Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / Economic Growth, De-Population, and Macroeconomics with UPenn Econ Professor Jesus Fernández-Villaverde

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Economic Growth, De-Population, and Macroeconomics with UPenn Econ Professor Jesus Fernández-Villaverde · The Capitalism and Freedom in the Twenty-First Century Podcast

0:00
>> Jesus Fernández-Villaverde: What we are trying to say is that the present of Japan
0:04
is the future of the rest of the world.
0:07
I have written in Britain a lot lately on demographic trends,
0:11
and the biggest demographic trend is the way I always put it: winter.
0:15
The demographic winter is coming.
0:17
And every country in the world, even poor and middle income economies,
0:22
are going through a very, very fast fertility decline.
0:26
Which means that there is going to be this big headwind of decreasing
0:31
working age populations all across the globe.
0:35
And that will force us to start rethinking about how we actually measure economic
0:39
performance.
0:40
[MUSIC]
0:49
>> Jon Hartley: This is the Capitalism and Freedom and the 21st Century podcast,
0:52
an official podcast of the Hoover Institution Economic Policy Working Group
0:56
where we talk about economics, markets and public policy.
0:59
I'm Jon Hartley, your host today.
1:01
My guest is Jesus Fernández-Villaverde, professor of Economics at the University
1:05
of Pennsylvania, a macroeconomist and frequent visitor to Hoover.
1:09
Welcome, Jesus.
1:10
>> Jesus Fernández-Villaverde: Thank you.
1:11
>> Jon Hartley: Jesus, you grew up in Madrid, Spain.
1:14
How did you first get interested in economics and macroeconomics?
1:17
>> Jesus Fernández-Villaverde: Well, so I grew up in the 1980s and
1:20
at that time the Spanish economy was not doing very well,
1:25
we had high inflation, high unemployment, high government deficit.
1:30
The economy was not growing very fast.
1:33
So I guess that for some kids who were more or
1:36
less interested in how his country was going on,
1:39
started thinking about economics and more in particular into macro was natural.
1:46
So one day I decided I wanted to be an economist.
1:49
And here I am, like maybe 40 years later.
1:52
>> Jon Hartley: That's funny.
1:53
I mean, you did your PhD in Minnesota and
1:56
your advisor was actually Leo Haney, a senior fellow here at Hoover.
2:02
Tell us about your path from growing up in Madrid to Minnesota and
2:06
getting your PhD there.
2:08
>> Jesus Fernández-Villaverde: Well, so already when I was an undergraduate,
2:11
I started trying to read things a little
2:14
bit more advanced than perhaps the average undergraduate.
2:19
And I bump into the very first textbook that
2:23
Tom Sarrient brought on macroeconomics.
2:26
It's a black book,
2:28
I always joke that Tom has written three textbooks in macroeconomics.
2:32
And I really like it.
2:33
I enjoy it a lot.
2:34
It opened like a lot of new views for me.
2:38
And he said, professor of economics at Minnesota,
2:40
because at that time Tom was at Minnesota.
2:43
So I thought, wow, I want to go to Minnesota.
2:45
Then this was before the Internet and all these type of things.
2:48
So I wasn't quite aware that Tom had moved, I think at the time to Chicago, but
2:53
nonetheless, I applied to Minnesota, they accepted me, and the rest is history.
2:58
>> Jon Hartley: That's amazing, I mean,
3:00
what a fascinating place to study macroeconomics.
3:03
It's produced so many famous macroeconomists,
3:05
it's really the home or one of the homes of the rational expectations revolution.
3:10
We think Tom Sargent, Ed Prescott, many others who are part of that and
3:16
many Nobel Prizes have come out of that, and a tremendous amount of
3:22
influence in terms of how macroeconomic modeling is done.
3:27
Find me a macroeconomic model that's published today that doesn't include
3:33
some level of micro founded individual agents underline the model.
3:38
You do a lot of work on a number of things, growth,
3:43
economic history, solving DSG models.
3:46
In fact, I think you're the first to solve DSG models using quantum annealers.
3:51
>> Jesus Fernández-Villaverde: [LAUGH] >> Jon Hartley: You're also the director
3:54
of the Penn Initiative for the Study of Markets, which you're also the founder of.
4:00
Tell us what that's all about.
4:02
>> Jesus Fernández-Villaverde: Okay, so a few years ago I started to grow a little
4:06
bit unhappy with the state of undergraduate education in economics.
4:12
I don't think we are doing a very good job at it.
4:14
I think that we go to class and we tell students a lot about Lagrangians and
4:19
first order conditions and how to solve optimization problems,
4:23
but we don't really give them an economic understanding of what is going on.
4:28
And I'm not against math, I use a lot of math in my research, but I think that math
4:33
must be built on the foundation of understanding the economic intuition.
4:38
And I also was a little bit worried that the students were a little bit separated
4:42
from things like the historical background of market economies,
4:46
some of the philosophical foundations of market economies, and that
4:51
there was some scope for a center at Penn that could provide some of those courses.
4:56
So I want to talk with my chair and then with the Dean.
4:58
I was able to get a little bit of support.
5:01
Not much.
5:02
It has been a little bit of a struggle, to be honest.
5:04
And we have been able to offer a lot of undergraduate courses.
5:08
I think this year we are offering six.
5:10
Some of them I really think are quite cool, like economics and
5:15
philosophy and history of financial markets.
5:18
And we also have a little bit of visitors program.
5:22
So I think it's very nice,
5:23
I think it has made a big contribution to the undergraduate education at Penn and
5:28
hopefully to a stream of graduate students and postdocs that help us over there.
5:33
>> Jon Hartley: Well, I'm sure many students go into
5:35
the Penn Economics Department and Wharton as well.
5:39
Appreciate that.
5:40
I want to get a bit into your research and
5:42
thinking around things starting with growth.
5:45
So you have a recent paper titled the Wealth of Working Nations, and
5:50
in it you're estimating, I think GDP per capita across countries.
5:55
But you're also taking into account the age of the labor force,
6:00
which varies pretty significantly across countries.
6:04
I think Japan, most of its population is much older.
6:09
So that distorts perhaps the size of its working population.
6:17
Or perhaps your GDP per capita figures don't really account for
6:21
some of that, the size of its working population.
6:24
Can you tell us more about that and your other thoughts on demographic
6:30
trends around aging populations, declining birth rates, and
6:35
obviously also declining GDP per capita growth rates across the developed world?
6:41
>> Jesus Fernández-Villaverde: Of course.
6:42
So, this research came from a very simple observation.
6:47
So, you know, you stop the average person in the street and you ask them, you know,
6:52
give me an example of a rich economy that has not been doing very well for
6:56
the last 10, 20, or 25 years.
6:59
Chances are that this person reads the financial press at all,
7:02
they will immediately say Japan.
7:05
So, you know, out of curiosity, I started looking at Japan and I realized,
7:10
look, there are much fewer Japanese of working age now than 25 years ago,
7:15
just because Japan was the first rich economy that witnessed a very,
7:20
very fast drop in fertility.
7:22
And yes, Japanese work a little bit longer on average than other people,
7:27
maybe 68, 69 in comparison with 65, 64 in the U.S. but
7:32
even when you control for that longer working age,
7:35
there are much fewer Japanese in working age now than 20 years ago.
7:39
So, what I did, and this is research work with Gustavo Ventura at Arizona State and
7:44
Wenjao, one of my former students at Tsinghua University, was to say,
7:48
let's look at the data.
7:50
And what happens if you somehow measure GDP in these units of working age
7:55
population where you try to take account, as I was saying before, of this.
8:00
And then turns out to be the case that Japan is doing pretty well.
8:03
In fact, over the last 15 years is the country among all the G7 that has
8:08
grown the fastest.
8:10
It's just that there are fewer Japanese and in comparison,
8:14
other countries that sometimes are argue are doing very well.
8:19
But once you take account that there are, for instance in the U.S,
8:23
many more Americans now than 25 years ago, well,
8:26
the performance of the United States is not that great.
8:29
Well, it's still good, but it's not as good as some people argue.
8:32
And what we are trying to say is that the present of Japan is the future of
8:37
the rest of the world.
8:40
I have in Britain a lot lately on demographic trends,
8:43
and the biggest demographic trend is the way I always put it,
8:47
winter, the demographic winter is coming.
8:50
Every country in the world, even poor and
8:53
middle income economies are going through a very,
8:57
very fast fertility decline, which means that there is going to be this
9:02
big headwind of decreasing working age populations all across the globe.
9:08
And that will force us to start rethinking about how we actually measure
9:12
economic performance.
9:14
>> Jon Hartley: That's fascinating.
9:15
So I guess one question I have for
9:18
you when you make this adjustment to GDP per capita and
9:22
change it to GDP per worker, I'm curious you're saying
9:27
that Japan has been growing faster by that measure even
9:32
versus the US, i'm curious what about levels though?
9:37
If you were to look at GDP, I guess per worker for
9:42
getting the growth rates, is GDP per worker still much higher for the us?
9:49
Cuz when I think about these GDP per capita trends,
9:53
at least the story that you get from looking at GDP per capita across
9:59
countries today is that most countries in the developed world,
10:04
so Europe, Canada, most of Western Europe, Canada and
10:08
Japan basically haven't had any GDP per capita growth or
10:13
much GDP per capita growth since the global financial crisis.
10:18
And in Japan's case, even prior to that.
10:21
Whereas the US just keeps growing and it's very unique and
10:24
arguably maybe it's because it has this tech sector that's very unique.
10:29
These tech giants and culture of entrepreneurism really maybe only exists
10:35
in the US, how does that all look when you look at these GDP per worker numbers?
10:42
In terms of levels.
10:42
>> Jesus Fernández-Villaverde: Yes, so in terms of levels,
10:45
the US is still much richer.
10:47
Since we basically argue that once you look at everything in working age terms or
10:52
in worker terms, there is no big differences in economic growth.
10:57
It basically means that Canada, Western Europe and
11:00
Japan have not been able to close the gap with respect to the United States.
11:05
And that's what I will bring in all the arguments you make about entrepreneurship
11:10
and tech and maybe a better business environment, because something that
11:14
economists believe is some idea of technological diffusion that fine.
11:19
You develop some new wonderful technology on Silicon valley, but
11:22
that 10 years later, 15 years later, you should be able to implement that
11:27
technology in Italy or in Spain or in Germany.
11:30
And the fact that Italy, Spain or Germany or Japan, since you asked about it,
11:34
do not seem to be able to close the gap with the United States,
11:37
only seem to be more or less keeping up at the same level,
11:41
tells you that there is something deeply wrong with those economies.
11:45
But that's a slightly different story than the story of Japan being stagnated.
11:50
It's just for whatever the reason, Japan cannot close the gap with the US.
11:55
And the second thing that people should really understand is if the US is
11:59
going to have in 20, 30 years the current demographics of Japan,
12:04
then what we are thinking now as the very, very vital and
12:08
dynamic US economy may not look so vital and so dynamic 20, 30 years down the road.
12:13
And we want to keep this in mind.
12:16
>> Jon Hartley: And I, I appreciate a lot your focus on growth.
12:22
And you know, I think, you know, Robert Lucas, you know, famously said it best,
12:25
you know, once you start thinking about growth,
12:28
you can't start thinking about anything else.
12:30
And it really is so important.
12:32
The difference in say GDP per capita between the US and say China is so stark.
12:39
China's maybe 1/7th the GDP per capita of the U.S. or something to that degree.
12:45
That's just a massive dispersion growth whereas, or in living standards,
12:50
whereas a recession, something even a very bad recession like the Great Recession
12:55
might be only say a 5% sort of divot in the GDP per capita growth rate.
13:00
I'm curious what your thoughts are on just this issue of.
13:03
I don't think growth and business cycles are totally independent of each other.
13:08
We think about there's these things,
13:12
topics of hysteresis where countries essentially never
13:16
recover from really bad troughs, and they're on new paths.
13:21
But I guess if we're in a world where say GDP per capita is say flat,
13:27
or isn't really growing very much, how do we think about, I guess,
13:32
recessions in terms of defining them, how we should respond to them
13:37
if the trend starts mattering a lot more for the cycle, if that makes sense.
13:44
There's been, I think, very famous papers Britain called the cycle is the trend or
13:48
the trend is the cycle, and so forth.
13:51
And it's very apparent I think outside the U.S. it's a big question outside the U.S.
13:55
in part because the U.S. has this very unique ability to grow out of
14:00
recessions very quickly in its post war time series.
14:03
But there's been a lot more hysteresis across I think.
14:06
>> Jesus Fernández-Villaverde: Yes. >> Jon Hartley: World outside the US,
14:08
I'm curious what you think about that.
14:09
>> Jesus Fernández-Villaverde: Yes, no, I always.
14:11
So let me tell you an anecdote.
14:12
When I was an undergraduate student.
14:15
So this is my sophomore year in college and
14:17
I'm taking intermediate macro and the professor walks in and
14:21
we were using the textbook back then was Darwin's Fischer.
14:25
I don't know if you used that one, maybe some of the listeners use that one.
14:29
I think like page four or page five of that edition had that graph where Dorvus
14:34
and Fisher draw like a linear trend and then fluctuations around that trend.
14:40
And the professor comes and says, well, that's false,
14:43
because that's not how the world works.
14:45
The world basically you have expansions and then you have drops and
14:48
then you very rarely recover further drops.
14:51
You kind of lose that 2%, you lose forever.
14:54
So he says I want you to tear out that page from the book.
14:59
And we are kind of, everyone is saying, well,
15:01
silly thing that the professor is saying.
15:03
So he actually goes to the first row and there is this girl and
15:07
I still remember her name but I'm not going to say it here in public and
15:11
picks the book from the girl and takes the page and in front of all the class
15:16
actually turns out the page and says I want all of you to do the same.
15:20
And of course, you know, all of us very happily took out the book and
15:24
turned the page apart.
15:25
So yeah, he made his point, I'm still convinced.
15:29
When you look at many countries really what is happening is that you lose 2,
15:34
3 points of GDP during a recession and you don't seem to ever recover them.
15:38
And even the US you can argue after the Great Depression,
15:42
the big financial crisis of 2007, 2008 probably lost around 2,
15:47
3% of GDP and we have not been able to really recover them.
15:51
I'm going back to the pre financial crisis trend and I think we have more and
15:56
more evidence these days that the big difference.
15:59
Between at least rich countries is that relatively poorer countries
16:04
have more of these drops and they just never recover from them.
16:08
So in that sense, I think the US is very peculiar and
16:12
is more the exception that the norm out there.
16:15
So a lot of what I have done in my own research is trying to understand
16:19
these links between the business cycle and economic growth in the long run.
16:24
>> Jon Hartley: Well, that's fascinating.
16:25
And I guess one wonders too, I guess if we end up having declining
16:31
population growth rates, whether or not that overpowers,
16:36
I guess, the growth in productivity across countries.
16:41
And if that's the case, maybe we would have negative
16:45
GDP growth rates would become a common phenomenon,
16:50
which seems almost crazy to think growing up in.
16:54
I guess if you grew up in the late 20th century, even though growth rates have
17:00
slowly declined over time from what they were at in the middle of the 20th century,
17:05
at the height of advanced economy productivity booms.
17:09
And we've had productivity booms like in the 90s.
17:12
Do you think that negative GDP growth rates could be the norm in the future?
17:17
>> Jesus Fernández-Villaverde: Yeah, definitely.
17:18
So this is the way I put it, very simple for my undergrads.
17:23
So I said, look, on average the US labor productivity has been growing
17:27
a little bit less than 2% a year.
17:30
Let's say 1.8, 1.7 and working age population grows around 1% in a year.
17:37
So pure accounting 1.8 labor productivity growth plus 0.1.
17:41
Sorry, plus 1% growth of population, of the working age population,
17:46
that gives you 2.8.
17:48
So that means that on average you grow 2.8.
17:51
When the economy is doing well for whatever the reason,
17:53
maybe a fiscal expansion, you grow 3.8.
17:56
When the economy is not doing so well,
17:58
maybe the Fed is cooling down the economy 1.8.
18:00
So on average you are around there.
18:02
Now let's think for a second that productivity still grows 1.8 and
18:07
you will see how this is a heroic assumption.
18:10
But now working age population is falling 1% like in Japan.
18:15
So again, just by pure accounting 1.8 minus 1%,
18:18
it means that on average you are going to grow 0.8.
18:22
So as soon as the economy enters into even the mildest recession or the Fed,
18:27
the monetary authority even increases the interest rates just a little bit,
18:33
you go into negative growth.
18:35
Now things are going to be probably worse because we know that a lot of
18:39
technological innovation is done by young people.
18:43
So an economy with a lot of older people keeping a productivity growth
18:47
of 1.8 is going to be very unlikely.
18:50
So let's suppose that we have productivity growth of only 1.2 and
18:55
you still have a drop in working age population of 1%.
18:59
It means that your average growth is going to be 0.2, which means that in
19:04
around 50% of the years you are going to have negative GDP growth.
19:08
And it's a completely different world.
19:10
You see why thinking about demographics completely
19:13
changes your scenario of how the world economy or
19:16
like any advanced economy is going to look like around the year 2050.
19:21
So we are really entering into a complete different environment.
19:25
And it's quite striking to me how very,
19:29
very few economies have interiorized that point.
19:33
And the few that have thought about it use the words artificial intelligence,
19:37
because apparently artificial intelligence now is the solution to everything.
19:41
[LAUGH] But even if you think about it carefully, you know,
19:45
it's very difficult to see the largest economies in the world growing very,
19:51
very fast in the year 2050, given the current demographic trends.
19:56
>> Jon Hartley: It's s amazing in terms of rewriting textbooks,
20:01
you mentioned the textbook that was written by Sam Fisher and
20:06
Rudi Dornbusch, two famous MIT economists.
20:10
It's funny how a lot of textbooks may need to be rewritten in the future.
20:15
Because I guess there's a couple of definitions of recessions, and I think one
20:20
of the most famous ones is two consecutive negative quarters of GDP growth.
20:25
And if we're in this new period of negative GDP growth
20:30
quarters happening all the time,
20:32
I think we'll have to revisit what exactly it means to be in a recession.
20:38
>> Jesus Fernández-Villaverde: Exactly.
20:39
>> Jon Hartley: And I guess we'll still have the NBR recession dating committee
20:44
that's been started and led by Bob Hall for quite some time,
20:49
is now led by Valerie Ramey, and both Hoover senior fellows here.
20:54
But yeah, it's gonna be interesting.
20:56
I think groups like that, along with the textbook writers,
21:00
macroeconomists like ourselves, are gonna have to sort of rethink what recess
21:05
mean in the context of being in some sort of permanent negative GDP growth periods.
21:10
But perhaps we should be defining things on a GDP per capita basis or
21:15
maybe GDP per worker basis and negative productivity growth rates in that sense.
21:21
I want to talk a little bit about models, just a bit because you spent
21:26
a lot of time on models and coming up with new methods for solving them.
21:31
And you've done a lot of really great work on that.
21:34
And so on sort of this topic, topic of business cycles and DSGE models,
21:39
VAR models, curious in your mind, for listeners that may not be
21:43
familiar with DSG models versus VAR, dynamic stochastic general
21:48
equilibrium models versus VARs or vector autoregression models.
21:53
How do you see the strengths and weaknesses of DSGE models vs VARs?
21:58
On this podcast we spent a lot of time talking to former central bankers,
22:02
other macroeconomists.
22:03
And funny, one recurring theme on this podcast seems to be that central bankers
22:08
don't really seem to find a whole ton of value in DSGEs.
22:11
I mean, there's a bit of economic intuition that they have, but
22:15
it turns out that VARs generally produced much better forecasts.
22:18
But a lot of economists, central banks,
22:21
are still producing these DSGE type models.
22:25
I mean, what is the best case in your mind for the DSGE models?
22:30
I guess from both an economic theory standpoint and from just sort of,
22:35
I guess, a practical standpoint of say, a policymaker.
22:38
>> Jesus Fernández-Villaverde: Okay, so [COUGH] first of all,
22:40
I have written many papers on DSGE models and many papers on VARs.
22:45
And as you say, I think they have advantages and disadvantages.
22:49
To me, the main advantage of a DSGE model is that it really ties down or
22:54
discourse or narrative.
22:56
And what I mean by that, I have also been a little bit involved in economic policy.
23:01
I have seen many, many times, and I'm not going to name any concrete person,
23:05
someone coming and saying, X should happen.
23:08
And let me tell you a simple regression or
23:11
simple VR that tells you that X will happen if Y occurs first.
23:16
And then two years later they come and they say, no, no,
23:19
Z will happen if A happens.
23:20
And you say, look, Z if A happens and Y if X happens.
23:25
They are incompatible, they are logically inconsistent.
23:28
How do you fit this square, how do you square this circle?
23:31
And I think that the DSGE models, and it's just not the DSGE models,
23:35
I mean, in general equilibrium models, they really tie down your hands and
23:40
they force you to think through the whole logic of the system.
23:43
Now, having said that, what people forget is that the reduced form of a DSGE model,
23:50
at least when you linearize it is just a vector autoregression.
23:55
It's just a vector autoregression that has a lot of restrictions imposed by theory.
23:59
So if you go to the data and you estimate an unrestricted VR,
24:03
of course, you are going to do a little bit better than when you
24:08
estimate the restricted VR from the DSE model.
24:11
So what do you gain?
24:12
You gain extra flexibility from the VR, you lose some economic interpretability,
24:17
and especially you lose the ability to run a lot of counterfactuals.
24:21
So if I were a central banker, what I would like to have is a battery of
24:25
models that will help me to think about all these situations.
24:29
And in a metaphor that I use all the time, this is like saying,
24:34
what is better, red wine or white wine?
24:38
No, that's silly, okay?
24:39
Sometimes you have a nice steak and you want red wine, and
24:42
sometimes you're having a nice fish and you want a light white wine.
24:46
And I think that central bankers and in general policymakers should
24:51
understand that economics offers a wide many of choices, and
24:56
that really the ability of a great policymaker is to select the right
25:01
wine pairing for the night, and that's what leads to success.
25:06
>> Jon Hartley: I might be of the view that red wine strictly dominates
25:10
white wine.
25:11
>> [CROSSTALK] >> Jesus Fernández-Villaverde: You are not
25:13
European, Jon, so I need to forgive [LAUGH] your lack of civilization [LAUGH].
25:20
>> Jon Hartley: It's too funny.
25:24
Yeah, I mean, it's interesting, and I think it's interesting to think
25:28
about the DSG literature and how much of it is really moved to central banks and
25:33
finance departments away from macro departments.
25:37
I mean, do you have any general thoughts on just sort of macro as a field?
25:42
I feel like there's a lot of folks from certainly the applied
25:46
micro world who kind of say, well,
25:49
macro models are kind of the science fiction, this work of science fiction.
25:55
And a lot of them lack identification and, say, natural experiments or
26:00
examples of exogenous shocks.
26:02
And of course, you can sort of take parameters,
26:04
estimates from those sorts of studies and plug them into macro models.
26:07
But there's a lot of assumptions even in doing that, whether it's external validity
26:12
and combining all these, putting all these parameters to one model.
26:15
I'm just curious, what are your thoughts on sort of the state of macro in general,
26:21
and where do you think it could do better?
26:23
Are you a believer that empirical macro with better
26:28
identification is kind of one future path to sort of bring
26:34
more credibility revolution, maybe, to macro?
26:39
Many out there, say, Jon Steinsson and Emi Nakamura and their students and
26:44
many others are sort of entering.
26:46
I myself am sort of one of these people as well.
26:47
But I'm curious if you have a sort of take on sort of the future of macro.
26:51
>> Jesus Fernández-Villaverde: Yeah, so a couple of thoughts over there.
26:53
The first is I think that in macro, we have not been forceful enough
26:58
over the last ten years to explain why we also have identification.
27:03
I think that some of the people in the applied micro, they have argued, you don't
27:08
have identification in that sense, and I think that those arguments are weak.
27:13
And they are weak because they are thinking about identification in a very
27:17
particular context.
27:19
Those type of identification arguments,
27:21
I don't think they make terribly sense when you're thinking about the aggregate.
27:25
It's inherently very different to think about what is the consequence of,
27:30
let's say, reducing a class size in a high school,
27:34
that thinking about what are the effects of reducing the class sizes in
27:39
all high schools of the United States?
27:42
And I think that macro models and macro econometric tools were
27:46
designed to answer the later where they are interested in the former.
27:51
And in the same way that they say, well,
27:53
maybe we don't believe many of your results, my counterargument is,
27:56
well, guess what, I don't truly believe a lot of your results either [LAUGH].
27:59
>> Jon Hartley: [LAUGH] >> Jesus Fernández-Villaverde: And
28:00
I think that a considerable amount of what is done in applied economics these days,
28:04
I don't find it terribly useful.
28:06
Now, having said that, there is a second thought, which is I think that at this
28:11
moment in macro, we are still digesting the revolution of heterogeneous agents.
28:15
And we are trying to really understand where you want to apply heterogeneous
28:20
agents and where you want to apply the enormous amount of micro data that we have
28:24
been accumulating lately.
28:26
Myself, I have been working a lot on that over the last 10, 15 years and
28:31
it's still not very clear where we want to be in the balance between a lot of
28:36
detail and incorporating a lot of important margins of adjustment versus
28:41
having more stylized models that are a little bit easier to understand.
28:46
So along that dimension, I think the field is still evolving and
28:51
I myself don't have a 100% clear answer of where really
28:56
the line between parsimony and detail should fall in the long run.
29:01
What I know for sure is that we have so much new data and we have,
29:05
in addition to it, so many good solution methods that this is going
29:10
to transform the profession over the next ten years.
29:14
And where we will end, well, who knows?
29:16
But that's why it's fun to do research,
29:19
[LAUGH] cuz we don't quite know what we are doing.
29:23
>> Jon Hartley: I feel like, you know, a lot of macro, certainly,
29:26
you pointed out heterogeneous agents is one big trend in modeling recently.
29:30
I think another recent trend has been trying to, I guess,
29:34
maybe relax some of the assumptions around full information, rational expectations.
29:40
There's a lot of folks that work on so-called behavioral macroeconomics.
29:45
And so there's a few trends there.
29:47
And then even going back farther than earlier than that, I think there's for
29:52
many years, and to some degree that still goes on, these massive,
29:56
massive battles between sort of the various different schools of thought.
30:01
And many of these sort of crept their way into these policy discussions in public.
30:05
And you sort of had very famously for
30:09
a long time the sort of so-called Keynesian schools of,
30:14
or maybe old Keynesian schools of Harvard and MIT,
30:18
I think Paul Samuelson and many others.
30:22
Versus Milton Friedman and sort of the neoclassical Chicago school,
30:28
later the so-called new classical folks in Chicago and
30:33
Minnesota, where you spent some time and did your PhD.
30:38
I feel like those battles loomed so large for a long time, and
30:42
maybe just at the same time that applied micro folks started to gain a lot of
30:47
credibility in terms of the much smaller questions that they started answering.
30:53
But I'm curious, where do you think those old debates lie now?
30:58
Given that I feel like a lot of the giants of those schools have recently passed,
31:04
what are we sort of left with?
31:06
I've seen some papers now that try and make empirical cases that sticky wages and
31:11
sticky prices are kind of the fundamental cause of recessions.
31:15
But I think even some of that evidence is maybe not perfect or somewhat scant.
31:21
Obviously, the end of Minnesota sort of approach, or at least one part of it,
31:27
argues that productivity shortfalls are the causes of recessions.
31:33
And I think if you look at certain banking crises and tech crises,
31:37
maybe that wasn't the case there.
31:40
But I'm curious, what is your take on sort of schools of thought?
31:43
Do they still matter now in those battles?
31:47
Do they matter less?
31:49
And how do they influence your own modeling?
31:51
>> Jesus Fernández-Villaverde: Okay, so first of all, I was always a little bit
31:54
unhappy about this idea of presenting macro as the struggle between two schools.
32:00
Three schools or I think when I was an undergrad I even read this book about
32:04
the seven schools of macro because it really gives undergraduates the impression
32:08
that this is like picking your soccer team,
32:11
that you are either Real Madrid fan or Bayern Munich fan.
32:14
And in fact most people try to look at the data, try to look at the theory and
32:19
try to make a consistent answer.
32:22
My own reading of the situation was that kind of the Minnesota,
32:27
Chicago, Rochester won in terms of methodology.
32:31
They insisted that you wanted to be very explicit about the micro foundations,
32:36
about how people made decisions about information flows,
32:40
about being sure that general equilibrium restrictions hold,
32:44
while perhaps more of the MIT harbor side warned in terms of substance, of saying,
32:50
look, financial frictions matter, nominal rigidities probably matter a lot,
32:55
markets quite often do not clear or output is demand determined.
33:00
And I think that by the early 2000s, especially as you were saying,
33:03
some of the older generation start passing away or maybe not yet passing away, but
33:08
at least been a little bit older and retiring from active research.
33:12
The next generation was a little bit less personally invested in some of the,
33:17
you know, more sticky discussions and
33:20
much more open to think about in constructive cumulative terms.
33:25
This is still the case today that when you go to the market and you read your market
33:29
papers, it's easy to tell if this is a macro person from MIT or a macro person
33:34
from Chicago, but the difference is probably smallest that it has ever been.
33:39
And I think that what we are trying to figure it out is okay, fine, people don't.
33:44
You were mentioning before behavioral,
33:46
and I fully agree with the idea that people don't have full information.
33:51
You asked me today, for instance, what is the exchange rate between the US and
33:55
the Euro?
33:56
I'm going to get it probably perhaps within 5%.
33:59
And look, I'm an economist from Spain living in the US.
34:02
So if there was someone who should know [LAUGH] the exchange rate between the Euro
34:06
and the US dollar, it should be me.
34:08
And yet I only have a fussy idea about it.
34:11
On the other hand, we want to think a little bit carefully about how people,
34:16
if people are building their beliefs and people are coming up with rules of thumb,
34:21
we want to be a little bit more constructive that just say no,
34:24
people is silly and make systematic mistakes.
34:27
My impression was always that a lot of behavioral macro was a little bit
34:31
like that.
34:31
Or let me assume that people make this mistake or have this bias and
34:34
let's look at the consequences.
34:36
I think that much more productive, and that's something I have been working on
34:41
lately, is thinking about, well, let's Imagine that people have very simple
34:45
learning systems and are using deep neural networks and say, well humans actually our
34:50
brains are just deep neural networks how we learn about that.
34:53
Can we come up with simple rules of thumb given the observations?
34:57
And that gives us a constructive way to work out through these things.
35:02
So in that sense, you know, I think that we are making progress and
35:05
we are certainly moving forward and I think we are going to see very good
35:09
work on this area over the next ten years or so.
35:13
>> Jon Hartley: It's interesting cuz I guess behavioral macro is all about how,
35:17
I think a lot of behavioral economics for
35:19
a long time was just sort of making this point that well, people actually
35:24
don't maybe follow full information rational expectations correctly.
35:29
Which is hard to kind of argue in the sense that you sort of
35:34
have to argue that one that there isn't some sort of a systematic model out there.
35:41
But if, I guess the sort of new holy grail of I feel like of sort
35:46
of behavioral economics or behavioral macro as well is how do
35:51
people systematically make mistakes and what biases or
35:56
how are people actually thinking I guess in terms of complex systems or
36:01
you're talking about neural nets but
36:04
it hasn't been quite enough to just I guess say on the part of Thaler and
36:10
others will look this is a violation of these past assumptions.
36:15
Well, maybe we just had the utility functions wrong.
36:18
What are the correct or what are the better utility functions?
36:22
And how do you square a lot of micro evidence with our models?
36:28
And I feel like that's still very much an ongoing debate.
36:31
On the schools side of things,
36:33
it's amazing in all our ECON 101 textbooks one of the first things
36:37
we're taught in macro is that there are these different schools of thought.
36:42
And I do wonder how the textbooks will be written in the future
36:47
given that maybe they matter a bit less.
36:50
But I do think there's some very real world implications of some of these shifts
36:54
in terms of.
36:55
I think you're right in saying that MIT and
36:58
Harvard is one the substance of things.
37:00
But I think because of that we only in models tend to care about interest
37:05
rates or tend to include interest rates.
37:08
So things like monetary aggregates or money are completely withdrawn or
37:12
non-existent.
37:13
Whereas a lot of people on Wall street for example would like to point out that look
37:18
at M2Is was rising a lot when we saw inflation in the early 2000 and twenties.
37:23
And even some Minnesota type economists who I know some new classical economists
37:28
who I know who are still around, some younger,
37:31
some older still sort of bemoan that shift in the sense that sure, maybe monetary
37:35
aggregates can't be used as a tool because my demand isn't really predictable, but
37:40
at some level it still explains inflation.
37:43
Well, when you see big jumps in M2 various monetary aggregates, I'm curious if.
37:48
>> Jesus Fernández-Villaverde: Yeah. >> Jon Hartley: You have thoughts on that
37:49
as a minister.
37:50
>> Jesus Fernández-Villaverde: Yeah, actually, this is interesting that you
37:53
bring this up [COUGH] because around 2010, 2011 there, maybe even a little
37:58
bit earlier 2009, there was all this discussion in particular from people
38:03
in financial markets about how the big monetary expansion at the Fed at the time
38:08
quantitative easing was to create a lot of inflation, maybe even hyperinflation.
38:14
And I remember I had an MBS student shouting in my class [LAUGH] at Wharton
38:18
that we were going to have hyperinflation.
38:21
And my thinking at the moment was the very basic fiscal theory of
38:26
the price level that basically states that you want to think about really
38:30
the interaction between the fiscal side and the monetary side of policy and
38:35
that if the fundamental deficits of the future, parts of deficits have not
38:40
changed, issuing more money, the only thing you are doing is you are switching
38:46
one type of debt of the public government, which is long term debt, for
38:50
another type of debt, which is the short term debt that we call money.
38:55
And that was not going to have much an effect.
38:57
In fact there is a very famous paper by Neil Wallace in American economic review,
39:03
either 1981 or 1982 that basically shows an irrelevance theory.
39:08
Anyway, I made that argument and I remember.
39:11
So I basically said, look, there is not going to be inflation, don't worry,
39:14
there will be no inflation over the next 10 years.
39:16
And I think that was a big victory for economic theory and
39:19
it was a big victory for macroeconomics and
39:22
anyone who had studied macroeconomics seriously at the time.
39:25
And I remember because [LAUGH] I had a few friends in the financial markets and
39:30
man did I get hate emails like you don't know anything.
39:34
You are typical ex head at the university that don't understand anything whatsoever.
39:40
I'm moving all my investment into inflation protected asset classes.
39:45
And I was telling them there is not going to be any inflation, don't worry about it.
39:50
And, I guess that even by 2019 when we were talking
39:54
about this 2020, [LAUGH] they were still saying okay.
39:59
Inflation didn't happen, but we are not quite sure why we are unwilling to believe
40:03
the fiscal theory of the price level.
40:05
And I guess on the other hand, in 2021, I was among the ones who argue, again,
40:09
think through the logic of the fiscal theory, the price level.
40:13
Now, we are going to have inflation.
40:15
And again, now I guess that there were people who kind of overlearned the lesson.
40:21
You know that old joke that we always generals always fight the last war.
40:25
And people were saying, there was no inflation in 2010.
40:28
There is not going to be inflation either now.
40:30
And I was saying, no, no, no, no, no,
40:32
[LAUGH] because the argument is completely the opposite.
40:34
The argument is now we are changing structurally the fiscal situation of
40:38
governments with everything we did around Covid, and
40:41
we are also changing the supply curve of the economy.
40:44
And that's very different from what happened in 2010.
40:47
Now, we are going to have inflation.
40:49
And again, my, the same friends from the financial markets were telling me, no, no,
40:52
no, no, no, this is not going to happen.
40:54
And guess what?
40:55
We had inflation.
40:57
So in that sense, even if this is not something
41:01
that macroeconomists are really bragging about,
41:06
I will say that macroeconomics were successful.
41:11
Okay, let me be very careful.
41:13
The macroeconomics that you will learn in the standard first year graduate
41:18
school textbooks was very successful at predicting both the lack of
41:22
inflation in the early 2010s and inflation in the early 2020s.
41:27
A very different thing is that the type of people that write for
41:30
the New York Times or the type of people who write for
41:33
the Wall Street Journal are a very particular subset of the profession.
41:36
And some of them, I have strong reasons to believe,
41:40
are not really up to date on the best economic theories.
41:44
And they say silly things because they are playing a different game.
41:46
They are playing the rhetorical game.
41:48
They are not playing the game of trying to understand the world.
41:51
>> Jon Hartley: Well, I guess like one response that I may have in I
41:54
partially one of the things I say is fiscal theory.
41:57
One of the things I think I just find a little challenging with fiscal theory is
42:00
measuring expectations about future deficits, right?
42:03
And you can do certain things.
42:05
You can look at centuries of data and
42:07
maybe assume that people have unbiased expectations.
42:10
I's a huge assumption, and try and test the theory that way.
42:13
But at some level, it's hard to know, and you can't really follow
42:19
CBO forecasts just because of their current policy and current law and
42:24
so forth and don't really reflect what fiscal expectations are.
42:29
And the story that perhaps John Cochrane or
42:33
Eric Leeper would tell is that one in 2008 and
42:38
2009, when there was a big fiscal spending,
42:43
there was a promise to pay it back.
42:47
Whereas in this case, with the early 2000s fiscal stimulus,
42:54
there weren't any promises to pay it back.
42:58
And I think that it's certainly, I think, a somewhat compelling story.
43:03
But how you actually measure that, as someone who's just an empirical
43:08
macro person, I feel like it's a bit of a difficult to measure thing.
43:13
Whereas you look at something like M2, for example,
43:17
in the 2010s QE, M2 didn't really go up a whole lot, and why?
43:22
Because when all the central bank was doing was buying up treasuries and
43:27
swapping them with reserves.
43:29
Whereas what I think was fundamentally different.
43:32
And you also had a stimulus that was very focused on government spending
43:37
with the ARRA or American Recovery Reinvestment Act.
43:41
Whereas the early 2000s fiscal stimulus was really all about transfers,
43:46
whether it was stimulus payments, unemployment insurance, PPP and so forth.
43:52
And so in that case,
43:53
you had this massive uptick in monetary aggregate measures like M2, and why?
43:58
Because the amount that was going, all this fiscal stimulus
44:01
was in part going into people's demand deposits, which are measured in M2.
44:06
So you had a massive jump this time, something that you didn't have last time.
44:09
So the character of fiscal policy was very,
44:13
very different in the early 2020s versus 2008,
44:17
2009, and I feel like that matters.
44:21
I'm curious if you have any thoughts on that,
44:24
even though essentially very similar QE was embarked upon.
44:28
>> Jesus Fernández-Villaverde: Okay, so first of all, for
44:29
those listeners who know more about this fiscal theory of the price level,
44:34
I have joke on a few conferences and interviews that I'm a moderate fiscal
44:38
theory of the price level person in comparison with both Eric and John.
44:43
Eric Leeper and John Cochrane, who I will say they are like the purest,
44:47
the pure orthodox fiscal theory of the price level.
44:50
I'm more of a moderate that puts a little bit of fiscal of the fiscal theory
44:54
of the price level with a little bit of NEO models.
44:57
So in that sense, I'm perhaps closer to Chris Sims.
45:02
So in that sense, I also think that issues related with supply and
45:07
with prices stickiness matter.
45:09
But I think that the explanation you just gave me,
45:14
I will argue, is a fiscal explanation.
45:17
And that really the only difference between what I tried to say before and
45:21
the way you put it is more on the emphasis or in the pure rhetorical aspect of,
45:26
in the sense of discourse of how you structure the argument that
45:30
in the substance.
45:31
And basically in 2000, okay, let me put it in the following way.
45:35
In 2010, people were not going to the restaurant because they didn't
45:40
want to go to the restaurant.
45:42
They were worried, they wanted to save.
45:43
And what the Fed is doing is saying well I'm going to take your 30 years bonds, and
45:47
I'm going to give you cash instead.
45:49
And people are saying okay, how is this changing my situation?
45:52
How is this changing the issue that I'm worried about the future and
45:56
that I don't want to save a lot.
45:58
While exactly as you say in 2021 people are not going to
46:01
the restaurant because they are afraid of COVID,
46:04
so we send them $500, and we tell them, go and ask on DoorDash.
46:08
And then, yes, people went and start ordering a lot of takeout at DoorDash.
46:12
So I think we were basically saying the same.
46:15
But the point I was trying to say is that if you pick,
46:19
I would say the top 10 macroeconomists in academia in 2010 and
46:24
in 2020, 21, they probably did a much better job in
46:28
forecasting inflation not in like the next month.
46:32
But like in the big picture of what was going to happen using a standard tools
46:38
of economic theory that what the savvy people from the financial markets did.
46:44
And I think we should be proud of it and be,
46:47
brag about it because people are not really getting this point.
46:52
>> Jon Hartley: Yeah, I guess like it's.
46:53
So I think there's still a difference to be made though with I guess
46:58
like both sort of monetarist and even your sort of old
47:01
Keynesian Islam like reasoning which is more, more static.
47:06
And where saying that look there were all these transfers today and
47:11
that's what was causing inflation.
47:14
And now, I mean there were lots of people saying it was all about supply chains and
47:18
so forth, and it can be both too, right?
47:21
Like a supply curve shifting leftward and a demand or an aggregate demand
47:26
curve shifting, shifting right can produce inflationary conditions together.
47:32
But I think,
47:32
there is still a big difference in terms of just the mechanisms.
47:36
Whereas the IS-LM and Montrose models are very sort of static models.
47:41
>> Jesus Fernández-Villaverde: Yes.
47:42
>> Jon Hartley: Fiscal theory at the price level is really all about expectations.
47:45
And I still think there's a big difference there.
47:48
>> Jesus Fernández-Villaverde: Okay, that's fair enough.
47:49
But I think that what the fiscal theory of the price level,
47:52
even if you just go back to the very old school of Wallace and Sargent and
47:57
Wallace and unpleasant monetaristic.
47:59
Arithmetic says, I think, that both the old Keynesian story and
48:03
the monetary story miss a fundamental linchpin,
48:07
which is the connection between fiscal and monetary theory, sorry, policies, and
48:12
that if you think about just one of them in isolation from the other, chances
48:17
are that you are going to make systematic mistakes in how you think about the world.
48:23
And what the fiscal theory of the price level, with all its limitations
48:27
is telling you really try to think about these two things together and to me,
48:32
that's a big advice.
48:34
>> Jon Hartley: Yeah, I think that's right.
48:36
And I think, at some level,
48:37
a lot of these models are somewhat observationally equivalent.
48:40
So it is really difficult to really distinguish, say, between them.
48:44
There's something to be said, I think too,
48:48
about what central banks have actually been doing too,
48:53
which is these massive QE largely announcements or
48:57
central bank swap line announcements that seem to have
49:02
this ability to quell financial panic and
49:06
provide liquidity to the financial system in moments of panic.
49:11
Which is a bit of a different thing than say, the fiscal policy, fiscal transfers,
49:17
say, causing inflation through these different mechanisms and
49:21
all that's something that's due in terms of how central banking is done.
49:25
I want to just pivot a little bit to economic history.
49:29
You're working on an economic history book.
49:31
Tell us a little bit more about that.
49:32
You've done a lot of really great work on things like Fractured Land Hypothesis,
49:38
many other great works of economic history.
49:42
I'm curious.
49:42
Tell us more about your economic history interest in your forthcoming book.
49:47
>> Jesus Fernández-Villaverde: Okay, so first of all, I guess I was always
49:49
a little bit more interested in economic history than macro when I went to college.
49:56
Economic history when I went to college was a little bit boring.
50:00
It was about textiles in Yorkshire.
50:03
So we basically, spent one semester in my freshman year in college learning about
50:08
the spinning Jenny and the mule and I'm probably getting all these things wrong,
50:13
but about textiles in Yorkshire during the late 18th century.
50:18
And that to me was so boring.
50:22
So I kind of lost interest in economic history at the time.
50:26
At the same time, I was always very concerned about,
50:31
let me call the big, big picture questions.
50:35
In one particular case for me, since I'm from Spain,
50:39
is why did Spain miss the train of industrialization in the 19th century?
50:44
Why then did Spain industrialize in the second half of the 20th century?
50:50
And as we were saying before, why Spain?
50:54
Convergence to the level of the US stagnated by the late 1980s.
51:00
So I was always very concerned about these issues.
51:04
And most of the answers that people were given were loose, they were kind
51:09
of big ideas, but not really trying to sit down and thinking about them.
51:14
And in the late 1990s, early 2000s, we started having a new generation of
51:19
economic history and of course this year the Nobel Prize went to Daron Acemoglu,
51:24
Simon Johnson and Jim Robinson, which I'm very happy about precisely because
51:29
they brought in those big questions back into the center of economics.
51:34
And we can fight a little bit at the margin whether or
51:37
not the instrument that they use is the right instrument or not, but
51:41
to me, those discussions miss the big point.
51:44
And the big point was to say, look,
51:46
the really big issue is why did Japan industrialize and China did not?
51:51
Let's try to work through this and
51:53
let's try to use the modern tools of economics to work about it.
51:57
So I thought, Gee, this is in some sense what I wanted to do from the beginning.
52:01
So I went and asked to be allowed to teach a class on economic history.
52:06
And I was lucky enough that my dean accepted that proposal and
52:11
I have been working since then on a book.
52:14
So now last week I was actually at Northwestern and I bumped into Joel Mokir.
52:21
Joel Mokir, the book is under contract with him for
52:24
Princeton University Press and he gave me what I think you guys call a dress down.
52:29
He basically told me what is happening with the book.
52:32
So the book is suffering from two problems.
52:34
The first one is I think I've been a little bit over ambitious by now.
52:37
I think I have like 800 pages and that's probably too many and
52:42
I'm still not even like one-third down.
52:46
The second one is I really, really need to find,
52:51
let's say six, nine months in a desert island
52:56
at the top of a mountain, in a monastery away.
53:02
Just yesterday I woke up in the morning and I said, today is Thursday.
53:05
I'm going to work on the book for the whole day, impossible.
53:08
I got like 200 emails and just handling emails,
53:12
answering students, working with co-authors.
53:17
So I really need.
53:18
So my main goal now in life,
53:20
if anyone knows about that monastery, please let me know.
53:25
Find a place where I can go hide for nine months and finish the book.
53:29
So I will say the book.
53:30
>> Jon Hartley: There's a place in California called Hoover.
53:32
>> Jesus Fernández-Villaverde: Yeah, I keep telling them that.
53:33
They don't seem to get the hint.
53:36
But really go in a place, hide for nine months,
53:38
disconnect myself from the Internet.
53:40
Internet, send my wife to a wonderful,
53:43
touristic trip around the world and finish the book.
53:47
And I really like the drafts that I have, I have shown it to some people, and
53:52
the drafts of the chapters I have, I think it's a very creative and innovative book.
53:57
I'm really bringing, like,
53:58
everything we have learned about economic history over the last 20 years.
54:01
It's just that it's a global economic history textbook,
54:06
it's a lot of effort and you really need to spend a lot of time learning stuff.
54:13
So, for instance, last year I wanted to write about Latin America,
54:17
like the chapters thinking about why Latin America fail.
54:21
So I basically had to learn a lot about Latin America economic history,
54:25
I didn't know that much myself.
54:27
And that was fun and I spent like maybe nine months.
54:31
So now I'm your person, I'm the guy.
54:33
If you want to ask questions about Argentinian economic
54:35
history in the 19th century, I know how to answer them.
54:38
But [LAUGH]- >> Jon Hartley: Would you describe
54:40
yourself as economic institutions?
54:42
Like, is what your sort of fundamental cause?
54:45
>> Jesus Fernández-Villaverde: Yes.
54:46
So my punchline yes is institutions.
54:50
I think some countries, for whatever the reason, can get the institutions right,
54:54
and some countries don't.
54:56
So let me give you an example of my favorite question,
54:59
I asked this question in nearly, I would say 50% of my midterms.
55:04
And I don't ask that question more often because otherwise,
55:08
the students will be able to forecast it perfectly.
55:12
Why did the oil industry first appear in the United States?
55:17
The United States doesn't really have a lot of oil in comparison with other
55:21
countries.
55:22
And yet the United States is even today the largest oil producer in the world.
55:27
Well, because there is a fundamental difference between the US and
55:30
nearly every other country in the planet.
55:33
If I go back to my backyard, I'm looking at my backyard now through the window,
55:38
and I dig and I find something, it's mine.
55:41
If I go to the backyard of my dad in Spain and
55:45
I dig and I find something, is the government's, okay?
55:49
Is what, for instance, in the British common law system was,
55:53
in the English common law system is called crown's property.
55:57
So if in a country where I dig.
55:59
And that belongs to the government.
56:01
You are not going to have a lot of digging in a country where you dig and
56:05
that's yours, you are going to have a lot of digging.
56:08
So the US develop a very vibrant.
56:10
The first oil industry in the world and even to today is the main
56:15
technological leader in oil industry is precisely what we have, why?
56:21
Because the US has better institutions.
56:22
It's not that the US institutions are perfect, the area is better.
56:25
Now, what I think I differ perhaps not, but
56:29
perhaps a little bit from some of the other institutional
56:34
guys is that I like to link this a lot with a rich historical narrative,
56:40
trying to understand these institutions.
56:44
Yes, they appear, but
56:46
they appear because of the confluence of a lot of different reasons.
56:50
It's kind of hard to have a one-size-fits-all.
56:54
The US is in the way the US because of a lot of events, and
56:57
a lot of them were random and a lot of them were more structural.
57:01
And what I'm trying to tell is a history that highlights institutions.
57:06
On the other hand, I also trying to be very balanced.
57:13
And in the book I try to also give some,
57:16
I will say reasonable amount of space to alternative theories and say,
57:21
look, maybe there is some other type of officials that may be important.
57:27
>> Jon Hartley: Like culture, geography.
57:28
>> Jesus Fernández-Villaverde: Yeah, exactly.
57:29
So geography, I give a lot of space.
57:30
And the reason for
57:32
that is because I actually don't think that geography per se matters that much.
57:36
But for instance, you mentioned my work before on the fractured land.
57:39
Geography is key on determine the type of institutions that you have.
57:47
And these things matter in a lot of subtle ways.
57:50
And I don't think that economies and economic histories experience have really
57:54
work out all those subtleties and all those nuances.
57:57
>> Jon Hartley: Yeah, and I agree,
57:58
I think there's a lot of these nuances to work through.
58:02
With institutions as well, Acemoglu,
58:07
Robinson and Johnson just won the Nobel.
58:11
I think institutions matter a lot for growth, but which institutions and why?
58:15
It's a huge question.
58:16
And I think even their taxonomy of inclusive versus extractive institutions
58:21
isn't perfect, I think.
58:22
And I asked Daron Acemoglu, and this when he came on the podcast,
58:26
which is I think, at some level how do you explain the success
58:30
of what I would call liberal economic institutions or massive market reforms?
58:35
If you look at India in the early 90s or Chile in the late 20th century, or
58:40
you look at Eastern Europe after the fall of the USSR and
58:43
a lot of these sort of stories about inclusive versus extractive institutions?
58:48
I don't think it fully answer that.
58:50
But it's been a real honor to have you on and hear about your career and ideas.
58:55
You're also a prolific Op-ed writer in Spain as well in your home country.
59:00
And I highly recommend that our listeners check out both all your
59:05
academic writings as well as your popular writings as well.
59:10
Thank you so much for joining us.
59:12
>> Jesus Fernández-Villaverde: Thank you.
59:13
Thank you for having me.
59:14
>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century podcast,
59:17
an official podcast with the Hoover Economic Policy Working Group,
59:20
where we talk about economics, markets, and public policy.
59:23
I'm Jon Hartley, your host.
59:24
Thanks so much for joining us.
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