsewhere using models with rules in them they do it all the time right and so that's good you can evaluate it doesn't mean that the policy has to be exactly like that and there are there are other issues that come into play right but i think it's it's a sense it's like any kind of strategy whether it's foreign policy or or regulatory strategy you can describe what what it is and you can use a mathematical formula to help you debate what's right or not but it doesn't have to be that precise all right i'm going to squeeze in two or three questions before we go to the audience let me ask you so we just talked about monetary policy and a lot of people say gee you talk they're rules for monetary policy maybe there should be rules for fiscal policy you know we have debt now approaching a hundred percent that held by the public 100 percent of gdp present value and entitlements present value unfounded at a time at 65 trillion how worried are you about growth in the debt and how how should we be thinking about the growth and the debt from here well i am worried going forward and i think if there isn't a third package part of that should be what happens afterwards you know there's all the discussion of this year and next year but where we're going in the future which is what you're asking about is is so important and so i did some uh some research with uh danny hill and john kogan we actually took some models and simulated some ways to keep the growth of spending from being so rapid going forward and uh the budget deficit is much lower as a result going forward doesn't not much difference right now and that then that's a sense of a better economy the growth is higher uh according to this fairly reasonable model growth is higher if we manage the debt growth more effectively yes exactly it's it it works better and uh i think that's that's a lesson we've been learning over time there's big debate about it now of course as you know the deficits don't matter is out there all the time but i think they they do and it doesn't mean you don't have a deficit and a terrible recession you it was always this notion of a rule as you say deficits arise in recessions and they go the other way in booms that actually represents a pretty good fiscal policy and i think if we aim towards that going forward we'll be better off it's it's not easy so people have talked about ways to get there one is entitlement maybe entitlement reform spending uh cuts more revenues which is sensitive topic obviously and then the other thing is growing faster finding ways to grow the workforce to improve productivity which what did you what did you look at in your paper or what are your thoughts on how we ought to go about this we tried to make it simple just look at the growth of entitlement spending so leave military aside for the most part discretionary spending aside so right now there's a growth of entitlement spending which is much more than gdp if you bring that down and i think in ways that are quite reasonable given the demographic situation that's all that's required quite frankly it's it's quite surprising to many people that's all you need and uh now it's and you do get higher growth and i think that's a benefit i would like to see policies that aim towards higher growth and that is regulatory reform tax reform things that stimulate investments stimulating innovation uh stimulating new ideas and it's it's a huge good time to do that right now in fact i think we're seeing so much innovation from the private sector that's because of of this terrible disease that we're facing and we don't want to we don't want to discourage that and there's a tendency to go the other way as you know with the government is a solution where frequently it's not there's other ways to deal with it and that's that's the productivity side that's the growth side it's it's a separate but very important issue compared to what we looked at all right so let me let me talk to you about uh inflation and the fed's new framework which you which we've talked a lot about uh i guess i'll start with before i get to the framework do you do you have a theory we we work here at the dallas fed on a theory as you know the technology technology enabled disruption may be having a more muting effect on pricing power than we've realized but but we're still working on but that's our working theory here having said that do you have a sense on why even at very low rates of unemployment we've seen more muted inflation over the last 10 years i think it's it's because of the the things you mentioned quite frankly it's a different technology different innovation which is putting downward pressure on prices and i think that's what's going on i wouldn't say it's completely out of line uh people saying no is the old equations don't work i think they they work just fine they're you know they've never been rocket science you didn't have to didn't want to rely on that for things like a tailor rule that's for sure but i think they're they still have a message and you shouldn't worry about you should worry about them but in the meantime you do have this uh what's the right inflation target for the fed and that's what you've been working on i i tend to say look let's not go let's not go high let's not go to four or five or something like that the two is not so bad and uh i've been somewhat critical of the uh the average inflation targeting um i think here here is where it would be very useful to have some description of what happens next and i uh one of one of your colleagues in texas david papel has been working on ways to think about the decisions that you and your colleagues have made in the context of a rule or a strategy yeah okay so i think it's a very healthy way a good way to think about this and it he shows it's it works quite well and so that's the way you translate in what you've done or what you're going to do but it's more flexible if the economy does come back come out of it like some people are forecasting rates will be higher as a result or if inflation picks up rates will be higher as a result or vice versa what should the fed do if it turns out that this structural driver of technology technology-enabled disruption makes it so that uh we're unable to reach the two percent target or average two percent how far should the fed what should the fed do should we how far should we go or we should we try to keep a balanced approach where inflation isn't the be-all end-all and we weighed it against how tight uh how low we can get unemployment i think it's important to keep inflation there as a as something that you're focusing on uh it's been good that unemployment has been low until this terrible crisis uh but i think that represents better policy you know the rates started to rise in uh 2016-17 18 19 even and that represented getting back to a normal policy i was very positive about that i think it extended the expansion beyond what most people thought at the time and and it did affect unemployment in a very healthy way so that that seemed to be representing good but interest rates were rising right interest rates were rising during that period and capital was being allocated i think more efficiently and then of course things changed and now we're trying to figure out what to do now and where we go forward right i think the history is that it's these rules and if you want to have instead of two percent real one and a half percent or one percent that's fine i think you want to make sure the analysis is is solid and clear and different people have different views about that but i think that's the way to do it you have this you have this overall strategy but there's things that change maybe then the full employment unemployment rate has changed maybe the equilibrium real interest rate to use a technical word has changed right bring those into account and i think i think we'll be fine so there's an argument going on some of it public as you know you've heard some of it at your conference last couple of weeks where some people believe uh if you if you start getting down again to three three and a half percent unemployment and you still are struggling to meet your inflation target despite the rule you should start raising rates and others would say no we should really keep the rate where it is until we've actually you know gotten to two percent where do you come out on that debate well i think you've got two factors you got the inflation rate you got the unemployment rate and both have to be measured and both are subject to problems of what the normal value is especially unemployment and there may be some something in the labor force that's making unemployment lower than otherwise would and so you want to take that into account yeah it was a while there were people said that the natural rate is six percent right maybe it's better maybe three and a half is four is better and four used to be it so i think the research should be focusing on determining what that level is best as possible you don't know and then and then working that out uh with a rule or strategy same with the inflation rate uh you have uh low inflation rate might be lower than otherwise because of the technological things that you're mentioning well take that into account and uh and i think we should be fine but there's always a trade-off right the world has this trade-off and not to even mention the international side of this trade-off we're just talking about domestically but international there's another another aspect of this too and i've written a lot about how i think maybe central banks have paid too much attention to the exchange rate and that's gotten them cutting them off and and caused a relationship between the decisions which is basically harmful so that's another factor which uh i'd watch for if if i were you okay good all right i appreciate that all right let's turn to mark when let's take some questions from the audience okay um first question that came in uh since the fed is now clearly involved with monetizing the debt and will be for some time is the fed currently behind the times and not moving quickly enough into its own dollar-based digital currency which can be both currency and debt itself at the same time such as ethereum is it not extremely important for the fed which is now effectively the world's central bank to be the first to market with this technology so i think the the fed has been a little slower to look at the digital currency then certainly you know it started with the private sector uh basic for example was early firm um and then certain central banks started to work on it the chinese are doing quite a bit um i think it's a good thing for central banks to be looking at um it doesn't mean they're giving up on we're not giving up on the dollar but there may be better ways to deal with it so it's a very important technology i'm interested in myself it may have some implications for central banks in other parts of the world but i would i would i would spend some time thinking about that having the best people around talking about it it's it's uh you might go in a different direction but it's it's happening anyway and so i would i would agree that we need to be looking on that and can i just one follow up on that um so we're talking about the digital currency how does all this affect uh the dollar as the world's reserve currency and what is your what are your thoughts about the sustainability of the dollars the world's reserve currency well if it's an alternative to the dollar then it affects the dollar as a currency and i at this point i think there's the the dollar being out there is important um i i think it provides some stability it's probably not going to be there forever just reality there's other things that are going on but i think it's it's an important aspect of u.s policy uh but i think other countries uh it's not going to work for everybody and you you know you had the euro forum not that long ago you have questions in africa and small open economies what they're doing so i think it's it's something which um most likely will reduce the importance of the dollar and that's one reason why the fed i think should be working on it how worried are you about the dollar not being the world reserve currency and causing the us having to pay a lot more uh for its debt with this amount of debt we built up well it's not clear that they're related right you could have the dollar be less important uh globally but have uh interest rate lower and less debt so it's it doesn't go hand in hand okay i think there's some value to having the dollar out there as an important currency an important uh store of value and that's that actually helps drive policy i think in a good direction having a a stable inflation rate uh two percent or one and a half percent whatever it is is good and this this that's a becomes a responsibility for global responsibility so i think it's fine and that's i think one reason why you want to be sure that uh there's some some alternatives in car that just it does moves that around in a sudden way which you don't anticipate so uh that's what i would think okay good thank you mark next one okay and just a reminder if anybody wants to ask a question live just click on the raise hand icon the next question that's been submitted do you think that the fed would ever implement a negative interest rate target how would they go about doing this practically so i don't think so you're probably asking the wrong person on this call quite frankly but i agree with you i agree with your answer on that okay um i actually think that um it was so great that uh we had this conference and robert kaplan spoke at it a couple couple weeks ago at stanford but uh last week we had someone from the ecb and they have a negative rate and uh there's analysis that say it's fine i don't think it'll work that well uh it hasn't hasn't passed through as much as you think so so i would not be going in that direction quite frankly i think it's there are people who say that's fine but i think the u.s has a large capital market a lot of uncertainty which will be caused by that i think it's it's fine leaving it above zero and uh that would not be a place i would go at this point okay next question in the uh post-world war ii period the fed pegged interest rates to keep interest rates low on the large government debt any lessons from that period for today yeah well we got off of that uh it took a while to get off of it uh this the bank of japan has done the other way now they've targeted the longer rate i don't think it's a good idea for us i think that you know we have a system uh where it's not exactly that way now but the the fed controls the money supply which controls the short-term interest rate which through the term structure of interest rates affects the whole term structure of rates including longer rates i think that's worked well if you if there's a specific effort to intervene at the long end i think that is another um confusing aspect of policy i wouldn't really want to go in that direction now to some extent uh the the quantitative easing has been motivated by that right it's not completely sometimes it's at the rate oh the rate is near zero we have to have other means we'll do quantitative easing means in large-scale asset purchases but to some extent purchasing the longer end has been motivated by reducing the interest rates of the longer end i think it's better if the markets are or what determines the other rates and the fed focuses on i think it's liquidity money demand money supply and therefore the the short-term rate i think that that's a system that's worked well in the past and it'll continue to work in the future and you're worried that if there's this distortion at the longer end would it encourage more risk taking or will it will encourage behavior that may be uh counterproductive yes but in addition what's the who's who's to determine what that rate is you know i think there's a sense in which the the market um will take various things into account and there may be some reasons why the rate should be higher i wouldn't want the central bank to fight those forces if it was the forces which represented lots of individual decision making lots of firms lots of consumers that seems to me you're getting in the way of something which economics would tell you works pretty well and so so why interfere with that okay uh next question do you agree with the bailouts the u.s government made or do you wish that the government had let more firms fail in the fallout from the crisis it's not clear if that's the current crisis or the last big one well the the past crisis uh i was as critical of the actions and that's why i was very active to propose this uh alternative uh and it was to modify the bankruptcy code so that even a large firm could go into bankruptcy meaning the creditors would have a system to recover some of their debt so we didn't have such a law and so that's one reason why the bailouts occurred so i i think it's too bad we didn't have one put in place and there may be a reason to revive it now it was very close actually in terms of passing the the treasury under uh president trump looked like they were going to push it but then things happened and there was not it wasn't going far enough but that's that's what i would say that there's lots of reasons that the bailouts it's it's big individual decisions it's it's uh affected by forces which are hard to know which is which are political which is not political and so it's better to let the system work and the bankruptcy code is part of the rule of law and that's what i would prefer maybe we'll get back to that in the future um i don't know i think would be i think we'd be better off if we did okay we have a question a live question from an audience member robert potter robert if you unmute yourself uh you can ask your question you need to unmute okay i had to go on new yeah put this question to the two of you actually john first i'd like to ask your view of cryptocurrency do you think it will live do you think it will ever replace the dollar do you think it will ever become a reserve currency what do you think of it so i i like the idea of alternative currencies uh it's it's innovation it's ways to transfer money more rapidly maybe because of this disease i haven't used paper currency in months and uh there's lots of lots of alternatives so i i like the thinking about it and and i like i wish the regulators were positive about it in terms of substituting for something uh i think we'll have to wait and see how good it is i mean the dollar we discussed a few minutes ago works pretty well as a currency so uh i would say encourage work on it don't try to stomp it out for uh because of jealousy or other reasons by the way i think originally even the bis uh was reticent to move ahead and to support this kind of research i think they may be changing now uh with carson's uh as in charge but uh i'd say leave it it should be left open and it's like anything why stifle uh invention and innovation so all i agree with all that and the only comment i would make is uh i i there they'll be a digital currency in the future it may not be the ones that are being discussed today you know a number of the ones discussed today bitcoin others you know sort of flunk the test of price stability uh and wide adoption but the technology that has come with that distributed ledgers and others other technologies they'll be critical to a digital currency that does ultimately meet the standards in his adopt and i agree with john i i think innovation is inevitable and is uh natural and probably a good thing okay we have another live question from uh william pate william if you unmute uh you can ask your question william you need to unmute william you need to unmute hardest thing there is to do all right okay i guess we lost him okay we'll move on um where was oh yes next question your thoughts on universal basic income well there's a monetary policy question for you i think it's i think it's best to worry about incentives for people to to work and get education and the extent that that uh distorts those i'm not in favor of it so i think it's we the welfare system i'm not saying it works well needs to be reformed but i would not go in that direction myself uh next question uh do you have any views or thoughts on the distributional effects of persistently low interest rates yeah so i think this is something which uh we probably need more research on i think the there's been a danger of certain sectors benefiting from the low rates versus the high rates and it's it's not necessarily always rich people or poor people whatever but i think the i would say this uh if rates are going to be zero forever then that's going to affect the income of people savings for people they're not going to always be able to to save to to get the reward that they should be having so that worries me in terms of of a distribution effect i think that that wouldn't be the reason i would focus on it so much i think the distribution issues are huge by the way in this country i think that the coronavirus in covid has revealed a lot of income disparity that people knew about didn't talk about it and i think we need to focus on that a lot part of it is education part of it is just basic services but i would say in terms of income distribution the low rates i think there's more important reasons to get those to a reasonable level than income distribution and what we should do as much as we can is use other means and to me i'm i'm an education business so i see a huge disparity uh k-12 in the state of california and other places as well so i hope we we fixed that part because believe me this income distribution effect we're seeing right now is just this is really terrible okay we've another audience member wants to ask a live question vance skin uh vance if you unmute uh you can ask your question hello dr taylor how are you good good to see you vance except i can't see you i know well thank you for the insights today i was wondering about your thoughts on um the federal reserve's actions to be better aligned with the natural rate of interest by imposing a fiscal rule along with the monetary policy rule um is one of them more important than the other and then for example if congress ran less than deficits wouldn't that help tame potential excesses by the fed i want to get your thoughts on that that's a good question so fiscal policy uh has long interested me i think in some sense it's it's maybe more difficult uh it's not like we have an independent fiscal authority there's lots of people weighing in in different directions but i think if there was some uh understanding about you know balanced budget and full employment and you have deficits and recessions and you have surpluses and booms that would be good i would like to see go in that direction i think it'd be better and and actually i think you're you're hinting that will affect monetary policy because there are questions right now and who knows what will happen in the future about don't worry about the big deficits the fed is always there and there's this theory modern monetary theory which uh i think goes in that direction it's not like nobody's paying attention to it i don't agree with that but uh but it's out there and you know who who knows about the future we we could be uh adversely affected by on a monetary side by the by the high deficits so it's something that not to completely discount could i can i ask you uh professor taylor one follow-up so we we've obviously had uh increasing political polarization over the last many years to where people have commented that it's harder to get agreement on fiscal measures obviously in a crisis is a different matter but fiscal measures and structural forms you mentioned education critical structural reform and so because of that maybe the central bank has tried to take too much put too much responsibility on themselves because we just haven't had an ability because of political polarization to get the fiscal and structural forms we needed how what would your comments be on on that i think it's very important for the central bank to maintain its independence and to have somewhat limited focus can't do everything there are talks about environmental issues now uh central banks and uh the question about income distribution just came up but i think the the more institutions like central bank can focus on inflation on this on the stability of the overall economy uh keeping inflation uh low two percent keeping unemployment close to the natural level they're better off we'd be they can't do everything and uh i think the extent central banks try to do other things or try to go beyond their um their specifics then that's dangerous and i i think what we you know we we had a huge disagreement in the 70s about policy and uh and that those that was changed was didn't disappear in the 80s but policy monetary policy become more became more focused in this in the midst of a very contentious debate about all kinds of policies so i think it's it's fine and also i think that people understand that and they're you're right though there's a huge tendency well we can't do this we have to have the central bank do that and but i think it's it's important not to go in that direction central banks have an awfully tough job the way it is now describing what they can do and what they can't do so that's what i would do as much as possible it's a very important job it's crucial to get right so don't have many other responsibilities at the same time all right good good advice uh next question if you were advising congress on its next package to support the economy where would you target additional funding to keep the recovery from slipping well i think this is where you have to have the funds go to where it's really needed there's always a problem with stabilization packages or stimulus packages that they they go out and they're not used effectively in fact i wrote about that in the in this in the 2007-89 period it's really amazing how much of that wasn't really part of the recovery people debate it now but i think that's the things that have it focused on the people who needed the sectors that need it and there are quite a few rather than just have it more general and then i would add to that as i mentioned a few minutes ago if you could somehow make part of that where we're going this is the future is fiscal responsibility hard to even say that word these days the future is to get back to a normal kind of policy and that means dealing with the high growth of spending certainly certain areas and have a debate about it there will be debates about taxes but but all those things should be part of the question we need to have a fiscal policy that is responsible and it's it's not too late to begin to think about that i i believe it's not it's not clear it's going to happen the next couple weeks but uh it's very important to not to lose sight of that and i think i think the there aren't many people talking about that quite frankly uh i think there should be more um what are your thoughts on the potential of the renminbi to displace the dollar as the world's reserve currency i don't think it's uh too realistic at this point the rule of law is awfully important the ability to invest your money without extra restrictions so but you know i just mentioned the chinese are thinking about cryptocurrencies and and so uh so don't be complacent but it's uh i've noticed just uh on the side here i've been very into the foreign policy things our relationship with china seems to be changing and their their attitude is changing so i think that makes the question more relevant uh than it was a while ago there may be some other things going on simply besides the economics and i think there are our foreign policy people need to be looking to that but i think the dollar is very strong we need to have good monetary policy that makes it strong and i i don't see why that's going to change again i'm i'm more for rules rules-based policy if we can somehow get back to that i think we'd be better off that's what's worked that is what has worked in the past and i think it's possible to do right now and that would uh preserve the role of the dollar going forward so let me just follow up given we mentioned rmb and china uh you know you spent a lot of time on trade and your role as uh under secretary of international finance what what's your what's your take your reaction to the tensions we've had over the last several years particularly trade tensions with china so i think what's what's important is to make sure that our overall objective of lower barriers is is there what has happened i think is china has been um for good reason pointed out as very high barriers have high impediments and so it's hard to use the usual in the trade negotiations when one side is very high and one side is very low and so that has caused us asymmetry but i think we shouldn't lose sight of the fact that we'd be better off with lower barriers around and sometimes that happens because not everybody wants lower barriers and i think the dialogue has changed a little bit but it worries me that we're losing sight of the ultimate goal which is really free trade let's face it that would be we'd be better off but in the meantime you've got this imbalance of restrictions and it's hard to use your usual trade negotiation in that circumstance so we're into these very unusual kinds of discussions but keep them in in train so i gather take from your comments you'd rather not use imposing tariffs as a remedy to try to level the playing field or you be careful about that be very careful i would it's uh that's the trade war uh potential is great and uh it's hard to control sometimes once it's once it's going but no i think the you know the us has been a leader for many years in uh trade and free markets and promotion of that i think we shouldn't get off of that it's it's been a great value to the international system so i think it's in in the the the trends are not that great now in that respect so this is maybe pushing pushing uphill a big stone we'll see okay uh i got a couple of questions on this what would be problematic about going back to the gold standard there's a little question so let me say i i have uh sympathies with the gold standard in a sentence a rules-based system you uh you know exactly what you're doing but i think it's um it's it's too restrictive and not realistic in fact and you can argue that these ideas for rules taylor roll whatever you want to think is in a way it's a more flexible more realistic way to have you have it you have a target for inflation you have the target for gold it makes sense it's a broad-based target it's not just one one commodity but the notion is saying you want price stability and that's good and you have a relatively limited role the central bank to deliver that and unemployment is part of that but i think it's in a way i'm sympathetic with the notion of a rule but i think there's much better rules that we could have moving forward how worried are you about our lack of policy space i guess on the fiscal side lack of policy space i need more clarification sorry i'm guessing it's you know by piling on death today it limits our ability to deal with the comparably sized crisis in the future uh well that's that's the question is if you're dead if you've got a hundred percent that the ratio is not not much you can do yeah it's it's an issue i think there's many reasons to be concerned about the debt being too high there's just general crowding out there's things like that so yeah i'd i'd add that to the list although it's not i on my list right now it's it's something to think about i don't know do you agree with that rob you yeah i do agree with it and i think this explains why uh or amplifies why in not in the middle of a crisis but as we get beyond the crisis to the extent we can taking steps to quote unquote normalize monetary policy taking steps to moderate our debt growth in the out years all that will give us more bandwidth space as a question you're asked to deal with future issues and i i do think that's important i agree with that and i guess we're we're running up in time mark yeah we've got about a minute left um i guess this is something we kind of talked about uh in the in before that we went live work from home you think that's going to be a permanent shift all right you know all these changes we've seen over the past six months how many are going to persist in many respects i think there's some permanence to this i think we're we're used to uh working in different locations uh it's it's affecting people's lifestyle it's not going to be exactly zoom zoom zoom all the time for sure but you know one of the firms out here facebook says they're going to be half half working away i think it may be more than that when you get through it you go to the parking lots and everybody's empty somehow they're functioning we're using zoom and our classes 350 students all over the world taking my course it won't be exactly the same but it'll be different and i'm convinced of that and i think it's going to be it's going to be different for the better i hope so john let me just ask you a question in closing uh you've been a leader in uh in the education sector uh in academia in the public sector uh you believe in public service we've got a big audience tonight you've got ceos mayors citizens and the one thing they probably have in common the fact they're tuning in from wherever they are is they care about the economy and they care about the country what advice would you give to people in the audience about how they can contribute what they can do personally to help better the country participate in public service ways they can make their community better so i think first of all like you i'm kind of disturbed by this uh huge disagreement we have there for reasons that seem to be inexplicable so i think the the analysis you know what's what's the right tax policy what's the right economic policy i think there's huge agreement about how we should discuss this not agreement on the results but but sensible discussion i i would say try to encourage that and don't get torn apart by the what seem to be petty kind of partisan disagreements the other thing which i think maybe personally if you if you have a way to go back and forth and if you're in business you know maybe take a leave or do something different for a while or in between jobs because i think there's so much to on both sides whether it's academia or private sector public sector that you can learn from that so i think if you just stay in one the whole time which of course many people do it's uh it's not that great i mean you yourself rob of i've chosen to take different different uh types of professions and i think that's i think that's something that be should be emphasized it's actually very american you know many countries uh dealing with uh public officials in various jobs frequently they're in that job all the time they're in the in the ministry of finance forever but we have a back and forth more you know more than other places and i think that's good as part of part of the system in the u.s and i i you know i'd like to continue with that you know citizen soldiers whatever it happens to be very important part so i would i would emphasize that too all right john thank you for being here thank you for your leadership and we look forward to having you back regularly in the years to come at the dallas fed but we uh really appreciate the conversation tonight with you thank you so much thank you to mark well thank you all for joining us this evening apologies if you submitted a question that we did not get to uh you'll soon receive a survey asking for feedback on this event and we'd very much welcome your candid responses we hope you'll be able to join us for some of our upcoming global perspectives events which will feature former bank of england governor mark carney and former texas speaker of the house of representatives joe strauss details on how to register for these events can be found at dallasfed.org and with that we are adjourned have a good evening

Channel: Dallas Fed

Views: 453

Rating: 5 out of 5

Keywords: federal reserve, dallas fed, global perspectives, John Taylor

Id: rxaUcM6JLng

Length: 62min 49sec (3769 seconds)

Published: Thu Oct 22 2020