Between Elections and the Pandemic, What’s Next for the US Economy?

Madhav Rajan: Good afternoon, ladies and gentlemen, slightly belated Happy New Year. Welcome to Chicago Booth virtual Economic Outlook, 2021. My name is Madhav Rajan. I'm the Dean and the George Pratt Shultz Professor of Accounting at Chicago Booth. Before we begin today, I would like to take a moment to honor the memory of Yiran Fan a fourth year PhD student in the joint program in financial economics at the University of Chicago, Booth School and the Economics department. Yiran, as many of you probably know was the victim of a homicide last weekend. A longtime member of the Booth community, Yiran exemplify the school's highest values. He is remembered as a generous classmate, a super research and teaching assistant, a promising scholar, and a kind friend. Please join me as we observe a moment of silence.

Thank you. I hope all of you are healthy and safe during this unusual time. And I'm truly grateful to all of you for taking the time to engage with the school in this way. Booth has a long tradition of informing public discourse through platforms such as Economic Outlook, which was started way back in 1954, as well as an initiative on global markets or Chicago Booth Review publication, and many other outlets. Economic Outlook provides a forum for our pathbreaking thought leaders to confront the future, evaluate emerging trends and share insights that help reframe our understanding of the world to come. We are of course, in a virtual world now and doing the Economic Outlet virtually and the virtually EOC series continues on January 20th in Hong Kong and February 2nd in London.

With that, let me introduce our dream team or all-star panel who are here today. We have Austan Goolsbee, the Robert Gwinn Professor of Economics at Chicago Booth. Austan served in Washington as chairman of the council of economic advisors and a member of the president's cabinet. His research has owned the recognition as a Fulbright Scholar and a Sloan Fellow, and it was previously named one of the 100 Global Leaders of Tomorrow by the World Economic Forum. Randy Kroszner, Deputy Dean for Executive Programs at Booth and the Norman Bobins Professor of Economics and served as a governor of the federal reserve system from 2006 until 2009. And he chaired the committee on supervision and regulation of banking institutions and the committee on consumer and community affairs and took a leading role in developing responses to the financial crisis and undertaking initiatives to improve consumer protection and disclosure.

Then we have a Raghuram Rajan, the Katherine Dusak Miller Distinguished Service Professor of Finance at Booth. Raghu served as the 23rd governor of the Reserve Bank of India from September 2013 until September 2016 and between 2003 and 2006, he was the chief economist and director of research at the International Monetary Fund. Raghu's research interests are in banking, corporate finance and economic development in particular the role that finance plays in that. We're very thrilled to have as our moderator again, Kathleen Hays, Global Economics and Policy Editor for Bloomberg Television and Radio. Kathleen has covered economies and central banks around the world are from the Federal Reserve and the ECB, to the Bank of Japan and the People's Bank of China. Thank you all again. And with that, let me hand it off to Kathleen.

Kathleen Hays: Thank you so much, Madhav. I'm, of course, very thrilled to be back with this panel and all those who have observed us before, been to the event you know that this is not only a very bright and interesting panel, we also have fun. And the topic, of course, as we start off is pretty serious. So U.S. election COVID-19 in the future of the global economy, there's a lot of ground to cover, but given my predilection, I'd really like to start on the Federal Reserve. Last year it was all about the pandemic. That's what 2020 was, dive in with emergency rate cuts, put the rate down to zero by trillions of dollars of bonds, try to put a floor under the economy as Fed officials put it last year, try to prevent a health crisis from becoming a financial crisis. They couldn't prevent a recession, but they certainly seem to have helped keep everyone stable.

So gentlemen, that's where I want to start what now for the Fed, we have had several questions already about the balance sheet, what this means for the dollar. I think my question is, is it still the virus and now the vaccine that are calling the tune and Randy let you kick it off.

Raghuram Rajan: You're on mute Randy.

Randall Kroszner: Yes. So I think that the virus is still going to be calling the tune because I think that's what everyone is responding to. And so our London Campus, where of course there's a pretty tough lockdown and the lockdown is getting even tighter because of the case load is increasing. I think it's something that we don't have full control over. It's been a miracle how we have gotten such incredible progress on the vaccine. Kathleen, I think last year you would ask this, what gives you hope or what are you optimistic about? And I had said at the innovations in healthcare and health tech, never did I think that we would see a pandemic and a vaccine come within the next year, but that's really been quite amazing. So I think that's going to be the key driving force.

The Fed and Central Bank can provide the foundation for recovery. They can look at the liquidity spot, they can make sure that markets are functioning appropriately, but it's really hard for them to do the next step of creating the jobs, moving people from one sector to another because the pandemic I think is going to have long legs. This is not something where things are just going to go back to the way they were from before. And so the Fed will need to continue to provide that support. The question will be, will we get much inflation pressure over the next year?

Kathleen Hays: And that's another question that came up in our list so far. So also I think some worries about inflation in fact, a lot of in the markets, of course, the reflation trade rages on. And at the same time, I think people are wondering about the Fed taper, the balance sheet, have they've gone too far? Did they have to keep that in place to backstop, not the economy and also be a backstop for whatever the next administration does?

Austan Goolsbee: Our lead depends what happens with the virus. And so it keeps calling the tune and we let it rage out of control on the third round now. We'll have to see whether an explicit national strategy, which I presume we're going to have very soon when the Biden administration comes in. An active and explicit national strategy to fight the virus, will that make any difference in the rate of spread as contrasted to the delegated to the states and say you guys should figure it out on your own. Now that said, I still continue to think that the Fed is largely on the sidelines and I continue to not be afraid of inflation. As I have said, maybe I've been doing these for what, 10 years now, 11 years since I got back from DC and the same argument that the Fed has a big balance sheet, we're knocking at the door of a hyperinflation has been wrong for however many years in a row.

The Fed has been saying that their inflation was a 2% target and they've missed their target for more than a decade consecutively. And we have many things that we know what to do if you see inflation and we have very few tools in the toolbox to deal with deflation. So I absolutely do not think that the Fed or anybody else should take their foot off the gas or start applying the brake preemptively because you're afraid of inflation.

Kathleen Hays: Raghuram, I think a lot of people figure as well as Austan does that the Fed is still important here, but they're more in the... they're not in the driver's seat, they're sitting in the passenger seat and helping as best they can. And this whole question of inflation, of course, in 2020, that was a big thing for the Fed; the new average inflation targeting strategy. How do you see this working out? Because the Fed has given us a lot of vague things about, well, we want maximum employment, we want inflation somewhere above 2% and staying there. In real terms, how is this going to work out? And what should we all be watching?

Raghuram Rajan: I think the Fed has really set things up so that it has maximum flexibility to act because I don't think the Fed officials themselves know what their precise reaction function will be, because a lot of it depends on events, which we've never encountered before such as the pandemic. So, for example, average over which period when the Fed sort of proposes this average inflation targeting obviously it hasn't specified which period. Part of the reason is it doesn't want the market to preempt its moves and basically act as if there will be tightening in case there is some inflation which has seen over the course of the year. Now, remember there's an enormous amount of purchasing power, which has built up through the savings. People have built up over the last few months of slow economic activity, that will come out. And that will almost surely raise the pace of inflation in the short term.

Now, as Austan says, it's very hard to predict inflation of the medium term and the economists talk about this a lot, but the reality is we've been surprised on both sides. Why did we not get deflation when we had so such low levels of economic activity? People said the Phillips curve is dead and so on, but in the same way, when we have had really high levels of employment, we haven't seen inflation either. Now, people are telling you, don't worry, be happy because there's still spare capacity in the economy, but that's again, invoking some kind of Phillips curve argument that is when there's high levels of unemployment, we're not going to see much inflation. The reality is we really don't know why we saw a relatively contained inflation post financial crisis. So betting on the fact that we'll see very low inflation going forward is really not based on some kind of a well specified theory. It's speculation. Of course that speculation has been right.

So my guess is the Fed at this point is not going to preempt anything, it's going to wait until it sees strong inflation. At that point, it may act when that will be, is anybody's guess, but probably not over the next year.

Kathleen Hays: Okay. I want to throw in a question from the audience now, while there has been low inflation in the goods market, what about inflation in the asset markets, is this problematic? And there are certainly a lot of people who say the stock market rally, incredible from that big bottom early last year record highs again, it's supposed to keep going. That's what many equity people are betting now. And a lot of them say as long as the Fed's going to keep a zero rate, doesn't cost anything to finance, as long as they're going to keep buying bonds, that's what we're going to see. So I want a quick comment from each one of you on that particular issue because I think it's front and center for a lot of people. Either because they think, "Okay, great. I'll make more money in stocks," or because they're worried about this. So Randy, quickly back to you.

Raghuram Rajan: I think when interest rates are zero or in like much of Europe when they're negative, you're discounting the future at a very low or negative rate. And so even if you see a recession over the next year or so, if you see profits in the very long horizon, those get much more weight than if you have higher interest rates. And I think that's one of the reasons why you're seeing such a boom in many of the tech stocks and so much of these so-called specs, these special purpose vehicles where a lot of new money coming into these tech firms that are not currently profitable because it's a hope that they will be profitable down the line. Now, that's possible, but it is assuming that everything is going to go very well. So low interest rates, I think do mean that a lot of equity prices are going to be higher than otherwise would be because of low discount rates. But I think it's also leading people to bet a lot on hope rather than non-profits.

Kathleen Hays: Either one of you Austan or Raghu want to jump in on that one as well?

Austan Goolsbee: All I'd say, when we had our special COVID session, I think I said, "Look, there's three... It could be three things." How was that as a stock market be up like this when the real economy is suffering that badly? Either the discount rate argument with low interest rates, they believe that either a vaccine is coming sooner or the public health measures, they will get this thing under control. And the long run profitability of the American corporate sector hasn't really changed. So the short one really economy would go down a lot more than the valuations would. Now that said, the second thing could be that they thought the Fed or the bailouts would overcome whatever hit to profitability that they might take. Or the third is they're crazy and you can't tell which it is. On different days we kind of go back and forth.

The premise of the question though, I would just say asset price valuations and goods inflation are not the same thing. So I think it's a mistake to kind of think, well, low interest rates can either cause goods inflation or can cause asset valuations. I don't think that those are direct substitutes and I would just caution us if the alternative is let's go raise rates and make the economy worse on the real side, hoping that would prevent an increase of stock market valuations; I think that's a kind of a dangerous road.

Raghuram Rajan: But Austan, it is the case that a lot of asset price inflation right now can be attributed to the very low interest rates, right? That's not the primary concern of the Fed. The Fed doesn't necessarily want to elevate those asset prices but is a consequence that the Fed will stay low for long. I mean, let me go back to something you said last time, which was about Bitcoin; here's an asset, which has absolutely no use because you can't, as you said, famously even use it in the Bitcoin conference to make payments, so difficult. And if you take payments off and you can't use Bitcoin to make legal payments, then it's what economists would refer to as a pure bubble. Its value is what people think it is because there's no nothing fundamental. Randy talked about tech companies, which sometime in the future are going to produce fundamental value. Bitcoin is unlikely to do that. Yes, you may hope that it becomes a global means of payment, but they'll have to restructure the technology significantly for that to happen. And it seems a pipe dream at this point.

So why is Bitcoin worth 700 billion when it was worth $42,000 a piece sometime last week, who knows? And that's the worry. Tesla again, that many hundreds of billion, these are what low interest rates help you do is also help you sort of value very faint expectations way out into the future. And the worry is... Again, I agree with you that doesn't mean the Fed should raise interest rates, but the worry has to be that you are inflating asset prices in such a way that you create problems down the line for yourself.

Austan Goolsbee: I'm worried about bubbles. My thing is, I think it's mistaken point the finger that the Fed created this, I don't think the Fed is what's creating the bubbles. I don't think the interest rates are low because Jay Powell chose them to be low. I think there's a massive savings glut, and we could go into the why are interest rates low. If you're worried about bubbles, I do think the best approach that you would start with, would it not be try to do the regulatory side and reduce the amount of leverage? So that if the bubble pops it doesn't infect everything else. So it's more like 2001 bubble popping rather than-

Kathleen Hays: Okay. 

Raghuram Rajan: Austan, this argument just to push a little bit, is what many central bankers will say it's not our job. It's macroprudential. But macroprudential measures to reduce leverage, et cetera, are so vaguely defined. Nobody in the United States... this is a point that Eric Rosengren has made; there is no official body in charge of macroprudential regulation. So it's somebody else's job. I don't know who it is, but they have to figure it out. It's not our job. And I sort of agree with that sentiment, but it does create the potential for problems down the line.

Kathleen Hays: All right, guys. What I want to get to is the fiscal side of it. Because we've all kind of... Obviously the Fed is in play. No doubt about it. And yet since the Fed has maximized stimulus, it's hard to know what more could do that would have much impact. It's all about what the federal government's going to do. And there was one question here from the audience about Biden, his team; will they have the same kind of policies on taxation, spending regulation, immigration as the Obama administration did? Now in this person's mind, that actually was not good for the recovery and it did not help working class wages rise, but I think that's kind of the main point what we need and I want to get right back to Austan on this because Larry Summers recently famously said, "No, I don't send $2,000 stimulus checks. That's not going to work."

But it just seems like almost everybody else has been, "Democrats spend money." Trump before when he was... just before the election, let's send more than $2,000 stimulus checks. Austan, you said that is the wrong path to take. Why?

Austan Goolsbee: No, I didn't. What I've said is absolutely the virus is the boss, that is the thing that drives the economy. And that we should not think of this... that we should not be calling these bills stimulus because they're not traditional stimulus. Traditional stimulus, we're spending this money and we argue about what's the multiplier. And we're thinking if the government spends $200 billion, how much will GDP numbers go up? This is just rescue payments. These are rescue payments, this is disaster relief, and it's not going to show up as a big positive in the GDP. It's all about the counterfactual that if you don't spend this money, it's going to be even worse and you're going to have permanent damage. Now, once you recognize that these are disaster relief payments, then I think it's obvious that where you want the money to go is to the people who need the relief.

So giving Don Jr $2,000, that's not the kind of relief. Well, I don't know. We'll see how the business gets canceled this week, but traditionally that's not what's needed. What's needed are monies to people who are about to be evicted, who are having their gas shut off and stuff like that. So I think if we're going to try to turn this back into a moment that in the middle of the worst downturn on record, and one where the comeback clearly stalled out in the last two months of jobs numbers, we were rebounding rapidly and now we've started going back down so we may very well be in a double dip recession soon. That is not the moment to go tighten the belt in my view. I think that they should spend money and they should direct the money to the places where the relief is the most necessary.

But cutting the deficit and deciding that now we're going to discover religion after trillions of dollars of tax cuts, now we're going to rediscover, now is the moment to cut the deficit; I just think that's wrong. It's just completely misreading the economic moment.

Kathleen Hays: So in terms of what needs to be done, because we can say very broadly, "Oh, well you can raise taxes to..." Well, don't even get there. Let's just talk more about this relief and what we hope can turn into stimulus, right? The vaccines will roll out, they'll work and you get to that point and let's go back to you, Randy, in terms of effectiveness for the economy and what's expected given the makeup of Congress. The small majority in the Senate on top of the majority in the House, on top of it Joe Biden in the White House, a Democrat, what does the economy need? What do you think will happen?

Randall Kroszner: I think what the economy really needs is along the lines of what Austan was saying of think about where is going to be the best bang for buck. It's not just about spending more and if we spend more, it makes everybody better off. There is a cost, there is a budget constraint and we certainly have seen a big change in the bond markets since the Georgia election, because markets in our thinking, there's much more likely to be much more spending and more debt outstanding. And so the tenure rate has gone up quite significantly and potentially could go up even further. And so raising borrowing costs and potentially slowing the recovery a bit. And so you want to think about what are you getting for the expenditures? So where do you send the money? If you are going to send a relief check, where do you send it so it's actually going to help those households and allow them to consume, rather than people simply putting it under the mattress.

We also have to move from a lot of policies, which were, I think very hopeful that well, maybe if we just turn the lights off for a little while and turn them back on, the economy go back to where it was. And I don't think that's true, we talked about that back in April/May. And I think it's really clear that there are many sectors where that's not going to be the case. And the most recent jobs report as Austan had alluded to illustrates that. So you've got a boom in tech, and you've got a very strong contraction in hospitality, transport sectors, and it's going to be hard to move those people from one to another. So rather than having policies like in the UK, which are furlough policies, hoping that we'll keep paying people as long as you don't shut the company down. Some of those companies will have to shut down. That doesn't mean that you don't provide support for the families, but you need to move them on.

And that's one of the most difficult things for politicians to do, to accept that you need to move on. We've seen this with disaster relief. There are disasters where many people lose their lives and one lesson from that could be, well, maybe we shouldn't rebuild in these very dangerous zones, but usually it's to rebuild in those dangerous zones. And I think we have to really see that we need to provide support for people to move on to other sectors that's good for them because that gets them back into productive, work more quickly and it's good for the economy.

Kathleen Hays: So Raghu, if you were the president, if you were the person who could design the perfect policies, what would you be doing to stimulate the economy from the fiscal side?

Raghuram Rajan: Well first, I would agree with Austan, put all your weight on trying to combat the virus as much money as needed to rule out the vaccine which means help to the states to make that possible. So that is job one. I think relief makes sense, but I read Larry Summers' saying it has to be much better targeted than the previous time. A lot of money has gone to people who can't spend it, who don't need it. And this is not small change. It is a lot of money, so we need better targeting. One way probably would be to extend unemployment insurance benefits in certain sectors, which are badly hit, not places as much as sectors because it's places like... and we have to figure out how to do that effectively, but that may be a thought.

I am a little perturbed by the constant feeling that this is all about stimulus. If we can't do monetary, let's do more fiscal. There is a need for serious structural reform in many industrial countries, including the United States. It is clear that the pandemic has exacerbated every inequality there was before. And to that extent, I think it is high time that we tried to fix those sources of problems, which means how do we build back better in the words of the new administration? How do we get the people on the front lines, onto a better employment track? How do we get the people who were laid off to have better careers? This means rethinking the process of education, rethinking the process of community building, rethinking infrastructure, including green infrastructure. So I would say it's not so much about stimulus because there's a lot of pent up demand, which will come out once we get back on track, but it's about how do we create sustainable growth over the medium to term. And that means focusing really on reforms that will up the ante for the economy.

Randall Kroszner: I totally-

Kathleen Hays: Go ahead. Jump in.

Randall Kroszner: I totally agree, because I think it's all about the number, the headline number, and that's not what it's about. We've already spent an astonishing percentage of GDP and what you want is some bang per buck. So where are you spending it so that you're going to get some benefit from that? Whether it's investing in human capital, to people have new skills, whether it's thinking about new types of infrastructure, because the geographic allocation of... distribution of activity is going to be different of cities versus suburbs, where there's going to be different types of activities; thinking about the return, the productivity of that investment, because that's ultimately what's going to drive wage growth. Without productivity growth, you're not going to get wage growth. And so thinking carefully about where you spend and then thinking about, are there ways to do structure reforms to try to make an investment more productive without actually having to spend more. That's where you get the biggest bang for buck.

Kathleen Hays: Okay, so let's... this is just leading right into a question that is obviously from the questions we received already on a lot of people's minds. One version when, and how will the national debt of 22 plus trillion dollars be repaid? Another one saying, no doubt the national debt will become a newfound issue once the new administration takes office. We never seem to get there and addressing the debt. Will it take catastrophe in a Greek-style austerity program? So Austan, again, you've been in Washington, you mentioned that you've been back at Booth School for about 10 years since you were a council of economic advisors under Barack Obama. What do you think of this issue and how do you think Joe Biden will address it?

Austan Goolsbee: Well, look, it seems like we go through the same kind of calculus each year in a different circumstance. The first is the argument that the United States is Greece, I think is deeply misunderstanding of what the situation is in Greece. Why the markets go after and punish emerging markets in fiscal crisis? The U.S. debt to GDP ratio to start is not the lowest among the advanced economies, but it's pretty low call it the 25th percentile. We already have... if you look at the UK or Greece or Spain, or even Japan, they've got income tax rates higher than the U.S. rates, they've got 20 or 25, or some cases even higher national sales taxes through the VAT that are already in place, they have worse demographics. They already have government spending to GDP ratios, well in excess of where the government in the United States would be, even if we did nothing. So there are many, many rich countries that would be dominoes to fall before the U.S. would be in the target, in my view.

The debt capacity of the U.S. government is vastly in excess of where it is now. The problem of deficits like I always say, the debt and deficit problem is not that it's going to drive up the interest rate in the United States. The problem is eventually they got to pay back the money. And so the right way to ask the question is, is it fair? Is it right that kids born in 2021 are going to pay vastly different tax rates as a share of their lifetime income than people who were born in 1951? And that intergenerational thing is what we should ask, but make no doubt about it. The United States has options. We could do it through higher taxes. We could do it by defaulting on the promises that people believe they're going to get from Social Security and Medicare. We could do it with some combination of Grand Bargain, but we have options. And it's a kind of a choose your own adventure that other countries do not have.

And for anybody who's saying, this is now their number one issue, I guess I still have my two questions. Number one, why did you wait for the depth of the crisis to say that? That's reading the wrong moment. And two, why were you not screaming bloody murder when Donald Trump cut taxes by $2 trillion? And so the argument that the U.S. will have a fiscal crisis, if we pass a trillion dollar infrastructure bill that was deficit finance, for example. I think if you are in that space, you kind of need to explain how George Bush could cut taxes by multiple trillions unpaid for, fight two wars multiple trillions unpaid for, that Barack Obama could have the stimulus of almost a trillion unpaid for, then Donald Trump could cut taxes by two trillion on four and a have the Care Act, another couple of trillion financed by the deficit. And none of those increase the U.S. interest rate. I think the market is telling you that the debt capacity is higher than where we are now and that the right way to think about that is intergenerationally.

Kathleen Hays: Okay. Raghu, you want to weigh in on that?

Raghuram Rajan: Yeah, well look, everything that Austan says is right. If you look at the flow cost of debt, not just the U.S., look at the advanced countries that has come down since the beginning of the century, even though debt levels have gone up. So at one level that may be a source of comfort. It's less as a portion of our budgets, less as a portion of our GDP. So why worry? But to worry, you have to ask a couple of questions. First, why has this continued to go up? Why has the stock continued to go up? Because the flow is just the rent in a sense, and the stock is what we got to pay back at some point. And the question is, is that stock as a fraction of GDP growing at a rate, which is unsustainable? And if you look at the pace at which it is growing, it certainly will prove unsustainable if it grows at the same rate, it has been growing over the last 20 years.

So then the question is, what do we do about it? It's not an emergency, but it does suggest that everything is not hunky-dory. We have had two really serious economic catastrophes over the last 12 years, the global financial crisis and now the pandemic, which each have contributed significantly to increasing the size of the debt. The hope is we won't have any more for the next century, but these were two, once in a century events happening in the course of 12 years, and climate change is close upon us; God knows what that brings. So the point is the stock of debt also matters because it gives us a sense of how much more room there is to spend. And if we exhaust that, or we go near that, it becomes problematic. The reality is nobody knows what that limit is until you test it and one day you find you cannot roll over your debt. That's the experience of many emerging markets. The U.S. is very far from it and as Austan says, there'll be lots of dominoes before, but do we want to go there?

So before that, can we think about how to spend more effectively? That's really the question and no doubt there is spending to be done, but let's not assume we have an infinite account we can spend from.

Kathleen Hays: Really quickly because I want to get Randy on this one more time, because we have a question from one of our audience asking about if this is part of modern monetary theory. This won't crowd out, it's okay, you've shown your debt in your own currency, et cetera, et cetera, this'll be fine. So I just want to... before we move on, Randy, why don't you just hop in and give your view on that?

Randall Kroszner: So my understanding and I think there are different flavors of what people call modern monetary theory is basically, you're really not constraint, and that there's really no budget constraint, there's no inflation constraint, or at least that's so far out that you don't really have to worry about it, and that you'll have more than enough time to respond if there is a problem. And I think two things on that; one, I believe that there are budget constraints. I believe that there are constraints. So I think thinking that there are no constraints is not an appropriate way to think. But second, and this relates to something that Raghu had said is that, when something goes wrong, all the models suggests, "Well, we'll have time. Gradually rates will start to go up, we'll get some warning signals that we can respond."

The way the world works, the crisis comes and it's quite sudden, and you don't really have the time to get ready for it. And so that's why you need to be prepared in advance rather than saying, "Oh, well, we can party today. And if something's going to go wrong, we'll get the call a day or days in advance before the end of the party." In reality, it is probably just being a day or days in advance when things go wrong. And so I think it's, it's very risky to just act as though there's no budget constraint to say that well, if there is a problem, we'll get enough warning signals so we can respond. That wasn't true with the global financial crisis a dozen years ago. It's not true in many emerging markets. And I fear that it can be the same, whether it's the U.S., UK, Japan...

Kathleen Hays: We've got some, in one way or another a variety of questions that want kind of a global view of what challenges... Well, two things, the challenges facing the new administration and the challenge of the virus. So let's start with China and trade. Raghuram this is something that it's on your mind and I think people are saying, "Well, tensions will ease because Trump has no longer in the White House." And other people saying, "Yeah, but Joe Biden has indicated that he too is going to be tougher on China than previously he might have been from his White House seat." How do you see this shaping up? And what do you think would be the best course for the new administration?

Raghuram Rajan: Yeah, look what we have here is a geopolitical battle. It's not a commercial battle only anymore. The fight between the U.S. and Russia during the Cold War was not economic, it was based on military power. The fight between the U.S. and Japan was economic, it was not based on military. And in fact, the U.S. provided for Japan's defense. This fight between China and the U.S. has both military and commercial. And it focuses on the very technologies that have dual use. Think about AI, think about chips, think about drones.  All these have dual users, and there is competition between the U.S. and China to be at the frontiers of these technologies. So I think the fear of China, the concerns about China, the concerns about Chinese broken promises, as well as Chinese concerns about the U.S., these are quite pervasive in both capitals. And so the notion that we have a new administration and the tensions all disappear tomorrow, the tariffs come off, I think this is overly optimistic.

I think there will be a new process of dialogue. I think this will be probably a little more systematic than the process of dialogue the previous administration followed. There will be an attempt to bring in the Europeans and the Japanese in a more comprehensive discussion on what the responsibilities of each side are. I think multilateral discussions are better than bilateral discussions, but I think if you're hoping that tariffs go away tomorrow, they won't. Now, economists would say, it's in everybody's interest to take them off tomorrow. And that's probably the right view but it will take time and it will take a certain amount of confidence building on both sides. So I see this as a process and it requires engagement from both sides, not just the U.S. and not just China, both have to participate.

Kathleen Hays: Austan, how do you read Joe Biden, where he stands, sits, whatever, on this now, what would you advise him?

Austan Goolsbee: Well, it's two different questions. Where does he stand? Or what do I... I'm an economist and it's our professions pathological commitment to free trade. Nobody's going to out free trade at group of universities, Chicago Booth School professors. I guess my reaction to hearing Raghu's points first, I think it's probably true, if you were thinking, "Ah, magic wand, everything's going to go, all tensions will go away." That clearly won't happen. I do think it opens a door of opportunity though. The Trump administration has been so actively engaged in confrontation and starting of the trade wars that there is at least going to be some relief and maybe they could open the door to negotiate something.

And then the second area of opportunity is I do think that our allies are going to be more likely to be on board with what we say about confrontation to China than they were in the era where we're simultaneously threatening trade wars on our allies, as well as on China. I don't think you will see that. I think the Biden approaches studiously, "Let us bring all the allies on board and together we go confront the Chinese." But I do think there will still be some confrontation and Biden has a long history of caring a lot about manufacturing in the U.S. and manufacturing is the one spot in the U.S. economy that has the most overlap with China.

Now, my secret inner hope is that over the next 10 years, these tensions will lessen between the U.S. and China in the same way they lessened with Japan precisely because so little of the U.S. and the Chinese economy are overlapping. 80 plus percent of the U.S. economy has nothing to do with China. They are not our competitor in those industries at all. And as China shifts to be less export oriented and more domestically driven demand in financial services, education, healthcare, stuff like that. I think the direct confrontation in those parts where there is overlap, I think that potentially would shrink too. So I guess I'm a grim optimist on the confrontation of U.S. and China over the medium run.

Kathleen Hays: So, Randy, I was going to bring you in with the European angle almost because you've been spending so much time in London at the Booth School campus there. From the European view, how does it all fit together? Again, what is a new president in the White House mean in terms of things like this that are so important, or even for future trade deals, because Donald Trump was very wary of anything that would rain in the U.S. too much upset that way. And in the past we almost had a couple of big trade deals done. How do you think this is going to work out and in terms of what it means, not just for the U.S. economy, but for the global economy?

Randall Kroszner: Sure. This is a very important issue. Obviously being in London just experiencing Brexit and so the question is, will there be a free trade deal between the UK and the U.S.? Would that be a priority? It doesn't seem to be a priority for the Biden administration, might've been more priority for the Trump administration. But even so fortunately there aren't enormous barriers that are there. And fortunately, so far, Brexit has not been fundamentally disruptive to the operation of the UK economy or the EU economy. There's more paperwork, there's more a little bit more friction, but most of the articles, I think a lot of the newspapers were expecting like everything of the borders to cease. And now the articles are more about how in Belfast someone can get Stilton cheese from England. So there are problems, but fortunately it hasn't been too problematic.

The issue with China is a very interesting one about how best to build a coalition if that was what the Biden administration wants to do, to try to deal with China, because you have very different interests and you see that within Europe itself. And so for example, a lot of German exports are very closely tied to China. There's been a lot of investment in the UK from China. There seems to be a movement away from that in the UK. There seems to be more weariness of dependency on China in Germany, but it gets back to those jobs, those sort of basic jobs that are being created either through trade with China or through some of the Chinese investment. So it's going to be very hard to make that transition, I think whether you agree or disagree broadly with Donald Trump, the Trump administration, I think did change the global discussion on China.

I think actually it will make it easier to build a coalition, a coherent coalition to try to deal with some of the intellectual property issues and some of the geopolitical issues that Raghu mentioned that China brings up. But it's not that everyone has the same interests. It's going to take a while to coordinate those. And I think that's going to be a real challenge.

Raghuram Rajan: Well, just to add one piece, which is, we shouldn't forget that China is also reacting to what has happened. The theory of dual circulation, which is now making the rounds in Beijing is basically saying that we have to become less dependent on industrial country demand. We have to become more self-sufficient, but not just in domestic demand, we also need to get our own technology be less dependent on their chips, their scientific developments. And so to some extent, a lot depends on how China reacts to whatever the Biden administration puts together. And that's why it requires sort of actions on both sides to embrace a more open world, hopefully.

Kathleen Hays: [crosstalk 00:46:59]. Go ahead.

Randall Kroszner: For sure.

Kathleen Hays: Okay. Well, a lot of questions about where the U.S. economy is now in terms of still having not exactly lockdowns, but very limited movement for people around the country. So that's hard for a lot of, especially the services businesses to reopen. A very long, interesting note from a small business owner who PPP helped him, he was able to retain his workers and now he's looking ahead... Well, cash and cash flow is very important to him and he's looking at what's going to happen next for small businesses. Taxes, trying to figure it all out. And Randy, let's come back to you in terms of are people going to come back to work? Are they going to not come back to work? Because that's going to help determine which industries thrive, which don't. How much support relief is needed? For how long? What's your view of... We've had a forever change, nobody ever comes back to work or when things get more normal again, when the vaccines are distributed that we'll get back to what we used to know.

Randall Kroszner: So I do think this is a fundamental change. And so I think it's different than other shocks we've had like 9/11, which also was an enormous shock to the hospitality and transportation sector. But there, the redress was to say, "Well, here's how we're making the transportation system more safe." And so you could see that in the hassles getting through security at the airport, you could see that in the locked cabin cockpit doors. Here, you've got this sort of silent killer or invisible killer potentially and so even if someone has a vaccine, you don't know whether they've been vaccinated or not. You don't know what proportion of the population has been vaccinated. And we still don't have all the information on whether someone who's vaccinated it seems it's very effective about preventing that person from becoming ill, but we don't have systematic data on whether that person could still be a carrier and potentially infect other people.

So with that kind of uncertainty around, it's going to be a very long time I think before people feel comfortable going back into the office, people feel comfortable shopping as they once did. And I think something that is very different than from before is technology, the technology that we're using now. Just think about how in finance, it was always said you can't sell equity and debt in large amounts, unless you have a roadshow because unless you see the people in the eye and your potential investors, they're never going to do it. Well, we had record equity and debt issuance last year and not a single in-person roadshow. So a lot of things that seemed to be impossible are now being made possible with technology, which doesn't require the people to move around.

And so I think that is going to be a permanent change. Does that mean no one will ever go into the office? No. For sure not. No one will ever go into cities? For sure not. But it is a very different trajectory going forward. And so I think, again, this gets back to our discussion before thinking about what policies we should have going forward. Policies have to acknowledge that some of these sectors are just not going to come back and people need to make the transition elsewhere. But I think this is long live, I don't think the vaccine rolls out over the next year. And then everything goes back the way it was in February.

Kathleen Hays: The implications in the short term are for everybody are big, but certainly again, if you're taking over leadership at federal government level, you're looking at states and cities. And so it's a question that will have a lot to do with how they fare. But you agree with Randy's view Austan that we've had this fundamental change that is not just going to have been a two year kind of thing and people realize, "Gee, I like to work in the city. I like to have a lot of places to eat lunch and maybe go out after work, etc." How do you think it's going to work out and what is it going to mean again for the economy and the policy challenges?

Austan Goolsbee: I guess I would say my personal bias is I agree with that sentiment that Randy expressed of, "Hey, this thing is changed and it's not going back." On most aspects that pile on top of existing trends. So the trend toward buying more things online and less in physical stores and the implications for commercial real estate and physical retail, that piles on to a trend that has been ongoing for a number of years and so I think it probably is permanent. I'm a little more skeptical perhaps on the question of does this mean the end of cities and will this facilitate a massive permanent increase in the work from home? If only because that one is a multi-decade, actually multi-sensory trend toward greater and greater urbanization in all advanced countries. And the reason you saw that big increase in urbanization in advanced countries is because historically we've been much more productive when we are in person together. That's so what the economists call the agglomeration economies.

And I think we will discover if thank God, knock on wood for please God, when this is over, we've all had vaccines and we are physically able to go back to what we were doing before. I think it begins with a lot of work from home, and then we begin to rediscover why there wasn't as much work from home before, which is wages are higher, there are big agglomeration economies. So that one in the medium run, I think might be a little overblown just because we're living through it.

Kathleen Hays: Hey, Raghu, before we run out of time, I'd like to get you to specifically look at any sort of aspect of this vaccine, COVID for the emerging markets, because Austan just referenced for developed economies. There's many people who are concerned about, particularly in the more emerging economies that they've been forced to rack up a lot of debt, they're trying to sell a lot of bonds. They're dealing with what their currencies are doing. Some have handled the virus much better than others. India, of course just has gotten a big vaccine approved, they have another one coming. But what is your concern there? And I guess, I don't know if the U.S. policy is such an important question here, but certainly all this past year is.

Raghuram Rajan: Yeah. No, look, I want to sort of continuing what Austan and Randy said and link up to your question, which is that no doubt the pandemic has been a tragic event, but the silver lining, it has jolted us out of complacency and made possible new technologies. So the longer way to productivity increase from the technological revolution, which we haven't seen so far, maybe this begins that process of realizing that we have to change our work processes to take advantage of the technology revolution. So for example, we don't stay away from the office, but we don't come in every day, we'd come in three days a week. upside productivity, we work more at home on days when we don't have to manage the kids or whatever, we're more productive, we don't have to do the commute. Downside, we have to reconfigure public transport because number of people traveling is somewhat lower than it was in the past. So they will be change, but productivity could increase.

Similarly think about telemedicine, as the pandemic hit, the amount of telemedicine that was happening went up quite a bit. Now, telemedicine, if you can do from Chicago to Phoenix, well you can do it from say Manila to Phoenix. So yes, the emerging markets have been hit tremendously, but if this revives the possibility of trading services, now what does that require? Well, that certainly requires strong broad bank connections, but it also requires agreement on recognizing each other's degrees, your medical degree in the Philippines, modules or some tests that you pass is considered equivalent to a medical degree in the United States. That would ramp up the possibility of medical services across the world and it can be a two-way flow. So the point is, it has created the possibility of opportunities. And when we build back, we shouldn't build back the same way we should indeed build back much better.

Kathleen Hays: Well, that's the hopeful note. I think we haven't really addressed something directly that I would like to direct again, maybe this is getting to be close to our final question. Technology, you just mentioned Raghu that again, one of the silver linings of the dark COVID cloud has been Zoom. Here we are, we have this huge audience and it's so easy for everybody to participate. All these things that are so great. But I think besides this, what we're seeing, not only in the U.S. but certainly in China now, is this move against big tech. And all the recent events in Washington had raised all kinds of questions with social media. So how should this work out? What is the real fundamental question that we're addressing with? What's the big danger? What's the danger of messing up something that's been so powerful for the rest of the world, and certainly enriched a lot of people in the United States? And so Randy, let's go back to you on this one. What's your biggest concern? What's the biggest issue here?

Randall Kroszner: Well, one of the interesting things that's come from this shock is that it's made basically the large firms be even larger and that it is the big firms that seem to be benefiting enormously from this and ones who are sort of innovating in particular areas that are of use now. And I think that is something that we have to think about going forward that it seems that a lot of the changes have helped to promote concentration. Now, some of that is because there are some efficiencies of everyone being on the same platform or being able to connect with each other, but there are also some potential downsides with that. So I think thinking carefully about how to deal with that whether there needs to be innovative thinking when it comes to the antitrust, whether it's other regulatory issues or whether we have barriers that make it difficult for fundamental competition to be going on is also important. So I think that's really where we need to have this focus, but it shows that data is super, super important.

And so in getting back to some of the discussions we had about China, China has an enormous advantage in that they have such a large population and so much focus of data centrally to be able to use for AI for so many other things. And that's something that in the past was never that important. And I think that's one of the differences between how Japan developed and how China might develop. Japan needed to sell cars to the rest of the world. They were the world's second largest economy, but they still needed to have that kind of physical sale. You can develop a lot in your own country if you have an enormous amount of data without needing to have the same kind of trade relations that the countries needed in the past. And so I think there's an issue both with tech and thinking about the tech firms, but there's also a bigger sort of global trade issue and global geo strategic issue on the role of data and scale that a country like China has.

Kathleen Hays: So Austan, again, from the U.S. perspective, what are the important issues to you? I know you're a University of Chicago economist, but this is a big part, certainly of micro aspects of the economy. And this is another big issue that Joe Biden and his team and of course the next Congress have to take up, is big tech too big? Does it need to be reined in? What's the issue here? And again, it's something that certainly affects key sectors of the economy.

Austan Goolsbee: Look, I agree with that. And Randy kind of set the stage there that on one hand, it's amazing. What big tech has given us has been incredible. And imagine us going through COVID over the last nine months without these technologies, if this had happened 15 years ago we'd be calling each other on the phone, but basically we would be going even more stir crazy than we have been now. I think if you take a step back though, fundamentally, while bringing those technologies, it's also come with a massive increase in corporate power, especially as Randy said for large corporations and especially in tech. And we don't have… N equals 1, we have had one episode like that in U.S. history before, around the turn of the 20th century and the Robert Barron era. And the lessons from that era were that the American people eventually they got new technologies, it made us massively wealthy and rich.

But it also generated a huge, tremendous backlash in which the balance of power had shifted so heavily in favor of corporations that they fundamentally changed the laws, created antitrust laws, changed the constitution through multiple amendments to allow more direct democracy, so that senators would be directly elected because state legislatures, which chose the senators were viewed as two in bed with corporations. Women were given the right to vote, and we established the income tax, multiple constitutional amendments, as well as the invention of antitrust. I wonder if we're now dancing on the edge of similarly major re-envisioning of what's the corporate and social compact. What's their deal?

And in a way, China is illustrative. If you look in China and in recent years, tech companies have come to dominate consumer payments in a way that really kind of has replaced the banking sector and has reduced the power let's call it of central banks. And now in China, you get the sense that the Chinese government has decided they're too powerful. And so the CEO of Alibaba has not been seen for months, and they're cracking down on corporate power. So that's certainly one way to go, and there'll be interesting to see how it plays out in the end.

Kathleen Hays: Well, and that leads perfectly to Raghu because this I think for many people is a concern. It's one thing for regulators to say, "We've got to look at what we're doing here. Yes. Alipay has gotten too big. It's too much like a bank, but not regulated like a bank, etc." But the other side of the coin is number one, yes, Jack Ma has disappeared. We hope just temporarily. And it does raise all these questions about is China a model in some ways, but certainly in other ways, is there something that is concerning to policy makers, to economists and to private investors potentially? At what point do you want to open a shop or some kind of a corporation in China, if these kinds of things continue to happen to business people?

Raghuram Rajan: Well I certainly think there are issues with the relationship between the government and Alibaba, which reflect the concern in the Chinese government about the private sector getting too large. There is a bigger issue for Chinese exporter services, if the Chinese government has so much say over these tech companies, what happens to the data they collect? Could that be used against some of the consumers in other countries? But I would say some of those issues, those that are playing out in the United States. This whole issue of how does Twitter get to decide that the president of the United States cannot actually use the platform? On what basis should this be something that is regulated? Because tomorrow it could be the democratic president of the United States rather than the Republican president who's shut down.

So one is on the democratic side and the other is the enormous amounts of money they're making. Is there a monopoly element to this, which is shutting out innovation? Should there be a different structure for these companies? Again, very efficient companies, done a lot of innovation, but are they actually standing in the way of further innovation through their acquisitions and so on. So perhaps some of the moves to make interoperability a condition requirement of these companies to enable data to be controlled by the consumer rather than by these companies, all those things I think will be debated over the next few years. But I think the point is this is a global problem. The Chinese approach to it has raised certain questions, but I think the U.S. approach is also something which is going to be questioned going forward. And we do need to figure out how to deal with this problem.

Kathleen Hays: Well, gentlemen, we could go on and on, and actually we've got so many great questions. Maybe if we had a day long outlook, we could get to everybody's because there's a lot of very interesting questions. I hope to you, our audience or we hope we touched on enough of the issues that you are watching closely. And certainly as always, I thank the team, Randy Kroszner, Austan Goolsbee, Raghuram Rajan. Thank you so much for letting me be part of the panel again. Thank you for joining us audience and we look forward to seeing you again soon. Thank you so much.

Raghuram Rajan: Thank you.

Randall Kroszner: Bye-bye.