C. Peter McColough Series on International Economics With Robert S. Kaplan

Tuesday, November 10, 2020

President and Chief Executive Officer, Federal Reserve Bank of Dallas


Editor-at-Large, Bloomberg News; Coanchor, Bloomberg Surveillance; CFR Member

Robert S. Kaplan of the Federal Reserve Bank of Dallas discusses monetary policy and U.S. economic conditions.

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

KEENE: Thank you so much, Carrie. Greatly appreciated. This has been hugely anticipated with an emphasis on the word hugely. It is the distractions of the moment, the matter of election 2020 and of course, much, much more about our economy, yes about our politics, also about international economics. And the Dallas Fed, of course, has such a resonance about international economics, particularly drifting south. This is the McColough Series on international economics, C. Peter McColough Series, and it is with Robert S. Kaplan today. He and I have battled for many years. And I think today, I can't fathom the number of topics we've got to squeeze in here in thirty minutes of conversation, and then your good questions and answers. I just ask simply that the questions be on the edge of terse, directed and pointed, so Mr. Kaplan can get to it. Mr. Kaplan religiously does not take follow up questions, unlike various and (inaudible) within the media. I don't know how Chairman Powell, does it Robert. I just really don't know how. I couldn't remember the first question, let alone the second question in the press conference.

It has been five years, five years, since Mr. Kaplan took over the Dallas Fed. The heritage of the Dallas Fed going back decades and original economics and of course, that presence on the nation's southern border out of Harvard Business School, and of course, the former vice chairman of Goldman Sachs. I just think it's been an interesting voice within our economics and always informative. Robert, I want to get to the issues at hand, but I first have to get to the immediate issue, which is the boom of your region. There is no other region in America booming, like Kaplan nation. Maybe Jamie Dimon would call it “Fortress Kaplan.” I would note in the Dallas Morning News of a couple days ago, maybe it was a bit ago can't remember, 25,000 JPMorgan workers in Texas, growing and growing. The Dallas Morning News has statistics that in Tribeca, that's here in New York for those of you internationally, for one million you can get 605 square feet, in the land of Kaplan you could get 5600 square feet, five bedrooms, six baths, and most importantly, a 400-bottle wine room for the same price as Tribeca. Please explain. Please color for us President Kaplan the boom in your district.

KAPLAN: So, great to be with you Tom. And at the Council on Foreign Relations. So, Texas has been outgrowing the nation for twenty years. And a big part of the story is migration of people and firms to the state and diversification of the state, lots of new industries being developed. But if you meet a typical CEO here, it's more likely than not, they're not from Texas. They came here in the last ten or fifteen years from somewhere else. With the pandemic, that migration is accelerating. So, population in Texas ten years ago was around twenty-two million. It's around twenty-nine today. We think it's on its way to forty over the next twenty years. But I got to tell you, businesses and companies generally, and their people are moving here and that's only accelerating. So that's a big part of the story. And then a diversification that's gone along with that.

KEENE: Your shop studies these trends like no one else. Do you have the infrastructure, the water, the school structure, the roads to take in that growth?

KAPLAN: So, the answer is yes and no. Certain cities have done a very good job at it. Austin is a city that I think is more challenged by that. But Dallas and Houston have built substantial infrastructure. But the bigger issues for us, we have the highest number of uninsured in the country. And so that's an issue that has to be dealt with. And we have lagging educational attainment and that's a very important issue for this district, because if early childhood literacy is faltering, educational attainment is faltering, particularly for the fastest growing demographic groups. That's the workforce of the future. And so, there's been a great emphasis here to dramatically upgrade early childhood literacy, secondary education, and improve skills training, because that's a big part of what employers want to see. That and infrastructure when they come here.

KEENE: It is inappropriate for you to comment on the election and all the dynamics of the nation right now. But quite seriously, is it a Texas solution? Or do you need assistance from the federal government. I think of Lyndon Baines Johnson years ago, and the federalism he brought to our society. A great society. Do you suggest that the district in this boom needs a greater assistance from Washington?

KAPLAN: So, I would say in this district and nationwide, for those who are unemployed, or employed, but they can't get enough hours, there's no question that unemployment assistance has been vital. And that's allowed consumer spending to remain solid. We would not have if it weren't for relief: local and from the federal government. And then the other thing I'm hearing, I hear from mayors and public officials all through this district and in the country, there's a fiscal hole from the spring. And while things are rebounding, these cities and states have to balance their budgets. And they're cutting back, and they will cut back without it. And so that's another drag and challenge.

KEENE: Well, I want to get now to the immediate two quarters. But I want to point out, folks, we started a little bit late. I'd say that Kaplan has to get to LaGuardia to get the plane back to Dallas, but that's not the case. So, we'll go a few minutes over here. The next two quarters, every interview I do, President Kaplan, are sport. Define the sport we're in right now.

KAPLAN: I don't know what the sport is, but we got a severe headwind we're dealing with. So, on the positive side, we've been rebounding in the United States since May. Even with resurgence of the virus, mobility and engagement, and we track it very carefully, is up substantially from April even though resurgence is back. Here's the issue, people can power through this until the local health care, the local hospitals are overwhelmed. That's happened in El Paso, for example. It's at risk by our measure of happening in other cities in the country where people don't want to lock down, but the local governments don't have a choice but to administer lockdowns because they worry about the health care system. And I do worry that that's a significant health care risk. If this resurgence keeps escalating the way it is we're, we're heading in the wrong direction. Over the next two quarters, I'm very optimistic that we're going to grow at very strong rates. But a real downside over the next two quarters is, does the resurgence get so bad, it forces lockdowns because of overwhelmed healthcare systems throughout the country? That's what we're watching for. That's a real risk.

KEENE: I mean, this is so emerging folks, I can't say enough. I thought our team and Bloomberg today had their strongest day with experts on the pandemic. And I did make note of El Paso a number of days ago, weeks ago, whatever it was, in the critical situation there. For you and for your team at the Dallas Fed, is it a question of days, weeks, or months before we find a constraint in our hospital care?

KAPLAN: It's probably weeks. It may not be months. And again, we track mobility engagement here at the Dallas Fed in every city in the United States. And we're watching Wisconsin. We've noticed all of a sudden mobility engagement is rolled over, meaning people are pulling back. And so, this is something we've got to watch but this is why the basics: mask wearing, social distancing, health care protocols is essential now. And we found that when people do observe that in a widespread way, resurgence mutes, but we're watching hospitalizations all through the country, and they're going in the wrong direction.

KEENE: Robert Kaplan, if I look at the two quarters slow down we're in and I'm going to say this word with a broad perspective. Not a three-ratios, but of the Kaplan-esque history that you had at Harvard Business School, which is our nation's productivity. What is your study of our nation's productivity through this pandemic? And what do you see over the next two quarters?

KAPLAN: It's been bifurcated by educational attainment. So, if you got a college education or better, you've been able to, very likely figure out how to work remotely like we are right now. And you're able to be surprisingly productive. If you've got a high school education though or less, it's very likely you don't have an option to work remotely. It's just the nature of a job is person to person. You're more likely to have lost income, and you almost certainly have lost productivity. And if you don't have access to Wi-Fi, which some areas of the country in at-risk areas don't, productivity has really been hurt. And so, it's a tale of two groups. And it's a real challenge we're going to have to work on to work our way out of this pandemic.

KEENE: To work our way out of a pandemic will take stimulus. I don't think you want to front run Chairman Powell here on stimulus. But what is the Kaplan use of stimulus? Is it for income substitution or replacement? Maybe more like what we see in the United Kingdom with Governor Bailey and previously Governor Carney? Or is there a different calculus for America in providing assistance?

KAPLAN: No, it starts with, for those who lost their jobs or can't get enough hours, unemployment benefits. State and federal have been essential to making ends meet. Our own sense, and we're watching this very carefully and we do it through bank balances and other ways. Our sense is the savings from that fiscal stimulus starting to run out. We don't know exactly when it will run out. When it does, incomes will start to drop and consumer spending will start to weaken. And so that, it starts with and probably the highest priority is some continuation at some level of the unemployment benefits.

KEENE: And what's so important here, folks, and you've heard Chairman Paul mention this, the acclaim of the Dallas-trimmed-mean. I'm going to let Mr. Kaplan translate the Dallas-trimmed-mean, but it's all linked in together. If we see damped in aggregate demand, if we see a rollover, as you say, post stimulus as well. It's a dampened two-quarter economy. What does inflation then do with your acclaimed series? And much more importantly, what does it do to wage growth? Do we become almost British, like in the 1930s, with true reduced wages?

KAPLAN: Well, so I'd say in the short run, while we're fighting in the teeth of the pandemic, and fighting the pandemic, it's hard to make a lot of broad generalizations, because we got these supply shortages—an unusual situation. So, we're noticing we have spikes. You know, you go to the grocery store, or you go to a sporting goods store or home improvement store, you'll see half the shelves might be empty. That's not going to be a long-term issue but right now we're seeing that. We got lots of overcapacity also, which is not going to last indefinitely. So that actually puts, even though wages are higher, it's more compositional, meaning lower-income people are losing their jobs. So, while wages are higher, I'm afraid it has more to do with the mix of the market. But there's a lot over capacity. So, inflation, not going to be an issue I don't believe during this period. We'll have to see over the horizon as we work our way out of this, what's the impact of technology and disruption on pricing.

KEENE: I'm going to go about another fifteen minutes here with Mr. Kaplan and then please start thinking about your questions and keep them short and pointed so we can get in as many as we can here with the Council on Foreign Relations. Robert Kaplan, first, I should point out that in the sporting goods stores, the shortages you're seeing, nobody's in the store buying Dallas Cowboy paraphernalia this year. It's an off-year for cowboy.

KAPLAN: They're buying chiefs paraphernalia.

KEENE: They're buying chiefs paraphernalia, which saves you up north. Let us talk about what you are acclaimed on and that is trying to measure our growth forward. I think of the Laureate Paul Romer, at New York University, of course, a giant soloed at MIT and others, Chad Jones out in the west coast trying to measure our “growthiness” as Mr. Colbert would say. After this pandemic, what do you see within the growth of the nation?

KAPLAN: We'll continue to see slowing workforce growth because of aging. And then the jury is out on whether productivity improvements will be enough to offset that. We're skeptical that it will unless we dramatically improve skills training, early childhood literacy, and secondary educational attainment. And so, potential growth in this country was say one and three quarters to, two-percent in January pre-pandemic. By the way, we think we're going to grow three and a half percent next year. So, some people may think we are, and we will be off to the races until we get toward full employment, but as we as we take up a lot of this excess capacity by end of twenty-two into twenty-three, you're going to start to see potential growth be closer, maybe to one and a half and one and three quarters. But it's structural, we can address it. But we got to find ways to grow the workforce. And there's a bunch of ways to do that, including expanded childcare, allowing women to get more fully into the workforce, they've taken a step back. Immigration sensitive is going to be an important topic, but then how to improve education and skills training, and make a more productive workforce. And some investments in Wi-Fi and infrastructure will also help with that. That's going to be our challenge.

KEENE: The challenge forward now is encumbered with a new measurement of debt, either the debt or the deficit, as Heilbroner said, or maybe we can just simply look at the many ratios of our debt. Is that now a constraint on that need to find a new structural strength?

KAPLAN: So, I would have said in January the path of U.S. government debt is unsustainable. At that time debt held by the public was seventy-seven percent of GDP. It's now close to one hundred. And present value of entitlements is still growing and sixty-five trillion. So, but during the pandemic, I do feel strongly we've got to do what we need to, to fight the pandemic. But as we begin to weather it and move beyond it, our attention is going to have to turn to moderating this debt growth. That's going to include things like entitlement reform, and other disciplines, but also means finding ways to grow the workforce and improve productivity to grow faster. That's going to be the challenge of our time, as we move out of this pandemic.

KEENE: Well, you mentioned potential GDP of under two percent, which is not a shock. I think of Michael Feroli, among others at JP Morgan, framing that out a number of years ago. So much of that comes down to one of the cottage industries of your Federal Reserve System, which is immigration policy. Color for us what your research department has learned on immigration, and particularly the value of immigration to spur consumption, and nominal GDP.

KAPLAN: So, our research here as you said, we do a lot of it, we have a whole team, that's all they do here at the Dallas Fed. What they found is number one, half of the workforce growth in the last twenty years of the United States is immigrants and their children. Their research, our research, also indicates that immigrants are not depressing wages for low-income workers. And they're not taking jobs of citizens here, even though there are comments to the contrary. Having said that, we've also said that of immigration systems in the world, we'd be lot better off in the United States, if we looked at what Canada is doing, a more skills-based employer-based immigration system and change our criteria and the way we think about immigration, and that would help us grow faster.


Is that going to be fixed at the state level? Or would you suggest we can see a revolution in a smaller government—Washington that we've seen for many, many decades? You and I don't want to talk about the president politics. We'll both be put in the Council on Foreign Relations timeout chair. But seriously, what is at point here that is so, so important, is almost a Lockian, a Reaganesque Washington. It says we don't want to participate. We want smaller government. How do you meet the Kaplan prescription if you want smaller government?

KAPLAN: Well, the good news about immigration reform, which does have to get done at the federal level, a lot of the education skills training can be done locally. This has to get done at the federal level. And it doesn't cost. It's not an expenditure. It's a structural reform. It doesn't, it doesn't cost. It's not an outlay, but faster workforce growth, and more of a magnet for talent throughout this country, which is one of the distinctive qualities. So, we've studied the United States over the last fifty to seventy-five years and what we found is one of the distinctive reasons the U.S. has grown is we're a magnet for talent. My grandparents weren't born here. People come here, they become U.S. citizens, and they contribute and they help us grow faster. It's what makes us different from Germany and from Japan, and other countries that don't have a receptivity to immigrants. It's helped us outperform.

KEENE: Well, then I want to address here and again, I want to stay out of the immediate politics, but I know in the Wall Street Journal and the Washington Post, just in the last seventy-two hours, we've had magnificent detailed articles about the Rio Grande Valley. You mentioned El Paso earlier with huge challenges. And they paint the picture there, as you mentioned, of unskilled, a lesser wage and the shocks of a challenging immigration. Take what the Dallas Fed has learned along the border about living in real time, wall, no wall, what you have learned about, about how to move immigration to a better place. How do we do that?

KAPLAN: So, it is a fair assessment that immigration over the last twenty years and for example, Texas and the Rio Grande Valley has been to some of that lower income, lower educational attainment workers, not as much focus for unfortunately on skills. Now the state, and we have a challenge on how to educate those workers, improve the educational attainment of their children, so that their children and they also can be more productive citizens. What we've also learned is, the greater the educational attainment, the more you ultimately, even from a tax point of view, contribute to society through making wages and paying taxes and supporting the costs that are associated with people being here.


I really want to say, we're going to go to questions here, folks, in about eight minutes and we're going to do that. For those of you that know the wonderful CFR room here in New York, Mr. Kaplan, we've got about four times that size today. It's like it's packed in and they're out in the hallways. Some are standing out on Park Avenue right now—virtually. Let me wrap up then with the position of the Fed. Now we have right now the vetting of the Secretary of Treasury. And I don't want you to comment on the governor of the Fed being considered and I know, Chair Yellen’s name has popped around the last couple days as well. I want you to link here the monetary question of the moment with our fiscal policy. You and I remember when Alan Greenspan would not speak about fiscal, he would not speak about the dollar. And now you guys every single day, conflate all this together. When does that end? When do we go back to the partition that you and I knew from another time in place?

KAPLAN: Well, so let me talk about what's conflated and what shouldn't be conflated. The 13(3) programs, the so called, you know, the programs that help restore market function, the PPP, main street, we work in coordination with the Treasury. And then they make decisions about how much losses we're willing to accept. And we coordinate and all of us in the system, including me, work on administering those programs the part that probably shouldn't be conflated. I think my job is to call out what part of what issues require monetary policy, and which like unemployment benefits are fiscal policy. I need to stop short and be careful to stop short of saying you should therefore do X, Y, or Z on the fiscal side to Congress and to the administration. I can have private conversations, but publicly, I need to call out our analysis, but stay in our lane about what we have responsibility for making decisions on.

KEENE: In your lane and I must speak of currency, peso 2021 to the dollar, etc. And there's a major currency dynamics as well. I am thunderstruck by an ahistorical media that doesn't know the Plaza Hotel from the Louvre Museum. And if we go back to the eighties, we had an excessively strong U.S. dollar, there's worry now about a strong dollar from selected parties. We've seen some recent dollar weakness. Does Robert Kaplan care about dollar strength in trade? Or is that a grossly overblown issue?

KAPLAN: No, it's not an overblown issue and I watch it very carefully. And you mentioned the peso. That's a great example of what can happen if you have currency volatility. It's been very challenging for the Central Bank of Mexico that we're very close to and have spent a lot of time with, in managing this currency volatility. And oh, by the way, it's made it harder for them to attract foreign investment. And their interest rates are much higher than ours, even though they're going to contract by about nine-percent GDP this year. So yeah, I've always got to be cognizant of currencies. I don't, we don't target them. I don't target them in our policies. But I'm very cognizant of the implications of our policies for currency.

KEENE: William Klein at the Peterson Institute was really quite good about compensating currency pairs. About it's not just about dollar/euro, dollar/yen, etc. It is a soup, if you will, a Texas chili stew, of thirty currencies, etc. Tell us how China redounds in to peso/dollar dynamics. Tell us how the China dynamic plays within your district.

KAPLAN: So, the only comment I'll make on that is this one, it's very hard to predict what currencies are going to do, but I would say they ultimately, we found in our work here, follow strength of the economy. So, China, for example, is rebounding at a pretty high rate and they've got, at least appear to have a much better grip on the virus. And ultimately, if there's divergence in performance of economies, you'll see it ultimately show up in the currency.

KEENE: I have been rude. I've already got a message in here. David from Brooklyn emails in and says: How can you talk to the Dallas Fed and not talk about oil? So, my final cup of questions here of course have to be on hydrocarbons. The state of Midland, Texas and that's the stereotype, the state of oil within your district serve.

KAPLAN: So, U.S. production will decline this year. From about twelve-point-eight million barrels a day back in January, will end the year about ten and a half, ten and three quarters of a million barrels a day. Big decline. That the Permian Basin, Midland, Texas is proportional to that decline. So, what's going on? Lots of bankruptcies, restructurings. The industries had a supply shock and a demand shock, both capital starved CapEx will be down dramatically this year. Having said that, what you're going to see coming out of this is a more consolidated, that's why you're seeing a lot of merger activity. Scale is more important. Companies will be bigger, they'll be more consolidated, they'll be able to operate with lower costs. That's why they're getting more scale. And they're going to also incorporate in environmental considerations: sequestration and other techniques to produce in a way that emits less greenhouse gas emissions. And that's expensive. So, the industry will be alive and well, but it will be a fewer players. They will be bigger and this industry will be around the next few decades, but will be increasingly smaller percentage of global energy consumption, but it will still be vital as a part of the puzzle. Even as alternatives, wind and solar grow dramatically.

KEENE: I hate to say this, folks, but this is a Kaplan wheelhouse, so we're going to go with this. My colleague, Lisa Abramowicz, sees my emails and says please, please, please ask about the high-yield exposure of those energy companies within the Dallas Fed. I mean, have we cleared out the challenges of high-yield financialization or not?

KAPLAN: I'd say that bomb has already gone off, so to speak. Meaning you've seen lots of failures, restructurings, bankruptcy. You went into this or, or even now if you're leveraged, it's very, very challenging. There's some examples of companies that are working through that. But it's a tough industry to be leveraged, and most CEOs in it have learned that lesson.

KEENE: Okay, I'm going to ask you about the Exxon dividend, but you'll hang up on me, so we're not going there. Robert Kaplan, of course, the Council on Foreign Relations. And Carrie, I think it's time for questions and answers. Again, let's have pointed questions to Mr. Kaplan, so we can get in as many people as you can. I'm thrilled, I should say, looking on my screen, at the turnout. Thank you so much for staying with us through these comments. Carrie.

STAFF: (Gives queuing instructions.) We will take our first question from William Tovell.

Q: Hi, it's Bill Tovell from JPMorgan. Thank you for the time, I'll be quick. So, you look at cities like Nashville that have done a great job of attracting new businesses. Dallas has done the same, obviously with my own company. What do you see as the pitch? I mean, Tom made the reference to the Tribeca apartment and that's meaningful, but as leaders in Dallas specifically are talking to businesses, you know, is it beyond just the tax rate? What are the key points?

KAPLAN: It's on the one hand that I'm going to give a caveat: central location, very pro-business attitude, very welcoming, and yes, no state personal income tax, and no state corporate income tax. And so that's on the positive side. And it's good for Texas. On the other hand, it does make me worry about all the cities and states around the country, where they're trying to keep population. They've got a fiscal hole from earlier in the year and it means while they're thinking about how to get the revenues to balance the budget. It's hard for them to raise taxes because they're going to lose more businesses and leaders. And it's a real challenge throughout the country. And while this migration is good for Texas, I think Texas will be much better off if the country does well. And I'm worried about this challenge in the country.

STAFF: We'll take our next question from Paul Sheard.

Q: Thank you very much. Paul Sheard from Harvard Kennedy School. Thank you, President Kaplan. Could you say a word about the Fed's thinking about and work on central bank digital currencies, stable coins? A lot of interest in this topic, a lot of central bank's doing work. Where does the Fed stand on this in this area?

KAPLAN: I think it's critical and likely not optional. That it's something we're going to have to do a lot of work on and develop views on and it is something you shouldn't, you won't be, surprised to see the Fed working on. And I think it's something we need to be working on and coming to a point of view on in the months and years ahead. I think it's part of life. And it's, it's something we need to be proactive about looking at.

STAFF: We'll take our next question from David Bartsch. Mr. Bartsch, if you could please accept the unmute now button.

Moving on, we'll take our next question from Tom Glocer.

KAPLAN: Hey, Tom. Good to talk to you, if only virtually.

Q: Hey, Rob. So, my affiliation is neighbor of the great Robert Kaplan. I wonder if you would comment on your view of the soundness of bank balance sheets, both (inaudible) and regional, and whether you'd expect that next year we could see a lifting on the Fed restrictions on buybacks and dividends.

KAPLAN: The striking thing through this pandemic, unlike the great great recession, is the banks by and large, not perfect, but have come through this pretty well. And I think it's due to going into a tough capital requirements, strong stress-testing and as you just mentioned, there's also been restrictions and limits on dividends and share buybacks. I'm more worried about the non-bank financial sector, by the way, but I can come back to that. I would say as long as we're in the teeth of this pandemic, which may well be for a good part of the first half of twenty-one, and maybe even through twenty-one, I think, my own view will be, we should be very careful about relaxing restrictions until we're confident we've worked our way through this. But we will work our way through this. At some point by the, sometime in the end of twenty-one. I'm hopeful into twenty-two. And I'm sure it'll be a time where what you asked about is appropriate.

STAFF: We'll take our next question from Vincent Reinhart.

Q: Vincent Reinhart from Mellon. Same here. Thank you for doing this. You dissented in September in a way that makes it sound like you were uncomfortable with the outcome-based interest rate guidance. Will you be similarly uncomfortable if your committee moves toward pulling the asset purchase decision towards something outcome based?

KAPLAN: Yeah, so it wasn't that I was against outcome-based guidance in September, it was the outcome that the guidance was based on. So, what do I mean by that: as long as we're fighting this pandemic, and we have not yet quote unquote, “weathered the pandemic,” and we're not on track to reach full employment and price stability, I support keeping the Fed funds rate where it is. And by the way, that could last into, well into, middle late 2022 or into 2023. My concern is what we do and commit to after we've weathered the pandemic. And what we said in September was, we will keep the current setting where it is, until not only have we reached full employment, but inflation needs to get to, two percent and we need to be on track to run moderately above two percent. And my concern is, as you approach full employment, the neutral rate continues, drifts up. If you keep rates at zero, you get more and more and more accommodative. So, as you approach three and a half percent, you're literally keeping rates at zero. I'm very supportive given our new framework of remaining accommodative or even highly accommodative, but I don't know that I would want to commit future committees to keeping rates at zero, as we approach full employment. That was my issue. On asset purchases, my own view is that we should have, we should at some point, have an outcome-based or state-based criteria for when we begin to taper, but I think it should be based on having made substantial progress or having weathered the pandemic something short of or less than the September guidance.

KEENE: I want to step in here, Carrie, if I could, because I think it's so important. Of course, Mr. Reinhart is too modest to say that, Rob Kaplan, he had my essay of the summer. Carmen Reinhart and Vincent Reinhart in Foreign Affairs magazine had a spectacular essay wrapped around the concept of pandemic depression. Now whether we get a depression or not, and it was extremely structurally not gloomy, but just a dampening essay on our spirit and economy. Do you suggest as we come out of this pandemic, and as we struggled to get to a better growth, a good growth, that we can do it with organized, smooth glide pass? Or can we see some of the cacophony that Reinhart and Reinhart alluded to in their essay?

KAPLAN: I think we're going to have a big challenge coming out of this pandemic, and again, I'm talking as we get through end of twenty-two, and twenty-three, and we feel like we've “weathered it,” and we're starting to approach full employment. The big issue we have is we structurally got slow workforce growth. And we've got a lot of the groups, at-risk groups, that have suffered in this pandemic. We're going to have to do more to help them reenter the workforce and get their jobs back. That's going to take a lot more than just monetary policy being accommodative. It's going to take fiscal targeted fiscal reforms, but structural reforms that help improve our ability to grow faster and then it's going to take all those things.

KEENE: Carrie, more questions, please.

STAFF: We'll take our next question from Linda Griego.

Q: It's a very, very excellent presentation. I have a question about small business. I'd like to hear if you think there's going to be a spike in bankruptcies after the first of the year?

KAPLAN: I, the short answer is without more relief, and with a greater resurgence, I think I think that's likely. And that I talk to small businesses, I talk to CEOs everyday, but I talk to small businesses in size every day and they're hanging on, particularly if they're in a person-to-person contact business. And the danger is, if you get greater resurgence, and unfortunate, I hope this doesn't happen. If the research and stop short of overwhelming the healthcare system, I think many of them can make it through. If it gets so far that it overwhelms the healthcare system, more small business will fail. And so, this is why I do think another round of PPP and other measures to help small business bridge this period, may well be appropriate.

STAFF: We'll take our next question from Joseph Bower. And as a reminder to members, please click the raise hand icon to ask a question.

KAPLAN: Professor Bower, good to see you, sir.

Q: Good to see you, Professor Kaplan. We miss you at Harvard Business School and the Kennedy. Going to your, back to your, sort of analysis of the strength of Texas. If you look at county maps of the United States, which I suspect you've done more than not, regions that have lower income, more long-term unemployed, more disability, more opioid deaths, more prime age men living at home. What can we do in those areas since the states that are home for those counties also have economic problems?

KAPLAN: Well, so you're getting to the, probably the rural area and smaller metropolitan areas. And then the larger trend, pre-pandemic, has been people moving to bigger cities, and a lot of these smaller areas, which I spent a lot of time with, losing population, losing their young people. Some of that trend, by the way, might be moderating, because you can work remotely and maybe there'll be greater prospect of working remotely, But, to your point, it's for those towns that are losing vibrancy, and they've got these challenges. We've spent a lot of time trying to brainstorm with them, whether it's incubators, innovation centers, things that attract businesses, build their local universities and make it more of a magnet for companies so they can attract people but get people there where they've got jobs and upward mobility. These are very big challenges and not easy solutions. But we spent a lot of time on that here and talking to leaders all through the state.

KEENE: Robert Kaplan. This is so important a question and let's keep it on a Harvard theme here. The giant, I was a huge, one of my heroes, Mr. McCraw of Harvard Business School, and I think of prophet of innovation, his wonderful one-volume on Schumpeter that's great, but we're going to have creative destruction. What do you see as our creative destruction? Is it nothing more? Look at the maps of Georgia I've seen in the last three days. Is it nothing more than the urbanization of America?

KAPLAN: Well, the creative—that's part of it, but the urban, the creative destruction that we more see more likely is technology and technology enabled disruption. And so, there's, and one of the negatives of that is size and scale for companies will matter more, because it's expensive to invest in technology and disruption. It will limit pricing power that's on the one hand, on the other hand, you can remotely more remotely innovate and start new companies. So as Joe Bower knows, we got an incubator at Harvard Business School we created. And a lot of those businesses doesn't really matter where they're domiciled. They're technology and technology enabled. And so, I think there's promise in that for a lot of these smaller cities, rural areas, particularly when you can work remotely. I don't know if we can realize that promise, but I think it's an opportunity.

KEENE: And Paul Krugman has spoken of this, I know, and I would really give high marks to Catherine Mann at Citi Group, and of course, OECD and Brandeis as well, on this dangerous word monopsony. Are we developing through technology, a national monopsonistic tendency that leads to consolidation, but far more true power for corporate America?

KAPLAN: So, I'll say this, we are seeing, it's unusual to talk to a CEO where they don't talk to you about size and scale and needing to get more of it. And so yeah, and they're very aware that they're not able to have the pricing power they did, because they're competing with platform companies or technology enabled disruptors. So, I think I'll stay away from the policy implications because we're another side of the government. But we are seeing that size and scale matters more and more. And you're seeing this since there's a lot of new business creation going on during this pandemic. But we're seeing up until here, the vibrancy indicators have been more challenged and size and scale matters more than it did a year ago. And more than that it did two years ago.

KEENE: Carrie.

STAFF: We'll take our next question from Mercedes Fitchett.

Q: Good afternoon. Can you hear me? Okay?

KAPLAN: Yup. Sounds great.

Q: Thank you, both of you. Excellent discussion. I wanted to turn us to the concept of universal basic income. Here in this country, we know that there's a very limited safety cushion for a large portion of the population. They're three-hundred dollars away from a financial emergency. Mr. Kaplan, could you speak to what kind of thought you've given to this, and especially with regards to the South Korea pilot that's taking place in one of their provinces? Thank you.

KAPLAN: So on this one, I'll give you my own, I'll give you my opinion, because we have thought a lot about this here at the Dallas Fed. I actually probably would not be supportive. I'm supportive of a robust social safety net when someone loses their job and unemployment benefits. But what we found is, even as technology and technology enabled disruption accelerates, as that was going on pre-pandemic, businesses couldn't find workers to hire. There were plenty of jobs, we didn't have a problem with jobs, we had a structural problem, that maybe we need to beef up training, and improve our education system to make sure workers were ready to do those jobs, or could it be more adaptable. But I think in the economy ahead, there'll be plenty of jobs, I'm convinced of that. The issue will be, we've got to redo our education system, and really beef up our skills training, and make the workforce more adaptable, and understand that during your career, you may have to change more jobs more often than we did and get retrained more often. We can do this. But I think that's the answer. Improving the education ecosystem. I don't think the answer is universal income unless it's for safety-net purposes when you lose your job. But that's my opinion. That's one person's opinion.

STAFF: We'll take our next question from Ronald Temple.

Q: Hi, it's Ronald temple with Lazard Asset Management. Thanks for doing the call. How are you and other fed researchers approaching assessing the risk posed by remote work and what we're seeing in cities in terms of people being able to move out of the cities as it relates to commercial real estate owners and the lenders who have funded the commercial real estate? It's always been a kind of volatile part of the lending market during downturns, but this one, just like, it could be drawn out.

KAPLAN: It could be and we don't know how much of this trend is transitory and how much of it is going to stick. And again, there's some ironies here, pre-pandemic, my bigger worry was small, smaller metropolitan areas and rural areas were losing populations and towns were losing vibrancy, because there was such a magnet to these large metropolitan areas: New York, San Francisco, Dallas, Houston, etc. Now, that is, that's more in question because people can work remotely. But one of the negatives of this, and this is part of capitalism, we're going to have to see how far this trend goes. And what's the impact on commercial real estate? And what's the impact on certain cities that have a lot of it? And the truth is, I don't know the answer, how it's going to work out. I know, I've heard all sorts of answers from companies, those that think they need more space, those that think they need a different type of space, you know, logistics distribution centers, and those that are just going to cut down on the number of space. So yeah, there'll be some, like, this will be capitalism at work. And we'll have to see how it unfolds.

STAFF: We'll take our next question from Alexis Crow.

Q: Thank you, President Kaplan. Alexis Crow from PricewaterhouseCoopers and Columbia Business School. Just a question. I'm quite in agreement with you on the vocational training and the skills revolution that needs to happen. Who's going to pay for this ideally, in the United States? Will this fall on some corporations in this sort of German vocational model? But ideally, where will that funding come from?

KAPLAN: I think a lot of it will come from companies. And by the way, every CEO I talked to, they're big enough to do the training themselves. But most companies are happy to pay for it, but they don't have enough scale to do it. And they combine with other businesses in the community. And they go to the junior colleges, and they do it. But I think this is one of those programs where a lot of the money can come from businesses, particularly local businesses. The challenge of this, it has been, this has got to be done again locally, as opposed to just make waving a wand and doing it nationally because worker mobility is challenged. And so, it means your local junior college becomes a critical player. Your workforce development forward, your local high schools and your local junior colleges need to partner and it means the new age, junior college president doesn't just push a curriculum, the good ones, and there are a lot of them in this country, are going out and interviewing businesses, backward integrating, getting the businesses not only to pay for it, but to supply the faculty, automotive technicians, IT specialists, registered nurses you name it, it's going on. It's just not going on fast enough to help workers adapt as fast as they need to adapt.

STAFF: We'll take our next question from Grace. If you could please state your last name and affiliation before proceeding with your question.

Q: Thank you. This is a great conversation. So, my question is, now that we have a very potent vaccine for potentially quarter two of next year, how do you think about the trajectory of monetary policy, specifically in terms of the level of quantitative easing, in light of this new development? Thank you.

KAPLAN: So, we had in most of our work here at the Dallas Fed, assumed that there would be a vaccine or other events, therapeutics, such that the level of mobility and engagement would dramatically improve as we went through 2021. And so that obviously is happening. And we're very hopeful. News yesterday and more news. Having said that, we're still in the teeth of the pandemic. So, I've been careful in my public comments, not to turn beyond that quite yet, because I think we're going to be in the teeth of it, the fourth quarter, at least the first quarter, and they'll still be social distancing and all the protocols through a good part of 2021, because it's going to take a while for the vaccine to be widely disseminated. My own view on starting to think about tapering is I don't want to. I want to see that begin at some point, but I don't want to see it begin until we're confident. We were weathering this pandemic and have visibility on moving beyond it. I don't know exactly when that's going to be and I'm going to be even careful about prejudging it. It's going to happen though I'm confident about that. But I don't want to prejudge exactly when that will be.

STAFF: We'll take our next question from David Chatzky.

Q: Hi Dr. Kaplan. Is there a playbook that economically underdeveloped regions in this country can follow to cultivate major economic development, the clustering of new businesses and new industries? Do we know how to do that? Or is that a black art that we don't really know how to do?

KAPLAN: I don't know if we know how to do it. I think there are examples. And several examples that we've looked at through the country, here in Texas, about cities that have managed to be magnets for new business, have been innovation centers, have made it easier for small businesses. But this is, to your points, an interesting point, I have been struck. There's not an easy playbook for a mayor, or Chamber of Commerce, in a lot of these cities. And, so I think, listen, I think that there are more when there are more centers of excellence and examples. I think doing more of this is probably a key role for academia where I used to be. Doing more case studies on what's worked and sharing that will probably be very beneficial.

KEENE: Robert Kaplan, I wonder, Carrie, if I could jump in here, because I think this is so important, and to the great loss this year of Bernard Balan, one of our historians and truly one of my heroes. And to the wonderful question, Rob, it goes back to the peopling of North America. And we're really having a struggle with this right now. And I would suggest the only solution to this is a digital structure, a more modern digital, LinkedIn internet. Why are we so behind?

KAPLAN: Well, so we're ahead in many ways. The part that's been behind, is up until recently, is our education system I would argue. Listen, it's hard to think of an industry in this country that hasn't been restructured and you can't even recognize it today versus what it was ten years ago. Education system isn't one of those, although it's getting there. But it's been slower. And I would argue a lot of the things that we're seeing are going to require greater emphasis on early childhood literacy, educational attainment, but we've made pretty good strides. One of the, there's been a lot of negatives from the pandemic. One of the positives: every university in the country, the President will tell you, you know, their faculty were resistant, resistant, resistant and then sometime in the spring, they just did it. They made the leap to digital learning and remote learning, where they didn't have a choice. And now they realize I can do this. And it's a high percentage of universities, their faculty are now doing it. And they've learned, but we've got to do more to make skills training more accessible, use digital assets to help our workforce become more adaptable. And obviously, it's already happening. It's easier to do remote work. And I think every CEO and I'm, I'm here at the Dallas Fed with 1300 people thinking very differently about being more open to remote working. So, it's happening, but just not fast enough.

KEENE: Carrie, one more question and then I've got a final question.

STAFF: Mr. Keene we actually have no remaining questions?

KEENE: Oh, that's good. Well we're on time. I want to talk, Robert Kaplan, about Tyler Atkinson and Alex Richter publishing today at the Dallas Fed on this pandemic. I'm going to get the fancy title up here. It's got lots of syllables: Pandemic Disproportionately Affects Women, Minority Labor Force Participation. This wonderful article, folks, I can't say enough, again about all of the Federal Reserve systems, access to intelligence. Presence of children in the home alters labor behavior. On behalf of the hundred and eighth mayor of New York, I believe I can state for Mr. Bloomberg, this is a real issue for CEOs. What is the Kaplan and Dallas Fed research from Richter and others? What is your prescription to get us into 1980 and European childcare?

KAPLAN: So, I'll just call out: Karel Mertens, Alex Richter, Tyler Atkinson. We've spent, they've been at the forefront. We spent an enormous amount of time in the last six months and it's been striking. We've noticed that women have disproportionately left the workforce. Women with a high school education or less, particularly if they have children, have disproportionately left the workforce. It's a big deal. Why is it a big deal? Leading up to the pandemic, one of the reasons we were able to improve our workforce in this country and grow faster was women were disproportionately reentering the workforce, particularly if they had high school education and they had children. So, what's happened? One of them is not good availability of daycare. A lot of daycare centers have not been able to function for obvious reasons because of COVID. Kids having to be at home and we're very concerned about this. And we're regularly calling it out because we're trying to get community leaders here and around the country starting to take steps now, not wait, now, to realize we've got to get these women back into the work. So, what's an example? Let's beef up, including if it means to non-profit support, let's beef up a daycare in, in this state and in the country, to help aid those women to get back in the workforce. It's going to be critical. It's not a nice thing to do. It's in all our interests, because we're going to grow faster, and we're going to be more prosperous if we do it.

KEENE: Well, the way we end this, folks, is I say to Mr. Kaplan, I know you've got to go, have fun driving to LaGuardia. Other than that, Carrie, how do we end this?

STAFF: That's it. Members are now welcome to disconnect from the virtual meeting.

KEENE: Thank you, everyone.

KAPLAN: Thank you. Thanks, Tom. And thank you, everyone.


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