Austan Goolsbee on Central Banking as a Data Dog | Conversations with Tyler
Conversations with TylerKey Moments
Austan Goolsbee discusses central banking, inflation drivers, financial stability, AI's economic impact, and the structure of the Federal Reserve.
Key Insights
Central banks, like the Federal Reserve, should prioritize data-driven analysis ('data dogs') over rigid adherence to partisan labels like 'dove' or 'hawk'.
Distinguishing between supply and demand shocks is crucial for understanding inflation, especially in non-traditional economic environments.
Financial innovation has altered traditional monetary policy relationships (e.g., M2 and inflation), necessitating a more nuanced approach.
Regulating the growing shadow banking sector and stablecoins is critical for financial stability, posing challenges for central banks.
Productivity growth may be significantly boosted by AI, but its long-term impact depends on its adoption as a general-purpose technology.
The decentralized structure of the Federal Reserve, with its 12 regional banks, is vital for incorporating diverse economic perspectives and preventing groupthink in policymaking.
THE MINDSET OF A DATA DOG IN CENTRAL BANKING
Austan Goolsbee emphasizes his identity as a "data dog" rather than a partisan "dove" or "hawk" in central banking. This approach prioritizes rigorous data analysis and understanding causal relationships, a discipline honed in academic economics. He believes this empirical focus is essential for navigating the complexities of monetary policy, particularly in distinguishing between supply and demand shocks, which is often overlooked in traditional macroeconomic models oriented towards demand.
INFLATION: DEMAND SHOCKS VERSUS SUPPLY SHOCKS
Goolsbee challenges the notion that recent inflation was solely demand-driven. He points to soaring inflation when unemployment was high, simultaneous inflation across countries with varying stimulus levels, and inflation's decline only when supply chains healed, not when demand stimulus waned. These observations suggest that supply-side factors, often neglected in standard models, play a critical role in inflation dynamics.
THE EVOLVING ROLE OF MONEY AND FINANCIAL INNOVATION
The relationship between money supply (M2) and inflation has weakened due to financial innovation, such as the shift to electronic payments and the rise of new money-like instruments like stablecoins. Goolsbee notes that the velocity of money has become unstable, making traditional M2-based monetary rules less reliable. He expresses caution about the risks posed by unregulated stablecoins, drawing parallels to historical bank runs.
FINANCIAL STABILITY AND THE SHADOW BANKING CONUNDRUM
The increasing size of the shadow banking sector presents a significant challenge to financial stability. Goolsbee highlights the conundrum of regulating an officially recognized banking sector while a larger, less regulated portion operates outside direct oversight. This can lead to regulatory arbitrage. He acknowledges that past efforts to increase capital ratios in official banks have demonstrably improved their stability, as seen in the 2008 crisis versus recent events.
THE HOUSING MARKET PUZZLE AND CONSTRUCTION PRODUCTIVITY
Goolsbee views the persistent rise in relative housing prices over decades, even in rural areas, as a significant puzzle. While not dismissing demand-side factors, he points to evidence of negative productivity growth in the construction industry. This suggests a potential combination of factors, possibly including land-use regulations and inefficiencies, that are making housing construction more difficult and expensive over time.
MANAGERIAL LESSONS FROM MICROECONOMICS
In his role at the Chicago Fed, Goolsbee applies microeconomic principles such as understanding marginal costs (often zero for knowledge sharing) and the theory of delegation. He stresses the importance of leveraging the expertise of individuals like the First Vice President and Research Director. These concepts are crucial for effective management, especially in an organization with a complex, multi-faceted mission.
THE STRUCTURE OF THE FEDERAL RESERVE SYSTEM
The Fed's hybrid federal structure, with its 12 regional reserve banks and a Washington-based Board of Governors, is a key strength. Goolsbee argues this decentralized model, established in 1913, prevents a monolithic perspective from Washington or New York, ensuring diverse regional input into monetary policy. This structure fosters independent thought and has historically been a source of new ideas in banking and supervision.
AI, PRODUCTIVITY, AND ECONOMIC GROWTH PROSPECTS
Goolsbee acknowledges the potential for AI to boost productivity, citing recent above-trend growth, though he cautions against over-reliance on short-term trends. He draws parallels to the slow, decade-long integration of technologies like computers and electricity. The impact of AI may concentrate in specific industries initially, spreading to user sectors later. However, he warns of the risk of over-anticipation leading to potential overheating.
THE CHALLENGES OF CRYPTOCURRENCIES AND DIGITAL CURRENCIES
Goolsbee expresses nervousness about stablecoins and cryptocurrencies, particularly regarding risks of bank runs and fraud, and cites historical parallels to the free banking era's instability. He is cautious about central bank digital currencies (CBDCs), particularly retail versions, due to potential disintermediation of community banks and operational complexities for the Fed. He believes Congress and the Board of Governors, not individual Reserve Banks, must set policy for CBDCs.
THE DELICATE BALANCE OF AI AND ECONOMIC THEORY
Goolsbee remains skeptical of AI's ability to fully replace human judgment in economics, citing the 'hallucination problem' and the training data limitations. He contrasts this with academic economists' rigorous analysis. He suggests that while AI can aggregate data and reduce errors, it may not inherently solve complex causality problems or replicate the nuanced reasoning required for policy decisions. The analogy of dot matrix versus laser printers highlights the difference between incremental improvement and fundamental breakthroughs.
Mentioned in This Episode
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Common Questions
Austan Goolsbee referred to himself as a 'data dog' to emphasize his approach to economics and central banking, which prioritizes empirical evidence and data analysis over ideological stances like being a 'dove' or 'hawk'. The core principle is knowing when to analyze the data broadly and when to focus on specific details.
Topics
Mentioned in this video
Mentioned as an example of a regional Fed bank, prompting the question of why such branches need substantial research staff.
The Federal Open Market Committee, where 19 members (7 political appointees and 12 non-political appointees from reserve banks) discuss monetary policy. It's described as the world's greatest deliberative body.
The central topic of a dilemma presented by the host, weighing the risks of proliferating stablecoins against the potential disintermediation of banks if a CBDC is created.
A digital library of academic journals, cited as a source of potentially hallucinated information, though the speaker agrees to defend it.
A participant in the FOMC meetings who shares his economic perspective.
Invoked to describe a historical period in the US characterized by numerous bank failures and financial crises, used as a cautionary tale against unregulated banking and the proliferation of entities like stable coins.
Cited for his work highlighting the balance needed in financial stability and the risk of regulatory arbitrage as activity shifts to less controlled sectors.
An economist who strongly believes that hybrid and remote work arrangements have significantly boosted productivity.
Mentioned as a close substitute for money, questioning why money would still matter if it's similar to T-bills with interest and liquidity profiles.
A colleague at the University of Chicago who wrote a paper on blockchain, contrasting centrally controlled crypto with non-centrally controlled crypto.
An economist who believes the negative productivity in construction is heavily tied to land use and other regulations.
A payment system operated by the Fed, part of the critical financial infrastructure for the United States.
Co-author of a paper with the speaker on negative productivity growth in the construction industry.
The central bank model discussed as a framework for macroeconomic analysis, with its machinery potentially oriented towards demand-side explanations for inflation.
The speaker, as president of the Chicago Fed, shares insights and references its operations, including its cash vault and research into construction productivity.
Discussed as a form of money-like deposit that can proliferate and poses risks similar to traditional bank runs if not properly regulated, due to potential issues with backing assets and deposit insurance.
Mentioned as an example of an economist who would be skeptical of overly complex, incomprehensible academic papers, contrasting with those who might be impressed by such complexity.
Mentioned as a framework for understanding inflation coming from overheating, which is embodied in the official Federal Reserve Bank model.
Proposed as a target for a monetary growth rule, considering both money supply and velocity of money.
Mentioned in the context of deposit insurance, highlighting that a significant portion of lending occurs outside FDIC-insured formal banks, increasing systemic risk.
The equation of exchange is discussed in the context of changes in the velocity of money (V) affecting the relationship between the money supply (M) and nominal GDP (PY).
The research director at the Chicago Fed, mentioned as part of the competent team that supports the speaker.
Mentioned as an example of a country with lower price inflation, which the host uses to argue for a demand-side explanation of inflation.
An AI tool that the speaker compares to, suggesting it hallucinates less than Jstor content, but also notes that paying for higher versions might not eliminate all hallucination issues.
The speaker's preferred basic framework for analysis, emphasizing the need to distinguish between supply and demand shocks.
Mentioned as a former national champion debater whom the speaker beat, with the speaker's strategy involving humor and teasing to get Cruz flustered.
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