Not many people say their goal in life is to be boring. But that’s the case for John Williams, the president of the Federal Reserve Bank of San Francisco, who is charged with overseeing the financial health of everything West of the Rockies.
Things in the economy have been far too exciting in the last decade, says Williams. And while he says the economy is generally on a strong track today, there are areas he’s watching closely — including the effect of government policies proposed by the Trump administration.
While many have emphasized the potential boost to growth from tax cuts and other measures the administration has discussed, Williams says other measures could pose a potential risk to growth, like trade restrictions or cuts to Medicaid.
This interview has been edited for length and clarity.
President Trump’s budget proposal released last week proposed pretty dramatic cuts to programs that help the poor, including Medicaid. What would that mean for the U.S. economy?
First, I don’t know what will happen in fiscal policy. There are a lot of proposals, but what really matters is what Congress enacts and the president signs. Second, some of these proposals would boost growth in the short run— like more spending on defense. But other changes that have been talked about, including trade restrictions, would have a negative effect in the short run.
Significant cuts in Medicaid or other programs affect money in people’s pockets that gets spent pretty much dollar for dollar. So cutbacks in spending that go to lower-income people have the biggest effect on the short-run of the economy. It’s different for tax cuts, especially for wealthier people, because a lot of that money is saved rather than spent. It doesn’t make it right or wrong, I’m just saying in the short run that doesn’t boost the economy as much.
A lot of people were expecting that tax cuts and less regulation would boost the economy, but if you match it with spending cuts, in the short run the effect could actually be negative. It depends on how the mix works. And that’s why it matters what happens, not just what people are talking about.
In my view the economy is in a good place and we really shouldn’t be focused on boosting it in the short run. We should be focused on long run growth and prosperity. That means promoting investments in research, the sciences and education. What worries me is that we are underinvesting in a lot of these areas.
One of the main measures the administration has talked about to boost growth is cutting the corporate tax rate and encouraging companies to repatriate more earnings. Would that increase investment?
I do believe our corporate tax system is far out of date. This whole repatriation issue is because our corporate tax system is not well designed for the modern world. But one should be suitably humble that this should have a huge effect on investment. Research has shown that just lowering the tax rates or having a repatriation holiday is probably not going to have a big effect.
Most businesses are not paying that very high rate, and there are a lot of things that go into corporate investment decisions besides taxes. Companies are sitting on a lot of cash, so they’ve already chosen how much investment to do. We know from the past that if you allow companies to repatriate profits at a very low tax rate, they’re likely to hand it out in dividends and stock repurchases. There’s nothing wrong with that, but it doesn’t change incentives for businesses to invest in a new building or factory, for example.
The budget assumes growth of 3 percent, something others have criticized and that the administration has vigorously defended. Is that kind of growth achievable?
It is twice as high as my estimate of trend growth, which is 1.5 percent.
If you go back to history, you can look at when we had 3 percent GDP growth over an extended period of time. One period was the 1980s, when a surge of people were entering the labor force, the Baby Boomer generation and women. That pushed the potential growth rate of the economy up. I don’t think we’re going to repeat that.
Then there were two periods when we had productivity surges that allowed the economy to grow 3 percent. One was the post-war period up to the early 70s. The second was 1995 to 2004, where we had a huge tech boom and the growth of the internet. Our best research shows that there is not another surge of productivity on the horizon, and labor force growth is slower, so it’s hard to see how you’re going to get really rapid growth for a 10-year period.
A better tax system and more investment in infrastructure and education could boost our trend lines by a few tenths, but they’re not going to fundamentally double the trend growth of the economy. Unless of course, around the corner a new technology fundamentally changes the economy. Right now, a lot of the innovation is in consumer goods – our phones, YouTube. They’re cool, we love them, but they’re not fundamentally changing the productivity of businesses.
The last thing I would mention is that we’re seeing a slowdown in productivity across Europe, North America and Japan, and demographic waves are affecting all these countries. If anything the U.S. growing a little faster. So there are fundamental forces that are basically affecting us all.
How would you describe the U.S. economy now? Where are we with regard to full employment?
I think we’ve now reached, maybe even exceeded, full employment. Many indicators have improved dramatically in the last several years. The unemployment rate was 4.4 percent in April, well below most estimates of a normal rate. A Conference Board survey of whether people find it hard or easy to find a job is also at a very high level, consistent with a strong economy.
Two measures are still a little elevated. One is people who are working part-time but want full-time work. That’s come down a lot, and there is some debate about whether there has been a structural change in the economy over the last few decades, where more people are working part-time because they are moving into the service sector, where that is more common.
The other is wage growth, which is still in this 2.5-2.75 percent annual growth range. I don’t find that surprising, because inflation and productivity growth have been low, so real wages have actually been growing consistent with a good economy. I would expect that wage growth picks up more in the next year or two, with unemployment now below normal levels.
When I write about the monthly jobs numbers, one complaint I often hear is that a lot of jobs are being created but they aren’t very good ones. Do you agree with that?
Research shows that most of the new jobs that are being created are in the service sector. That’s not surprising, because the U.S. economy is now primarily a service-sector economy. But within those sectors, the mix of jobs is basically consistent with what we’ve seen in the past. There’s no shift to lower-quality jobs. I’ve been around long enough, I’ve heard this story that there aren’t good jobs for decades. It used to be hamburger flippers, now it’s baristas. Every generation has its version.
There are high quality jobs out there, but a lot of them are in areas like healthcare that require high levels of education or training. To me, it’s more an issue of supply than demand. In areas where the economy is doing well, there is a lot of demand for skilled workers, but a lot of people need more education.
Could some of these perceptions be due to regional variations? When you say the United States is a full employment economy, are there some parts that look more like that than others?
Yes, and that’s always true. Anytime the unemployment rate is below 5 percent, some areas will still be struggling. Much of small town America has seen job loss and population loss, from people moving to urban areas. Certain sectors for decades have been losing jobs, like manufacturing or resource-dominant industries. Sometimes that’s because a sector has become more efficient, like manufacturing, so that it can produce more with fewer workers.
But the economists who have looked at whether these changes are more extreme today than 25 years ago generally find they’re not. Twenty-five years ago you would have heard a different story about which parts of the economy were struggling.
This might be kind of a funny question, but I’m extremely interested in the Fed —
What’s wrong with that? That’s a sign of a healthy intellect.
— but someone to me the other day was like, the Fed is so boring, it’s basically plumbing, making sure the water is still running. What do you think about that?
It’s actually a great question. Mervyn King of the Bank of England quipped that central banking should be boring. The point was, if the economy is doing well, if the financial system is working well, if the hot water and the cold water turn on, that’s success. My goal is to make this as boring as possible. It’s been too exciting the last ten years.
But we earn our pay also when we deal with when things don’t work well. The events that led up to the financial crisis and the housing bubble were areas that central banking is involved in. Clearly, it’s a lesson that not having the plumbing working can be devastating, affecting millions and millions of people and trillions of dollars.
On the flip side, once the recession hit, monetary policy is often the only game in town. There was fiscal stimulus, but I would say from 2009 to today, the stimulus that central banks around the world have provided has been hugely important in getting businesses and households to spend rather than save. Compare what’s happened in the great recession to other periods in history, when the economy would have 20-25 percent employment and get stuck in a long depression.
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