Brian Barnier: The Future of the Central Bank


Brian Barnier, Director of Analytics at ValueBridge Advisors, talks to Rob Johnson about how the pandemic could change the mission of central banks.

Transcript

Rob Johnson:

I’m here today with Brian Barnier who is a guest professor at the Colin and Powell School at CCNY University in New York, and he’s the head of analytics at ValueBridge Advisors. Brian, thanks for joining me.

Brian Barnier:

Hey, delighted to be here. INET’s doing such great things in the world and teaching new economic thinking. So, looking forward to the conversation.

Rob Johnson:

I always enjoy talking to people from Detroit anyway.

Brian Barnier:

Ah, there you go.

Rob Johnson:

But I appreciate your thoughts. We’ll get into the relationship between Ernie Harwell and economics and various other things before we know it. Anyway, we’re talking here on the 13th of May, 2020. The pandemic is all around us. There seems to have been a very, very profound unmasking, people sensed a lot of unsustainability, particularity as it pertained to social unsustainability and equality and they were very concerned about climate and the trajectory we’re on. But the pandemic brings everything forward and like I said, it kind of unmasks the false security or false specifications of many of the ways we’ve approached the structure and the analysis of society.

You’ve done some fantastic and innovative work in a lot of realms, particularly want to talk with you about things related to financial bubbles and psychology and so forth as we go on. But why don’t you … How do you see the world and how it’s changed in light of the pandemic’s arrival and the call to action that it entails?

Brian Barnier:

Yeah, I try to think I’m just sort of following the footsteps of the great of the past. When you look at the history of economics, people were actually trying to explain things. Whether it was Smith trying to explain the transition out of mercantilism or Irving Fisher using mechanical diagrams, or more recently Bill Powell with his water machine to try to model the flows of the economy, that’s sort of the world that I live in. We’ve already said that we’re kids from Detroit. We grew up on our driveways fixing cars and stuff like that. So how does it work? And avoiding abstractions, avoiding going things in the clouds and far away and how it works.

So, that’s why I’m very intense in data and at the Colin and Powell School at CCNY teaching graduate seminar on data analytics in financial economics and drill down into stuff. Because when you get to the data, when you get to the mechanics and all of a sudden you realize it’s not so clean, it’s messy. And you’ve got to be interdisciplinary. You can’t fix your car if all you’re doing is saying, “I turn wrenches and I use no screw drivers.” That’s not going to get you very far. You need to have a full toolkit, you need to be robust. And this gives you a sense of context. And that’s important because it gets economics out of a bunch of theoretical specialists, to practical systematizers and dot connectors. And that’s why I was thrilled to have the folks from your team come into my class and share what the Young Scholars Initiative is doing to give them that sense of context.

And then when they’ve got that context, now they’ve got a sense of causality that they can use, whether it’s for economics or when we’re talking in financial markets, trading bubbles, asset management, whatever it is. But you need that piece in order to avoid these surprises. So, it comes back to data and it comes back to these core pieces.

Rob Johnson:

Well, Brian, in the nature of your work, which has been very disciplined about searching for data and also in, whatchamacallit? Interpretation of data for what it is. What is … I guess what is shown by the pandemic is that we’ve been off course. But there’s a process of being off course. Why did people derive so much false confidence in an era where you have, as you call it, global tech trade and transformation? Everybody knows things are in transition, everybody’s anxious. Whether you call it diseases of despair or fear of transformation, fear of transition, we were not in a period of structural stability, and yet acting like we were. Why do people do that?

Brian Barnier:

Well, to your point earlier Rob, I mean that’s a great question. And it brings in psychology. So those of us that have been in the risk management in financial markets or business anyplace else, you realize that people’s brains are sort of blind. Now I’m not psychologist, but of course I love talking to them and getting educated by them. And they talk about a notion of structural blindness and cognitive bias. Structural blindness is when we can’t see what’s around us because something about our structures are preventing it. It’s the way we organize data. It’s the data sources we pull. Sometimes it’s the software we use. Sometimes it’s the organizational silos of companies that are there, the silo effect is heavily discussed in this space. So we don’t even see what’s moving around us.

The other piece is cognitive bias, where we see the information, but we don’t perceive it correctly because we are proceeding forward with some kind of lens that causes us to not see what’s going on. There’s a lot of literature around those two and PhDs and tenure has been gained by futzing with those terms and organizing pieces underneath it. But here in economics what’s happens for the markets more broadly, is that when you are cutting out the types of data you use, for example, using only the headline releases from the Bureau of Economic Analysis or the Bureau of Labor Statistics or the Fed Financial Accounts, and you don’t look at the wealth of data that our statistical agencies publish for us that gets down to state and local data, that breaks things up by product types, that’s a structural error. And then we move over to how do we process that error?

And there, if we are looking at it through the lens of theory that hasn’t existed since say the ’60s or the ’70s, which is the case for many things, then that causes us to misinterpret what we’re seeing. The notion of inflation is one of those, where there’s a theoretical assumption that inflation is mostly caused famously by too much money chasing too few goods. But I go to conferences just like you and I ask the question, “Show me a filter that demonstrates that in our world of today.” Where are the mechanics that show me that average price level change is mostly due to monetary factors, being interest rates and money supply, and more recently, large scale asset purchases, popularly called QE. It’s really difficult to find.

I think some of it’s there, I can point to certain amounts of it around say foreign exchange rates. But I’ve come up with nobody that’s given me a model or a filter, as we say in econ speak, to parse that out. And if there’s somebody listening to this, I’d love to get an email from you, showing me your model that parses out all the causes for the price change in every price published by the DLS or even the more summary set published by the Bureau of Economic Analysis.

Rob Johnson:

I’ve seen, from our earlier conversations and some of the papers you’ve shared with me also, a lot of what you might call, very severe criticism of Japan that did not bear out. You heightened my awareness as their economy on the supply side was under profound transformation. I was at the World Economic Forum and I was in a meeting towards the end where started talking about your toolkit for macro. The notion of a stable … These just are not the experience we’re having. And it seems now more and more of the world could benefit from what you might call the example of his perception or teachings. But I still find it mysterious why people want to cling to these frameworks that, how would I say? Don’t explain the evidence. They explain what you want to believe, not what’s happening.

Brian Barnier:

Yeah, it is just absolutely stunning, Rob. You’re absolutely right. I mean, I have my students graph out the Phillips Curve. And I have them take, first of all, annual data and plot out the curve. Because you only have one point per year. And if you plot it to about 1971, it looks okay. But as soon as you then switch to quarterly data and you take it beyond then, it completely blows up. And all these attempts to inflation adjust or inflation expectations adjust or whatever, it doesn’t come together.

Now, your point on Japan is very contemporary. Because it seems like you can’t go more than a couple days where somebody’s talking about the Japanification, the Japanification. The sky is falling. And the issue with Japan is nothing whatsoever to do in terms of their price level, with lower demand per shopper. The situation that you’ve got in Japan, when you actually look back the numbers and their equivalent of the Bureau of Economic Analysis is the Economic and Social Research Institute. When you pull the numbers apart, what you find out are several things. First of all, that their demand for durables has actually been very good on a per shopper basis. Per capital basis, per population basis. And in many cases over the last couple of decades, has been stronger than the US. So durables isn’t a problem.

Then we look at nondurables and nondurables has been stagnant on a whole. But on per person basis, it’s hanging in there. And then we look at services. And there, the services trends is growing somewhat. And then we start to take that apart and we look at what are the demographics? And I have to give kudos to a researcher at the US Bureau of Labor Statistics that pointed me to a dataset. When you actually break down the things that are falling off, a lot of it is like traditional Japanese clothing, baby clothing, stuff like this that’s a reflection of the demographics that’s happening there.

And then you look at energy. Well, there’s a big energy conservation thing going on in Japan, so that’s pulling it down. So, you don’t see this notion of falling demand and falling prices. If anything, you see durables, especially because it’s the most tangible thing. It doesn’t have the measurement tiers of services. You see that expanding out very nicely and prices are falling. As any shopper today in the midst of COVID going to a Costco or a BJ’s or Walmart or whatever it is; prices fall, shoppers buy more. And there’s no problem with that. But there’s this theoretical stuff. The long run aggregate supply curve, the LRASC. Which everybody thinks up upward sloping, where the vertical axis is price and the horizontal is quantity. To say that if price is falling, then you must have a collapse in your quantity. But go pull the data from the Bureau of Economic Analysis, go pull the data from the Economic and Social Research Institute. That’s just not the case.

And yet policy is being made as though that is the case. They’ve got an issue of demographics, absolutely, that’s going on over there. Population first and then the specifics of the demographics second. They’ve got a fear factor that’s going on, which has been stoked by a lot of policy statements, so that makes people be more apprehensive. And then third, they’ve piled up a mountain of debt. And they’ve been trying to pay down that debt, so it’s smart not to spend money and pay down debt when you’ve got an aging population. So that’s a very rational explanation for it. And then lastly, there’s some other measurement issues, especially around housing and healthcare and higher education. Where the way the index is constructed varies significantly between countries, so you can’t compare these things very easily.

Rob Johnson:

At the center of this macroeconomic management and interpretation or false interpretation of data, sit an institution called a Central Bank. There are many, many facets. We went through a whole era of Central Bank independence. My dear, late friend, William Greider, wrote the book Secrets of the Temple, a book which caused a little bit of heartburn for Paul Volcker, but late in his life he told me, “Might be the best darn book every written about Central Banks.” But these institutions which are said to be most helpful to society when they’re quote, independent, they’re said to be most valuable because they have high quality very well educated staff that is independent of a political process. It feels like what they are is changing and what they can do is subject to that humility of this unstable structural system that, how would I say, can’t be easily bracketed and put in a file. So the recipe book is a little out of balance.

Historically, Central Banks were founded for war finance. Somewhat later, Central Bank became important in making liquidity services, particularly lender last resort services related to crop cycles and periods of financial instability. And finally, was the macrostabalization, where in the modern term, independence meant the Central Bank didn’t need to goose the economy for the incumbent politicians just before an election. But when I look at this world now, and you’ve said it to me, in many ways Central Banks are fiscal agents, in many ways by controlling very, very large elements of what I’ll call contingent fiscal capacity. They may be a stabilizing force in the middle of a crisis when you’re going over the waterfall and that’s helpful. But they may also be, what you might call the symphony conductor of the mother of all moral hazards. And building bubbles and building aggressive reckless behavioral moguls who feel like they have political access to a one-sided bet.

How do you see Central Banks today? We talked implicitly about the macro instability so that their framework is a bit ajar. But I sense a deeper hostility now, particularly after 2009 and beyond, towards Central Banks, as though they are the fulcrum of crony capitalism.

Brian Barnier:

Yeah. I mean, as they change their missions, they open themselves up to a variety of issues. Take as a departure, the point that you mentioned before when you were so nicely going through the history. So, when you have this view that the Phillips Curve was operating and the LRASC is operating and all this other stuff, that all right, they had a set of policy objectives in the US, the Federal Reserve Website list three. Interest rates, stable, inflation and unemployment or employment. Other countries, they’ve got different objectives. But generally something around price level. What happens is that when money supply is not a big driver and interest rates are not a big driver of aggregate average price level, right? Inflation is a theoretical concept, deposits most of that generalized or average is coming from monetary factors. When that doesn’t happen, right? Because durables have been falling since about 1995 in the US, right? Non-durables have been flat for the past decade. Prices for services have been going up.

But when you tear those apart, what are you seeing? It’s like housing, right? Which is controlled by a lot of government policy or the Central Banks’ purchases of mortgage asset securities. You’ve got healthcare, which as Janet Yellen pointed out in her October 27 speech to the Nation Association of the Economists, that’s a big factor play. And if the Obamacare thing hadn’t worked, the price level would have gone up and that would’ve triggered them to be more aggressive in their monetary policy.

And then there’s other things like higher education and stuff. But as governor says, those are policy inflation things. Right? Nothing to do with the Central Bank. So, the notion that the two big Central Bank levers are three in the age of LSAPs, large scale asset purchases, can affect price level, is sort of out the window. And the notion that it can affect the unemployment rate, unless you’re into these liquidity issues as you just mentioned, we haven’t seen a lot of that over the last couple of decades. So, those big pieces are gone. What does that leave a Central Bank as being? Well, it’s sort of a Back to the Future notion of liquidity as a service, as you just mentioned. Or as you also mentioned, being a fiscal agent for treasuries. And of course remember, when you go read the essays where they take it country by country, a lot of those Central Banks are not as independent as one would think they are.

And then that comes into the issue of they’re searching for a mission, right? It’s like you’re a hammer in search of a nail. “We got to do something.” Right? And they do have the ability to act fast. Faster than a deliberative elective legislative body. So they do have the capability to act fast, to walk into an FOMC meeting as a bunch of non-elected people and walk out with a decision that financial markets are paused for. But then what can they do with that? Right? Because you throw out all that cash and where does that cash go? And this opens the discussion that you’ve had with some of your colleagues at INET for a while, about is the Central Bank have any role in redistributive effects or not? They’re using blunt instruments.

So, while they’re not specifically social or regulatory policy, other than when they’re working on the bank regulation side, they are blunt instruments. So therefore, they will affect people in different ways. There will be discontinuities, there will be distortions, there will be inequities because of how these things hit people. And that’s a fact of life. And the issue is then how do you manage that?

Rob Johnson:

Yeah. Well I remember during the 2008-09 crisis, a lot of people, as the economy went into a recession, felt like their municipalities had to balance their budget unless somebody bought issues of municipal bonds, which would allow their police departments and their schools and their local infrastructure to be invigorated and sustained. At the same time, while the Fed didn’t choose to buy those things, they did buy a lot of the complex mortgage derivatives off of the balance sheets of many financial institutions. And they could say, and there is a logic to it, that what they were doing was fortifying the financial system so that it didn’t, through negative externalities, take down the real economy with it. But just at face value, it felt to people like the fed was picking winners. And the winners were not the population, they were the people who had made the mess.

I think, I remember Paul Volcker in the last years of his life, was very, very concerned about the integrity of Central Banking as he set up his Volcker Alliance. And I think I remember there was a Group of 30 report, which he had a lot of heartburn over because the authors were advocating for fortifying the credibility of bailouts ex-ante, by giving extra powers to the Central Bank. And this felt like, how would I say? To some people, that the Fed goes in and they intervene when things are in distress and they actually make money by buying the distress, alleviating it, and then putting things back in the market later. Others said, well, you won that round. But what happens when you lose? And why should you have the right to use that fiscal capacity that might be devoted to paying municipal workers’ pensions, like in the city of Detroit, new infrastructure, tuition, a Green New Deal?

So, the kind of mythology of scarcity was blown open by the snapping fingers and two weeks later a TARP bill of over $700 billion was materialized after the Lehman Crisis. And now in this pandemic crisis you have the snap of the fingers and trillions of dollars are being passed around by the Central Bank with the cooperation of the Treasury Department. I wonder how long we can continue like this, before what you might call the eruption of distrust starts to overwhelm our politics.

Brian Barnier:

Yeah, that’s a great question. Since you tossed out Detroit, I’ll have to bite at that first. But what you’ve really got here is the ability of these funds, we don’t fear inflation, monetary inflation in tangible products, goods and services. That is out the window. Maybe it’s going to find a way to come back, but we haven’t seen it in decades. And the causes we look for aren’t there either. So, what can it do? It can bubble asset prices. I did a piece several years ago at the end of the LSAPs and it also ran on Yahoo getting hundreds of thousands of hits. But it was basically, with not too difficult visual calculus, to say that 93% of the gains in the market over the time of LSAPs were from LSAPs. And that everything else is just the ED.

And when you talk about the pension funds, this created enormous difficulty for people trying to pay pensions for municipal workers, teachers for the whole state, my mom’s a retired teacher in Michigan. Because a lot of them using their asset allocation models and risk management models, wrongly understood risk. So they entirely missed out on the rise of the public equities markets during that period. That then drives back to these issues about where we’re going to get money to pay people. And this drives back into the issue of the moral hazard that you mentioned in terms of how we’re picking winners and losers in this. Of course the desire is not to pick winners and losers. The desire is to say let’s freeze everything and then try to basically reset to where we were and then let things play out as they naturally would. But this stuff is trillions of dollars in activity. And it’s going someplace other than others.

So, how does that come out? And it screws things up for institutional investors because pension funds, endowments, trusts, family offices, that kind of thing. Because they can’t just sit back and say, “We’re going to look at market risk.” They’re now tied to real business operating risk. And that’s something they haven’t done in a long, long time. Really, since the 1970s or thereabouts. Certainly since the late 1980s with the beginning of the derivatives. They just looked at market risk and it was really trading spread risk, like when you were in the hedge fund, and fees, that was making things work out for asset managers and then passing stuff on. And the bottom piece, that just tugged along because of the expanding credit bubble, whether it was consumer credit cards, home mortgages, LSAPs, whatever. That’s what was driving this big underlying data and asset prices. But that, of course, worked out for some people better than others.

Today, because people fundamentally don’t understand how the economics works, that’s where they get thrown off when it comes time to make risk management and asset allocation decisions in things like a pension fund for Detroit and many others. And that’s where people end up getting hurt. Because we have so many disconnects in the economy. And that’s added to by these trust issues just mentioned. Because now, you’re trading based on a jittery expectation about what the next FOMC pronouncement will be or ECB or whatever it will be. Instead of how are companies producing widgets? What’s happening at any place else that’s growing the economy?

Rob Johnson:

Well there’s a writer named Ian Welsh who has a very, very interesting website. He, about a week ago, wrote an article on how he thinks neoliberalism has destroyed capitalism. And he talked about how this what you might call ability to apply broadly the anesthetic that we might attribute to Central Bank injections of liquidity services, has kind of devastated the economy. And he’s talking about how the stock market’s doing pretty well, the big banks are doing pretty well, but in the midst of it all about 40% of Americans’ small businesses are threatened with closing permanently. So the stock market’s doing fine, but the small businesses aren’t. I think, how would I say? I don’t know that people will attribute that so much to the Central Bank as a conduit, but to the system and the priorities of the bailout that we’ve seen. How do you react to that notion that Welsh suggests may be upon us?

Brian Barnier:

Yeah, so it’s certainly a valid point. I peel it back a layer because I’m a data guy and the stock market is 10%, 15% off of all time highs, depending upon what you’re looking at. But when you’re looking at these broad indexes, we’ve got to peel them back. So you’ve got five companies that are 20% of the market cap, 21 last I think I checked, of the S&P 500. So they’re having this huge outsized impact, and they’re all tech companies. And you’ve got Uber going after buying Grub hub now. M&A and alive and well in that space. So first of all, it’s an issue of aggregating rather than looking at the details. Because you’ve got a lot of companies that are ailing in the S&P 500 as well.

But then second of all, you look at where is the money coming from to fund this stuff? The money has got to come from somewhere. And that’s back to this issue that happened during LSAPs. The money is coming out of the Central Bank, whether directly or as a fiscal agency, and is making itself available in the market. And that finds someplace to go. So let’s say, not to date ourselves too much, but Detective Columbo and follow the money. And if you follow the money, and you can use the federal financial accounts for this or if you’re an investor and you’ve got access to a bit of database, you could do that too. But you can follow the money through and find out where it’s going from. Coming out of the Central Bank, we’ve got a lot of money coming in from overseas that varies. But this is flowing into the US public equity markets and allowing that to happen. So that’s what the mechanics are of how does that work?

You’ve got this other issue that then is what are the mechanics of these small businesses that aren’t getting money? What are the industries they’re engaged in? What’s shuttered because they’re a restaurant or a service business? What’s shut down because of the supply chain it’s in? And then some of these are like going great guns because they’re in areas of high demand. And then you got those, when you walk through the whole supply chain piece, that have dependencies on overseas that was shut off on them or you’re in the meat industry that’s had troubles. So we’ve got a whole bunch of stories there. And this gets back to your earlier point, you can’t look at the blunt instrument of the Central Bank, you’ve got to get more granular with figuring out what’s going on and where you’ve got these disruptions going on in the economy. And the stuff that’s coming out so far is having a very difficult time targeting. Does that make sense?

Rob Johnson:

Yep. Oh yeah. Now, I guess the question I’d ask is if you’re a small business or if you’re an emerging market country, how would you advise them on a survival and resilience strategy in light of what you see before you?

Brian Barnier:

Again, very insightful. Take those in two pieces. First, let’s look at the small businesses. If you go back to being mechanics with wrenches in Detroit, how do these things work? The good news is a lot of these small businesses have a good sense of how things work. They’re not like stratospheric CEOs on top of huge companies that barely understand how the things are made in their companies. These people are much closer to stuff. When you look back into the supply chain and for them it’s an exercise of will what I need to make and will where I need to sell it be there? And how far back will that come? Some businesses were catering, and this goes back to sort of moral hazard point, they may never come back. Because they had uncertain futures anyway.

Others, like for example we read a lot in the news recently about these businesses that are attracting people because they’re in low density areas and they’re marketing like crazy to get people to go do summer tourism who are all pent and cooped up under lockdown. They’re going to do well. Or people that are doing various kind of things in the restauranting industry. All the stuff you see in the newspaper. You’ve got opportunities there.

The thing that’s really a killer in the small business space is the short time carrier financing. And then the other piece is people that are trying to pivot and that are really struggling to pivot because they don’t know how to connect with buyers of what they see are these scarce products. And there’s a lot of inefficiency in the market right now. And that’s where I look at some things that chambers of commerce or industry associations and others are doing. Say for example, a call I was on recently that was trying to connect women farmers that normally fed the hospitality industry with truckers in the grocery supply chain, to get them connected and get their food into the grocery stores so it is not these tragic pictures we see on TV of vegetables rotting and eggs and milk being broken and destroyed and everything else.

So those kinds of things have caused a great amount of damage that was completely unnecessary. But it’s in an area where again, people don’t understand how it works anymore, the details. So all the big program planners had no clue how these pieces work. So those two pieces are sort of the tragedy of the small business that I’m most focused on and when I reach out and talk with those folks, this is where I’m at from my world of data and mechanics. Does that make sense?

Rob Johnson:

Yeah. Well, one of the features that people are talking about in our segment of the INET Commission on Global Economic Transformation that Joe Stiglitz and Mike Spence co-chair, pertains to the notion of what you might call the structure of globalization. What is the pandemic going to do to the notion of a global supply chain?

Brian Barnier:

This is one of those really great questions where in some cases, you can say, “Oh yeah, there’s going to be all this disruption.” But people that are making that statement are not realizing what’s already happening in the global supply chain for other reasons, good and bad. Right? You’ve got the ascendancy of India and Vietnam and that are trying to pull stuff away from China already. Going back years you can see it in the data in their activities. Prime Minister Modi with his Made in India Initiative and his incentives. Japan incenting people in their bailout packages, to help Japanese companies take China-based stuff and move it to some other country. All these pieces are out there and that are already happening previously, and now they’ve been accelerated by this.

Another big trend that’s been out there for years, and this goes to your earlier question on emerging markets, is that the traditional path in developmental economics for a country has been start in the extractive industries, agriculture and mining, then build up a little bit. Like do more processing for your mines, more food processing before you ship it off. And then let’s get into manufacturing, climb up the manufacturing scale. Evermore sophisticated manufacturing, the demand to high skilled workers and you make tons of middle age wages and tons of exports and the world will be a good thing and reduce your dependency on imports. The problem is, that’s been blown up by the global tech and trade transformation, really by automation. And it’s been going on for centuries.

I mean, real hat tip a book is Sir Harold Evans, They Made America: Two Centuries of Innovation From the Steam Engine to the Search Engine. That’s just about the US. But now that’s gravitating around the rest of the world as well. So the traditional path out of difficulty has been removed. And the big sort of macro type economic programs to get them out of this, that are focused on multipliers and money and rescue packages and all this, they’re not addressing these decades of underlying change. And saying, how do we take people in those countries who have domain knowledge about how to get something done, how do we marry them up with people with tech skills? Better, how do we give them the tech skills so that they can then improve those environments and then grow?

I mean, a real poster child these days, for example, is Armenia, where I’ve been several times. And you’ve got the opportunity to grow in some of these spaces. So that’s this opportunity that people are overlooking because they’re thinking it’s just COVID. Or it’s just trade wars. And not understanding there’s these decades of stuff that’s been going on that has first of all, been killing the path to economic growth. And second of all, all these other country activities each trying to figure out how they can be a sourcing base and grow their exports. And do it in a way where the automation that they’re achieving to do it, does not kill off their own jobs opportunity. Because every time some country prime minister gives a speech and says, “We’re going to have more robots than the next country,” that means we’ve got fewer ways to employ people. So these are these big issues that need to be focused on, and there’s good ways to do it. But they’re being overlooked as we’re just sort of glossing over this in the theory of economics or the geopolitical response. Does that help?

Rob Johnson:

Yeah. Let’s focus on what I’ll call advice to the young scholars. You’d mentioned they had come and visited you all the Colin and Powell School and that they’re almost 12,000 strong now. With them in mind, what guidance would you give them? I think this opportunity, a lot of the what you might call stale traditions of paradigms that were misleading, have been brought back into question. I guess I’m asking about career development. I run the organization, what kind of courses, lectures, processes should be put in place to invigorate those young scholars and set them off on a course towards a healthy leadership and a re-invigoration of trust and faith in the integrity of and the value of expertise?

Brian Barnier:

Yeah. I mean, that’s awesome. And you’re doing so much it’s great already, Rob. All I can do is sort of emphasize, put frosting on the cake. I mean, my way of thinking of this is sort of back to the future, as I said earlier. Because remembering that early economists were appreciative in trying to figure out how do things actually work? I mean, they were in factories, they were looking at transportation, looking and ships and stuff like this. And then also understand the context this came out of, with mercantilism and the wars that ravaged Europe. There is a great sensitivity to reading some of our geopolitical analysts of the past, Plutarch and Thucydides. Plutarch’s lives and Thucydides’ histories. And then just clear thinking. It’s new economic thinking. Well, put a capital T in bold letters around thinking. Read your Aristotle, read epistemology, understand how to put an argument together and what evidence is, so that you know what you believe and why you believe it.

And that, from your point about courses, rather than blowing off all those cognates, take cognate courses that help you build this. I mean, I had some in political science and I did survey research at Michigan. Which is awesome, right? Because that’s where the Michigan Survey of Inflation Expectations comes out of. But there’s other stuff, right? And that stuff is, that survey is not stratified to this day, the way you would if you were marketing orange juice and doing representative samples for market research or for politics. So we don’t appreciate the gradations when we look at that survey. So, that helps. I took my sciences in astrophysics. And it was great, right? Because they were talking about how to understand and filter out data in astronomical observations way outside of our solar system and way in the galaxy looking at distant objects. A lot of that you can bring into economics.

And then of course business, right? Where I teach at the Colin Powell School, we’ve got an integrated economics and business department. And many other schools do too I came out that, the University of Michigan. Starting in liberal arts and going into the Ross Business School. You have to take operations management. You’ve got to take financial management. You’ve got to take financial markets. You’ve got to take organizational behavior. Right? So all these things that would otherwise be a shock to economists, you get as part of your required core courses before you then go on and do your specialty. So that’s an opportunity for the scholars all over the world.

And then there’s this explosion of data analytics, but I emphasize in my class decision science. Decision science is really formalized in some of the 1930s. Here in New York, by a guy by the name of Walter Short at Bell Labs. And looking at how systems work. And all the system thinking stuff and cause and effect and trying to say, “Can we connect a telephone call?” Became very important details to make work. And then one of his great students and disciples was the famed W. Edward Stemming, who took systems and then re birthed Japan and who did so much to drive down their costs in their export industries and improve innovation and quality. I guess I’m hung up on the back to the future movie today. But when Marty McFly bestows the camcorder to Doc Brown and he says, “How could it be from Japan?” Because he’s in 1955. And Marty McFly speaking in ‘84 says, “Well all the best stuff comes from Japan.”

Brian Barnier:

And even the James Bond movies in the ’60s, right? One of the showcased Japan and all the high tech stuff that was coming out of it. That was all of this playing out. So the scholars need this kind of sense of history and where to put things. And they need hard data. And then that allows you to get to these issues like understanding why behavioral. Yeah, of course. When people look at externalities, yeah, of course. How could you not do that? When people look at utility functions in a very antiseptic kind of isolated way, of course you need to understand the behavioral issues and all the things that people are thinking. And it’s not just some kind of numerical trade off.

And then you bring in the interactions of human beings. And now you’re in a market, right? People picking over different oranges or buying different things. But that’s the power of what I see. I encourage listeners, if they haven’t seen your YSI videos, to go on your website and look at them and see the energy that’s coming out through them. So, it’s all of that and more, to help people think differently.

Rob Johnson:

One of the areas that you and I have discussed in relation to W. Edward Stemming is the notion of how education is structured in America. Then Andrea Gabor, who wrote the Man Who Discovered Quality, and how he brought, how Deming brought the quality revolution to America and then to Japan. Was recently applied by people in Texas to the governance and invigoration of a local public school system. And we’ve been used to large foundations, the Walton Family, Gates Foundation, Mark Zuckerberg and others who were well-meaning, trying to affect change in education in a way that would put people on a better trajectory. But the people who adopting Deming, instead of a top-down kind of vision from on high, pledged faith in the next phase in that down in the grit, down in the texture of the process and to let those people be at the core of that innovation. And according to Andrea Gabor in her recent book After The Education Wars, America should have a very, very deep look at the lessons of this positive experience that has arisen in Texas with the help of the insights of Deming.

It’s my hope that people looking at Central Banks like you, will be brought into Central Banks. Because they’re a bit untethered right now. They’re a little out over their skis. And you can help them, rather than embarrass them. And I know that’s your intent. And people like Andrea Gabor can help people understand that these kind of dehumanized mechanical approaches to analysis of things like education systems, are full of danger of being false, certain and misleading. So when you tell me Aristotle or Thucydides or Plutarch or Deming or Andrea Gabor, I just, I feel like it reminds me of the song by Natalie Merchant called These Are Days. These are days you’ll remember. But she gets into the middle of it and she says, “See the signs and know their meaning.” And the signs we can see now are that our frameworks have been found lacking. And yet, in our midst, are examples and beacons like yourself, for moving things forward and being of better service to society and being of service to re-invigorating the faith and the trust in expertise. Brian, thanks for being with me today. This has been a delightful discussion.

Brian Barnier:

Absolutely, delighted to be here. And I just wish you all the best in what you’re doing with INET and with the Young Scholars. And just really want to thank you for all that Young Scholars Initiative’s doing for the students we’ve got at Colin Powell School and Harlem and New York City. So, thank you so much.

Rob Johnson:

We’ll talk again before too long. I’m sure there’ll be plenty to discuss in another episode of this podcast. Thanks again.

Brian Barnier:

I’m looking forward to it.

Rob Johnson:

I’d hope. bye bye.

Brian Barnier:

Bye.

About the Host

ROB JOHNSON serves as President of the Institute for New Economic Thinking.

Johnson is an international investor and consultant to investment funds on issues of portfolio strategy. He recently served on the United Nations Commission of Experts on International Monetary Reform under the Chairmanship of Joseph Stiglitz.

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About the Guest

BRIAN BARNIER is Director/Head of Analytics at ValueBridge Advisors (U.S.)/Burnt Oak Capital (UK).