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The Region
JUNE 2010 26
In a discipline that celebrates specialization, Robert Hall is a
Renaissance man.And economics is far the richer for it.
The Stanford economist’s extensive publications over four
decades—books, blogs, articles and lectures—provide ready evidence
of wide-rangingexpertise. (The interview below hardly scratches the
surface.) As a laboreconomist, Hall has produced some of the
field’s most influential models oflabor market dynamics and
essential articles on labor supply, demand andwages. A scholar of
fiscal policy, he built the intellectual foundationfor the 1986 tax
reform bill as well as recent consumption tax proposals.
His work in financial theory, consumer and corporate
incentives,and government policy illuminates regulatory issues
currently underdebate in Washington. Innovative analysis of stock
market valuation by Halldemonstrated the importance of intangible
capital. His studies of entrepreneurialincentives (with his wife,
economist Susan Woodward) and antitrust theoryare pathbreaking.
Hall’s research on trading through electronic markets—“digital
dealing”is his term—provided one of the first lucid explanations of
the economics ofthen-new Internet phenomena such as eBay. Hall’s
analytical gifts also havegenerated important insights on monetary
theory and optimal monetarysystems. He has done invaluable work as
well in growth theory, determinantsof productivity, spending on
health and economic geography.
His erudition has range, depth and quality that few economists
canmatch. And the profession has recognized this with honors
including theRichard T. Ely lecture in 2001, presidency of the
American EconomicAssociation in 2010, and fellowship in the
American Academy of Arts andSciences, Econometric Society and
National Academy of Sciences.
Hall’s public profile, however, is largely confined to the
sphere ofbusiness cycles, in which he also has unquestioned
expertise. That narrow“fame” is due to his chairmanship, for over
30 years, of the committee thatdetermines when U.S. recessions
officially begin and end. It is a painstakingand largely thankless
task. Pundits and policymakers clamor for the
committee’sannouncements, but inevitably second-guess the decisions
made. Committedto the integrity of process and result, Hall has
never bent to pressure, manifestingtime consistency that monetary
policymakers can only envy.
Robert E.Hall
Photography by Peter Tenzer
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THOUGHTS ON U.S.MONETARY POLICY
Region: Perhaps we could start withmonetary policy. What is your
broadview of the Fed’s efforts over the pastfew years to stem the
crisis using uncon-ventional monetary policy and strate-gies?
Hall: First of all, I believe you shouldthink of the Fed as
simply part of thefederal government when it comes tothe financial
side of its interventions. Ifyou look at how the federal
governmentresponded initially, it was the Treasurythat was
providing the funds. Of course,TARP [Troubled Asset Relief
Program]was there using the taxpayers’ moneywithout involvement of
the Fed. Also,early in the crisis Treasury depositedhundreds of
billions of dollars at theFed, which the Fed then used to
buyassets. So there the Fed was just an agentof the Treasury. It
was as if the Treasurytook its funds to a broker.Eventually, the
Treasury was imped-
ed from doing that by the federal debtlimit. But the debt limit
doesn’t apply tofunds borrowed by the Fed, so it thenstarted
borrowing large amounts frombanks by issuing reserves. That is
whatcaused all the confusion about thinkingthis was somehow part of
conventionalmonetary policy.I would distinguish between conven-
tional monetary policy which sets theinterest rate and this kind
of financialintervention of buying what appear tobe undervalued
private securities.Issuing what appear to be overvaluedpublic
securities and trading them forundervalued private securities, at
leastunder some conditions and some mod-els, is the right thing to
do. In my mind,it doesn’t make a big difference whetherit’s done by
the Federal Reserve, theTreasury or some other federal agency.
Region: And what are your thoughts onthe best course for a Fed
exit strategy?
Hall: That again gets at this confusion.Traditionally, reserves
at the Fed pay
zero interest in the United States, so innormal times with
positive marketinterest rates, banks try to unloadreserves; when
they do so, they expandthe economy. That does not happenwhen
interest rates in the market arezero because there’s no incentive
forbanks to unload reserves. They can’tgain by getting something
off their bal-ance sheet if what they buy doesn’t yieldany more.
And during the crisis, therewas no differential, nothing to be
gainedby unloading reserves.As the differential reestablishes,
which the markets think is going to hap-pen in the next year or
so, then thatissue comes up. It would be highlyexpansionary and
ultimately inflation-ary if market interest rates began to
riseabove zero and the Fed didn’t do some-thing to either reduce
the volume ofreserves or increase the demand forreserves.So the Fed
has two tools, and
Chairman Bernanke has been very clearon this point. He’s given a
couple of
excellent speeches that have describedthis fully, so it
shouldn’t be an issue, andI think more or less it’s not anymore.
TheFed can either leave the reserves outthere but make them
attractive to banksby paying interest on them, or it canwithdraw
them by selling the correspon-ding assets they’re invested in.
Sellingassets will be timely because those invest-ments will have
recovered to their propervalues; the Fed can sell them and use
thefunds to retire the reserves.So, again, there are two branches
to
the exit strategy: There’s paying intereston reserves, and
there’s reducingreserves back to more normal levels.They’re both
completely safe, so it’s anonissue. The Fed itself is just not a
dan-ger. It is run by people who know exact-ly what to do. And we
have 100 percentconfidence they will do it. It’s not some-thing I
worry about.
FINANCIAL FRICTIONS
Region: That’s reassuring, but I believeyou doworry about
financial frictions…
Hall: I do, I do very much.
Region: Your recent paper on gaps, or“wedges,” between the cost
of andreturns to borrowing and lending inbusiness credit markets
and homeownerloan markets argues that such frictionsare a major
force in business cycles.Would you elaborate on what you
mean by that and tell us what the policyimplications might
be?
Hall: There’s a picture that would helptell the story. It’s
completely compelling.This graph shows what’s happened dur-ing the
crisis to the interest rates facedby private decision makers:
householdsand businesses. There’s been no system-atic decline in
those interest rates, espe-cially those that control home
building,purchases of cars and other consumerdurables, and business
investment. Soalthough government interest rates forclaims like
Treasury notes fell quite a bitduring the crisis, the same is not
true forprivate interest rates.
The Region
28JUNE 2010
There are two branches to the exitstrategy: There’s paying
interest onreserves, and there’s reducing reservesback to more
normal levels. They’re bothcompletely safe, so it’s a nonissue.The
Fed itself is just not a danger. It isrun by people who know
exactlywhat to do.
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Between those rates is some kind offriction, and what this means
is thateven though the Fed has driven theinterest rate that it
controls to zero, ithasn’t had that much effect on
reducingborrowing costs to individuals and busi-nesses. The result
is it hasn’t transmittedthe stimulus to where stimulus is need-ed,
namely, private spending.The government sector—federal,
state and local—has been completelyunable to crank up its own
purchases ofgoods; the federal government has stim-ulated
[spending] slightly but notenough to offset the decline
that’soccurred at state and local governments.
Region: Yes, I’d like to ask you about thatlater.
Hall: So to get spending stimulated youneed to provide incentive
for privatedecision makers to reverse the adverseeffects that the
crisis has had by deliver-ing lower interest rates. So far, that’s
justnot happened. The only interest ratethat has declined by a
meaningfulamount is the conventional mortgagerate. But if you look
at BAA bonds orauto loans or just across the board—there are half a
dozen rates in this pic-ture—they just haven’t declined. Sothere
hasn’t been a stimulus to spend-ing.
The mechanism we describe in ourtextbooks about how expansionary
pol-icy can take over by lowering interestrates and cure the
recession is just notoperating, and that seems to be verycentral to
the reason that the crisis hasresulted in an extended period of
slack.
Region: So to incorporate that in amodel seems quite
important.
Hall: Yes, and many, many macroecono-mists have turned their
attention to that.I’ve been following the literature andbeen a
discussant at many conferencesof other people’s work on this. In
fact,the Fed is giving a conference at the endof next week, and
I’ll be presenting mypaper on frictions.
Region: Your model is able, I think, toexplain a fair amount of
the currentbusiness cycle by incorporating thosefrictions.
Hall: I mainly look at, as kind of athought experiment, how much
of adecline in activity occurs when thatkind of a friction
develops. When pri-vate borrowing rates rise and publicborrowing
rates fall, the differencebetween them is the amount of friction.I
show that that’s a potent source oftrouble. I haven’t tried to
align it with
history prior to the current crisis. That’san interesting
question, but data on his-torical events aren’t always so easy,
sothat lies ahead.
Region: And the policy implications?What can and should be done
to reducefrictions?
Hall: Good question! Well, it does pointin the direction of
focusing on thingslike lower rates for corporate bonds,BAA
corporate bonds. They appear tobe undervalued private assets,
althoughthat’s not been one of the types of assetsthat policy has
seen as appropriate tobuy or to help private organizations tobuy.
That would be one way to turn.
The Region
29 JUNE 2010
Even though the Fed has driven theinterest rate that it controls
to zero, ithasn’t had that much effect on reducingborrowing costs
to individuals andbusinesses. ... When private borrowingrates rise
and public borrowing rates fall,the difference between them is the
amountof friction. ... That’s a potent source oftrouble.
Most of the undervalued assets thatthe Fed has bought have been
mortgagerelated. ... There would be a case forexpanding that type
of policy to otherseemingly undervalued instruments.
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We’ve concentrated on doing that inmortgage-related assets. You
can see inthe picture that it’s had some effect.Most of the
undervalued assets that theFed has bought have been
mortgagerelated. It’s been kind of an obsessionwith trying to solve
these problems asthey arise in home building, but homebuilding is
only part of the story. Thecollapse in other types of
investmentspending has been equally large. Therewould be a case for
expanding that typeof policy to other seemingly underval-ued
instruments.That would presumably result in the
same pattern you’ve seen in mortgages.That policy has been
successful—differ-entially successful in depressing mort-gage rates
as opposed to bond rates orother areas.
EQUITY DEPLETION
Region: Let me ask you about a paperyou wrote in December 2008,
on equitydepletion, defined as the “withdrawal ofequity from firms
with guaranteeddebt.” We’re all well aware of govern-ment bailouts,
and implicit or explicitguarantees of financial institutions…
Hall: That paper was actually reprintedin a book that just came
out, Forward-Looking Decision Making [PrincetonUniversity Press,
2010]. It’s the lastchapter in this book, which is a compi-lation
of the Gorman lectures I gave atUniversity College London in
October2008.
Region: You had a wonderfully provoca-tive statement in it. You
declare thatequity depletion “appears to be anunlimited opportunity
to steal from thegovernment.”Could you tell us what you mean by
that? Why does equity depletion occur,and how does it constitute
an opportu-nity to steal?
Hall: George Akerlof and Paul Romerwrote a paper published in
1993 in theBrookings Papers that described whatthey called
“looting.” The particular
form that looting took was through theownership of a savings and
loan; thiswas a feature of the savings-and-loancrisis of the late
1980s.As a “looter,” you would use the sav-
ings and loan to attract deposits, pay thedeposits as cash to
yourself and thendeclare bankruptcy. Akerlof and Romerdescribed a
number of clever ways ofdoing that to escape the attention of
laxregulators, and that’s the type of thingyou see in many
settings.One of the big problems encountered
recently is that institutions that havebecome very
undercapitalized were stilldepleting their equity by paying
divi-dends. The government has had to pushvery, very hard to get
these financialinstitutions to stop paying dividends.Dividends are
exactly equity depletion.With a government guarantee, it’s
exactlywhat there’s incentive to do—asdescribed in that paper.On
the other hand, it seems we’ve
been much more successful currentlythan we were in what Akerlof
andRomer described as far as preventingthe most extreme forms of
this conduct.It’s a danger whenever you have guar-
anteed financial institutions that havegotten into a very low
capital situation.They’ve suffered asset value declines,they’ve
become extremely leveraged andthey have this very asymmetric payoff
tothe owner: If they go under, it’s the gov-ernment’s problem; if
they recover, it’sthe owner’s benefit. That asymmetry,which is the
so-called moral hazardproblem, is just a huge issue.And yet, while
we have a lot of insti-
tutions in that setting today, we don’t seemany of them doing
things that Akerlofand Romer described, such as payingthemselves
very large dividends. It’sbeen difficult to get them to cut the
div-idends, but they have not paid out verylarge dividends or
concealed dividends.So it looks like we’ve been somewhat
successful in preventing the worst kindof stealing, but the
asymmetry is stillpotentially a big issue. There are way toomany
bank failures that should not haveoccurred and especially should
not havecost the taxpayers as much as they did.
Region: Your thoughts about what meas-ures can be taken to curb
this moralhazard?
Hall: The most important thing is to besure that financial
institutions that areguaranteed by the government havelarge amounts
of capital so that the dan-ger of them spending the taxpayers’money
rather than their own money isvery small. That’s a principle that’s
beendeeply embedded in our regulations fora long time.But I pointed
out in this chapter the
principle of so-called prompt correctiveaction, which says if
capital goes belowthis mandated level, which is typicallyaround 8
percent, then something has tobe done right away before all
theremaining capital gets depleted.We just have not been successful
at
doing that. We have principles of regula-
The Region
30JUNE 2010
It’s a danger whenever you haveguaranteed financial institutions
thathave gotten into a very low capitalsituation. They’ve suffered
asset valuedeclines, they’ve become extremelyleveraged and they
have this veryasymmetric payoff to the owner: If theygo under, it’s
the government’s problem;if they recover, it’s the owner’s
benefit.That asymmetry, which is the so-calledmoral hazard problem,
is just a huge issue.
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tion that allow the regulators to say thata bank is well
capitalized even thoughthe markets know that it’s not. Bankshave
been declared to be well capitalizedeven when the market value of
theirdebt and the market value of their equi-ty have declined to
very low levels.Regulators seem to ignore something
that everyone in the market seems toknow, which is that they’re
shaky. Thereseems to be a lack of willingness to payattention to
all the signals that a regulatorshould pay attention to. All they
do islook at certain accounting records, whichdon’t reflect what
people know.It’s not easy though. There’s been a
large amount of discussion of this topicamong very knowledgeable
financialeconomists. My colleague DarrellDuffie here at Stanford
has been a par-ticular leader. There’s a group called theSquam Lake
Working Group, of whichhe’s a member, that has been advocatingideas
like, as a backstop, having long-term debt be convertible to
equity. Thatis what happens in a bankruptcy, butunder this strategy
it would happenwithout a bankruptcy. It would happenautomatically
with certain contingen-cies and would solve the problem in avery
nice way. It would potentiallyincrease the borrowing cost, but
itwould properly get the incentives right.A lot of people look to
the example of
Citibank. Citibank’s long-term debt hasbeen selling at a
considerable discount,which is a sign that the market knowsthat
there’s an issue. So instead of doingwhat we have done, which is
give guar-antees of short-term debt with govern-ment investments,
the alternative thatthe Squam Lake people are thinking of,and I’ve
been thinking of too, is to some-how convert Citibank’s long-term
debtinto equity, which is the same thing thatthe market is in
effect doing. That wouldeliminate the danger then that the
bankcouldn’t meet its obligations, in a waythat is less burdensome
to the taxpayer.In retrospect, what we did was to save
the economy from a tremendous trainwreck. But we didn’t do it in
a way thatwas as cheap for the taxpayer as it couldhave been. And,
of course, there have
been many examples discussed of this.This is all in retrospect.
And I cer-
tainly don’t criticize the people whowere doing it at the time,
especiallyChairman Bernanke. But looking for-ward now to the next
time this happens,convertible debt would be a huge stepforward. If
people at the Treasury couldhave just pushed a button to convert
thedebt, without needing a new law, theywould have done it in a
second. There’sno doubt about that. They just didn’thave that
power.So we need to give regulators that
power through some sort of sensiblesecurity design. Regulators
could dothat, and financial institutions wouldn’tsee it as terribly
burdensome because themarket would know that the probabilityof this
kind of thing happening again ispretty low. And when it does
happenagain, which will be sometime in thenext century, that button
would be thereto press, and we wouldn’t have the chaosthat we had
in September of 2008.
GOVERNMENT SPENDINGAND GDP
Region: You mentioned earlier the diffi-culty of stimulating the
economy, andI’d like to discuss your work on govern-ment
multipliers. The federal govern-ment’s stimulus package has been
atopic of heated debate among econo-mists, in terms of how much
stimulusit’s truly provided and whether more isneeded. In a recent
paper, you analyzebasically what happens to GDP whengovernment
purchases goods and serv-ices.Would you give us your rough
esti-
mate of the size of the multiplier in thecurrent era of very low
interest rates,and share your sense of the impact ofthe current
stimulus package?
Hall: The first thing to say, just lookingat the big picture, is
that when the ideaof a stimulus through federal purchasesprogram
came up in the current crisis,the thinking was, “That’s feasible.
Wecan increase purchases.” And then thequestion was how much would
it raise
GDP. There was a vigorous debate,around here anyhow, on this
multiplierquestion.The discussion has shifted now
because the premise was that we wouldbe able to raise government
purchases.But, in fact, government purchases havenot increased.In
part that’s because it’s very difficult
and time-consuming to actually get thegovernment to buy more
stuff. This hasbeen a critique of fiscal policy as long asI’ve been
an economist, this notion thatit takes so long to get spending up
thattypically the spending rises only afterthe recovery has
occurred, and it comesat completely the wrong time.
Region:We searched in vain for “shovel-ready projects.”
Hall: Yes, “shovel-ready” turned out notto be. But the other
fact is that there’sbeen a small increase in federal govern-ment
purchases, but it’s been more than
The Region
31 JUNE 2010
It takes so long to get [federal government]spending up that
typically the spendingrises only after the recovery has
occurred,and it comes at completely the wrongtime. ... But the
other fact is that there’sbeen a small increase in federal
govern-ment purchases, but it’s been more thanoffset by declines in
state and localgovernment purchases.
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offset by declines in state and local gov-ernment purchases.The
stimulus bill recognized that that
was a danger. We have had thesetremendously pinched state and
localgovernments. A lot of them have justhad no choice when their
tax revenuedeclined but to reduce spending.In spite of recognizing
that potential
when the stimulus program wasdesigned, still the net effect of
the crisisand the policy response was for govern-ment purchases to
decline, not to rise.But by very small amounts. Basically,nothing
happened to government pur-chases. And that was in an environmentin
which everybody—and certainlyCongress was enthusiastic about
it—waswilling to go for a program with higherpurchases. But no
matter how hard theytried to turn the knob, it just wouldn’t govery
far.
Region: So ARRA [American Recoveryand Reinvestment Act of 2009]
was fornaught?
Hall: First of all, you have to take itapart, as I do in that
paper, and ask howmuch of it went directly into govern-ment
purchases, which is fairly small, orwould stimulate state and local
purchas-es, which was also fairly small.A lot of it was providing
income sup-
plements, and there you get into thequestion of whether the
people receiv-ing the supplements increased theirspending or not.
That’s a whole otherissue; I’m not commenting on that issue.That’s
a very difficult question toanswer.To go on to the other part of
your
question, had there been an increase ingovernment purchases that
was success-fully achieved, how much would thathave increased GDP?
The answer I gotwas around a factor of 1.7, which is atthe high end
of the range of what mosteconomists were talking about.I only
reached that by thinking very
carefully and reading a lot of recentcommentary on this question
of theimplications of having a zero fed fundsrate. That turns out
to be very impor-
tant. Others have found that to be true.So I think that the
people who looked
at the evidence of what the multiplier isin normal times and
said it’s maybe 0.8or 1.0 (which I would agree with) kindof missed
the point. There was a lot of, Ithink, inappropriate
criticism.Valerie Ramey, in contrast, has
focused not on the immediate policyquestion but raised the
scientific ques-tion about the long-run multiplier. Hernumbers are
ones that I respect and agreewith. They’re more in the 0.9
range.But on the issue of multipliers during
periods of zero interest rates, because wedidn’t have any
changes in governmentpurchases during this one time whenwe’ve
reached the zero interest point, wedon’t have any good empirical
evidence.What we need is a time when interestrates are zero and
there’s a big increasein government purchases. That just
hasn’thappened.So we have no way to know through
pure practice; we have to use models.The models are very clear
that it makesa big difference when we’re at the zerointerest rate
limit. The normal configu-ration is that you get this fiscal
expan-sion—the government buys more, butthat triggers sort of an
automaticresponse from monetary policy to leanagainst it. If you
shut that down by hav-ing interest rates stay at zero, you’ll get
abigger effect. That’s what this literaturesays and it’s quite a
big difference.
TAX POLICY
Region: Of course, this raises the issue oftaxes, of needing to
pay for deficit spend-ing. And I notice the Time magazinecover
above your desk about the flat tax.
Hall: From long ago!
Region: Yes, exactly. Your work withAlvin Rabushka on the flat
tax was ahuge sensation in the early 1980s, asrepresented by making
the cover ofTime.
Hall: That’s right. It’s one thing to getyour face on the cover
of Time; it’s quite
another to get your idea on it! Forgetwhat’s-his-name’s
face!
Region:And I think it can be argued thatthat helped pave the way
toward the1986 Tax Reform Act.
Hall: We like to think so. I’ll accept that.
Region: Twenty-five years later you reis-sued the book, updated
of course, andcontinue to advocate it as the “most fair,efficient,
simple and workable plan onthe table.”Given its clear merits and
strong
advocates, why do you think it’s gainedrelatively little
traction in the UnitedStates?
Hall: One important thing to under-stand is that contrary to
some people’simpressions, it’s not gone very far in therest of the
world either.
Region: Not in central and easternEurope? Mexico, perhaps?
Hall: Yes, but if you look at their overalltax structure, it’s
not what we have inmind. Their rates are high becausethey’ve
adopted income tax systems thatwork like a flat tax, but they’re on
top ofa very high value-added tax. So thecombination doesn’t
achieve the lowrates that we were hoping for.In the U.S., there’s
been a lot of back-
sliding. It looks like there’s going to bemore and more. The
state of California,for example, has a couple of times
addedsurcharges for very high incomes. Thereseems to be a belief
that it’s a great idea,that we can get all the revenue we needby
taxing high incomes, without regardto the problems that those tax
rates cre-ate, especially in the longer run. That’sone of the
things we talk about in ourbook. There’s more to the logic of
lowmarginal tax rates than just the questionof who pays the tax.But
another factor I would emphasize
is that since 1981 when we first promot-ed that plan, there’s
been a dramaticwidening of the income distribution inthe U.S. That
means that the idea of the
The Region
32JUNE 2010
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poor paying the same tax rate just seemsless viable than it was
when the incomedistribution was tighter.The division between a
small num-
ber of winners in the modern economy,mostly businessmen and
lawyers, asopposed to most other people, hasgrown significantly.In
“others,” I include doctors, by the
way. One of the amazing things thatdoesn’t get much attention
these days isthe widening division between doctorsand lawyers. It
used to be that doctorsand lawyers competed for the best hous-es in
Palo Alto. Now they’re all lawyers orventure capitalists; they’re
not doctors.While there are a lot of good ideas in
flat tax reform, it wouldn’t be remotelypractical to do it with
a single positivetax rate now. So I play around with sys-tems that
have, say, two brackets. The“not-so-flat” tax. But of course
thatdoesn’t have quite the simple appeal thatthe “flat tax” did.
[Laughter]But there’s still a great idea in that book
which applies to any tax system, which is,it basically figures
out how to implement
a value-added tax or other consumptiontax in a way that’s
progressive.There were two economists on
President Bush’s Advisory Panel onFederal Tax Reform in 2005,
JimPoterba and Ed Lazear, who reallyunderstood that. They pushed
prettyhard; that was one of the designs thatwould make sense for
how to do a con-sumption tax, even though it wouldn’tbe a flat
tax.The origin of our initial flat tax effort
was Rabushka coming to me in 1980and saying, “I know what the
peoplewant. The people want a flat tax, but Idon’t know quite what
that is.” And Isaid, “I know what it is because I’ve beenthinking
about it since I was a graduatestudent.” But, of course, for me, it
was aconsumption tax—an efficient, simple,fair consumption tax. The
flatness wasn’tso important but, of course, the flat taxname, which
Rabushka contributed,was very important politically.
Region: Marketing is important.
Hall: Yes, but now the idea of tax flatnessis understandably not
as popular.
DYNAMICS OF LABOR MARKETS
Region: You’ve also done a great deal ofresearch on labor
markets. In 1982, youdocumented the “importance of long-term jobs”
in the United States. I’m notsure that’s still the case.
Hall: It’s still the case. That paper’s beenreplicated quite a
few times. It’s almost alaw of nature. The financial press is
con-stantly telling us how much turnoverhas increased, how the old
days of thelifetime job have disappeared. Butthere’s no
particularly strong evidenceof that. There are some
interestingchanges going on, but nothing that dra-matic.
Region: A 2005 paper of yours arguedthat job separation was also
fairly stableand what was more important was look-ing at the hiring
process and job find-ing.
Hall: That’s right.
Region: So you’ve been studying thatprocess carefully, looking
at job searchdynamics, wage stickiness, wage bar-gaining,
productivity, other factors.You’ve developed a model that
explainslabor market fluctuations withoutassuming what you consider
to be unre-alistically high labor supply elasticity.
Hall: I think “explain” might be a littlebit of an
overstatement. I’m not surehowmany of my colleagues would agreewith
the word “explain.” [Laughter] Ithink “accounting for” might be
right.
Region: Fair enough. What factors haveyou found most successful
in account-ing for job-finding rates? And what arethe key drivers
of labor market volatility?
Hall: The important feature that con-trols the job-finding rate
is the incen-tives to employers to create jobs. At anygiven time,
if the incentives are not verystrong—it could happen for many
dif-ferent reasons—then employers will dorelatively little to try
to recruit workers.Job seekers will then have trouble find-ing
jobs, will see themselves at the endof a long line of people
waiting for thejob.Interestingly, the number of people
who find jobs each month is more orless a constant. Of course,
this changes,but it’s a pretty good starting point forunderstanding
labor market dynamicsthat the number of people who find jobseach
month is the same in a strong mar-ket or a weak market.In a strong
market, you have a rela-
tively small number of job seekers, soeach one finds it easy. In
a good market,it takes the average person about amonth to find
another job. In a weakmarket, there are twice as many
peoplelooking, but each one of them is half aslikely to find a job
each month; theproduct of the two—the number look-ing for a job and
the fraction of themwho find a job—is the same.So, something like 4
million people
find jobs every month. Even with 10
The Region
33 JUNE 2010
Since 1981 when we first promoted that[flat tax] plan, there’s
been a dramaticwidening of the income distribution inthe U.S. That
means that the idea of thepoor paying the same tax rate just
seemsless viable than it was when the incomedistribution was
tighter.
-
percent unemployment, as recently,we’ve still seen the same
thing. A verylarge number of people looking, verylow job-finding
rate for each individual,but the product—the number of
jobsfilled—is roughly a constant. It’s a veryimportant fact about
the labor market.Think about a slack market from an
employer’s point of view. They see thereare all kinds of highly
qualified peopleout there they can hire easily, so theydon’t need
to do a lot of recruiting—people are pounding on the door.
Region: And these days they’re censustakers.
Hall: [Laughter] Right! So that’s the firstthing to think about:
job creation incen-tives.If you ask, how did we get into a
situ-
ation where job creation incentives havedeclined? It’s that
there’s been a declinein the profitability of hiring a
workerwithout a corresponding decline in the
wage. The incentive to create a job is thedifference between
what a worker willcontribute to the business and what theworker has
to be paid.That’s a very simple calculus. But that
seems to vary. In a recession, for variousreasons, the profit
margin from hiring aworker declines, and that reduces job-creating
efforts, all the things that keepthe labor market moving. And that,
inturn, causes it to be difficult for the jobseeker to find a
job.There’s a great debate going on as to
just what the factors are that reduce theadditional profit from
hiring anotherworker.For a while, there was the thinking
that movements in productivity—pro-ductivity is one of the
factors, so if pro-ductivity falls and the wage doesn’t fallwith
it, then that reduces the profit mar-gin. But that idea has not
worked in thelast three recessions because they wereperiods when
productivity was rising,not falling. So the old productivity
storyhas not worked for the last 30 years.But each of us has our
own set of
ideas. To tie it to what we were talkingabout before, financial
frictions havethe same effect. Increasing financialfrictions
reduces the desirability ofadding workers. That’s especially true
ifthere’s anything about the employmentrelationship that has an
investmentcharacter. If a worker has to be trainedand becomes
highly productive laborin time, then this question of what thecost
of funds is becomes important. Arise in the cost of funds will
result in adecline in employment, and that’ssomething a lot of
people are looking atright now.There are many threads to this
topic.
We’re debating actively which ones aremost important.
RECESSIONS AND RECESSIONDATING
Region: People are wondering when will,or did, the current
recession end, but I’dlike to ask how you and the NBER[National
Bureau of EconomicResearch] committee you lead decided
when it began. Many countries define arecession as two quarters
in a row ofnegative GDP growth, and by that stan-dard I think the
United States wouldhave entered its recession in, maybe, thethird
quarter of 2008.
Hall: But that gets back to the wholequestion of, do you include
the peak ofreal GDP?We always talk about the dateof the peak. That
helps sort out this tim-ing. The peak occurred in the secondquarter
of 2008. However, as you know,we declared the peak to be a little
earlierthan that, December of 2007.
Region: Would you explain what stan-dards—I know it’s on the
NBER Website; it’s very clear there—but could youelaborate on what
standards you use todetermine turning points in businesscycles?
Hall: Actually, it’s not that clear, becausethese things are
always up in the air.[Laughter] There’s a certain amount
ofambiguity in what we put on the Website. We haven’t resolved some
impor-tant questions about how this processshould work.
Region: Why really do we need a com-mittee, a dating committee,
rather thanrelying on a rule of some sort, like twoquarters of
negative GDP growth? I thinkyou’ve been on the committee since
itbegan…
Hall: I’m the only chairman the commit-tee has ever had, for 32
years.
Region: I didn’t know you’ve chaired itthe entire time! Well
then, you’re theright man to ask. Do you think it mightbe useful
for the NBER, in addition todoing what it now does, to also
issuesomething closer to a real-time indica-tor or signal of
recessions—that couldbe revised for false positives or nega-tives,
along the lines that Òscar Jordàhas recommended?
Hall: I think we feel that doing some-thing like that, and in
any sense making
The Region
34JUNE 2010
Something like 4 million people findjobs every month. Even with
10 percentunemployment, as recently, we’ve stillseen the same
thing. A very large numberof people looking, very low
job-findingrate for each individual, but the product—the number of
jobs filled—is roughly aconstant. It’s a very important fact
aboutthe labor market.
-
it official, would somewhat cloud thingsbecause there would be
enough type 1or type 2 errors [false positives or nega-tives].
We’re very happy to see that typeof research be done; we don’t
claim anymonopoly on this point, and it’s beenvery
instructive.Actually, long ago, in the 1980s, we
sponsored a project that informally,unofficially put out a
recession proba-bility index that Jim Stock and MarkWatson
prepared. It didn’t work verywell in the 1991 recession, so
theystopped doing it after that.And it didn’t work for fairly
typical
reasons. That was the first recession thatwasn’t accompanied by
a decline in pro-ductivity, so it looked somewhat differ-ent. So
their historical relationshipsweren’t as stable as they
hoped.That’s one of the main reasons why
automatic rules haven’t worked. Peoplehave done research on the
machineapproach for years. In fact, when I was agraduate student
and took a computerscience course, my project was to writesoftware
that would automate this. Soit’s not a new idea. But it’s never
workedvery well.
Region: It would have missed the 1981recession if we’d used the
two negativeGDP quarters rule.
Hall: You mean 1980.
Region: Right, 1980.
Hall: 1981 was no problem. The 1980recession was just one
quarter. And peo-ple have said that the 1980 recession wasactually
just sort of a prelude to the ’81recession. We say no, but it’s
been said.
Region: It seems it’s more of an art thana science then.
Hall: It’s a classification problem that theworld seems to want
an answer to, but ithas a shifting structure, and dealingwith the
shifting structure is the issue.We try very hard to achieve
historicalcontinuity.We don’t doubt for a second—and I
don’t think anyone else does either—that we know when there’s a
recession.In all the data we look at, certainly inthe period when
we’ve had reliabledata, which is since World War II,there’s never
been an episode that’ssomewhere halfway between a reces-sion and a
nonrecession. Every reces-sion has been clear. And they all
seeunemployment shoot up and typicallysee GDP decline.We do face
issues though. With the
most recent revisions of GDP, the 2001recession essentially
doesn’t exist. It wasa flattening, but as emphasized on ourWeb
site, there are issues of depth, dura-tion and dispersion, but
there was nei-ther depth nor duration in what hap-
pened in ’01. By the alternative measureof total output, real
gross nationalincome, the 2001 recession is quiteapparent.To me,
it’s not an issue because that’s
just looking at GDP. If we look atemployment, as I did in a
2007Brookings paper on the “ModernRecession,”—by “modern recession”
Imean one in which productivity rises…
Region: And monetary policy is undercontrol.
Hall: Monetary policy is stable, exactly.But here I think the
key point is aboutproductivity. With rising productivity ina
recession, you can see a relatively mildmovement in GDP, and
there’s a longperiod of GDP growth at the same timethat employment
is falling.When people talk about the jobless
recovery, it’s just another term for pro-ductivity growth.
That’s complicated theprocess. The complication in the
2001recession is that productivity roseenough to offset employment
declines,so we have a very pronounced, obviousrecession in
employment and what’shardly a recession at all in GDP.I’m perfectly
satisfied that’s a reces-
sion because I want to balance the two.To the extent you look
just at GDP,though, it would be hard to call that arecession.That’s
material today because, of
course, we’re seeing the same thing.GDP reached a very
pronounced troughin the summer of 2009. It’s been
prettyconsistently rising—with one little hic-cup recently—since
then. So on thatstandard, we say the trough was in sum-mer of ’09
or maybe the fall of ’09.But employment is still declining. We
still have not seen a growth month.Everyone is presuming that we
will inMarch—but that’ll be the first. You canplausibly make the
trough of GDP be inJune of ’09, but the trough of employ-ment is
probably going to be March of2010. That’s a long time.Not as bad as
’01, when the situation
was even worse. The trough in employ-ment didn’t occur until
2003.
The Region
35 JUNE 2010
Historical relationships weren’t as stableas ... hoped. That’s
one of the main rea-sons why automatic rules haven’t worked....
It’s a classification problem that ... has ashifting structure, and
dealing with theshifting structure is the issue. We try veryhard to
achieve historical continuity.
The complication in the 2001 recessionis that productivity rose
enough to offsetemployment declines, so we have a verypronounced,
obvious recession in employ-ment and what’s hardly a recession at
allin GDP. ... That’s material today because,of course, we’re
seeing the same thing.
-
STOCK MARKET VALUATION
Region: Let me ask about the stock mar-ket. Roughly a decade
ago, you did a lotof work on eCapital, eMarkets and stockmarket
valuation. Your 2001 Richard Elylecture was an example of that. And
yousuggested that investors did seem to befairly estimating the
market’s value ifintangible capital was taken intoaccount. Is that
accurate?
Hall: Well, I talked about some individ-ual cases where I
thought you could tellthe story. There was a discussion of eBayin
the Ely lecture. On the other hand, ifyou look at the results in my
AER[American Economic Review] paper, itobserves that intangible
capital by thatmeasure was deeply negative in the mid-’70s to about
1980. Now, positiveeCapital makes a lot of sense, but nega-tive
eCapital is a little hard to swallow.So I’d be careful.There was
something weighing down
the stock market from basically 1974 to
1990. eCapital turned positive in 1990.So during that period,
there was someundervaluation. It was very clear thestock market
later decided it was anundervaluation because if you made astock
market investment in 1980 andheld it to 1999, you had a very
largeexcess return in the 20-year period. So Ithink there are still
some mysteries.In spite of the fact that the valuation
that we see in the market right nowseems to be in a reasonable
range, thereturns since 1999 have been way belowany benchmarks,
which suggests thatthere was some overvaluation then.
INTELLECTUAL PROPERTY
Region: You’ve thought and written agreat deal, in both
technical and laypublications, about the economics ofcomputers and
software, as well as ven-ture capital and entrepreneurs. Thatseems
natural given that you were bornin Palo Alto and have worked here
for along time.
Hall: Flora Hewlett, married to theHewlett of Hewlett-Packard,
was myfather’s secretary when he was aStanford professor. If only
he’d boughtone share!
Region: You’ve also devoted some timeto studying antitrust
economics, andlooking at potential for monopoly pric-ing in
upstream supplier markets.What is your view of the argument
that intellectual property, copyright lawsand patents inhibit
rather than encour-age innovation?
Hall: First of all, I think that that’s onlybeen directed at
patents. I don’t thinkthere’s any feature of copyright law.
Itprotects the expression. There’s an infi-nite space of melodies
that composerscan compose and once they do, it doesn’tinhibit other
composers from compos-ing other songs because there’s this
infi-nite space. Every expression is complete-ly unique, so when it
comes to expres-sion, I don’t think there’s any real issue. I
The Region
36JUNE 2010
More About Robert Hall
Current Positions
Robert and Carole McNeil Joint Senior Fellow, Hoover
Institution,and Professor, Department of Economics, Stanford
University; joinedfaculty in 1978
Previous Positions
Massachusetts Institute of Technology, Professor, 1970–78
University of California, Berkeley, Assistant Professor,
1967–70
Professional Affiliations
President, American Economic Association; President-elect,
2009;Vice President, 2005; Ely Lecturer, 2001
Director, Research Program on Economic Fluctuations and
Growth,National Bureau of Economic Research, since 1977;
Chairman,Committee on Business Cycle Dating
Member, National Academy of Sciences, since 2004Member, Advisory
Committee, Congressional Budget Office, since 1993
Member, Oversight Panel for Economics, National Science
Foundation,1989; Advisory Panel for Economics, 1970–72
Honors and Awards
Fellow, American Academy of Arts and Sciences, Econometric
Societyand Society of Labor Economists
Hall of Fame, Money magazine, with co-author Alvin Rabushkafor
their book The Flat Tax
Publications
Author of Forward-Looking Decision Making: Dynamic
ProgrammingModels Applied to Health, Risk, Employment, and
Financial Stability(Princeton University Press, 2010), Digital
Dealing: How eMarkets AreTransforming the Economy (Norton, 2002),
The Flat Tax (with AlvinRabushka, Hoover Institution Press, 2d ed.,
1995) and The RationalConsumer: Theory and Evidence (MIT Press,
1990), among other books.Widely published in academic journals,
with research focused onemployment, technology, competition and
economic policy
Education
Massachusetts Institute of Technology, Ph.D. in economics,
1967
University of California, Berkeley, B.A. in economics, 1964
-
think almost everyone believes in apretty powerful IP rights
regime forexpression.When it comes to the things that
patents protect, then the patent regimehas to do the things that
the patentregime claims to do. The patent has tobe original; it has
to be an innovation.And there the standard of obviousnesscomes
in.If what’s happening is that people are
somehow able to figure out what theobvious next logical step is
and some-how get a patent on that and then collectroyalties from
that patent even though itdoesn’t really make any contribution,then
there’s something wrong with thepatent regime. But I don’t think
there’sany very good evidence that that’s actu-ally what’s
happened.People make fun of a lot of the
patents that the patent office issues, butthey don’t matter.
There’s only a muchsmaller set of patents that have everattempted
to be enforced and have
caused any problems. On the otherhand, the patent system has
generatedsome very substantial rewards to sometrue innovations.You
know, it’s all in the details. I don’t
accept a broad condemnation of thepatent system. I don’t join
any of thesepeople who say there shouldn’t be anybusiness process
patents or thereshouldn’t be software patents. Somegood ideas are
implemented in software.What is a good idea, and what every-
one stands by, I think, is the notion thatpatents shouldn’t last
forever. The ideaof a finite patent life, which is currentlyaround
20 years, does seem to be animportant part of the design.The result
of that is that the great
majority of innovations ultimately ben-efit workers in the form
of higher wagesrather than any permanent stream ofmonopoly profits
going to owners. Ifthat weren’t true, you’d see a hugeamount of
innovation value capitalizedin the stock market, but you don’t,
andthat’s proof. Consistent productivitygrowth and corresponding
real wagegrowth is demonstration then that thebenefits ultimately
of innovation aregoing to workers. So it’s a great thing.
THE STATE OF ECONOMICS
Region: The past few years seem to havebrought about a crisis of
confidence inthe economics profession, with criticssuggesting that
macroeconomics hasfailed in some fundamental way. It’s atopic
addressed by [Minneapolis FedPresident] Narayana Kocherlakota inour
Annual Report this year. Do youagree that the macro profession
failedthe nation during the financial crisis?
Hall: I don’t. There are two parts to theissue. First, did
macroeconomists fail tounderstand that a highly levered finan-cial
system based in large part on real-estate debt was vulnerable to a
declinein real-estate prices? No way. Many of uspointed out the
danger of thinly capital-ized banks. We had enthusiasticallybacked
the idea of prompt correctiveaction in bank regulation, so that
banks
would be recapitalized well before theybecame dangerously close
to collapse.We watched in frustration as the regula-tors failed to
take that action, eventhough they had promised they would.Second,
did macroeconomists fail to
understand that financial collapsewould result in deep
recession? Not atall. A complete analysis of that exactissue
appears in an extremely well-known and respected chapter in
theHandbook of Macroeconomics in 1999,written by Ben Bernanke, Mark
Gertlerand Simon Gilchrist. Depletion of thecapital of financial
institutions raisesfinancial frictions to levels that distinct-ly
impede economic activity. In particu-lar, credit-dependent spending
on plant,equipment, inventories, housing andconsumer durables
collapses. Thatchapter is an excellent guide to thedepth of the
current recession.
Region: Thank you for a great conversa-tion.
—Douglas ClementMarch 16, 2010
The Region
37 JUNE 2010
Patents shouldn’t last forever. The idea ofa finite patent life,
which is currentlyaround 20 years, does seem to be animportant part
of the design.
The result of that is that the greatmajority of innovations
ultimately benefitworkers in the form of higher wages ratherthan
any permanent stream of monopolyprofits going to owners.