He was kind to keep his commitment to be with us here today. But he will not be able to talk about the Monetary Policy aspect of his position at the fed in todays session. That said, there is lots he cans ill talk about. Very goodwill have a discussion on the topic of too big to fail. Before that, over bit of background on president kashkari. All fed bios are interesting but his is particularly eclectic. Anbegin his career as Aerospace Engineer in california where he developed technology for nasa Space Science missions. After graduate school, he joined Goldman Sachs in San Francisco where he helped Technology Companies raise capital and pursue strategic transactions. To 2009, a very quiet time in terms of the economic and Monetary Policy environment, of course. He served in several senior positions at the u. S. Department of the treasury. 2000 eight, he was confirmed as assistant secretary of the treasury and oversaw the troubled Assets Relief Program or tarp during the financial crisis. Inlowing his tenure washington, he returned to california in 2009 and joined pimco is managing director and a member of the executive office. He left the firm in 2013 to explore returning to public asvice and found that outlet a gubernatorial candidate. Andarned his bachelors masters degree in Mechanical Engineering at the university of illinois. And in nba from the university of pennsylvania. Nabet to extend a warm hkari. E to neil pesch kar nabe foryou to inviting me here today. I want to talk about too big to fail. As it is a joined the minneapolis fed, i asked supervision experts about the problem of too big to fail. I lived as firsthand, the guy that bill that the banks in 2008 and 2009. Have we really addressed too big to fail . Should we do more . We announced an initiative called the ending too big to fail initiative where we created a symposium and invited some of the best experts in the world to come to minneapolis and share their perspectives. We wanted to educate the public while we were learning ourselves. Everything we did was open press, livestream to the web, and if you want to check it out, they are there for you. We wanted to hear all views. Some people came to us and said that we already saw too big to fail. Dodd frank worked. They made their case. Said no, we havent done nearly enough. The government needs to step up and break them up. Other people said we need to put so much capital in them and treat them like a utility. We heard all of this. We came up with their own plan. We released our own draft by the end of last year and we go through comments before we release our final plan. I want to update you on what weve learned and where we are in the analysis. More and more, we heard from experts even though they had their own solutions. The first was the importance of assessing both cost and benefits. What i learned from this process is Financial Stability is a lot like physical security. Big about the risk of terrorism in our country. And every american knows we cannot literally eliminate the risk of terrorism. You can never make it zero. And you intuitively know that increased safely safety comes with costs. We pay for more police officers. More homeland security. We pay for medical detectors. We pay with convenience or inconvenience. Safety isnt free. We have to decide how much safety do we want . And what price are we willing to pay for that safety . That is also true in Financial Stability. Those tradeoffs are critical. Making those calculations requires an assessment of what is the cost of a crisis, and what is the cost of more regulation or more capital to do that . How do you estimate the cost or probability of a crisis . I will show you the data. Published a paper looking at the history of financial crises around the world. We use that data to estimate how likely a crisis is going to happen in the future. That is the cost benefit analysis that im going to walk you through. Walking youwith through the details of the plan. What is the chance of a bailout . Think about the Great Depression. 80 or so years ago. A 100 year time horizon is a reasonable perspective to take. We had the 2008 financial crisis. The next column will be the total cost of regulation. This is the cost of that safety. You end up with a net benefit for society. If you look at the imf database and you look at the capitals of the biggest banks, you could step back and say in 2007, there was an 84 chance that there would be a crisis that requires a bailout in the next century. Set the baseline as a total cost of zero. That is pretty remarkable. If you looked at the Financial System, you couldve said there was an 84 chance of a crisis. It happened the next year. It said that where the capital levels were is a pretty risky situation. This is a result of the dodd frank act. The biggest banks have more capital today. We reduced the chance of a bailout. There is some cost to that. The value of the permanent effect of gdp. It is not a reduction. It is just the value accounting. The net benefit is 12 . Byiety is better off avoiding the crisis or reducing the likelihood of a crisis, spending some upfront in terms of higher capital for the banks. Lets put that in context. This is the typical cost of a banking crisis. That is massive. Think about it intuitively. How costly was the 2008 financial crisis for the u. S. Economy and advanced economies . Massively costly in terms of reduced output, job losses, etc. 158 of gdp is what were trying to avoid. You are willing to spend a fair bit of money if youre willing to avoid one of those out comes. I will walk you through what those steps are. We cut the chance of the future bailout down to 39 . A big reduction in risk. Safety is not free. 24 . There is a net benefit. Society is better off by 19 if you look at the right column. To as low as a 9 chance on a future crisis. There are increase costs associated with that. Multiply this altogether. Society is on a net benefit far better off. I will walk you through what these are. One. It was substantially increased the common Equity Capital of large banks to 23. 5 of gdp. Current regulations are less than 13 . We are being generous but from the point of comparison, we are. Oubling the equity banks,ify the biggest 250 billion and up are no longer too big to fail. The treasury secretary will not want to certify that. If you are she certifies that and the bank gets into trouble and they have the bail it out, there will be a lot of back on secretarys face. If they refuse to certify, we automatically increase the Capital Requirements of the biggest banks. Most big banks choose to restructure themselves. The big concern is that if we increase capital of the biggest banks, all the activity would just move to hedge funds. Here, the large shadow banks, we apply attacks on their debt that equalizes the cost of funding so there is no longer the incentive to run from a capitalized bank. This levels the Playing Field. There is no incentive for the activity to move. If the hedge fund is 100 equity finance, we dont see that as a systemic risk. The debt is the source of instability. Finally, we reduce regulations on Community Banks that are not weset up the important increase capital for the biggest banks. We level the Playing Field and we reduce regulation on Community Banks. This is the probability chart. This would be a function of the Capital Requirements. They allow probabilities on the yaxis. A very high probability of a bailout. This is were we get to in step one. One of our goals was we want to cut it down to a 10 or less chance of the future bailout. And then do the analysis on what the cost to our. Costs are. It are two types of risk. Systemic shock. Think of this as the 2000 a crisis. A massive housing downturn. The biggest banks have taken correlated risks, exposure to real estate. The shock hits the economy. By increasing the capital level to 23. 5 , this will protect against a vast majority of systemic shocks. Think of this like a dike against a flood. It you want to build the dike is paul is as tall as you possibly can. How likely the serious floods are. And then second, if an idiosyncratic shock hits a systemically important to bank, think about the london whale. Was clearly an idiosyncratic shock unique to jpmorgan. Imagine if it had been 10 times as big. Potentially could have destabilized jpmorgan. What do we do in that situation . These very large banks. It is devastating for society. Governments will spend whatever it takes to try to stabilize the reactor if it is running into trouble because of socalled need for society. We have a choice when it comes to nuclear power. We regulate it so tightly that we truly minimize the risk that idiosyncratic failure. It is what were doing in step two of the plan. We tell the biggest banks that you can choose to stay large. Business model can support these levels of capital, youre welcome to stay large. If you cant, you will break yourself up. Love to tell banks you. They love to say that theyve got these great economies of scale. They can afford higher capital. It if they can afford higher capital because they are trading below book value, maybe they dont really have these great economies of scale and society is not benefiting from having them remain so large. The Key Assumptions we made. This was a very important point. Longterm debt is not going to take losses in a crisis. This is a big difference in opinion that i have with the board of governors. In their analysis, they assume something called tlac, total loss absorbing capacity. I call it a fantasy. Debt in a that this crisis will absorb losses. We didnt do it in 2008. Fannie and freddie had issues of subordinated debt in 2001 and they told their investors, you will take losses if we get into trouble. In 2008, i was in the room when we decided to protect fannie and freddies subordinated debt. Why did we do that . Because of contagion risk to other institutions. You see this in italy right now. Italy wants to protect the bondholders. This happens crisis after crisis. The bondholders get protected. Ands time we admitted that force the equity to take losses rather than hoping the bondholders will. Analysis, we assume 50 gets passed along in terms of higher borrowing costs. This is the point of contention. Some say there is no cost to higher equity. Others say 100 of the costs get passed on to the economy. We dont think either of those is correct. Returnlook at banks, the on equity has gone down. They have not been able to pass on all of the cost. The middle of the more reasonable position. We follow the approach i talked about. We assume that most banks will choose to restructure so they are no longer cyst amick rather than facing big capital systemic rather than facing big Capital Requirements. Big government will not tell a bank how to tarp themselves up. If it benefits from huge scale, they can choose to maintain that scale in highly capitalized business lines. Let the banks choose how to respond to Capital Requirements. Shadow bankn the tax equalizes funding across various sectors. What is the feedback . I expect people to poke holes in this. Agreement, the tradeoffs between safety and cost. Some people think we overestimate the cost. Some pound the table and say there is no cost to higher capital. I personally dont buy it. Nobody has said were underestimating the cost of this. Were on the side of being more conservative in terms of cost. Some people say we are underestimating the arbitrage movement overseas. Fair point. Theres not much we can do about that. They are national champions. If they have to bail it out in 20 or 30 years, so be it. What i would suggest is that we implement reforms and regulations that are sensible. We show the world that we can have a robust economy without too big to fail risk and encourage other countries to follow our lead. People have asked us for more detail and Community Bank regulations, which i think is fair. We have both 23. 5 Equity Capital of the biggest banks. A 15 leverage ratio. We think both measurements and of being important. About, we i will talk will have a discussion. Some of the recent discussions in the press have been moving in the wrong direction. Bank ceos have claimed they have too much capital. It is holding back lending. This assertion is demonstrably false. It which is a polite way of saying it is nonsense. Complete nonsense. For homeowners, consumers, businesses are near record lows. That is not happening today. The vast majority of Small Businesses report having their credit needs met. They are very credit challenged borrowers. I dont think making loans willynilly to people that have very poor credit records is necessarily a good idea for the banks. The ceos arguments are nonsense. They are trying to boost stock prices. You can bet what they will do with it. It will buy back the stock and increased dividend. It will not lead to more lending. A month or soed ago about my unexperienced getting a home loan. I was stunned at what an ordeal it was to go through. I thought they were punching me punking me, so to speak. Endless documentation. It was incredibly difficult. It is only fair we demand the big banks put 20 down. [laughter] seriously. Of the way a lot theyre addressing the too big to fail risk if we say ok, banks. You put 20 down on your investments. Most of the too big to fail risk addresses itself. Thank you very much. I look forward to hearing your questions. [applause] would you like me . As i promised, i think we will have plenty to talk about. We will be using cards or scraps of paper. You wont be marked down freezing scrap paper for questions. As moderator, i will start with a couple. The plan that you have outlined that would require new legislation, correct . You described it as a choice. This is a tradeoff that we have to make between what we want to andfor an insurance policy a banking crisis. If you are not maker, and oddsmaker, where would you assess that tradeoff . Neel i have met with representatives of both parties. There is a lot of agreement. People say that we need to address too big to fail and both parties generally say that we need to relax regulations on Community Banks. How that works its way through the legislative ross s and what positions the administration takes, i dont know. It is very hard for me to handicap the specifics of tax reform and what Health Care Reform is going to come out. I just dont know. They make it through their elected representatives. How does that fit into this plan . Is it a standalone aspect or is it necessary for the rest of the plan to have the desired effect . It is somewhat of a standalone. Roughly 1000 savings and loans failed. Risk of economic collapse. They are caught up in the politics of too big to fail. I think what some elected officials worry that if you relax regulations on Community Banks, you might relax them on everybody. I feel it we have to show that you really addressed the risks posed by the biggest banks if you want to make progress on banks. Ty in terms of the framework, where would subsidiaries fit . You mentioned the possibility of taking a share. Wants to comeody to the u. S. To do business, we would make them subject to our regulations. You didnt mention part of that. Is lending. Neel we have not called for a specific repeal of the different regulations put in place. But i will say this. If we increase our Capital Requirements. We dont ask specifics. What restrictions you want to put on a giant bank. It is likely gone too far. They ask all of us to put 20 down on our homes. In case we make a mistake and we run and a hardship. Its to protect the banks. Tangentially related to that, here is a question of whether the government should force all u. S. Banks to be a member of the Federal Reserve. Neel i dont have a strong view on strong banks. Regulated by state agencies. Some are regulated by the fdic. I dont have a strong view. Subject to supervision by the fed. I think that is important. Getting back to one of the points regarding your difference with the board on debt. Being transferred to equity. Capital requirements counties he in fear he, but do regulators define capital and risk accurately. Neel that is why we need risk weighting and a leverage ratio. It captures the fact that people may rate wreak debt as riskfree, as an example. Consider suspenders, but we dont think anyone by itself the subject to it. This is a question that comes up fairly frequently. You may have gotten this one frequently as well. There have been a lot of discussions of protecting against another big financial crisis leads to other risks. And what is the capacity of the dealer to take on risk. Is that something you worry about . It. Just dont buy managers, whether it is blackrock, fidelity, calipers. You need to tell me that theyre just counting on . If they are not there, they are not going to figure out how to trade with each other . Theres a fun price move in the asset class. The bond rate dropped 10 in value. I think these are just banks. We are in the business of making money. Working on behalf of their shareholders. But dont be duped by that. Another argument that banks will make. Well, the big manufacturers in the u. S. Like General Motors or ford, they need us. They do business in 100 countries. Gm, ford, boeing. They manage thousands of suppliers. They cant manage a dozen banking relationships . Not according to the big banks. They really dont stand up. Would that be an alternative . Neel i think thats the way to go. A doesnt solve anything. Them to have skin in the game just like you and me. When you buy a car, buy a house. That skin is there to protect the lender. Either as depositors or taxpayers. Capital should be there. How do you see the play and the fed supervisory role . Including whether you would like to be the next chair. Again, if we have a much higher capital requirement. My old boss, secretary hank paulson. We are due for a financial crisis. Markets have been to calm for too long. There is a team of us work with the Federal Reserve. A hedge fund blows up. Public servants will see the next one coming. Ill must guarantee you they wont. All of our antennas were up after the crisis. It looking for the next big economic shock. How many people saw oil going from 150 to 30 . Its a huge economic shock and we all missed it. Lets assume that we will miss the next one. Lets lighten the burden on the banks, supervisors, and regulators. Lets not force them to try to be omniscient or expect that they will be omniscient. Its make jobs a little easier. Capital can do that. Ideainking through the that in the depression, and you can argue in the savingsandloan crisis, we had a large number of institutions that were the source of the problem. Neel one of the push backs we will get is a little bit of a strawman argument worth you take a to trillion dollar bank and 20 100t up into billion banks and they take the identical position and make the same mistakes, has safety been improved . Its a fair question but its an artificial construct. 20 100 billion banks each with their own management teams and board of directors, they are not all going to make identical decisions. The point is still taken. Is notf little banks necessarily safer if they take identical positions. A thousand little banks failed in america. It was costly for the country. Risk of National Economic collapse or Global Economic collapse . No. Homogenate he is our friend. Homogenaeity is our friend. This could eliminate a Cottage Industry but there is stress testing. It would that change under this plan . Could. T stress testing is a useful exercise. The biggest banks have this much more capital. I is an inoculation xers exercise. If one person so gets sick, it is much less likely to spread everybody else. The fact that all the bigger banks will have more capital instantly reduces the risk of contagion. Jpmorgand up having a or whale type scenario. Liquidity. They might become partially more expensive depending on what the passthrough is. There are liquidity lines to companies and so on . Neel i think they will be able to raise the capital. Maybe the most substantive pushback is that the banks Business Model cannot afford these higher Capital Requirements. Not sure today given the runup in the stock market. Many banks have been trading below book value. The question is, do they have viable Business Models . And do they have viable Business Models affair forced to have higher capital. If banks dont have viable Business Models, that is not a Public Policy problem. That is their problem. We should not be creating a Regulatory Environment to support their business donald if they are dependent upon taxpayers standing behind them. I think they will adjust to it. The question regarding your view of using the Bankruptcy Code to address failing banks . Neel i am sympathetic. I would love to be able to do it but there is the same flaws haircutting debt in a crisis. Once you put a banks or Liquidation Authority that they , in about and dodd frank both cases, it is the debt holders supposed to take the losses and provide the funds for recapitalizing the bank. The problem with that is exactly what we faced in 2008. If you are a bondholder of one big tank. And the gentleman to your right, youre the bondholder of another big bank. A crisis hits and i hear cut his debt. Youre terrified. Maybe you are next. You want to run in any way that you can. Stability leads to your banks instability leads to more banks instability. That is what we faced in 2008. Whether you call it bail and r bankruptcy, none of those provide a firewall preventing that contagion from bank to bank. 2008 sowhat made difficult to solve and why the tarp ended up being necessary. It was the only authority in the entire federal government to put capital on an unsecured basis, to put in equity as a firewall to prevent the dominoes from falling. In october ofr 2008, we invested equity and nine banks at the same time on the same day as a way to once and for all stabilize those dominoes from falling by recapitalizing them all at the same time. Bankruptcy might work. Again, if you go back to the inoculation example, if the banks have a lot more capital so the risk of a domino knocking them over is reduced, you might be able to put the one bank through bankruptcy without the fear of other banks. You provided some fairly eyepopping numbers about the cost of the financial crisis and the probabilities over 100 years. S. If bif using can you talk about the cost benefit recognizing the very small changes in the discount rate for example that significantly change the math . Neel i dont have the citations off the top of my head. Since we released this, a number of neighbors have recently come out. They also called for substantially higher Capital Requirements. Our numbers are high relative to where it is right now. Papers thather recently published from reputable economists calling for similar type numbers. I will encourage all of you to take a fresh look. Look at the numbers. We wanted our work to not only be replicable. We want to follow the best practices in use today. That is what we feel like weve done. All of the analysis is there. All of the footnotes are there. I that you will come up with numbers. Wante detailed plan, we this to be analysis. If you change the passthrough from the banks to the economy, if you change the losses on default, those scenarios are there. With regard to the shadow banks, you mentioned taxing their debt. All that . The portion that is mismatched . Is that ok . Neel ideally, we would want one standard to apply. The first thing we would do is and then you would treat whether it is a bank or hedge fund. I feel like it would be to complicated to try to create a capital standard for hedge fund. A capital standard for mutual fund. It would be simpler to tax the debt of large shadow banks. If you took a very large bank, a 2 trillion traditional bank, applied the capital standards. In the activity moves to hundreds of hedge funds, i am fine with that. I feel like the Financial System you will have all of these hedge funds. What we dont want to have happen is all of the activity moves from one giant bank to one giant hedge fund. And a debt finance all of that. That is not a reduction. We only apply the tax to large shadow banks that use that on their activity. We dont determine if it is shortterm or longterm debt. We just think debt the source of the instability. I know there are questions about your step one and step two. If you are going to certify the large banks, do you still need to do step one . Neel that is why it goes back to inoculation. The top dozen bakes at 23. 5 capital. Certify theymust are no longer systemically important. If they do certify, why do they need the 23. 5 . Good question. The same reason we need to be an oculi did against various diseases. Months, whatever. When we were kids. By having all the banks, the big banks have this much capital. The whole system is more resilient in case one bank has a big idiosyncratic problem. That big domino falling does not knock over other dominoes. That is what you need the higher capital levels in those banks. Had a question about another proposal out there from the house and it committee chair. That banks choose to have a higher leverage ratio. Or follow. Frank. Or follow. Frank. Follow doddfrank. Neel directionally, that makes sense to me. The comments i offer to staff into you is that the Capital Requirements need to be higher. Should be 15 at a minimum. Number two, if you give the banks of choice, they are going to choose the regulation. They are already expressing this position that they just dont want higher capital. They would rather live under the micromanagement of dodd frank. No one is going to choose door number two. They will choose to live under dodd frank. You will live with more capital or you will restructure yourself. Maybe one more question. You have a compost quite a lot in a little over a year. Did you want to talk a bit about outside of Monetary Policy, what is next on the agenda for the many annapolis minneapolis fed . Neel i met with my Research Department and asked them, what would be the biggest Economic Risks and challenges we face as a country . Lets fear lets go back and hear your ideas. Another one was issues of economic opportunity. And inclusive growth. The lunchtime speaker that was fantastic today. We announced a Major Research initiative, working with all of our colleagues across the system. Or we and Inclusive Growth Institute that is trying to encourage the Federal Reserve to do research on issues of economic opportunity. Position has been Monetary Policy is to blunt of an instrument. Be targeted at communities or demographics so these issues are purely distributional. , ite can do the Research Helps unravel these challenges. Rigorous analysis and potential solutions. I feel like its an important contribution for us to make. White unemployment and black unemployment in america. It is almost always two times. Recession and white unemployment to 6 , pretty good chance black unemployment is going to be 12 . Andts a booming economy white unemployment is 3 , black unemployment will almost certainly be around 6 . Why is that . You think we would be able to answer that question. We are partnering with some of the best academics in the country. Not just economists. They are already looking into them. But we want to do our part. While this is going to be housed at the many annapolis fed at. He minneapolis fed economiclem of disparity is decades or longer. We will not come up with an answer in year. I want to thank you all for your great questions. Kash you so much president kari for being with us. [applause] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. Visit ncicap. Org] [captions Copyright National cable satellite corp. 2017] good afternoon, everyone. We talking about productivity. I dont think we couldve gotten a better advertisement at the end of the last discussion. Productivity is something that we can talk about any time but it seems particularly important. Not just for Income Growth but for the expansion of markets. In the last 60 years, u. S. Gdp grew. We look ahead. Is going togrowth drop to one third. Roughly. 5 because of slower fertility rates and aging. The kind of growth we will see in the economy and in our market is going to depend more than ever on productivity. We need productivity more than ever and the rates have dramatically dropped. Average productivity hasnt been very different in the rest of the developed markets. Question, of course, is what does it mean for the future . Is this the new normal . The times thatof they can start probing when we see the economy picking up again. They have a pretty abysmal track record coming forward. They dont have great models of will do the next business innovation. Starting next to me, the professor of economics. And Research Advisor at the Federal Reserve tank. Welcome. The way we will run the session and thesech panelist i will be posing to the panel. Write the questions down and pass them. They will pass them on to me so we can ask those questions. Ithout further a do the recovery since 2009 has been extraordinarily slow. 2. 1 growth in gdp. The question is if we can do better than that. They came out last month. 25 fasterabout than what we saw in 2009. It would be great if we see that, but even the disappointing growth rate was enough to bring the Unemployment Rate down from 10 to 5 . Maybe Underlying Forces are stronger than we would otherwise like. It might be slower than that. These are my own views and not necessarily those of anyone else seated with the Federal Reserves sis him. System. From 1. 5 to 1. 75 is what i think is plausible. Maybe five years to 10 years out. Is notgest part productivity per se but some of the headwinds. It is enormously productivity growth. It would be a the 70s and 80s case. 2004 period was exceptional and were back to normal on productivity with some cyclical dynamics that i wont say much about right now. Up,hen you add all that there is a norm is uncertainty because of low frequency productivity trends. See aper articles did not likelihood of the pickup. When they did talk about policies. There are a lot of mysteries that are hard to get. Just that we have to overcome future labor. 2. 4 or 2. 5. This shows the working population. All those Going Forward are immigration. It would be the local population. The labor force. We can argue if there is more of a lesson out of the next few years. The second is education. We had a massive increase in education of 20th century. Thatis a wellknown chart shows average years of schooling. There was no additional increases. That data in the 1980s. They get another big boom in education Going Forward. The people are retiring, replaced by people that had a lot of education. What im showing here is a broad measure. For selected subperiods in 1948. Since 1948. 70s, they get past that first bar. Everyone pointed to information technology. What was going on within companies. They are very good. As john documented, the higher productivity establishment will learn that and grow fast. The average, the 2007 to 2010 bar there. I will mostly not talk about the last six years. It is better than Labor Productivity over this period. That they areis wearing something normal. Worry about the educational piece, too. It has added a lot to growth. The orange bar shows accounting contribution of labor quality. If you get more educated it is more effective labor. It is a onetoone output. I dont think it should be for this purpose. Adding. 4 or. 5 historically, in time, we 2007 to 2010 fired all those skill workers. That, event rid of the 2007 to 2010 bar doesnt look that different from the historical. Other than the past 40 years. I think Going Forward, we will get about. 1 or. 2. , a of labor quality benchmark that will do the 70s, 80s, or early 90s. For labor force, you get to something a little over. There is a norm is uncertainty about that because people in 90 forward to expecting this enormous surge. They werent expecting the slowdown. Let me just say a few words then. About how to interpret slow productivity growth. One story would be it is this measurement. Mismeasurement. I tried hard to make that work and a paper i wrote last year with dave byrne and we couldnt. We have always had mismeas urement and there is no evidence it got worse. It was probably worse in the past related to i. T. No one has managed to make that story work. Given that we just had the worst recession since the Great Depression, we look at that. There are lots of intuitive reasons. The clearcase you get some dynamics related to capital and after. It doesnt actually look that different than where we wouldve been on a prerecession trend. I wont say that it doesnt contribute to anything. We dont know the counterfactual. It cant be the big story. Have been getting, for the past dozen years we will take you live to the floor of the house gaveling in for a brief pro forma session. [captioning made possible by the national captioning institute, inc. , in cooperation with the United States house of representatives. Any use of the closedcaptioned coverage of the house proceedings for political or commercial purposes is expressly prohibited by the u. S. House of representatives. ] , washington, d. C. , march 6, 2017. I hereby appointed honorable andy harris to act as speaker pro tempore on this day. Signed, paul d. Ryan, speaker of the house of representatives. The speaker pro tempore the chair will be offered by the guest chaplain, reverend gene hem rick of st. Josephs Catholic Church in washington, d. C. The chaplain lord god, as we approach the season of spring, please bless our congress and country with fruitful planting, resulting in a horn of plenty to nourish us and those who dont have it as well as us. May our country and congress continue to share its bountiful food with the starving in this world. Please grace them with the strength needed to shoulder this awesome responsibility. Amen. The speaker pro tempore the chair has examined the journal of the last days proceedings and announces to the house his approval thereof. Pursuant to clause 1 of rule 1 the journal stands approved. The chair will lead the house in the pledge of allegiance. I pledge allegiance to the flag of the United States of america and to the republic for which it ands, one nation, under god, indivisible, with liberty and justice for all. The chair announces the speakers appointment pursuant to 46 u. K. Code 51312b and the order of the house of january 3, 2017, of the hol foling member on the part of the house to the board of visitors, to the united tates merchant marine academy. The clerk mr. Suozzi of new york. The speaker pro tempore the chair lays before the house the following communications. The clerk the honorable the speaker, house of representatives, sir. Pursuant to the permission granted in clause 2h of rule 2 of the rules of the u. S. House of representatives, the clerk received the following message from the secretary of the senate on march 2, 2017, at 1 07 p. M. Appointment, Senate Delegation to the British American Interparliamentary Group conference during the 115th congress. Signed, sincerely, karen l. Haas. The honorable the speaker, house of representatives, sir. Pursuant to the permission granted in clause 2h of rule 2 of the rules of the u. S. House of representatives, the clerk received the following message from the secretary of the senate on march 6, 2017, at 11 51 a. M. Appointment, Senate Delegation to the British American Interparliamentary Group conference during the 115th congress, Senate National Security Working Group for the 115th congress, United States caucus on International Narcotics control, signed, sincerely, karen l. Haas. The speaker pro tempore without objection, the house stands adjourned until noon tomorrow back now to the business economics conference underway life. A 10 return each year. That will take 10 or 15 years to happen. Isadly, what you want to do think about how to generate ideas and then make them easy to translate into productivity. Funding basic research is something we should be doing. Its like modifying a lottery ticket. Ideas,s of generating ideas dont have to just happen in the u. S. Ideas are global. One positive feature is that ,hina and india and so forth other countries are doing research that matters to the u. S. This shows r d relative to gdp. China has been steadily rising. That is positive future potential growth that more people in the world are potentially doing ideas that will matter. Growth,ope for stronger we can hope for another wave of i. T. Late integration link but most of that will be a series of incremental things. We can hope for better, but i wouldnt count on it. Policies will foster the creation of ideas. Thanks. [applause] thank you very much. John and i have been on the circuit on this. Hopefully is to tell you a little about micro evidence. I dont think i have persuaded you get on terms of dynamism. What i am particularly interested in, we have seen some dramatic changes in the indicators of business dynamism. Theres a prima fascia case as to why that is. We want to dig into this, including the appropriate skepticism john has about timing and so forth. This particular talk comes with work of nice working with lots of colleagues, but the blame is all on me for the remarks here. What do we mean by these indicators of decline of dynamism . Nimism here, the upper left is from Business Employment dynamics, tracking what is called the job reallocation rate. It is the pace of reallocation of jobs across establishments in the United States. You can see what he dramatically this has been falling over the last couple of decades. The key part of this decline in dynamism, there has also been a decline in entrepreneurship in the United States. , this isator of this from the business dynamic statistics, there has been a activityn the sure of accounted for by young businesses. Not only is the population getting older, in terms of concentration of activity. Oftentimes when folks characterize the u. S. , we use terms like dynamic and flexible and entrepreneurial. These charts suggest this is less so today than it was a few decades ago. Why might that have an adverse impact on productivity . The process is linked to productivity. Who are the businesses that are expanding inside industries who are the businesses contracting . The businesses that are low within the industry. All the nice things john talked about, its a very noisy and complex process with a lot of greed and destruction going on. The concern is the right be some factors that are repeating this reallocation dynamic that may have an adverse effect on productivity. Thats what i want to talk about it my remark. Theres a whole bunch of possible connections. Concern, the idea that somethings going on in the u. S. Economy that is impeding the reallocation process. I want to get into your heads early and ill show you evidence in just a few minutes. Is of the other key factors if you go inside very narrow industries, you see enormous dispersion of productivity across businesses inside the industry. John talked about changes in aggregate productivity but we ofl also seek gaps in terms the range across businesses. That,ou hear numbers like one Immediate Reaction is, how can that be . How can look pretty low productivity businesses survive . The answer is, they dont. We are moving resources away from the less productive businesses. Enormous scope for things to go wrong, and that is much of what im going to talk about. Somethingn is there impeding the reallocation process. I will show you some evidence. I dont know exactly what it is, but there is something going on. But i may have a completely backwards. John described the productivity surge in the 1990s and in the slowdown afterwards. Theres a lot of evidence that suggests what happens when there is a time of innovation, theres lots of experimentation, lots of dispersion, and a shakeup process and reallocation occurs in productivity occurs. Of dynamism may be related to that. Asking, you just said there was a slowdown, but not in the hightech sector. Another possible channel is that it may be that in some sectors theres been some change in the Business Model. We dont need nearly so much startups and reallocation hookups. So there is some truth to each one of these, and it makes it difficult to disentangle the relationship between dynamism in productivity growth. The way im going to do this is to primarily contrast to sectors, the retail trade sector and what i call the hightech sector. This is a combination of sectors which is largely the itt and the biotech sector. Retail trade is a sector where we deem it really dominated the long run decline in indicators of dynamism in terms of reallocation rates and startup rates and the sheriff young activity. That has been going on for decades. In contrast, look at the hightech sector. 1990s the search started pretty early in terms of Interest Rates and then a surgeon young activity. That certainly looks like there may be some connection here. Which not told you direction of causality is going, but it looks more promising. Now all want to spend a little time talking about retail trade and hightech and the more general issue, is there evidence something is going on in terms ofimpeding the pace reallocation in the United States. First, lets talk about retail trade. The studies have looked at changing Business Model in the retail trade sector. By probably already know walking down the street that a fundamental change over the past several decades in the Business Model on retail trade. We moved away from bringing goods and Services Retail trade through single unit establishment firms, what we call mom and pop firms, toward national chains. It has been a dominant factor in retail trade sector. What we know about that in the micro data . Weve seen inside narrow Industries Establishment of Large National chains are much more productive than the establishments that are single unit, and much more stable. What do we think is been driving this . We think i. T. And globalization have played a role here. They favor the Large National chains. Change a structural where we have seen a decline in dynamism that is productivity enhancing. Look at the 1980s and the 1990s when this was going on, this was a time when the kind of dynamism and entrepreneurship , not the otherg way around. Theres a different kind of dynamic that goes on in other sectors, particularly in the innovative intensive sector. Been trying to look at the nature of the innovation dynamics inside the hightech sectors of the economy. On,thing weve been struck there are rich dynamics. I told you a few minutes ago there was a surge in entry in the 1990s. We found the following. Following a surge in entry inside a particular hightech sector, the immediate thing was not an increase of productivity growth but an increase of the dispersion i talked about. After that, we tend to see an increase in productivity and associated with that is an increase in the reallocation inside that factor. Thats the kind of dynamic you expect when you are arguing that entrepreneurs and young businesses play an Important Role in the experimentation process. Into want to start taken do we see evidence that there in the naturenge of the reallocation dynamic, something impeding that process. The place and going to start is a place i talked about at the beginning, which is that it is good to get in all of our heads the enormous dispersion in productivity across sectors. Lets look at the hightech sector, the lower righthand panel. Im showing you the 9010 differential. You look at the scale of this, the numbers are just enormous in terms of the 9010 differentials. There is enormous scope for things to go wrong. I want you to notice a couple of things about these figures. This is from data we only had from the late 1990s to the present. Young businesses that have much more dispersion than mature businesses. That kind of makes sense with and view of experimentation young businesses face a lot of frictions going on. If you come away with all one you fact today, i think this is so important. Sectorshat inside the and age groups, the dispersion is rising. Is that a bad thing . Not necessarily. It suggest enormous opportunities that are not being realized. The question is, why are they not being realized . , sometimes we see this happen you will see a sector take off with lots of experimentation. So the dispersion rises and that is a good ring at time of experimentation. What is also the case as we look inside countries and across the world, when a country experiences this kind of rise, something is impeding the reallocation of resources. Do we see that . The answer is yes, we do. One key fact i want you to get into your head is there has been rising dispersant inside of history. Why do i think that is going on . I will give you an approximate answer. Because we see as time has gone on, high productivity businesses in the United States are less likely to grow, and low productivity businesses are less likely to contract an exit. The kind oft get reallocation dynamics im talking about, that will widen the distribution of productivity. So hopefully i just told you to interesting things. Dispersion is lightning and a key reason is businesses are taking advantage of the opportunities in the same way they were before. So we can actually quantify how much of a productivity drag this unrealized opportunities that are building up in the u. S. Economy and the slowdown in the reaction, what the drag is on productivity. Gay prettyy big kick. Theres something going on here with dynamism. Be enactedn seems to to the productivity of decline. This isdriving precisely that the hype productivity businesses are not growing as rapidly as they used to and the low productivity businesses are shrinking. I want to bring this to a close because i see time is moving on here. Interestingly, there has been some nice work that suggests the kind of dynamics im talking broadly across the oecd. This paper was presented at the brookings conference is passed ball. There has been a decline in the share of young Business Activity across the oecd and the lower righthand panel says theres also been an increase within industry dispersant. It seems to be a pervasive phenomena. In this particular paper, they take a somewhat different view as to what is going on. Its a reasonable hypothesis that what is going on is a slower diffusion process. Move resources away from the less productive to the more productive. There is enormous evidence that suggests that is important. There is aon goes up diffusion process and people catch up. Those are different kind of mechanisms and i dont think we fully know which ones work. Highhere is evidence that productivity businesses are not growing as fast anymore, and that almost cannot be a good thing. Let me bring this to a close. I have not fully persuaded my esteemed colleague of this yet but i would say this is largely macrotent with the evidence. In the 1990s, we did actually see the surge in dynamism and innovation and productivity that was consistent with the temporary surge. ,ven when there was a decline it was important to sectors like retail trade. Retail trade has continued to shift toward more essential change. What sector has had the biggest decline in entrepreneurship . Ive shown you that in this time when there is a decline in entrepreneurship and dynamism in the hightech sector, dispersion hasrisen and responsiveness fallen. So the really big question is, suppose i am right. The question is why . What is going on . Somethingility is happened in the Regulatory Environment in the United States. We have more crosscountry evidence at this point and within country evidence. John is right about that. That would be a good topic to talk about. Somewhatd thing is related. Theres evidence that the u. S. Has become less competitive. Shift toward a bigger and older businesses. The concentration rates have been going up in the United States. A third factor is, there is lots of evidence that uncertainty in the u. S. Has gone after manically over this time. Our economic model suggest when uncertainty goes up, businesses become more cautious, and that may be what is going on. Idle think we know which of these factors is driving decline but the fact that high productivity businesses are not growing as rapidly, something is going on and we need to figure that out. I will try to be more optimistic than you might think. One thing that is true about the rising dispersion is there is sort of the silver line there. There are unrealized opportunities. So if we can find ways to bylize those efforts, improving the diffusion process, or its my hypothesis that we can improve the pace away from less productive to more productive businesses, we could get a big kick. The numbers are in enormous rises of dispersion and productivity. So large gains are being unrealized. That offers a more optimistic view maybe even than john suggested in terms of the future. I will stop there. Thank you. [applause] plex thank you very much. Please pass on your questions so we can get them directly to the panelists. You say youre not as worried about the downturn. Whoes a lot of businesses are feeling there is a lot of uncertainty in the environment. I know you have looked at this. What do you see as the impact of cyclicality and what should we expect . My best guess is productivity will look much better in the next five years than it has in the past. The past five years weve seen capital showing rather than the longterm factors. Just because we came out of the did notn, businesses have demand and they didnt have the workers. The capital output ratio is actually back to longrun trends. Those dynamics take a while to play out, but that makes me more optimistic about the future. Apart from any policy changes we see about corporate taxes, for example, i would have expected a pickup in capital investment. There is a broader question of whether recessions leave long shadows. The evidence is they often do, but they dont have to. The Great Depression maybe the most obvious example. There was an extraordinarily. Nnovative decade there were a lot of things that were worth trying to innovate on even though there was a smaller market. I think a case could be made that the Great Recession is not like the Great Depression in this regard. One of thee that things that was true about the Great Recession is, younger businesses were not doing badly, but if you look in detail, young businesses got hammered in the Great Recession and they have been slow to come back. , you could a concern say we lost a cohort of the entrepreneurial capital that played a critical role. We can come back from this, but thats one of the overhangs that could persist from the Great Recession. A question on how big an the slowdown was more like a percentage point. Ntsb has been the same in the past five years as it was in the three years before that. I have a pile of questions. You made a point that this might just be returned to the i. T. Trends of the past. On the other hand, this is a pretty dramatic change on the technology front. Question really is, what is the likely impact of digital technology, whether social media, the new kinds of the fact that the industry supply curve might look very different. Versus amazon entering the Retail Industry with very different technology. I would love for the two of you to react on one of the big questions, what does digitalization mean for what we can expect for the future . Since 2007, one of the big things weve seen is consumer technologies have to manically change. The things you can do on your phone are completely different. Has changed how we spend our lives, how we live our lives. But most of that is what we do outside the marketplace. We can watch movies as we commute, or we can communicate better with our families. Question. Broader know, we are in the realm of speculated metaphysics about what the future might hold. One of the things i appreciated about bob gordons magnificent book it is kind of antidote to our inherent narcissism of thinking whatever happens now is the most important thing ever. When we try to figure out what to armal, we compared period when our entire lives were transformed. I. T. Has been contributing enormously for 45 years and is shown utmost that time is 15 gdp growth. I think the evidence i talked about remind you and is related to what is an important perspective, its just how complex the process of innovation and productivity growth is. Valleylks in silicon here my talk, they dont believe it. They say things are changing more rapidly than ever. There is technical optimism, they are incredibly optimistic about being on the cutting edge. They are worried that robots are going to destroy all our jobs in 2018. I would remind you how slow that process is. One view of the kind of evidence im talking about is not just whether the opportunities are there, but how they are realized. Interestingly, the evidence im suggesting is, theres lots of opportunities out there but were just not realizing them as quickly. Processal, it is a slow and we always need to remember that. What is critical is how quickly we take them up and how productively we take them up. Haveother set of questions to do with the policy and Regulatory Environment, its clear that the last few decades there istime of discussion about increasing tariffs are putting more effort into reassuring manufacturing in the u. S. Have an idea of how it may influence the market . I think one key fact you just cannot forget is the enormous dispersion and productivity inside very narrowly defined sectors and the need to reallocate resources to the most productive units. We should always be thinking about, is his policy going to distort that process . I worry about a lot of the policy suggestions that i think might distort those reallocation dynamics. This is the difficult thing about the United States from back in the 1990s. Is a costlyruction thing, but it has huge payoffs in the United States. So flexibility in allowing businesses that dont have the right Business Model to contract while creating an environment those mosts innovative businesses to succeed is just critical. This is not a direct answer to that question, but as i listened to the policy debate, i worry about, we seem to have lost that , whenctive that the u. S. He used to go to g 20 kind of meetings would say you need to make your economies more dynamic and flexible. Thats the way to be able to adjust to the changing globalization and changing i. T. And the like. Not to stop the process, but embrace it and enable yourself to allow the winners to win and to create the jobs, the startups to take off. We have gotten enormous gains from that. I think thats a critical perspective and trying to evaluate these. I would agree. Supply chains of been developed with expectation of one set of rules. Such rules change and that will be disruptive. Supply chain the that crosses borders essentially multiple times, the immediate effect of that is a basic to productivity. The policy can weigh the pros and cons of that. Of people i talked to in business and health care talked aboutction the cost of adjusting to Affordable Care out a formal care act. They have artie paid the adjustment cost. Any time you change these things, there will be adjustment costs. In the year term, negative productivity. Am going to read the next question. Spent nott come competitive structures, the question is, are we seeing some of the successful recent ipos, is that an example of business creation . We are nowhere near where we were back in the 1990s. So full stop there. So again, im just going to come theme, you need an environment that enables you to move resources away from these very low productivity businesses to more productivity businesses. The question is whether there has been a change in the competitive structure in the United States. The question is, why might that be . I dont think we understand that very well. Is there a policy issue here . I did hear some nice remarks at the brookings conference this last fall. About the fact that in the i. T. Sectors, it has become that much harder to press antitrust cases because exclusionary practices are something very hard to prove in the i. T. Sector. You could say back in the old the, antitrust was about guy in the cement industry in the back rooms axing prices. Now to the extent that the United States is that much more i. T. Oriented, there is something going on in the competitive structure. I think it is a really interesting question, to ask whether there is something going on there, but come back again to the data. Increases inus market concentration in the United States. We should ask ourselves why that is going on and what are the potential adverse effects of that. The title of the panel had to do with policy. Thinking about the policy agenda, what kind of Research Area would you see is a priority for us collectively so that we could learn more . Areas of new kind of research that could shed light on the debate . Needlot of the research we is exactly what john and his coauthors are doing, which is digging down into the numbers. One of the challenges with johns numbers is you have accounting, you have causation is but much harder to determine. So finding ways to find the causal links between policy changes or the policy or institutional environment and those dynamics seem firstorder. One other interesting fact we uncovered, why we should push in this direction. Some of the work is closely related. What is the contribution of entrepreneurs and why are they so important . We seen this dramatically across sectors. 1990s, when startups came in, what was true about most startups in the i. T. Sector, they failed. But what was true was a small fraction of them grew really rapidly, and they were way up in terms of measure productivity and innovation distribution. An enormous contribution from that 1990s cohort of i. T. Entrance. Those are the ones that went back into the ipos that went public. They are the companies you know so well today. That process slowed down dramatically post 2000. We see a decline in not only the number of startups but weve seen a decline in highgrowth startups. Were not seeing them take off in the way they did before and they are not going public in the same kind of way they were before. Question is, what was the secret sauce in the 1990s that was enabling this . And what is missing today . We would like to know, and i dont think we know the answer, but that is why we are trying to dig into the numbers. Done,f the work ive weve gotten very good at tracking the firms and establishments. Now we are saying we ought to trust the entrepreneurs themselves. So were trying to bring in the person level data into the data set to try to track the career dynamics, what is going on for highgrowth entrepreneurs back in the 1990s versus today. I did not get to go through many of the questions. I think they would be happy to hear from you during the break. Im looking for short answers to two questions. If you had a magic wand and could make one policy change, either implementing a new policy one,anging an existing what would your policy change be . You need ideas and the flexibility for businesses to get them. Thats what john was talking about. Towill do everything we can make sure china, india, and other emerging markets continue to being advanced economies. They will be doing research in matters at the front tier of knowledge. Thing, iould do one would change the Small Business administration to the young business administration. That would not solve all the if thes, but that is why young businesses, where you worry about all the barriers that the administration worries about, it would enable a kind of opus for the kind of Research John i have been talking about. I would switch it to the youngest administration. If we did exactly what you what is the optimistic view productivity could grow . Its like buying a lot of ticket and raising the probability that we get another wave of fast growth. Thatwill say that the fact there is unrealized opportunities suggest that we could certainly do better than within the last five years. The question is whether we can do better than the longrun growth. That is a much deeper question. Thank you very much. [applause] [captions Copyright National cable satellite corp. 2017] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. Visit ncicap. Org] the u. S. House back in session at noon eastern time tomorrow for generals beaches, followed by debate at 2 00 p. M. On seven bills including the nasa measure and legislation to courthouse inal nashville to fred thompson, the late tennessee senator. Click cspan, where history
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