3 Takeaways - Former Vice Chair of the Federal Reserve Alan Blinder on Cryptocurrencies, Soft Landings and What's Really Happening with the US Economy Now. (#132)

Episode Date: February 14, 2023

The one and only Alan S. Blinder, former Vice Chair of the Federal Reserve and member of President Clinton’s Council of Economic Advisors, shines a brilliant light on some of today’s hottest economic topics — including the politicization of economic policy, the criminality of cryptocurrency, the likelihood of a soft landing, the prospect of a national digital currency, and more.

Welcome to the Three Takeaways podcast, which features short, memorable conversations with the world's best thinkers, business leaders, writers, politicians, scientists, and other newsmakers. Each episode ends with the three key takeaways that person has learned over their lives and their careers. And now your host and board member of schools at Harvard, Princeton, and Columbia, Lynn Thoman. Hi, everyone. It's Lynn Thoman. Welcome to another Three Takeaways episode. Today, I'm excited to be with Alan Blinder. Alan was a member of the President's Council of Economic Advisors and also a vice chair of the Federal Reserve Board.

His new book, A Monetary and Fiscal History of the U.S. 1961 to 2021 is wonderfully nonpartisan and frank. I'm excited to find out how he sees government and interest rates now and what he thinks about cryptocurrencies and the possibility of national digital currencies. Welcome, Alan, and thanks so much for our conversation today. Thank you. Glad to be with you. You open your book with a great quote. Those who cannot remember the past are condemned to repeat it. What are the lessons of history you're most worried about repeating? Oh, my.

There are so many. I guess I would start with the politicization of fiscal policy. It bothers me a lot. It's led to errors, both small and grievous, but it's probably inevitable. We don't have a dictator dictating fiscal policy. We have a White House and a Congress, at least sometimes we have a Congress, that make these decisions for us, they should. I mean, I wouldn't want them made anywhere else. If I could wave a magic wand, which I don't have, my wish would be that they were made more on the economic merits and less on the politics. But that's a wish that I don't expect ever to come true. What do you mean by the politicization of fiscal policy?

I mean that one party or the other often, not always, runs off to ideological extremes and enacts things that are slightly wacky, shall we say. A wonderful example of that, which is like the proverbial bad penny that keeps bouncing back, is supply-side economics. It failed in the Reagan years. It failed in the George W. Bush years. And sure enough, Donald Trump gets elected. He does it again. It failed again. If the Republican Congress could ever focus on policy instead of recrimination, and one day I think they will, but not soon, I fully expect it to be back. And to refresh everybody's minds, what is supply-side economics?

The right way to think about supply-side economics is it takes a kernel of truth and then blows it up to crazy proportions. So the kernel of truth is that incentives to work, to save, to invest, to be entrepreneurs, etc., are all improved when tax rates are lower. That's true. I don't think anybody doubts that. But the supply-siders going way back to the late 70s and still exaggerate the magnitudes of those responses to ludicrous degrees, so much so that you hear not infrequently, and we heard this at the beginning of the Trump administration, that the supply side responses, which is what they're called, to get more labor supply, more savings supply, more investment supply, and so on, will boost GDP, gross domestic product, the size of the economy, so much that even though it starts by cutting taxes,

revenues will come pouring in the Treasury's transom so much that total revenues will actually go up, even though the tax rates went down. So that never happens. But it implies, which also never happens, gigantic boost to the growth rate of the economy. It seems today that politicians are incentivized to spend and not worry about deficits. And all of the presidents over the last 20 years, including both Republican and Democratic ones, George W. Bush, Barack Obama, Donald Trump and Joe Biden have run enormous budget deficits. Yes. And they each also created enormous unfunded programs that are going to cost the government and the American people even more in the future. How do you think deficits are viewed by today's politicians? I think today's politicians, just as you said, Lynn, are basically ignoring

like the deficit is an accounting number. You get a bunch of accountants and they can tote the two columns and tell you you've got a big deficit. And the politicians say, so what? One thing we've learned over time, and this book of mine covers 60 years, is that the capacity of the United States government, and I might say the governments of other advanced countries as well, not all, but many, to run deficits is larger than we thought. Another way to make the same point is the United States Treasury and the treasuries of a number of other countries can float debt in the open market and sell it at reasonable prices in magnitudes that Dwight D. Eisenhower or even Kennedy or Johnson would never have imagined possible. Coming to the United States,

if you would ask most economists what interest rates would look like if the U.S. debt got to be 100% of GDP, which is about where we are now, they'd have thought much higher. I'm one of them. I would have said much higher, thinking you get some buyer resistance as you start flooding the market with treasuries. But the market's appetite for treasuries, I don't want to say it's infinite, but it's obviously extremely large. Now, rates have gone up recently, but that's because the Fed has acted to tighten up monetary policy and push rates up. But it's not hard to remember before the Fed started doing that. It was only March of 2022.

Interest rates were very, very low despite enormous deficits. And to your point also, deficits expected to remain high if not grow in the future. So it's not like these things are big shocks. Market participants expect the U.S. deficit to be large for a long time. And yet, until the Fed started tightening up, interest rates on treasuries were very, very low. How do you think that we can incentivize our politicians, and by that, I mean both Republican and Democratic presidents, senators, and congressmen, to be more long-term oriented and less focused on spending, spending, spending.

I wish I knew how to do that. In a previous book that I published about four years ago, I did emphasize trying to push harder the idea that when a president is elected, he or she has four years. That's a long enough time to see the effects of most monetary policies. And it shouldn't be impossible to explain to politicians that there isn't an election every Tuesday. Many of them act that way. Now, once you get to the end of a presidential term, there is an election looming pretty soon and it's hopeless. So forget about it. You're not going to get them to think long term. But I should hope that for a president early in his term, you could get them thinking about a four year time horizon.

And for a senator early in their term, thinking about a six-year time horizon. Members of the House, it's hopeless. James Madison's curse included two-year election cycles for the House of Representatives. And as you know, Len, they start campaigning for the next election on the day they're elected to the previous election. I mean, that was just a terrible mistake that Madison and his friends made. So in the House, I think it's completely hopeless. But in the Senate and in the White House, I think there's at least that much hope. They'll never listen to economists like me. But if we get the political advisors telling the new president, you just got elected, you got four years now. It doesn't matter what happens to

the economy in the next year for your political future. What matters is in years three and four. And think about that. And ditto for the senators in years five and six. I expressed the wish. I was going to say a naive hope because I'm not that naive. I don't think it's going to happen. The wish that the politicos who have the ears of the politicians would sing that song more than they do. But in fact, they act like there's an election every Tuesday. Former Senator Phil Graham, who joined the podcast in episode 126, says that the government numbers on poverty and inequality don't include two-thirds of payments to poor families and also don't include taxes paid by middle-class and wealthy families. So he says that the true numbers are inequality, I think, is four times less than the numbers reported by the government. And poverty, similarly,

is much less. Can you comment about the government numbers? And don't you think that poverty and inequality should be measured after transfer payments and taxes paid? I do. And there's a group at Columbia that does that, not the official government measure, and they do find it lower. When you do things like that, Lynn, however, and this is the misleading part of, I didn't see what Phil Graham told you, but I read things in the Wall Street Journal that he publishes. When you make adjustments like that, the trends tend to look very similar. The levels are different because you're throwing more dollars into the pot. But the trends don't usually look very different.

So when poverty is going up by one measure, it's usually going up by the other measure and so on. But to the question you asked, yes, I mean, you should include things like that. Let me tell you what the hardest part is, and it's a main reason why the government doesn't do what you think they should do with the official number, is Medicare, Medicaid, Medicare and Medicaid. The poor are eligible for, not all of them get it, but they're eligible for Medicaid. If you put an open market price tag on the Medicaid health insurance policy, it's a very big number. It by itself would probably lift most people out of poverty. Do we really want to say that?

That they're not poor because if they get sick, they could go on Medicaid instead of having to pay it out of their own pockets, which they couldn't possibly do. That's just one, not randomly chosen. It's the biggest conundrum in that issue. That is, what do you count? What do you not count? Interest rates have basically been declining since about 1980 over the last 40 or so years, except for recently. The U.S. has had very low interest rates, near zero interest rates for most of the last

10 years. Do low interest rates benefit some people more than others? And if so, who do they benefit? Sure. Generically, they benefit borrowers. Now, who are the borrowers? A small amount of that borrowing is people that just think it's Christmas every day. They're spending more than they're earning and they're borrowing like mad, but that's a small fraction. It benefits the federal government. We were just talking about that. Federal government is a very big borrower. Even before the recent gigantic deficits, it's been a big borrower and it benefits. And so the state local governments that borrow. And importantly, the plus side, it benefits investors, businesses and individuals that want to borrow money to make hopefully productive investments.

That's the good side of very low interest rates. And I might add, finally, it benefits people that want to speculate whether it's in crypto or any other crazy thing with borrowed money. Not a great idea, by the way, as Sam, whatever his name is, just found out. It benefits people like that. It hurts the lenders, which are some of whom are retired people trying to live on interest that they've paid off the bonds that they own. That went down to a triple, as you know. Ellen, how do you see cryptocurrencies and what do you think about

the possibility and the advantages or disadvantages of national digital currencies, such as a U.S. or Chinese digital currency? Let me break that into two questions. First, I'm glad you asked me that now, Lynn, and not three months ago. I would have said the same thing, but three months ago, I would have looked like an old fuddy-duddy in saying this is craziness. And now I say the same thing as I would have said three months ago, and I'm going to come back to your national currency question in a moment, is basically a vehicle for wild speculation, tax evasion, and criminality. That's what it's been for. Nobody goes to a store and buys something with Bitcoin. And that's the most reliable and oldest of these cryptos. People do speculate as they speculated gold, for example. Gold goes up and down in value and people make money and lose money betting on what gold will do. And the same has been happening

with crypto lately. In the fullness of time, I don't know how long that will be, but I'm not talking about 100 years. I'm not sure if I'm talking about 10 years, maybe, maybe less. I believe there will be digital currency, which is national digital currency backed by the Federal Reserve. I don't think that's going to happen in the next 10 months. Probably will happen sometime in the next 10 years. That will be a further evolution towards simplicity, availability, and low cost of the transactions technology that's been going on forever. Go back in history, people used to have to carry around sacks of gold to buy and sell things. We got off of that to paper money a long time ago. Paper money then was usurped by checks. And nowadays, credit cards have almost knocked checks out of the box and other electronic media. And so a Federal Reserve electrical dollar will probably a moot point. I don't see how the private cryptocurrencies will be able to compete with the Fed, except for illicit activities and criminality and things like that. Because if it's backed by the Federal Reserve, you know that it's good. It's not going to disappear like FTX. So why would anybody that is completely above board on the use of electronic currency

ever use a private electronic currency when there's a Federal Reserve? And will cryptocurrencies or national digital currencies for any country offer the opportunity for the government to essentially monitor, see, spy on each individual's transactions? Probably. The government will say, we'll never do this. No, sorry. You generalize this to many countries. The Chinese government will not say, we'll never do this. And everybody knows they will do this. The U.S. government will say say we'll never do this. And it remains to be seen to what extent they will or will not do this. There's an obvious parallel to IRS records, which the government has a pretty good record of not revealing to anyone. There are some exceptions.

As you know, Donald Trump just became a big exception to that. But for the most part, we don't worry that the information we send to the IRS is going to get into the public domain. And the crypto may be like that, too. But as with IRS records, there is the possibility that an unscrupulous executive branch peers into there. It exists right now, but they could peer into our IRS records. And in this future days of crypto money, of Federal Reserve dollars or Treasury dollars or whatever they are, that possibility will be there also. Ellen, before I ask for the three takeaways you'd like to leave the audience with today, is there anything else you'd like to mention that you haven't already talked about? I don't think so. I'm ready for your three takeaways. So what are your three takeaways, Ellen? First, that soft landings or soft-ish landings, which the Federal Reserve is trying to engineer right now,

are not quite as rare or near impossible as many people have said. Many people have said, it's only been done once and it's history. But I documented the book, many instances of what I, I'm not sure this is an English language word, but I use it, softish landings. So not completely soft. You see some damage to the real economy as the Fed tightens monetary policy, but not very much. And the Fed has managed that a number of times, more than it's realized. Second takeaway is that you can fight inflation either with fiscal contractions, higher taxes, less spending, or with monetary policy, higher interest rates. In fact, if you look at the historical

record of the United States, the last time we used fiscal policy to fight inflation was 1968. 1968. It's never been used for that purpose since then. It's always been up to the Fed when we had to fight inflation. I think that's not a well-known fact. It is a fact. And the third thing I'd like to offer as a takeaway is really one of the main themes of my book, which is the question of which is the senior and which is the junior partner between monetary and fiscal policy in managing the economy has changed many times in the 60-year period that I cover in that book. Sometimes it's fiscal, sometimes it's monetary. Lately, it's been an unusual mixture of the two cooperating with one another. It's not been the historic norm because the need was so great in first getting us out of the recession that followed the financial crisis of 2007-8

and then the recession that was caused by the pandemic. But who's sitting in first chair and who's sitting in second chair has changed a lot over history. Alan, thank you so much. This has been great. My pleasure. Thank you. If you enjoyed today's episode and would like to receive the show notes or get new fresh weekly episodes, be sure to sign up for our newsletter at 3takeaways.com or follow us on Instagram, Twitter, and Facebook. Note that 3takeaways.com is with the number three. Three is not spelled out.

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