The Central (Bankers') Question : Planet Money We crash a party of central bankers to get an answer to one of the biggest economic questions of our time.

The Central (Bankers') Question

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The 1970s were this very weird moment in American economic history. Industries were dying. There was an oil embargo. And by the end of the decade, inflation was out of control.


I kind of lived through it, and I totally remember the price of comic books going up, like, every month. I collected them for a few years, and I was paying 25 cents at the start and, like, $1.25 when I just gave up.

ROMER: And a little inflation is actually good for the economy - 2 or 3 percent. But by 1980, inflation was at 13 percent. It was making America crazy. Like, how do you decide whether to buy a new house or make a new factory if you don't know how much a dollar is going to be worth a year from now.

URSTADT: And what's really interesting about a moment like that is that the inflation is caused by all these different parts of the economy, but the power to do anything about it basically rests with one institution.

ROMER: The Federal Reserve Bank - America's central bank, the bank that basically sets interest rates for all of the other banks in the country. In 1979, the Fed got a new chairman, this 6-foot-7 cigar-chomping economist named Paul Volcker. Volcker knew there was one surefire way to bring down inflation - raise interest rates.


PAUL VOLCKER: Well, I - the whole object of the exercise is to improve the conditions in the long run.

URSTADT: Volcker's exercise was raising interest rates to crazy levels - 20 percent.

ROMER: Twenty percent.


VOLCKER: I guess it's something like having an operation. It's not much fun. But in terms of you've got something the matter, you better have the operation.

ROMER: The idea was that those super-high interest rates would make it expensive to borrow money. Consumers wouldn't spend as much. Businesses wouldn't invest as much. The economy would cool down.

URSTADT: And, of course, the same idea works in reverse, too. If the Fed lowers interest rates, borrowing is easier, so people and companies will spend and invest more, and inflation goes up. Raise interest rates, inflation goes down. Lower interest rates, inflation goes up.

ROMER: If you're a central banker, that interest rate lever - it's kind of all you've got. And at least historically, like with Volcker, it is a very powerful tool. When Volcker cranked up interest rates to 20 percent, he changed the entire economy.

URSTADT: By 1983, inflation was down to just about 3 percent. Millions of people's lives changed. How many jobs there were, what you got paid, what stuff cost at the store - all of it changed basically because Volcker decided it should.

ROMER: But that trillion dollar lever that is the single tool that central bankers can use to completely remake the economy - it's not working the same way it used to, and people really don't know why.


URSTADT: Hello, and welcome to PLANET MONEY. I'm Bryant Urstadt.

ROMER: And I'm Keith Romer. Today on the show, we try to get to the bottom of this mystery. What has changed since Paul Volcker's time that is making the interest rate lever act so strangely? It's a super-nerdy macroeconomic question, but it is also a question that gets to the heart of how much things cost at the grocery store and how much money you take home in your paycheck.

URSTADT: To answer this central question, we go to the center of central banking - an annual meeting in Jackson Hole, Wyo., where the world's most powerful lever-pullers are trying to figure out what the hell is going on.

ROMER: We're going to the central bankers' conference.


ROMER: We should explain why the central bankers' conference is in Wyoming every year. So back in 1982, the organizers were trying to figure out where they could hold a meeting that would attract the big name in central banking, Paul Volcker.

URSTADT: And the only thing that Volcker loved more than fighting inflation, and cigars, I guess, was fly-fishing. And apparently, at the end of the summer, Jackson Hole is the place for fly-fishing.

ROMER: So they put the conference there. Volcker couldn't resist. He showed up. And even though he hasn't been there for years, everyone still goes out to Jackson Hole.

URSTADT: So we sit around all day obsessing over wage stagnation and the natural rate of unemployment and the money supply, so the chance to go to a central bankers' conference - it was like nerd fantasy camp. We were totally in.

UNIDENTIFIED PERSON: Ladies and gentlemen, welcome to Jackson Hole. Local time is 11:59. We'd like to thank you for flying with us today. We hope you have a pleasant experience.

ROMER: It was such a pleasant experience. It is gorgeous there. And it's about a 45-minute drive through just beautiful country to the conference.

URSTADT: It's a 45-minute drive if you don't stop every 2 miles.

ROMER: All it said was, historic site, and I...

URSTADT: You really - we're really - what about lunch?

ROMER: I kind of want to know what happened there.

URSTADT: It's just the Cunningham Cabin.

ROMER: It's historic.

URSTADT: It's just - come on.

ROMER: It says right there, historic site.

URSTADT: Eventually we got there, Keith.

ROMER: There is the Jackson Lake Lodge. It's this giant mountain lodge smack in the middle of Grand Teton National Park. It has 60-foot windows that look out over the mountains. It's all wood beams and paintings of bighorn sheep.

URSTADT: And it's kind of nice because the bankers chose a place that was hard to get to, but, you know, if you were obsessed with monetary policy, you could just basically show up, which is what we did. We were not technically invited.

ROMER: We weren't. We weren't invited.

URSTADT: No. We weren't invited.

ROMER: But the hotel is open to the public. The lobby is filled with hikers and families with their kids. And then, there are the central bankers.

ESTHER GEORGE: I'm Esther George. I'm the president and CEO of the Federal Reserve Bank of Kansas City.

URSTADT: Esther George and the Kansas City Fed - they host this meeting every year. And she's essentially the person who decides what the conference is going to be about each year. So she's a pretty obvious place for us to start as we're trying to figure out what's going on with the lever.

ROMER: But talking to a central banker is not like talking to your uncle. If your uncle's like, oh, the economy is going to hell, like, nothing happens. But if a central banker says that, the economy actually will go to hell. So people like Esther George are understandably very careful when they talk to journalists.

Bryant, if you can translate.

GEORGE: What we've noticed is, globally, the advanced central banks have been putting a lot of accommodation into their economy, and yet, not seen inflation rise.

URSTADT: So that's George saying, we're keeping interest rates low, but inflation isn't going up the way we want.

ROMER: I tried to get her to give me her actual opinion about what was causing the lever to work funny. Not so much.

GEORGE: I want to be careful that I don't front-run the conference, that I don't influence the dialogue there.

URSTADT: That's pretty much her saying she is not going to answer you.

ROMER: In short, the person who organized the conference - she's not about to explain what's wrong with the lever.

URSTADT: But it wasn't like she was the only person we could talk to. I mean, we were in a conference filled with people.

ROMER: So the conference is held in a room just off the lobby called the Explorers Room - the white tablecloths, antler chandeliers.

URSTADT: We hung out outside, and we just watched as this endless stream of bankers came by. All these, like, regional Fed presidents and academic heavyweights.

ROMER: There were central bankers from Iceland and Israel and South Africa - everyone just walking up with their little plastic-covered nametags.

We're super-close to Jerome Powell.

URSTADT: There you go.

ROMER: I almost touched him.

URSTADT: That would not have been a good idea.

ROMER: Jerome Powell - he is the chairman of the Federal Reserve. And according to Bryant, you are not allowed to touch him.

URSTADT: I think it's a good guideline.

ROMER: We also met this guy, Shawn Sebastian, in the lobby. This is actually his fourth year coming to the conference.

SHAWN SEBASTIAN: A whole bank of photographers comes in, and it's like the Oscars for economic nerds.

ROMER: Like us, Shawn - not invited. But Shawn is not here to report.

URSTADT: No. He's actually here to protest. He's with a group called Fed Up.

ROMER: Clever name. It's a clever name.

URSTADT: I thought about it a lot, and I'm on the fence about how clever it actually is.

ROMER: Fed Up.

URSTADT: Because it has Fed, but then the up just...


URSTADT: Are they saying to raise Fed's interest rates?

ROMER: No, no. Fed Up means that you're tired of something. It means, like, you've had enough. Do you get it? Do you see it?

URSTADT: I would think if they took another swing at it, they would be happy.

ROMER: OK, but protesting the Federal Reserve is not really like protesting your local school board.

SEBASTIAN: There's a lot that we're not allowed to do. We're not allowed to have signs.

ROMER: They can't hand out leaflets.

SEBASTIAN: We're not allowed to make a disturbance. And I don't know, like, you know, they'll tell us what their definition of that is.

ROMER: The they Shawn is referring to are these pretty tough-looking dudes from the Federal Reserve Police, which is actually a special...

URSTADT: That's a thing.

ROMER: ...Police force, like the Secret Service. And they have these matching tan, like, fishing vests on.

URSTADT: And the earpieces. It was like - like, imagine the Secret Service went on this, like, 10-day fishing trip. That's what these guys look like.

ROMER: Since the protesters aren't allowed to hold signs or hand out leaflets, they come up with this kind of brilliant workaround. They put their message right on the T-shirts they're all wearing.

URSTADT: And this - this is what I love about this conference. Even the protesters are in deep, deep nerd mode. Like, the front of their shirts say things like, we're at full employment? Nah. Ask me about my story. But the back is where the magic happens.

ROMER: OK. I don't have a side in this, but I have to admire that T-shirt. It's a percentile graph. On the bottom, it has the years from 1950 to 2020, and it shows how productivity and hourly compensation has been diverging remarkably since 1980.

URSTADT: No, I think it's, like, '73.

ROMER: Seventy-three. Flat wages, below target inflation, rising EPOP. Look at the data. Talk to us.

URSTADT: And the color scheme is nice. It's just a serious, serious T-shirt.

ROMER: That graph is basically about how wages really haven't grown the way economists expected them to. And wage growth is one of those things we were talking about before that's been behaving so weirdly in the economy. You almost want to grab Jerome Powell...

URSTADT: No. Don't do that part.

ROMER: I'm not literally going to grab Jerome Powell, but you want to grab Jerome Powell and say, look at the graph. What is happening there?

URSTADT: But before we can ask Jerome Powell or anyone else anything, they close the doors on the Explorers Room. One of the Fed police fishing agent vest guys steps in front. And the lobby goes back to just hikers and PLANET MONEY reporters and several dozen very, very well-behaved protesters.

ROMER: Day Two starts. And at this point, we've got the lay of the land. We know how this place works. We go back to the lobby, and we start grabbing economists and bankers as quickly as we can before the organizers ring the cowbell that says the next session is starting in the Explorers Room.


URSTADT: Now, the highlight of the conference is not the views or the antlers. It's the papers - economic papers. And everyone keeps telling us, talk to John Van Reenen because his paper - it's the one.

ROMER: So I track him down, and we agree to meet up later in front of the giant, stuffed grizzly bear just outside the Explorers Room.

JOHN VAN REENEN: I'm John Van Reenen. I'm a professor in the Department of Economics at MIT and the Sloan School of Management.

ROMER: Van Reenen's paper has some really interesting clues to this big question everyone is here to solve - why the interest rate lever isn't working.

URSTADT: He started by looking at how all these giant new companies like Apple and Facebook and Amazon have been concentrating all of this power in their markets.

VAN REENEN: But I think what's really surprised me when I first started looking at this is that this increase of concentration hasn't just happened in those high-tech markets - but you also see happening in the majority of other markets that you look at.

ROMER: You've got retail...

URSTADT: Shipping, banking, health care...

ROMER: Airlines, insurance, utilities - all consolidating.

VAN REENEN: It's actually happening across a wide range of sectors of the American economy.

URSTADT: And all of these big, new companies - it might be that they're what's making the lever act funny.

ROMER: We see this in essentially three ways. The first way is pricing. The Amazons and Walmarts of the world - the one thing they all do really, really well is offer low prices.

URSTADT: Which we like - but those low prices are messing with how central bankers should even understand what inflation means.

ROMER: Back in Paul Volcker's day, prices going down might have meant that economy was in trouble. But now, it might just mean these giant companies are getting more and more efficient.

URSTADT: The second way Van Reenen says that the giant companies are making the economy act weird is through borrowing. It used to be to become a giant company, the important thing was to build the best factories and buy the newest machines.

ROMER: But these days, the way you win as a company is by owning the best version of what economists call intangible capital - things like patents and software.

VAN REENEN: Think about Walmart in retail - a much more, you think, low-tech type of sector. But what Walmart's done is that it's invested huge amounts of money in building up better software.

URSTADT: Because Walmart isn't just a company with, like, a ton of trucks and warehouses. It's a company that's used all this technology to get somewhere. Now it understands better than any other company how to move these trucks around the warehouses really, really efficiently.

ROMER: Right, it's not about the trucks; it's about how you move the trucks. And this is how it ties back to borrowing. Another way that the interest rate lever is supposed to work is by making it cheaper or more expensive for businesses to grow. But companies may not need as many loans to build factories and warehouses that they used to.

URSTADT: And that means that the lever won't work on businesses the way it used to.

ROMER: The third way Van Reenen says big companies might be messing with the levers is wages.

URSTADT: And that one might be on us.

VAN REENEN: So, you know, think about, say, Google. Google dominates search. You know, everybody uses Google everyday to search for things. So why is it that Google's so dominant in search?

URSTADT: Van Reenen says it's because we as consumers made it so dominant.

ROMER: Right, when I want to look something up, I'm not asking Jeeves. I'm not going to Bing. I'm using Google because Google works. It's fast. It's easy.

URSTADT: Same thing with Amazon - if I need something, like a new garlic press, I'm not going to go look on 10 different sites for it.

ROMER: And there's this other thing that's happening. When we're going to Google, and we're going to Amazon to get information or to buy something, we're also giving them all of this information about what we want and how we think. And that actually allows Google and Amazon to make their products even more what we want.

VAN REENEN: So it creates this kind of virtual circle that's kind of chicken and egg, whereby if you can get be a kind of a bigger kind of platform, you can kind of win almost the entire market.

ROMER: As consumers, we're actually being pretty well-served by all these giant companies, at least for now. But by all of us picking Amazon to be the company for buying everything, we're actually changing the job market and how much workers get paid.

URSTADT: Which brings us back to the protesters' nerdy, green T-shirts - the ones with the graph that shows how wages haven't grown all that much since the early 1970s.

ROMER: I showed John Van Reenen a photo of the shirt.

VAN REENEN: Yes. So this is a famous tee - this graph is a famous graph from this T-shirt. It says flat wage is below target inflation, rising EPOP, which I believe means employment to population ratio as the fraction of people with jobs in the population.

ROMER: Van Reenen says the graph is basically right. A bigger and bigger share of profits has been going to all these big companies, and a smaller and smaller share has been going to workers.

VAN REENEN: It's amazing you can fit this on a T-shirt.

URSTADT: And remember - for years, a lot of economists thought wages would rise with inflation - that it was something that they could really control and count on.

VAN REENEN: This is one of the major puzzles in economics and social science - why you've seen this big fall of the labor share. So this is something we're still trying to understand. And, you know, my personal view is that there's not a single explanation.

ROMER: The protester Shawn - his theory is that all of this is because of a decline in union power.

URSTADT: Van Reenen thinks that might be part of it but not all of it.

VAN REENEN: There's another story which is more what economists call monopsony power.

URSTADT: Monopsony is like the less famous cousin to monopoly. Imagine there's just one company in a town. Nobody else is around who will hire people. And the company can pretty much decide how much it wants to pay workers. They can take it or leave it. That's monopsony.

VAN REENEN: Even if you haven't got unions, what larger firms in particular can do is they can actually drive down wages below what the competitive level is.

ROMER: Whether it's because of unions or whether it's because of monopsony, either way, workers end up with less money. And that - that matters to the lever. Interest rates have been low. And unemployment has come way down; it's less than 4 percent. But wages? Wages have not gone up. Companies should be competing with each other to get all these new workers, but it's not happening.

URSTADT: Now, last month, we did see a tick up in wages. But in the long run, nothing like what a decade with crazy-low interest rates should have caused.

ROMER: For Shawn Sebastian and the other protesters, the solution seems obvious. You just keep interest rates low, run the economy hot, and wages will eventually pick up. Don't worry so much about inflation.

SEBASTIAN: A lot of these people at the Fed are still shaped by the trauma of the 1970s inflation, when inflation was actually quite bad. It shapes their entire worldview. It's actually why we're here in Jackson Hole - is because they worship Paul Volcker like a god. And so we're here in Jackson Hole because, whatever, 40 years ago, he decided he wanted to go fly fishing.

ROMER: There was only so much we could understand by talking to protesters and professors. We wanted to talk to somebody who had actually had to make a decision about pulling the lever.

RAGHURAM RAJAN: My name is Raghuram Rajan, Raghu for short.

ROMER: Rajan is a professor now, but he used to run India's central bank. He and I sat on a bench under a pine tree, looking out over the Tetons. And he told me Shawn's worries actually made a lot of sense to him.

RAJAN: People are not satisfied with the quality of the jobs. They want better jobs. But what if all those jobs are in a few firms, while the rest don't have good jobs?

ROMER: Still, Rajan knows that central bankers don't have the luxury of just keying in on one element in the system, trying to fix that. Wages, interest rates, inflation, prices - they all affect one another, even if we're less sure how.

RAJAN: What this kind of conference highlights is we're uncertain about what really is going on. Central bankers have the task of making decisions when everything is clouded with uncertainty. And it's not an easy job.

URSTADT: And what might be hardest about the job of central bankers isn't deciding whether or not to pull the interest rate lever. It's deciding what description of the economy is true.

ROMER: On the one hand, it could just be that this is one more case of economic trends taking a long time to sort themselves out. All of this weirdness - it could just be a blip. After a decade or two, wage growth and inflation and everything else - it might just start tracking the way it always did before. If that's the explanation, then it might be that the lever is working. It's just working more slowly than we want it to.

URSTADT: But on the other hand, maybe everything really has changed. A lot of economists think these giant companies have remade the way the lever works.

ROMER: And our takeaway, after spending three days with all these central bankers in this beautiful place, is that the central bankers don't really know. And so for now, they're making these tiny, little moves with the lever and just hoping it will all work out.


URSTADT: We'd like to thank Bill Medley and everyone else at the Kansas City Fed for letting us crash their conference. And if you know of a secret meeting we should be at, email us - Or find us on Facebook and Twitter.

ROMER: This week, we're posting some photos of those Fed Up T-shirts on our Instagram, so you can try to figure them out yourselves. We are @planetmoney.

URSTADT: Special thanks to our intern, Alissa Escarce. It is her last day. Thank you.

ROMER: This episode was produced by Alexi Horowitz-Ghazi, with editing by Karen Duffin. PLANET MONEY's supervising producer is Alex Goldmark. Bryant Urstadt, you are PLANET MONEY's editor.

URSTADT: And you're Keith Romer.

ROMER: Thanks for listening.

I'm from the West. I know what historic cabins look like. It looks like some split logs. And you go inside, and there's, like, a rusty pot. And then, somebody has, like, a "Little House On The Prairie" fantasy, and you work through that. And you get back in your car, and you're still not where you were going.

URSTADT: (Laughter) Is that the West?

ROMER: It's my childhood.


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