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Transcript: Audience Q&A With St. Louis Fed President James Bullard; Official discusses living standards, rural-urban migration, inflation, housing, other topics Last Modified: 02:47 PM, Mon Apr 16, 2018 WSJ Pro Central Banking. 16 April 2018 Economy Word Count: 4308 James B. Bullard, president of the Federal Reserve Bank of St. Louis, took audience questions Friday, April 13, 2018, after a presentation in St. Louis. Here is a transcript of the exchange, edited for length and clarity. Q: So I know this is a one-year kind of a study, but do you speculate—do you feel that there's like a—like a business cycle, there's a standard wage cycle? And if you think there might be, do you think we're on the uptick or the downtick? MR. BULLARD: In the growth literature it's not thought of as being very cyclical. So these are—it's more about identifying long-run trends. And the very long-run trend internationally is up. Just to put a finer point on it, the—a country for which we have data is the U.K. Over the last 200 years the standard of living in the U. K.—we're talking about for the average person—increased by a factor of 22. So what is that? That's the industrial revolution and everything that's happened over the last 200 years. Most people would say, I think internationally, that is continuing, will continue in the next hundred years as technology diffuses, capitalism diffuses across the world. China and India are now growing—for a long time were very stagnant and very poor, but now growing. Other countries are joining in that haven't joined in. So I think it's an upward trend internationally. Is it an upward trend across the country or has it stagnated? Some of the literature kind of suggests that maybe it is stagnating or splitting. So I think that's an important issue. But I can't get at it with these data. And what was the second part, sorry? Q: How are you doing in St. Louis? MR. BULLARD: Oh, I'm not—yeah. Well, again, that's more about growth. So I would say this is a slow-growing— right now—a slow-growing region with a high standard of living. You might—I think, you know, in the last decade probably somewhere like Las Vegas is a fast-growing type of place. But Las Vegas doesn't show up very much in this —in this kind of calculation. So, you know, growth is a different issue, I think, than the standard of living. Q: Speaking about the most recent tax law and the implications of the limits on local tax deductions and mortgage interest deductions, how do you see that affecting large (metropolitan statistical areas), especially the coastal and high-tech cities ? MR. BULLARD: You know, I haven't seen a complete briefing on that, but my basic understanding is that that's a more complicated issue than people appreciate because there's—the different states have different tax codes, and then the different locations—you know, the cities might also have elements in there. So it's hard to make real general statements about, you know, it's going to affect, you know, certain people. One other aspect of that is that you're talking about itemizers. The itemizers are the top end of the income distribution. So, you know, for—in the tax reform, they increased the personal deduction. They basically doubled the personal deduction. So there's supposed to be less itemizers in the future. So this should have less effect than it otherwise would have had. And that effect should land mostly on very high-income earners relative to the rest of the country. So I think those are the things that you can say. But the extent to which that's affecting one city versus the other would be a very difficult calculation, I think. Q: You talked—you talked about Chicago, Nashville. And I think MSAs compete regionally. What about Kansas City, Indianapolis, other regional areas? MR. BULLARD: A great point. So this makes it seem like you'd want to be in a low-cost area. But low cost doesn't do it all by itself. So Oklahoma City was not on here, Memphis was not on here, Kansas City not on here. They're probably all similar cost to St. Louis or lower cost. It's a combination of being a low-cost place, plus having lots of good jobs within that low-cost place. And then you put those two together, that's how you get the high standard of living . So, you know, some places are low cost, but just don't have enough job base to drive the high standard of living. I think the complete list—if you want to look at the complete list, it is on the webpage. And you should be able to click and see where everybody comes out on this. You know, one of the slides I also—that I took out is one thing you might thing about is, like, what is the kind of range across all these MSAs? So if you went to the 95th percentile, and then you looked at the fifth percentile, how much difference is there between those guys? And the answer to that is about 35 or 40 percent. So the standard of living range across these—the whole country, you know, on the order of 30 or 40 percent. If you look across countries, the range is much, much wider. It's like a factor—at least a factor of two across [Organization for Economic Cooperation and Development] nations. And it's a factor as high—it's controversial—but it's a factor as high as 30 across all countries in the world. So there's a big difference between the U.S. and India. So we're not talking about that kind of huge amount of difference. But we are talking about a 30 or 40 percent difference in lifestyle and standard of living across these different — (inaudible). Q: So one thing we've been watching is the hollowing out of rural America. A lot of young people are moving to urban areas, but also moving from Midwest to the coasts. What does that—where do you see trending and how that would affect your data in the long term as younger people are not wanting to stay rural, they're moving to urban, and then cities along the coast are growing faster than cities in the—in the heartland? MR. BULLARD: Yeah, I think the rural-urban migration, that's been 100-year phenomenon. And if I understand agricultural technology, it's going to continue. So you're really getting bigger and bigger farms. What I used to think of as an astoundingly large farm is now considered kind of normal or average today. And the technology to, you know, have the tractor just do all the things—you know, program it up and do the whole thing—is just astounding. So there's so much going on there that I don't think the rural-urban migration is going to change. Now, whether you should go to Miami or you should go to San Diego or Los Angeles or New York City—like my daughter did—you look crazy based on this. (Laughter.) Those aren't necessarily the places to go. And I think those of us that have kids that did it, I think they are kind of scratching their heads. I actually asked my kids—at one point both of them lived in New York. And I told them, you know, based on my research, you know, your lifestyle's about — (laughter)—you know, it probably went down about 30 percent. (Laughter.) And then they said, yeah. (Laughter.) That's about right. (Laughs.) So you know, it's exciting to be in the big city and everything. And there are many other factors other than this. But I guess what I want to focus on is you look at all these MSAs, and you want to have a good metric for thinking about which ones are really delivering for the average guy—not for the rich guy, for the average guy or the median guy— which ones are really delivering a good—a good standard of living to their—to their constituents and which ones are not? And then pick a policy, you know, from there. And you could have kind of a high-cost strategy, and then you make up for it by paying—also paying high wages. That's maybe one way to go about it. Another way to go about it is to say: You know, let's keep the cost side down. And then we'll—we also have to have good jobs, but we don't have to pay quite as much as in the high-cost places. Q: Jim, over the last decade the Fed has picked up the responsibility of having a 2 percent inflation target . Decades ago it was felt that having an inflation rate over 1 percent was not good for the country. And I think you've been a fan of having a range, as opposed to a target. Could you comment on that? MR. BULLARD: Yeah. The Fed has a 2 percent inflation target. I did a lot of work to get that target. I think my thinking was it was more important to have a target than actually exactly what the target was…It says that inflation is the responsibility of the central bank. And it does something to hold the central bank accountable. Are you delivering or not on the target that you stated? So it's kind of Management 101. And I thought it was very important to be able to say: Here's what we're trying to do. That stabilizes expectations in the economy and gets everybody to coordinate and understand. And then you have to deliver. And you have to try to hit your 2 percent target. So I think a lot of good things came out of the 2 percent target. So there's a lot to be said for just leaving it alone and keeping it the way it is. There's a lot of talk now about, well, you know, we missed our target on the lower side for five years in a row. You know, maybe we should review it. Maybe we should review how we go about setting monetary policy in order to hit the inflation target. I think those are all great topics for discussion. But in the big picture, I think it was an excellent thing to name the target and insist that the central bank try to hit the target. That coordinates expectations. So that's been a good thing. Now, should it be 2 percent? Should it be 1 percent? Some people would say price stability should be zero percent. That's something I've actually worked on in my research. But I think it's more important—just setting the target is more important than the actual number — (inaudible). This idea about a range, I've actually been lukewarm about a range. I think if you have a range then if you're in the middle it suggests that you're not going to do anything or you're going to go to sleep while you're in the middle. And I'm sure that's a great thing. And then as you get closer to the edge of the range, then maybe you take more aggressive action. So in some ways, I think it creates—might create more problems than it solves to have a range. So, so far I haven't been blown away by arguments about a range. Q: The regional price parity data seems to be driven a lot by housing costs, which is a bit of a lagging indicator. Do you have any ideas about maybe what some of the root cause indicators are, that are driving down that cost across some of these MSAs, or maybe driving it up as well? MR. BULLARD: Why is the housing cost a lagging indicator? Q: Thinking of it as it's the end result of desirability of living in that MSA, what people are willing to pay in the market. MR. BULLARD: I think [economist Edward] Glaeser would say there's a bunch of crappy policies that are—that are protecting homeowners and real- estate owners in these various places. And so they don't want—they don't want more building to occur. They want their own prices to go up. And he would say giving them all that and allow more stuff to be built, and then you would get sensible prices in New York City and San Francisco. But because that's not happening—this happens everywhere to some degree. All of us that own property are not too anxious to see a big subdivision built right next to us that's going to make our home worth less. So this is kind of an endemic problem. But I would—I would push back against—just slightly against the idea that it is not a—it's a lagging indicator. So what you're doing is you're—if you look at the inflation measurements, and how they really work, you're computing imputed rent. So what would you have to say to rent your house, which has always been a controversial calculation. But that's what you're talking about. And then these rents are—actually are moving around month to month. So you are getting a signal about, you know, how things are progressing month to month. So I don't think it's a matter of these things were built 10 years ago and then they took a long time to come online. I think you are getting a measure of those prices—sort the consumption value of the house. That's really what you want to know. You're trying to get that in the price level index. So I think it is timely. Q: How would you expect your conclusions to change given a rising interest rate environment? MR. BULLARD: Well, these are—these are stories about longer-run trends and not so much about day-to-day monetary policy. I don't think—I mean, certainly higher interest rates make housing less affordable. So it would enter a little bit on this calculation. But I don't think it would be—fundamentally alter what I did here. Q: Going back to the housing, I believe the St. Louis metropolitan area is—I would think, the trend over the last 10 years is below-average home appreciation. And that has an impact on household net worth. MR. BULLARD: Yeah, like I say, I think—I think—if you're thinking strategically about this region, I think the trends favor us because probably the coasts will get even more expensive than they are today, and we probably will get somewhat more expensive, but not as fast as the coasts. And so therefore we're going to benefit from this trend. That's what I think. And the Midwest in general, I guess, would benefit from this trend. Q: I was wondering, as a randomly-passing — (laughter)—I was wondering if there's been any thinking at the Fed by you or other Fed presidents about incorporating asset prices into a more general broad-based sense of inflation? And if there hasn't, why not? MR. BULLARD: Great question, and longstanding topic. If you write down models, then the models say that the prices that matter are the prices for consumption. So you want something like a consumption basket, and then you want to look at the prices in that consumption basket. So that's the core idea. And then the question would be, well, what about assets—because you're also saving for retirement and sending your kids to school and stuff, and to buy a house. You're saving over here. And you got to pay prices over here. So those are investments—that's been the thinking, that those are investments that you're going to later sell off so that you can consume, and then you'll pay the consumption prices again. So it's hard to get the idea that you should include asset price inflation as part of the inflation basket, the measures of inflation. So it's been an uphill climb for those that wanted to make that argument. I think there's a different argument, which is that asset prices can get out of line somehow, and then they can flux on you. And that causes a recession. That looks like what happened in the housing bubble. It also looks like what happened in the late 1990s. To get that to work in a model is not that easy either, but I feel a lot of people are very sympathetic to that idea, that somehow there gets to be misalignment in some asset prices. And when it comes back into line, it causes a lot of disruption in the economy. So that's where we are on that today. Q: I have a question around the relationship between standard of living, as you've defined it, and what I mostly call quality of life. For example, the research based on income level versus cost of living rated, doesn't perhaps, or does it, take into consideration the fact that one community might have a higher quality education or higher quality medical care or whatnot, and how those differences relative to services within those communities relate to standard of living and, conceivably, quality of life. Does that make sense to you? For example, Minneapolis has wonderful schools. And Nashville has poorer schools. Based on the delta relative to their income and expenses, one draws a conclusion. But in fact, Minneapolis might have a much higher quality of life because the schools are superior. MR. BULLARD: Yeah. So when you look at the journalist-style rankings of cities, then they'll bring in all kinds of stuff —other considerations other than real per capita income. And because I'm a macro guy, I'm insisting you go right back to the hard numbers. Sure, you can—you can say a lot of things about any—you could say this in the crosscountry rankings as well. Norway's actually the richest country per capita, but their neighbor Finland has the best educational system. So should I say Finland's—should I rank Finland ahead of Norway, or should I rank Norway ahead of Finland, or what? So I think also, like, you know, Brazil is going to come lower on the list in per capita income. But then I might say something like, well, Brazil's a beautiful country with a long coastline. And therefore, I'm going to move it up in the—in the rankings because of that, because that's a nice amenity compared to Uruguay, which is a landlocked country. Yeah. I don't know. To me, that's all—you can do that, but that's all kind of arbitrary because what we're trying to do is get economic systems that give the most back to the average guy that's living in that particular area. And we want to study what it is about—what kinds of policies can we pursue that are going to help that average person, that median person, and also to keep the income inequality down to reasonable levels. What kinds of things can we do? And if you start bringing in all these—and maybe education is part of that. Maybe education is a driver. And that's certainly been thought of in the international literature. But I'm not sure it really pans out as well as you'd think it would. There are African countries that have extremely high literacy rates but are very low standard of living and low growth. So it's not so clear what drives everything. This is just about data. So this—to me, this is the starting point. And then you bring in other considerations from there and think about policies from there. What is it that—look at—look at it this way. St. Louis is 13 percent above the national average. What if every city in every MSA came up to St. Louis' level? We might not all get to San Francisco levels, but maybe we can get everybody to St. Louis' level. [Gross domestic product] in the U.S. would be 13 percent higher. I'd be giving everybody in this room a raise of 13 percent in real terms. That would be great, you know? But how can we get that to happen? What is it that's driving success in the various places? Q: So a little bit off of your research, but what's the culture like at the top of the Fed? So, like, the other folks that own each representative bank, do you guys collaborate a lot? Is it simply a let's go in and vote? How do you guys kind of drive, you know, the organization as a whole, just from a culture perspective? MR. BULLARD: Well, it's a matrix-based organization. (Laughter.) The banks are set up as individual entities and corporate—they have a corporate culture. And they're not government, so we do—it's not civil service or anything like that. So we do expect performance and fire people if they don't perform. So it's more business-y. The board of governors is more like a government agency has more of a feel like that. And then the executive team, which is really the governors plus the presidents, runs the system as a whole. We have a lot of committees. We have a lot of systemwide initiatives. And a trend in the Fed has been more toward that type of activity versus the original conception was, you know, I was —a person like me would run the St. Louis Fed and then we never had to talk to anyone else. But that's all breaking down because everything has to be done as a system. So we actually get along extremely well. People know each other very, very well. We have lots of meetings all around the different facilities around the country. I'll give you one example. I'm the CEO of the St. Louis Fed, but I'm also the chair of the Information Technology Oversight Committee. That is a spend of about $1.4 billion for the whole—for the whole Federal Reserve system. We try to drive strategy for security, for productivity and other things within system IT. And so my colleagues on there are the president of the Richmond Fed, president of the Dallas Fed, and others. And so there's a lot of opportunity to work at the system level, in addition to working at the—at the bank. Q: This is fascinating research. Could you talk about what it will be used for a little more, and what actions—possible actions you could see, either from the Federal Reserve or local governments or businesses? MR. BULLARD: Yeah. I can talk—that's a great question. I'll talk just a little bit about what I'd like to see going forward. So keep in mind, these RPPs, which are the central thing here—these regional price parities—they didn't exist before 2014. No one had done this. And so when you were comparing cities, you just said the price level's the same in New York City as it is in St. Louis, and you didn't make any adjustment for that and then you went on and did your analysis. So this is an improvement on that. And these differences…pretty big—30-40 percent. It seems to me you should always be doing this now going forward when you're thinking about comparing places to live across the country. And now you can start to ask—this is a way to level-set the debate and say: OK, here's where the real per capita is and here's where it isn't. And now you start to say which policies are really driving that. Is it that Minnesota has a great education policy? Is it that San Francisco has a lot of innovation going on, or Seattle—a lot of innovation going on? Or is it that Houston's kind of Wild West attitude about how they want to run their MSA? What is it that could be successful? Or are there multiple strategies that could be successful? Can they be copied by other cities? But what is done here is to level set here's what the playing field is. And also, this growth question, you know, higher standard of living does not mean fast growth. So you might be high today, but others might be catching up. And so that's a—that's a big question as well. So I think there's a lot that can be done now going forward. And I'd certainly encourage any students here to look into this and think about this going forward. Related Coverage * Transcript: Media Q&A With St. Louis Fed President James Bullard * Fed's Bullard Says March Minutes Didn't Reflect His Policy View (April 13) * Fed Minutes Signal Greater Confidence in Reaching 2% Inflation (April 11) * Minutes of the Federal Open Market Committee * Living Standards across U.S. Metropolitan Statistical Areas Copyright © 2018, Dow Jones & Company, Inc. Article Info Publication: WSJ Pro Central Banking Organization: Board of Governors of the Federal Reserve System Location: Missouri Industry: Banking, Financial Services, Central Banking, Banking/Credit Accession #: RSTPROCB20180416ee4g000gp Topics Economic News, Politics/International Relations, Domestic Politics, Foreign Exchange Markets, Inflation/Prices, Political/General News, Economic Performance/Indicators, Money/Currency Markets, Commodity/Financial Market News