Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / Economic Growth, De-Population, and Macroeconomics with UPenn Econ Professor Jesus Fernández-Villaverde
Transcript
- 0:00>> Jesus Fernández-Villaverde: What we are trying to say is that the present of Japan
- 0:04is the future of the rest of the world.
- 0:07I have written in Britain a lot lately on demographic trends,
- 0:11and the biggest demographic trend is the way I always put it: winter.
- 0:15The demographic winter is coming.
- 0:17And every country in the world, even poor and middle income economies,
- 0:22are going through a very, very fast fertility decline.
- 0:26Which means that there is going to be this big headwind of decreasing
- 0:31working age populations all across the globe.
- 0:35And that will force us to start rethinking about how we actually measure economic
- 0:39performance.
- 0:40[MUSIC]
- 0:49>> Jon Hartley: This is the Capitalism and Freedom and the 21st Century podcast,
- 0:52an official podcast of the Hoover Institution Economic Policy Working Group
- 0:56where we talk about economics, markets and public policy.
- 0:59I'm Jon Hartley, your host today.
- 1:01My guest is Jesus Fernández-Villaverde, professor of Economics at the University
- 1:05of Pennsylvania, a macroeconomist and frequent visitor to Hoover.
- 1:09Welcome, Jesus.
- 1:10>> Jesus Fernández-Villaverde: Thank you.
- 1:11>> Jon Hartley: Jesus, you grew up in Madrid, Spain.
- 1:14How did you first get interested in economics and macroeconomics?
- 1:17>> Jesus Fernández-Villaverde: Well, so I grew up in the 1980s and
- 1:20at that time the Spanish economy was not doing very well,
- 1:25we had high inflation, high unemployment, high government deficit.
- 1:30The economy was not growing very fast.
- 1:33So I guess that for some kids who were more or
- 1:36less interested in how his country was going on,
- 1:39started thinking about economics and more in particular into macro was natural.
- 1:46So one day I decided I wanted to be an economist.
- 1:49And here I am, like maybe 40 years later.
- 1:52>> Jon Hartley: That's funny.
- 1:53I mean, you did your PhD in Minnesota and
- 1:56your advisor was actually Leo Haney, a senior fellow here at Hoover.
- 2:02Tell us about your path from growing up in Madrid to Minnesota and
- 2:06getting your PhD there.
- 2:08>> Jesus Fernández-Villaverde: Well, so already when I was an undergraduate,
- 2:11I started trying to read things a little
- 2:14bit more advanced than perhaps the average undergraduate.
- 2:19And I bump into the very first textbook that
- 2:23Tom Sarrient brought on macroeconomics.
- 2:26It's a black book,
- 2:28I always joke that Tom has written three textbooks in macroeconomics.
- 2:32And I really like it.
- 2:33I enjoy it a lot.
- 2:34It opened like a lot of new views for me.
- 2:38And he said, professor of economics at Minnesota,
- 2:40because at that time Tom was at Minnesota.
- 2:43So I thought, wow, I want to go to Minnesota.
- 2:45Then this was before the Internet and all these type of things.
- 2:48So I wasn't quite aware that Tom had moved, I think at the time to Chicago, but
- 2:53nonetheless, I applied to Minnesota, they accepted me, and the rest is history.
- 2:58>> Jon Hartley: That's amazing, I mean,
- 3:00what a fascinating place to study macroeconomics.
- 3:03It's produced so many famous macroeconomists,
- 3:05it's really the home or one of the homes of the rational expectations revolution.
- 3:10We think Tom Sargent, Ed Prescott, many others who are part of that and
- 3:16many Nobel Prizes have come out of that, and a tremendous amount of
- 3:22influence in terms of how macroeconomic modeling is done.
- 3:27Find me a macroeconomic model that's published today that doesn't include
- 3:33some level of micro founded individual agents underline the model.
- 3:38You do a lot of work on a number of things, growth,
- 3:43economic history, solving DSG models.
- 3:46In 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
- 3:54of the Penn Initiative for the Study of Markets, which you're also the founder of.
- 4:00Tell us what that's all about.
- 4:02>> Jesus Fernández-Villaverde: Okay, so a few years ago I started to grow a little
- 4:06bit unhappy with the state of undergraduate education in economics.
- 4:12I don't think we are doing a very good job at it.
- 4:14I think that we go to class and we tell students a lot about Lagrangians and
- 4:19first order conditions and how to solve optimization problems,
- 4:23but we don't really give them an economic understanding of what is going on.
- 4:28And I'm not against math, I use a lot of math in my research, but I think that math
- 4:33must be built on the foundation of understanding the economic intuition.
- 4:38And I also was a little bit worried that the students were a little bit separated
- 4:42from things like the historical background of market economies,
- 4:46some of the philosophical foundations of market economies, and that
- 4:51there was some scope for a center at Penn that could provide some of those courses.
- 4:56So I want to talk with my chair and then with the Dean.
- 4:58I was able to get a little bit of support.
- 5:01Not much.
- 5:02It has been a little bit of a struggle, to be honest.
- 5:04And we have been able to offer a lot of undergraduate courses.
- 5:08I think this year we are offering six.
- 5:10Some of them I really think are quite cool, like economics and
- 5:15philosophy and history of financial markets.
- 5:18And we also have a little bit of visitors program.
- 5:22So I think it's very nice,
- 5:23I think it has made a big contribution to the undergraduate education at Penn and
- 5:28hopefully 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
- 5:35the Penn Economics Department and Wharton as well.
- 5:39Appreciate that.
- 5:40I want to get a bit into your research and
- 5:42thinking around things starting with growth.
- 5:45So you have a recent paper titled the Wealth of Working Nations, and
- 5:50in it you're estimating, I think GDP per capita across countries.
- 5:55But you're also taking into account the age of the labor force,
- 6:00which varies pretty significantly across countries.
- 6:04I think Japan, most of its population is much older.
- 6:09So that distorts perhaps the size of its working population.
- 6:17Or perhaps your GDP per capita figures don't really account for
- 6:21some of that, the size of its working population.
- 6:24Can you tell us more about that and your other thoughts on demographic
- 6:30trends around aging populations, declining birth rates, and
- 6:35obviously also declining GDP per capita growth rates across the developed world?
- 6:41>> Jesus Fernández-Villaverde: Of course.
- 6:42So, this research came from a very simple observation.
- 6:47So, you know, you stop the average person in the street and you ask them, you know,
- 6:52give me an example of a rich economy that has not been doing very well for
- 6:56the last 10, 20, or 25 years.
- 6:59Chances are that this person reads the financial press at all,
- 7:02they will immediately say Japan.
- 7:05So, you know, out of curiosity, I started looking at Japan and I realized,
- 7:10look, there are much fewer Japanese of working age now than 25 years ago,
- 7:15just because Japan was the first rich economy that witnessed a very,
- 7:20very fast drop in fertility.
- 7:22And yes, Japanese work a little bit longer on average than other people,
- 7:27maybe 68, 69 in comparison with 65, 64 in the U.S. but
- 7:32even when you control for that longer working age,
- 7:35there are much fewer Japanese in working age now than 20 years ago.
- 7:39So, what I did, and this is research work with Gustavo Ventura at Arizona State and
- 7:44Wenjao, one of my former students at Tsinghua University, was to say,
- 7:48let's look at the data.
- 7:50And what happens if you somehow measure GDP in these units of working age
- 7:55population where you try to take account, as I was saying before, of this.
- 8:00And then turns out to be the case that Japan is doing pretty well.
- 8:03In fact, over the last 15 years is the country among all the G7 that has
- 8:08grown the fastest.
- 8:10It's just that there are fewer Japanese and in comparison,
- 8:14other countries that sometimes are argue are doing very well.
- 8:19But once you take account that there are, for instance in the U.S,
- 8:23many more Americans now than 25 years ago, well,
- 8:26the performance of the United States is not that great.
- 8:29Well, it's still good, but it's not as good as some people argue.
- 8:32And what we are trying to say is that the present of Japan is the future of
- 8:37the rest of the world.
- 8:40I have in Britain a lot lately on demographic trends,
- 8:43and the biggest demographic trend is the way I always put it,
- 8:47winter, the demographic winter is coming.
- 8:50Every country in the world, even poor and
- 8:53middle income economies are going through a very,
- 8:57very fast fertility decline, which means that there is going to be this
- 9:02big headwind of decreasing working age populations all across the globe.
- 9:08And that will force us to start rethinking about how we actually measure
- 9:12economic performance.
- 9:14>> Jon Hartley: That's fascinating.
- 9:15So I guess one question I have for
- 9:18you when you make this adjustment to GDP per capita and
- 9:22change it to GDP per worker, I'm curious you're saying
- 9:27that Japan has been growing faster by that measure even
- 9:32versus the US, i'm curious what about levels though?
- 9:37If you were to look at GDP, I guess per worker for
- 9:42getting the growth rates, is GDP per worker still much higher for the us?
- 9:49Cuz when I think about these GDP per capita trends,
- 9:53at least the story that you get from looking at GDP per capita across
- 9:59countries today is that most countries in the developed world,
- 10:04so Europe, Canada, most of Western Europe, Canada and
- 10:08Japan basically haven't had any GDP per capita growth or
- 10:13much GDP per capita growth since the global financial crisis.
- 10:18And in Japan's case, even prior to that.
- 10:21Whereas the US just keeps growing and it's very unique and
- 10:24arguably maybe it's because it has this tech sector that's very unique.
- 10:29These tech giants and culture of entrepreneurism really maybe only exists
- 10:35in the US, how does that all look when you look at these GDP per worker numbers?
- 10:42In terms of levels.
- 10:42>> Jesus Fernández-Villaverde: Yes, so in terms of levels,
- 10:45the US is still much richer.
- 10:47Since we basically argue that once you look at everything in working age terms or
- 10:52in worker terms, there is no big differences in economic growth.
- 10:57It basically means that Canada, Western Europe and
- 11:00Japan have not been able to close the gap with respect to the United States.
- 11:05And that's what I will bring in all the arguments you make about entrepreneurship
- 11:10and tech and maybe a better business environment, because something that
- 11:14economists believe is some idea of technological diffusion that fine.
- 11:19You develop some new wonderful technology on Silicon valley, but
- 11:22that 10 years later, 15 years later, you should be able to implement that
- 11:27technology in Italy or in Spain or in Germany.
- 11:30And the fact that Italy, Spain or Germany or Japan, since you asked about it,
- 11:34do not seem to be able to close the gap with the United States,
- 11:37only seem to be more or less keeping up at the same level,
- 11:41tells you that there is something deeply wrong with those economies.
- 11:45But that's a slightly different story than the story of Japan being stagnated.
- 11:50It's just for whatever the reason, Japan cannot close the gap with the US.
- 11:55And the second thing that people should really understand is if the US is
- 11:59going to have in 20, 30 years the current demographics of Japan,
- 12:04then what we are thinking now as the very, very vital and
- 12:08dynamic US economy may not look so vital and so dynamic 20, 30 years down the road.
- 12:13And we want to keep this in mind.
- 12:16>> Jon Hartley: And I, I appreciate a lot your focus on growth.
- 12:22And you know, I think, you know, Robert Lucas, you know, famously said it best,
- 12:25you know, once you start thinking about growth,
- 12:28you can't start thinking about anything else.
- 12:30And it really is so important.
- 12:32The difference in say GDP per capita between the US and say China is so stark.
- 12:39China's maybe 1/7th the GDP per capita of the U.S. or something to that degree.
- 12:45That's just a massive dispersion growth whereas, or in living standards,
- 12:50whereas a recession, something even a very bad recession like the Great Recession
- 12:55might be only say a 5% sort of divot in the GDP per capita growth rate.
- 13:00I'm curious what your thoughts are on just this issue of.
- 13:03I don't think growth and business cycles are totally independent of each other.
- 13:08We think about there's these things,
- 13:12topics of hysteresis where countries essentially never
- 13:16recover from really bad troughs, and they're on new paths.
- 13:21But I guess if we're in a world where say GDP per capita is say flat,
- 13:27or isn't really growing very much, how do we think about, I guess,
- 13:32recessions in terms of defining them, how we should respond to them
- 13:37if the trend starts mattering a lot more for the cycle, if that makes sense.
- 13:44There's been, I think, very famous papers Britain called the cycle is the trend or
- 13:48the trend is the cycle, and so forth.
- 13:51And it's very apparent I think outside the U.S. it's a big question outside the U.S.
- 13:55in part because the U.S. has this very unique ability to grow out of
- 14:00recessions very quickly in its post war time series.
- 14:03But there's been a lot more hysteresis across I think.
- 14:06>> Jesus Fernández-Villaverde: Yes. >> Jon Hartley: World outside the US,
- 14:08I'm curious what you think about that.
- 14:09>> Jesus Fernández-Villaverde: Yes, no, I always.
- 14:11So let me tell you an anecdote.
- 14:12When I was an undergraduate student.
- 14:15So this is my sophomore year in college and
- 14:17I'm taking intermediate macro and the professor walks in and
- 14:21we were using the textbook back then was Darwin's Fischer.
- 14:25I don't know if you used that one, maybe some of the listeners use that one.
- 14:29I think like page four or page five of that edition had that graph where Dorvus
- 14:34and Fisher draw like a linear trend and then fluctuations around that trend.
- 14:40And the professor comes and says, well, that's false,
- 14:43because that's not how the world works.
- 14:45The world basically you have expansions and then you have drops and
- 14:48then you very rarely recover further drops.
- 14:51You kind of lose that 2%, you lose forever.
- 14:54So he says I want you to tear out that page from the book.
- 14:59And we are kind of, everyone is saying, well,
- 15:01silly thing that the professor is saying.
- 15:03So he actually goes to the first row and there is this girl and
- 15:07I still remember her name but I'm not going to say it here in public and
- 15:11picks the book from the girl and takes the page and in front of all the class
- 15:16actually turns out the page and says I want all of you to do the same.
- 15:20And of course, you know, all of us very happily took out the book and
- 15:24turned the page apart.
- 15:25So yeah, he made his point, I'm still convinced.
- 15:29When you look at many countries really what is happening is that you lose 2,
- 15:343 points of GDP during a recession and you don't seem to ever recover them.
- 15:38And even the US you can argue after the Great Depression,
- 15:42the big financial crisis of 2007, 2008 probably lost around 2,
- 15:473% of GDP and we have not been able to really recover them.
- 15:51I'm going back to the pre financial crisis trend and I think we have more and
- 15:56more evidence these days that the big difference.
- 15:59Between at least rich countries is that relatively poorer countries
- 16:04have more of these drops and they just never recover from them.
- 16:08So in that sense, I think the US is very peculiar and
- 16:12is more the exception that the norm out there.
- 16:15So a lot of what I have done in my own research is trying to understand
- 16:19these links between the business cycle and economic growth in the long run.
- 16:24>> Jon Hartley: Well, that's fascinating.
- 16:25And I guess one wonders too, I guess if we end up having declining
- 16:31population growth rates, whether or not that overpowers,
- 16:36I guess, the growth in productivity across countries.
- 16:41And if that's the case, maybe we would have negative
- 16:45GDP growth rates would become a common phenomenon,
- 16:50which seems almost crazy to think growing up in.
- 16:54I guess if you grew up in the late 20th century, even though growth rates have
- 17:00slowly declined over time from what they were at in the middle of the 20th century,
- 17:05at the height of advanced economy productivity booms.
- 17:09And we've had productivity booms like in the 90s.
- 17:12Do you think that negative GDP growth rates could be the norm in the future?
- 17:17>> Jesus Fernández-Villaverde: Yeah, definitely.
- 17:18So this is the way I put it, very simple for my undergrads.
- 17:23So I said, look, on average the US labor productivity has been growing
- 17:27a little bit less than 2% a year.
- 17:30Let's say 1.8, 1.7 and working age population grows around 1% in a year.
- 17:37So pure accounting 1.8 labor productivity growth plus 0.1.
- 17:41Sorry, plus 1% growth of population, of the working age population,
- 17:46that gives you 2.8.
- 17:48So that means that on average you grow 2.8.
- 17:51When the economy is doing well for whatever the reason,
- 17:53maybe a fiscal expansion, you grow 3.8.
- 17:56When the economy is not doing so well,
- 17:58maybe the Fed is cooling down the economy 1.8.
- 18:00So on average you are around there.
- 18:02Now let's think for a second that productivity still grows 1.8 and
- 18:07you will see how this is a heroic assumption.
- 18:10But now working age population is falling 1% like in Japan.
- 18:15So again, just by pure accounting 1.8 minus 1%,
- 18:18it means that on average you are going to grow 0.8.
- 18:22So as soon as the economy enters into even the mildest recession or the Fed,
- 18:27the monetary authority even increases the interest rates just a little bit,
- 18:33you go into negative growth.
- 18:35Now things are going to be probably worse because we know that a lot of
- 18:39technological innovation is done by young people.
- 18:43So an economy with a lot of older people keeping a productivity growth
- 18:47of 1.8 is going to be very unlikely.
- 18:50So let's suppose that we have productivity growth of only 1.2 and
- 18:55you still have a drop in working age population of 1%.
- 18:59It means that your average growth is going to be 0.2, which means that in
- 19:04around 50% of the years you are going to have negative GDP growth.
- 19:08And it's a completely different world.
- 19:10You see why thinking about demographics completely
- 19:13changes your scenario of how the world economy or
- 19:16like any advanced economy is going to look like around the year 2050.
- 19:21So we are really entering into a complete different environment.
- 19:25And it's quite striking to me how very,
- 19:29very few economies have interiorized that point.
- 19:33And the few that have thought about it use the words artificial intelligence,
- 19:37because apparently artificial intelligence now is the solution to everything.
- 19:41[LAUGH] But even if you think about it carefully, you know,
- 19:45it's very difficult to see the largest economies in the world growing very,
- 19:51very fast in the year 2050, given the current demographic trends.
- 19:56>> Jon Hartley: It's s amazing in terms of rewriting textbooks,
- 20:01you mentioned the textbook that was written by Sam Fisher and
- 20:06Rudi Dornbusch, two famous MIT economists.
- 20:10It's funny how a lot of textbooks may need to be rewritten in the future.
- 20:15Because I guess there's a couple of definitions of recessions, and I think one
- 20:20of the most famous ones is two consecutive negative quarters of GDP growth.
- 20:25And if we're in this new period of negative GDP growth
- 20:30quarters happening all the time,
- 20:32I 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
- 20:44that's been started and led by Bob Hall for quite some time,
- 20:49is now led by Valerie Ramey, and both Hoover senior fellows here.
- 20:54But yeah, it's gonna be interesting.
- 20:56I think groups like that, along with the textbook writers,
- 21:00macroeconomists like ourselves, are gonna have to sort of rethink what recess
- 21:05mean in the context of being in some sort of permanent negative GDP growth periods.
- 21:10But perhaps we should be defining things on a GDP per capita basis or
- 21:15maybe GDP per worker basis and negative productivity growth rates in that sense.
- 21:21I want to talk a little bit about models, just a bit because you spent
- 21:26a lot of time on models and coming up with new methods for solving them.
- 21:31And you've done a lot of really great work on that.
- 21:34And so on sort of this topic, topic of business cycles and DSGE models,
- 21:39VAR models, curious in your mind, for listeners that may not be
- 21:43familiar with DSG models versus VAR, dynamic stochastic general
- 21:48equilibrium models versus VARs or vector autoregression models.
- 21:53How do you see the strengths and weaknesses of DSGE models vs VARs?
- 21:58On this podcast we spent a lot of time talking to former central bankers,
- 22:02other macroeconomists.
- 22:03And funny, one recurring theme on this podcast seems to be that central bankers
- 22:08don't really seem to find a whole ton of value in DSGEs.
- 22:11I mean, there's a bit of economic intuition that they have, but
- 22:15it turns out that VARs generally produced much better forecasts.
- 22:18But a lot of economists, central banks,
- 22:21are still producing these DSGE type models.
- 22:25I mean, what is the best case in your mind for the DSGE models?
- 22:30I guess from both an economic theory standpoint and from just sort of,
- 22:35I guess, a practical standpoint of say, a policymaker.
- 22:38>> Jesus Fernández-Villaverde: Okay, so [COUGH] first of all,
- 22:40I have written many papers on DSGE models and many papers on VARs.
- 22:45And as you say, I think they have advantages and disadvantages.
- 22:49To me, the main advantage of a DSGE model is that it really ties down or
- 22:54discourse or narrative.
- 22:56And what I mean by that, I have also been a little bit involved in economic policy.
- 23:01I have seen many, many times, and I'm not going to name any concrete person,
- 23:05someone coming and saying, X should happen.
- 23:08And let me tell you a simple regression or
- 23:11simple VR that tells you that X will happen if Y occurs first.
- 23:16And then two years later they come and they say, no, no,
- 23:19Z will happen if A happens.
- 23:20And you say, look, Z if A happens and Y if X happens.
- 23:25They are incompatible, they are logically inconsistent.
- 23:28How do you fit this square, how do you square this circle?
- 23:31And I think that the DSGE models, and it's just not the DSGE models,
- 23:35I mean, in general equilibrium models, they really tie down your hands and
- 23:40they force you to think through the whole logic of the system.
- 23:43Now, having said that, what people forget is that the reduced form of a DSGE model,
- 23:50at least when you linearize it is just a vector autoregression.
- 23:55It's just a vector autoregression that has a lot of restrictions imposed by theory.
- 23:59So if you go to the data and you estimate an unrestricted VR,
- 24:03of course, you are going to do a little bit better than when you
- 24:08estimate the restricted VR from the DSE model.
- 24:11So what do you gain?
- 24:12You gain extra flexibility from the VR, you lose some economic interpretability,
- 24:17and especially you lose the ability to run a lot of counterfactuals.
- 24:21So if I were a central banker, what I would like to have is a battery of
- 24:25models that will help me to think about all these situations.
- 24:29And in a metaphor that I use all the time, this is like saying,
- 24:34what is better, red wine or white wine?
- 24:38No, that's silly, okay?
- 24:39Sometimes you have a nice steak and you want red wine, and
- 24:42sometimes you're having a nice fish and you want a light white wine.
- 24:46And I think that central bankers and in general policymakers should
- 24:51understand that economics offers a wide many of choices, and
- 24:56that really the ability of a great policymaker is to select the right
- 25:01wine 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
- 25:10white wine.
- 25:11>> [CROSSTALK] >> Jesus Fernández-Villaverde: You are not
- 25:13European, Jon, so I need to forgive [LAUGH] your lack of civilization [LAUGH].
- 25:20>> Jon Hartley: It's too funny.
- 25:24Yeah, I mean, it's interesting, and I think it's interesting to think
- 25:28about the DSG literature and how much of it is really moved to central banks and
- 25:33finance departments away from macro departments.
- 25:37I mean, do you have any general thoughts on just sort of macro as a field?
- 25:42I feel like there's a lot of folks from certainly the applied
- 25:46micro world who kind of say, well,
- 25:49macro models are kind of the science fiction, this work of science fiction.
- 25:55And a lot of them lack identification and, say, natural experiments or
- 26:00examples of exogenous shocks.
- 26:02And of course, you can sort of take parameters,
- 26:04estimates from those sorts of studies and plug them into macro models.
- 26:07But there's a lot of assumptions even in doing that, whether it's external validity
- 26:12and combining all these, putting all these parameters to one model.
- 26:15I'm just curious, what are your thoughts on sort of the state of macro in general,
- 26:21and where do you think it could do better?
- 26:23Are you a believer that empirical macro with better
- 26:28identification is kind of one future path to sort of bring
- 26:34more credibility revolution, maybe, to macro?
- 26:39Many out there, say, Jon Steinsson and Emi Nakamura and their students and
- 26:44many others are sort of entering.
- 26:46I myself am sort of one of these people as well.
- 26:47But 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.
- 26:53The first is I think that in macro, we have not been forceful enough
- 26:58over the last ten years to explain why we also have identification.
- 27:03I think that some of the people in the applied micro, they have argued, you don't
- 27:08have identification in that sense, and I think that those arguments are weak.
- 27:13And they are weak because they are thinking about identification in a very
- 27:17particular context.
- 27:19Those type of identification arguments,
- 27:21I don't think they make terribly sense when you're thinking about the aggregate.
- 27:25It's inherently very different to think about what is the consequence of,
- 27:30let's say, reducing a class size in a high school,
- 27:34that thinking about what are the effects of reducing the class sizes in
- 27:39all high schools of the United States?
- 27:42And I think that macro models and macro econometric tools were
- 27:46designed to answer the later where they are interested in the former.
- 27:51And in the same way that they say, well,
- 27:53maybe we don't believe many of your results, my counterargument is,
- 27:56well, guess what, I don't truly believe a lot of your results either [LAUGH].
- 27:59>> Jon Hartley: [LAUGH] >> Jesus Fernández-Villaverde: And
- 28:00I think that a considerable amount of what is done in applied economics these days,
- 28:04I don't find it terribly useful.
- 28:06Now, having said that, there is a second thought, which is I think that at this
- 28:11moment in macro, we are still digesting the revolution of heterogeneous agents.
- 28:15And we are trying to really understand where you want to apply heterogeneous
- 28:20agents and where you want to apply the enormous amount of micro data that we have
- 28:24been accumulating lately.
- 28:26Myself, I have been working a lot on that over the last 10, 15 years and
- 28:31it's still not very clear where we want to be in the balance between a lot of
- 28:36detail and incorporating a lot of important margins of adjustment versus
- 28:41having more stylized models that are a little bit easier to understand.
- 28:46So along that dimension, I think the field is still evolving and
- 28:51I myself don't have a 100% clear answer of where really
- 28:56the line between parsimony and detail should fall in the long run.
- 29:01What I know for sure is that we have so much new data and we have,
- 29:05in addition to it, so many good solution methods that this is going
- 29:10to transform the profession over the next ten years.
- 29:14And where we will end, well, who knows?
- 29:16But 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,
- 29:26you pointed out heterogeneous agents is one big trend in modeling recently.
- 29:30I think another recent trend has been trying to, I guess,
- 29:34maybe relax some of the assumptions around full information, rational expectations.
- 29:40There's a lot of folks that work on so-called behavioral macroeconomics.
- 29:45And so there's a few trends there.
- 29:47And then even going back farther than earlier than that, I think there's for
- 29:52many years, and to some degree that still goes on, these massive,
- 29:56massive battles between sort of the various different schools of thought.
- 30:01And many of these sort of crept their way into these policy discussions in public.
- 30:05And you sort of had very famously for
- 30:09a long time the sort of so-called Keynesian schools of,
- 30:14or maybe old Keynesian schools of Harvard and MIT,
- 30:18I think Paul Samuelson and many others.
- 30:22Versus Milton Friedman and sort of the neoclassical Chicago school,
- 30:28later the so-called new classical folks in Chicago and
- 30:33Minnesota, where you spent some time and did your PhD.
- 30:38I feel like those battles loomed so large for a long time, and
- 30:42maybe just at the same time that applied micro folks started to gain a lot of
- 30:47credibility in terms of the much smaller questions that they started answering.
- 30:53But I'm curious, where do you think those old debates lie now?
- 30:58Given that I feel like a lot of the giants of those schools have recently passed,
- 31:04what are we sort of left with?
- 31:06I've seen some papers now that try and make empirical cases that sticky wages and
- 31:11sticky prices are kind of the fundamental cause of recessions.
- 31:15But I think even some of that evidence is maybe not perfect or somewhat scant.
- 31:21Obviously, the end of Minnesota sort of approach, or at least one part of it,
- 31:27argues that productivity shortfalls are the causes of recessions.
- 31:33And I think if you look at certain banking crises and tech crises,
- 31:37maybe that wasn't the case there.
- 31:40But I'm curious, what is your take on sort of schools of thought?
- 31:43Do they still matter now in those battles?
- 31:47Do they matter less?
- 31:49And how do they influence your own modeling?
- 31:51>> Jesus Fernández-Villaverde: Okay, so first of all, I was always a little bit
- 31:54unhappy about this idea of presenting macro as the struggle between two schools.
- 32:00Three schools or I think when I was an undergrad I even read this book about
- 32:04the seven schools of macro because it really gives undergraduates the impression
- 32:08that this is like picking your soccer team,
- 32:11that you are either Real Madrid fan or Bayern Munich fan.
- 32:14And in fact most people try to look at the data, try to look at the theory and
- 32:19try to make a consistent answer.
- 32:22My own reading of the situation was that kind of the Minnesota,
- 32:27Chicago, Rochester won in terms of methodology.
- 32:31They insisted that you wanted to be very explicit about the micro foundations,
- 32:36about how people made decisions about information flows,
- 32:40about being sure that general equilibrium restrictions hold,
- 32:44while perhaps more of the MIT harbor side warned in terms of substance, of saying,
- 32:50look, financial frictions matter, nominal rigidities probably matter a lot,
- 32:55markets quite often do not clear or output is demand determined.
- 33:00And I think that by the early 2000s, especially as you were saying,
- 33:03some of the older generation start passing away or maybe not yet passing away, but
- 33:08at least been a little bit older and retiring from active research.
- 33:12The next generation was a little bit less personally invested in some of the,
- 33:17you know, more sticky discussions and
- 33:20much more open to think about in constructive cumulative terms.
- 33:25This is still the case today that when you go to the market and you read your market
- 33:29papers, it's easy to tell if this is a macro person from MIT or a macro person
- 33:34from Chicago, but the difference is probably smallest that it has ever been.
- 33:39And I think that what we are trying to figure it out is okay, fine, people don't.
- 33:44You were mentioning before behavioral,
- 33:46and I fully agree with the idea that people don't have full information.
- 33:51You asked me today, for instance, what is the exchange rate between the US and
- 33:55the Euro?
- 33:56I'm going to get it probably perhaps within 5%.
- 33:59And look, I'm an economist from Spain living in the US.
- 34:02So if there was someone who should know [LAUGH] the exchange rate between the Euro
- 34:06and the US dollar, it should be me.
- 34:08And yet I only have a fussy idea about it.
- 34:11On the other hand, we want to think a little bit carefully about how people,
- 34:16if people are building their beliefs and people are coming up with rules of thumb,
- 34:21we want to be a little bit more constructive that just say no,
- 34:24people is silly and make systematic mistakes.
- 34:27My impression was always that a lot of behavioral macro was a little bit
- 34:31like that.
- 34:31Or let me assume that people make this mistake or have this bias and
- 34:34let's look at the consequences.
- 34:36I think that much more productive, and that's something I have been working on
- 34:41lately, is thinking about, well, let's Imagine that people have very simple
- 34:45learning systems and are using deep neural networks and say, well humans actually our
- 34:50brains are just deep neural networks how we learn about that.
- 34:53Can we come up with simple rules of thumb given the observations?
- 34:57And that gives us a constructive way to work out through these things.
- 35:02So in that sense, you know, I think that we are making progress and
- 35:05we are certainly moving forward and I think we are going to see very good
- 35:09work 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,
- 35:17I think a lot of behavioral economics for
- 35:19a long time was just sort of making this point that well, people actually
- 35:24don't maybe follow full information rational expectations correctly.
- 35:29Which is hard to kind of argue in the sense that you sort of
- 35:34have to argue that one that there isn't some sort of a systematic model out there.
- 35:41But if, I guess the sort of new holy grail of I feel like of sort
- 35:46of behavioral economics or behavioral macro as well is how do
- 35:51people systematically make mistakes and what biases or
- 35:56how are people actually thinking I guess in terms of complex systems or
- 36:01you're talking about neural nets but
- 36:04it hasn't been quite enough to just I guess say on the part of Thaler and
- 36:10others will look this is a violation of these past assumptions.
- 36:15Well, maybe we just had the utility functions wrong.
- 36:18What are the correct or what are the better utility functions?
- 36:22And how do you square a lot of micro evidence with our models?
- 36:28And I feel like that's still very much an ongoing debate.
- 36:31On the schools side of things,
- 36:33it's amazing in all our ECON 101 textbooks one of the first things
- 36:37we're taught in macro is that there are these different schools of thought.
- 36:42And I do wonder how the textbooks will be written in the future
- 36:47given that maybe they matter a bit less.
- 36:50But I do think there's some very real world implications of some of these shifts
- 36:54in terms of.
- 36:55I think you're right in saying that MIT and
- 36:58Harvard is one the substance of things.
- 37:00But I think because of that we only in models tend to care about interest
- 37:05rates or tend to include interest rates.
- 37:08So things like monetary aggregates or money are completely withdrawn or
- 37:12non-existent.
- 37:13Whereas a lot of people on Wall street for example would like to point out that look
- 37:18at M2Is was rising a lot when we saw inflation in the early 2000 and twenties.
- 37:23And even some Minnesota type economists who I know some new classical economists
- 37:28who I know who are still around, some younger,
- 37:31some older still sort of bemoan that shift in the sense that sure, maybe monetary
- 37:35aggregates can't be used as a tool because my demand isn't really predictable, but
- 37:40at some level it still explains inflation.
- 37:43Well, 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
- 37:49as a minister.
- 37:50>> Jesus Fernández-Villaverde: Yeah, actually, this is interesting that you
- 37:53bring this up [COUGH] because around 2010, 2011 there, maybe even a little
- 37:58bit earlier 2009, there was all this discussion in particular from people
- 38:03in financial markets about how the big monetary expansion at the Fed at the time
- 38:08quantitative easing was to create a lot of inflation, maybe even hyperinflation.
- 38:14And I remember I had an MBS student shouting in my class [LAUGH] at Wharton
- 38:18that we were going to have hyperinflation.
- 38:21And my thinking at the moment was the very basic fiscal theory of
- 38:26the price level that basically states that you want to think about really
- 38:30the interaction between the fiscal side and the monetary side of policy and
- 38:35that if the fundamental deficits of the future, parts of deficits have not
- 38:40changed, issuing more money, the only thing you are doing is you are switching
- 38:46one type of debt of the public government, which is long term debt, for
- 38:50another type of debt, which is the short term debt that we call money.
- 38:55And that was not going to have much an effect.
- 38:57In fact there is a very famous paper by Neil Wallace in American economic review,
- 39:03either 1981 or 1982 that basically shows an irrelevance theory.
- 39:08Anyway, I made that argument and I remember.
- 39:11So I basically said, look, there is not going to be inflation, don't worry,
- 39:14there will be no inflation over the next 10 years.
- 39:16And I think that was a big victory for economic theory and
- 39:19it was a big victory for macroeconomics and
- 39:22anyone who had studied macroeconomics seriously at the time.
- 39:25And I remember because [LAUGH] I had a few friends in the financial markets and
- 39:30man did I get hate emails like you don't know anything.
- 39:34You are typical ex head at the university that don't understand anything whatsoever.
- 39:40I'm moving all my investment into inflation protected asset classes.
- 39:45And I was telling them there is not going to be any inflation, don't worry about it.
- 39:50And, I guess that even by 2019 when we were talking
- 39:54about this 2020, [LAUGH] they were still saying okay.
- 39:59Inflation didn't happen, but we are not quite sure why we are unwilling to believe
- 40:03the fiscal theory of the price level.
- 40:05And I guess on the other hand, in 2021, I was among the ones who argue, again,
- 40:09think through the logic of the fiscal theory, the price level.
- 40:13Now, we are going to have inflation.
- 40:15And again, now I guess that there were people who kind of overlearned the lesson.
- 40:21You know that old joke that we always generals always fight the last war.
- 40:25And people were saying, there was no inflation in 2010.
- 40:28There is not going to be inflation either now.
- 40:30And I was saying, no, no, no, no, no,
- 40:32[LAUGH] because the argument is completely the opposite.
- 40:34The argument is now we are changing structurally the fiscal situation of
- 40:38governments with everything we did around Covid, and
- 40:41we are also changing the supply curve of the economy.
- 40:44And that's very different from what happened in 2010.
- 40:47Now, we are going to have inflation.
- 40:49And again, my, the same friends from the financial markets were telling me, no, no,
- 40:52no, no, no, this is not going to happen.
- 40:54And guess what?
- 40:55We had inflation.
- 40:57So in that sense, even if this is not something
- 41:01that macroeconomists are really bragging about,
- 41:06I will say that macroeconomics were successful.
- 41:11Okay, let me be very careful.
- 41:13The macroeconomics that you will learn in the standard first year graduate
- 41:18school textbooks was very successful at predicting both the lack of
- 41:22inflation in the early 2010s and inflation in the early 2020s.
- 41:27A very different thing is that the type of people that write for
- 41:30the New York Times or the type of people who write for
- 41:33the Wall Street Journal are a very particular subset of the profession.
- 41:36And some of them, I have strong reasons to believe,
- 41:40are not really up to date on the best economic theories.
- 41:44And they say silly things because they are playing a different game.
- 41:46They are playing the rhetorical game.
- 41:48They 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
- 41:54partially one of the things I say is fiscal theory.
- 41:57One of the things I think I just find a little challenging with fiscal theory is
- 42:00measuring expectations about future deficits, right?
- 42:03And you can do certain things.
- 42:05You can look at centuries of data and
- 42:07maybe assume that people have unbiased expectations.
- 42:10I's a huge assumption, and try and test the theory that way.
- 42:13But at some level, it's hard to know, and you can't really follow
- 42:19CBO forecasts just because of their current policy and current law and
- 42:24so forth and don't really reflect what fiscal expectations are.
- 42:29And the story that perhaps John Cochrane or
- 42:33Eric Leeper would tell is that one in 2008 and
- 42:382009, when there was a big fiscal spending,
- 42:43there was a promise to pay it back.
- 42:47Whereas in this case, with the early 2000s fiscal stimulus,
- 42:54there weren't any promises to pay it back.
- 42:58And I think that it's certainly, I think, a somewhat compelling story.
- 43:03But how you actually measure that, as someone who's just an empirical
- 43:08macro person, I feel like it's a bit of a difficult to measure thing.
- 43:13Whereas you look at something like M2, for example,
- 43:17in the 2010s QE, M2 didn't really go up a whole lot, and why?
- 43:22Because when all the central bank was doing was buying up treasuries and
- 43:27swapping them with reserves.
- 43:29Whereas what I think was fundamentally different.
- 43:32And you also had a stimulus that was very focused on government spending
- 43:37with the ARRA or American Recovery Reinvestment Act.
- 43:41Whereas the early 2000s fiscal stimulus was really all about transfers,
- 43:46whether it was stimulus payments, unemployment insurance, PPP and so forth.
- 43:52And so in that case,
- 43:53you had this massive uptick in monetary aggregate measures like M2, and why?
- 43:58Because the amount that was going, all this fiscal stimulus
- 44:01was in part going into people's demand deposits, which are measured in M2.
- 44:06So you had a massive jump this time, something that you didn't have last time.
- 44:09So the character of fiscal policy was very,
- 44:13very different in the early 2020s versus 2008,
- 44:172009, and I feel like that matters.
- 44:21I'm curious if you have any thoughts on that,
- 44:24even though essentially very similar QE was embarked upon.
- 44:28>> Jesus Fernández-Villaverde: Okay, so first of all, for
- 44:29those listeners who know more about this fiscal theory of the price level,
- 44:34I have joke on a few conferences and interviews that I'm a moderate fiscal
- 44:38theory of the price level person in comparison with both Eric and John.
- 44:43Eric Leeper and John Cochrane, who I will say they are like the purest,
- 44:47the pure orthodox fiscal theory of the price level.
- 44:50I'm more of a moderate that puts a little bit of fiscal of the fiscal theory
- 44:54of the price level with a little bit of NEO models.
- 44:57So in that sense, I'm perhaps closer to Chris Sims.
- 45:02So in that sense, I also think that issues related with supply and
- 45:07with prices stickiness matter.
- 45:09But I think that the explanation you just gave me,
- 45:14I will argue, is a fiscal explanation.
- 45:17And that really the only difference between what I tried to say before and
- 45:21the way you put it is more on the emphasis or in the pure rhetorical aspect of,
- 45:26in the sense of discourse of how you structure the argument that
- 45:30in the substance.
- 45:31And basically in 2000, okay, let me put it in the following way.
- 45:35In 2010, people were not going to the restaurant because they didn't
- 45:40want to go to the restaurant.
- 45:42They were worried, they wanted to save.
- 45:43And what the Fed is doing is saying well I'm going to take your 30 years bonds, and
- 45:47I'm going to give you cash instead.
- 45:49And people are saying okay, how is this changing my situation?
- 45:52How is this changing the issue that I'm worried about the future and
- 45:56that I don't want to save a lot.
- 45:58While exactly as you say in 2021 people are not going to
- 46:01the restaurant because they are afraid of COVID,
- 46:04so we send them $500, and we tell them, go and ask on DoorDash.
- 46:08And then, yes, people went and start ordering a lot of takeout at DoorDash.
- 46:12So I think we were basically saying the same.
- 46:15But the point I was trying to say is that if you pick,
- 46:19I would say the top 10 macroeconomists in academia in 2010 and
- 46:24in 2020, 21, they probably did a much better job in
- 46:28forecasting inflation not in like the next month.
- 46:32But like in the big picture of what was going to happen using a standard tools
- 46:38of economic theory that what the savvy people from the financial markets did.
- 46:44And I think we should be proud of it and be,
- 46:47brag about it because people are not really getting this point.
- 46:52>> Jon Hartley: Yeah, I guess like it's.
- 46:53So I think there's still a difference to be made though with I guess
- 46:58like both sort of monetarist and even your sort of old
- 47:01Keynesian Islam like reasoning which is more, more static.
- 47:06And where saying that look there were all these transfers today and
- 47:11that's what was causing inflation.
- 47:14And now, I mean there were lots of people saying it was all about supply chains and
- 47:18so forth, and it can be both too, right?
- 47:21Like a supply curve shifting leftward and a demand or an aggregate demand
- 47:26curve shifting, shifting right can produce inflationary conditions together.
- 47:32But I think,
- 47:32there is still a big difference in terms of just the mechanisms.
- 47:36Whereas 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.
- 47:45And I still think there's a big difference there.
- 47:48>> Jesus Fernández-Villaverde: Okay, that's fair enough.
- 47:49But I think that what the fiscal theory of the price level,
- 47:52even if you just go back to the very old school of Wallace and Sargent and
- 47:57Wallace and unpleasant monetaristic.
- 47:59Arithmetic says, I think, that both the old Keynesian story and
- 48:03the monetary story miss a fundamental linchpin,
- 48:07which is the connection between fiscal and monetary theory, sorry, policies, and
- 48:12that if you think about just one of them in isolation from the other, chances
- 48:17are that you are going to make systematic mistakes in how you think about the world.
- 48:23And what the fiscal theory of the price level, with all its limitations
- 48:27is telling you really try to think about these two things together and to me,
- 48:32that's a big advice.
- 48:34>> Jon Hartley: Yeah, I think that's right.
- 48:36And I think, at some level,
- 48:37a lot of these models are somewhat observationally equivalent.
- 48:40So it is really difficult to really distinguish, say, between them.
- 48:44There's something to be said, I think too,
- 48:48about what central banks have actually been doing too,
- 48:53which is these massive QE largely announcements or
- 48:57central bank swap line announcements that seem to have
- 49:02this ability to quell financial panic and
- 49:06provide liquidity to the financial system in moments of panic.
- 49:11Which is a bit of a different thing than say, the fiscal policy, fiscal transfers,
- 49:17say, causing inflation through these different mechanisms and
- 49:21all that's something that's due in terms of how central banking is done.
- 49:25I want to just pivot a little bit to economic history.
- 49:29You're working on an economic history book.
- 49:31Tell us a little bit more about that.
- 49:32You've done a lot of really great work on things like Fractured Land Hypothesis,
- 49:38many other great works of economic history.
- 49:42I'm curious.
- 49:42Tell 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
- 49:49a little bit more interested in economic history than macro when I went to college.
- 49:56Economic history when I went to college was a little bit boring.
- 50:00It was about textiles in Yorkshire.
- 50:03So we basically, spent one semester in my freshman year in college learning about
- 50:08the spinning Jenny and the mule and I'm probably getting all these things wrong,
- 50:13but about textiles in Yorkshire during the late 18th century.
- 50:18And that to me was so boring.
- 50:22So I kind of lost interest in economic history at the time.
- 50:26At the same time, I was always very concerned about,
- 50:31let me call the big, big picture questions.
- 50:35In one particular case for me, since I'm from Spain,
- 50:39is why did Spain miss the train of industrialization in the 19th century?
- 50:44Why then did Spain industrialize in the second half of the 20th century?
- 50:50And as we were saying before, why Spain?
- 50:54Convergence to the level of the US stagnated by the late 1980s.
- 51:00So I was always very concerned about these issues.
- 51:04And most of the answers that people were given were loose, they were kind
- 51:09of big ideas, but not really trying to sit down and thinking about them.
- 51:14And in the late 1990s, early 2000s, we started having a new generation of
- 51:19economic history and of course this year the Nobel Prize went to Daron Acemoglu,
- 51:24Simon Johnson and Jim Robinson, which I'm very happy about precisely because
- 51:29they brought in those big questions back into the center of economics.
- 51:34And we can fight a little bit at the margin whether or
- 51:37not the instrument that they use is the right instrument or not, but
- 51:41to me, those discussions miss the big point.
- 51:44And the big point was to say, look,
- 51:46the really big issue is why did Japan industrialize and China did not?
- 51:51Let's try to work through this and
- 51:53let's try to use the modern tools of economics to work about it.
- 51:57So I thought, Gee, this is in some sense what I wanted to do from the beginning.
- 52:01So I went and asked to be allowed to teach a class on economic history.
- 52:06And I was lucky enough that my dean accepted that proposal and
- 52:11I have been working since then on a book.
- 52:14So now last week I was actually at Northwestern and I bumped into Joel Mokir.
- 52:21Joel Mokir, the book is under contract with him for
- 52:24Princeton University Press and he gave me what I think you guys call a dress down.
- 52:29He basically told me what is happening with the book.
- 52:32So the book is suffering from two problems.
- 52:34The first one is I think I've been a little bit over ambitious by now.
- 52:37I think I have like 800 pages and that's probably too many and
- 52:42I'm still not even like one-third down.
- 52:46The second one is I really, really need to find,
- 52:51let's say six, nine months in a desert island
- 52:56at the top of a mountain, in a monastery away.
- 53:02Just yesterday I woke up in the morning and I said, today is Thursday.
- 53:05I'm going to work on the book for the whole day, impossible.
- 53:08I got like 200 emails and just handling emails,
- 53:12answering students, working with co-authors.
- 53:17So I really need.
- 53:18So my main goal now in life,
- 53:20if anyone knows about that monastery, please let me know.
- 53:25Find a place where I can go hide for nine months and finish the book.
- 53:29So 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.
- 53:33They don't seem to get the hint.
- 53:36But really go in a place, hide for nine months,
- 53:38disconnect myself from the Internet.
- 53:40Internet, send my wife to a wonderful,
- 53:43touristic trip around the world and finish the book.
- 53:47And I really like the drafts that I have, I have shown it to some people, and
- 53:52the drafts of the chapters I have, I think it's a very creative and innovative book.
- 53:57I'm really bringing, like,
- 53:58everything we have learned about economic history over the last 20 years.
- 54:01It's just that it's a global economic history textbook,
- 54:06it's a lot of effort and you really need to spend a lot of time learning stuff.
- 54:13So, for instance, last year I wanted to write about Latin America,
- 54:17like the chapters thinking about why Latin America fail.
- 54:21So I basically had to learn a lot about Latin America economic history,
- 54:25I didn't know that much myself.
- 54:27And that was fun and I spent like maybe nine months.
- 54:31So now I'm your person, I'm the guy.
- 54:33If you want to ask questions about Argentinian economic
- 54:35history in the 19th century, I know how to answer them.
- 54:38But [LAUGH]- >> Jon Hartley: Would you describe
- 54:40yourself as economic institutions?
- 54:42Like, is what your sort of fundamental cause?
- 54:45>> Jesus Fernández-Villaverde: Yes.
- 54:46So my punchline yes is institutions.
- 54:50I think some countries, for whatever the reason, can get the institutions right,
- 54:54and some countries don't.
- 54:56So let me give you an example of my favorite question,
- 54:59I asked this question in nearly, I would say 50% of my midterms.
- 55:04And I don't ask that question more often because otherwise,
- 55:08the students will be able to forecast it perfectly.
- 55:12Why did the oil industry first appear in the United States?
- 55:17The United States doesn't really have a lot of oil in comparison with other
- 55:21countries.
- 55:22And yet the United States is even today the largest oil producer in the world.
- 55:27Well, because there is a fundamental difference between the US and
- 55:30nearly every other country in the planet.
- 55:33If I go back to my backyard, I'm looking at my backyard now through the window,
- 55:38and I dig and I find something, it's mine.
- 55:41If I go to the backyard of my dad in Spain and
- 55:45I dig and I find something, is the government's, okay?
- 55:49Is what, for instance, in the British common law system was,
- 55:53in the English common law system is called crown's property.
- 55:57So if in a country where I dig.
- 55:59And that belongs to the government.
- 56:01You are not going to have a lot of digging in a country where you dig and
- 56:05that's yours, you are going to have a lot of digging.
- 56:08So the US develop a very vibrant.
- 56:10The first oil industry in the world and even to today is the main
- 56:15technological leader in oil industry is precisely what we have, why?
- 56:21Because the US has better institutions.
- 56:22It's not that the US institutions are perfect, the area is better.
- 56:25Now, what I think I differ perhaps not, but
- 56:29perhaps a little bit from some of the other institutional
- 56:34guys is that I like to link this a lot with a rich historical narrative,
- 56:40trying to understand these institutions.
- 56:44Yes, they appear, but
- 56:46they appear because of the confluence of a lot of different reasons.
- 56:50It's kind of hard to have a one-size-fits-all.
- 56:54The US is in the way the US because of a lot of events, and
- 56:57a lot of them were random and a lot of them were more structural.
- 57:01And what I'm trying to tell is a history that highlights institutions.
- 57:06On the other hand, I also trying to be very balanced.
- 57:13And in the book I try to also give some,
- 57:16I will say reasonable amount of space to alternative theories and say,
- 57:21look, 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.
- 57:29So geography, I give a lot of space.
- 57:30And the reason for
- 57:32that is because I actually don't think that geography per se matters that much.
- 57:36But for instance, you mentioned my work before on the fractured land.
- 57:39Geography is key on determine the type of institutions that you have.
- 57:47And these things matter in a lot of subtle ways.
- 57:50And I don't think that economies and economic histories experience have really
- 57:54work out all those subtleties and all those nuances.
- 57:57>> Jon Hartley: Yeah, and I agree,
- 57:58I think there's a lot of these nuances to work through.
- 58:02With institutions as well, Acemoglu,
- 58:07Robinson and Johnson just won the Nobel.
- 58:11I think institutions matter a lot for growth, but which institutions and why?
- 58:15It's a huge question.
- 58:16And I think even their taxonomy of inclusive versus extractive institutions
- 58:21isn't perfect, I think.
- 58:22And I asked Daron Acemoglu, and this when he came on the podcast,
- 58:26which is I think, at some level how do you explain the success
- 58:30of what I would call liberal economic institutions or massive market reforms?
- 58:35If you look at India in the early 90s or Chile in the late 20th century, or
- 58:40you look at Eastern Europe after the fall of the USSR and
- 58:43a lot of these sort of stories about inclusive versus extractive institutions?
- 58:48I don't think it fully answer that.
- 58:50But it's been a real honor to have you on and hear about your career and ideas.
- 58:55You're also a prolific Op-ed writer in Spain as well in your home country.
- 59:00And I highly recommend that our listeners check out both all your
- 59:05academic writings as well as your popular writings as well.
- 59:10Thank you so much for joining us.
- 59:12>> Jesus Fernández-Villaverde: Thank you.
- 59:13Thank you for having me.
- 59:14>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century podcast,
- 59:17an official podcast with the Hoover Economic Policy Working Group,
- 59:20where we talk about economics, markets, and public policy.
- 59:23I'm Jon Hartley, your host.
- 59:24Thanks so much for joining us.
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