390. Fed Up

Mary Daly rose from high-school dropout to president of the Federal Reserve Bank of San Francisco. She thinks the central bank needs an upgrade too. It starts with recognizing that the economy is made up of actual humans.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Stephen J. Dubner?

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• 0:48Stephen J. Dubner?

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• 1:19Stephen J. Dubner?

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• 2:09Stephen J. Dubner?

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• 2:46Stephen J. Dubner?

  All right, so you once said this, "I'm 4'11 1/2 on a very strong day. I'm openly gay, I'm female, and I come from a lower socioeconomic status. So I don't think I've ever felt like I was in the majority." How do you think those non-majority attributes help you look for things that haven't been looked for before when considering good economic policy?

• 3:13Speaker 01

  I'm comfortable being uncomfortable. I've only ever swam upstream, so it gives me a sense of freedom to just look. And I don't think that I'm more courageous, or that I'm more wonderful, or anything. I'm just simply more experienced. And the skill that we can all grow is to just be a little more comfortable being uncomfortable.

• 3:36Stephen J. Dubner?

  Mary Daly's discomfort has served her well. And as president and CEO of the Federal Reserve Bank of San Francisco, she's in a position to have it serve millions of other people well, too. The San Francisco bank is the largest of the Fed's 12 branches. It covers nine western states and more than 20% of the US population. These days, it's run by someone who dropped out of high school. Today on Freakonomics Radio, the American Dream's Promise and Problems.

• 4:06Speaker 01

  Yes, it is absolutely true that get a college degree, you can become someone like me. But we haven't brought me to scale.

• 4:15Stephen J. Dubner?

  Also, the Fed's imperfect history of turning high-level economic theory into ground-level economic success.

• 4:23Speaker 01

  Well, I'm undaunted by unsuccessful pasts.

• 4:26Stephen J. Dubner?

  And what it's like to be a Fed president when the US president is attacking you on Twitter every five minutes.

• 4:33Speaker 01

  Well, let me first say that we've always had disharmony.

• 4:51Speaker 02

  From Stitcher and Dubner Productions, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.

• 5:10Stephen J. Dubner?

  When the Federal Reserve Bank is in the news these days, it's usually related to its most public policy tool, the setting of interest rates. As the global financial meltdown and great recession set in, the Fed, under its then-chairman Ben Bernanke, dropped rates to zero. This was in 2008, and they stayed there for seven years. The idea was that zero rates were necessary to prevent a depression and to help the economy rebound. Bernanke's successor, Janet Yellen, finally began to raise rates, confident the recovery was secure. In 2018, Yellen was succeeded by Jerome Powell, who'd been installed under the newly-elected President Donald Trump. Powell also continued to nudge the Fed's rates higher,

• 5:54Stephen J. Dubner?

  encouraged by a robust economy and record stock market highs. Most monetary policy veterans felt that Powell was playing it just right. In this environment, you didn't need to make money too cheap, and you also didn't want to spike inflation. But not everyone agreed with Powell and his most vocal critic almost right from the start happened to be the President of the United States. I think the Fed is out of control. I think what they're doing is wrong. The Fed is technically and historically an independent operation. The President is not its boss. But Trump has very publicly encouraged Powell to drop interest rates

• 6:34Stephen J. Dubner?

  despite the relative strength of the US economy. Why? There are any number of reasons. Other countries' central banks have kept their rates low. The European central banks' rates are currently set below zero. There's also the ongoing US tariff war with China. Trump may see low rates as a useful counterweight in that battle as well as a means to avoid a self-inflicted US economic slowdown should the tariff war escalate. Furthermore, the global economy is showing serious signs of slowing down. In any case, President Trump has leaned hard on the Fed to cut rates and in the last few months Jerome Powell and the Fed have done just that twice. First in July.

• 7:17Speaker 03

  We decided today to lower the target for the federal funds rate by a quarter of a percentage point. It is intended to ensure against downside risks from weak global growth and trade policy uncertainty.

• 7:29Stephen J. Dubner?

  And again, just last week.

• 7:31Speaker 04

  And the Federal Reserve cuts the benchmark a quarter of a percentage point. The federal funds rate is now 1.75% to 2%.

• 7:40Stephen J. Dubner?

  The Fed's policy-setting committee is uncharacteristically divided as to the future direction of interest rates. Jerome Powell did say there may well be further cuts. Trump, for his part, is not remotely satisfied. After the most recent cut, he tweeted that Powell and the Fed have, quote, "no guts, no sense, no vision." He said he wants rates brought down to zero or less. A few months ago, we had Gary Cohn on our show. He's the former head of President Trump's National Economic Council. I'd asked Cohn whether Powell was thinking about interest rates purely on the merits or as a capitulation to Trump's Twitter demands.

• 8:20Speaker 05

  I'm going to hope it wasn't. I surely hope, and I almost pray, that what the Fed did was in reaction to what they were seeing in the data, that they felt that there was an actual slowing of the economy, and they were in the wrong place.

• 8:37Stephen J. Dubner?

  So, we thought it might be an interesting time to hear from someone at the Federal Reserve, to learn what they are seeing in the data and what they're doing about it. Mary Daly took over the Federal Reserve Bank of San Francisco just under a year ago. She started working there in 1996. One of her mentors was Janet Yellen, who, before becoming Chair of the Federal Reserve, ran the San Francisco Fed from 2004 to 2010. And for those who don't fully understand what the heck the Federal Reserve Bank is or does, and I'd honestly kind of include myself there, why don't you tell us what it is and does?

• 9:17Speaker 01

  So, let me start by telling you the banner we put on the front lobby of our bank in San Francisco. And it says, right as you walk in the door, "Our work serves every American and countless global citizens." And in practical terms, that includes three things. We work on supporting a healthy economy through monetary policy. Given a dual mandate that Congress gave us, we are looking to achieve full employment and price stability. But the real thing, the underpinning of that, is a healthy economy, so that everybody has an opportunity to participate to their full abilities. The second thing we do is we work on financial intermediation.

• 9:57Speaker 01

  So, we're in charge of regulation and supervision to many of the banks and financial institutions in the economy. And the real goal there is to ensure that there's interconnectedness among people, so that, again, everybody has access to savings and wealth accumulation and investment to allow them to fully participate in the economy. And then the third thing is the payment system. And we are responsible for the safety and soundness of the payment system. And the piece that everybody knows really intimately is cash, the dollar, the coins and dollars in our pockets.

• 10:30Stephen J. Dubner?

  So this sounds like if the Fed were to magically or tragically disappear tomorrow, the way that some people on some fringes occasionally wish for, a whole lot of things would happen, yes?

• 10:42Speaker 01

  Yes, and when people are asking questions about, well, why is the Fed getting in the way here, or why is it doing this thing that I don't understand or agree with? It's largely not about they want the Fed gone. It's really about they want it to work more effectively. And our job, our mission, is to continuously listen to people so that we can take that in. But we do know if we would disappear, then the risks that were present when we were created in 1913 would once again emerge. And that was a much worse situation than any of us want to repeat.

• 11:18Stephen J. Dubner?

  Those risks were a series of financial panics and bank failures. This led Congress to pass the Federal Reserve Act and to the establishment of the central bank. The goals then and now were to stabilize the banking sector, ensure the free flow of capital, and keep unemployment and inflation low. So, yes, the Fed has the reach to affect just about every American every day and billions of other people. But it seems to approach this mission at a serious remove. The Fed doesn't seem very interested in explaining why, for example, a country as rich as ours has so many people just one step away from financial ruin, as Mary Daly's own family was.

• 12:02Stephen J. Dubner?

  Or why we've built an economy that's so good at providing cheap food and clothing and TVs while the cost of health care and higher education and real estate have spiked beyond the reach of many. Mary Daly does seem interested in wrestling with these dilemmas. She hosts a podcast called Zip Code Economies, where she travels around her region to find out what's happening on the ground. There was an earlier podcast, too, called Twice Around.

• 12:30Speaker 01

  I was just talking to my nephew who just started his first semester in college in Missouri at one of the state schools. And he went in wanting to be a math teacher. He was asking me, is a math teacher a good career? It's what I really want to do, but I know it doesn't pay very much many times. But I said, well, it depends on what you want out of your life. If you really want to teach math, you have to realize that you're probably going to have a smaller home than people who want to work in the stock market. And that's okay if the things that matter to you are teaching math and you don't actually care about having the biggest home around the block or something of that sort.

• 13:10Stephen J. Dubner?

  Daily gets into a lot of topics that you wouldn't expect a Fed president to get into. Gratitude, the nature of facts, how a person should know what they quote, "deserve."

• 13:23Speaker 01

  We have to know the people we serve. And if you don't engage in these deep questions of what makes people do the things they do, are people missing out on opportunities because they don't actually count the benefits of some of their actions? You know, think of mentorship. We often think, well, we discount the benefits of future creations of our mentees because we don't see them. These are all things that go deeply to issues like gratitude and are you getting what you deserve? And how do you even think about that? Those are things that are integral to doing our best work as policymakers. At least, that's how I see it.

• 14:02Stephen J. Dubner?

  You've said that people misunderstand economics as the study of data or finances, and you define it simply as the study of humans, a kind of psychology writ large. Now, personally, I would like to think that your definition is legit because I think it's really important for economists to take human behavior into account. But I would argue that most economists are not very concerned or maybe just not very good at describing and predicting and maybe influencing human behavior. And furthermore, I would say most public communication from your own organization, the Federal Reserve Bank, certainly doesn't sound as if it's about or intended for actual humans.

• 14:42Stephen J. Dubner?

  So tell me why I'm wrong and you're right, that economists like you, even the Fed, really is about understanding people, humans, social interaction, et cetera, et cetera.

• 14:58Speaker 01

  I guess the question I ask myself is why are the perceptions of what economics is, even among economists, so very different than the reality of what we do? One reason is it's really hard to be vulnerable. It's really difficult to say, "We don't know." I'm trained to be quantitative. My whole ethos is about quantitative measurement, trying to figure things out. But if you do that, and I think there are many economists who reach this point in their career, if you do that, you eventually run into the wall. That is, the data aren't the answers. They're part of the answer, but they're not the complete picture. And, you know, to the Fed, I think that's a reasonable criticism of us as an institution

• 15:42Speaker 01

  that we haven't always been forthcoming about the people part of our job. But we recognize that. When Jay Powell took over as Chair, the very first thing he did is said, "We have to go out and do this program called Fed Listens." And it wasn't just about, "We want to hold 10 research conferences. We're super good at research conferences." But he said, "We want to go out and talk to community people about monetary policy. We are not very practiced at that."

• 16:08Stephen J. Dubner?

  So, the American dream is a famous and beloved concept, and it's a concept that, to my mind, certainly describes your life, your accomplishment. But more and more people argue that the dream is, if not dead, at least greatly diminished. So, let me ask you, in a nutshell, is the American dream dead or alive? Or maybe better, on which dimensions is the American dream most alive and on which dimensions most in trouble?

• 16:35Speaker 01

  So, here's the thing I've learned over my life. The American dream has always been mostly emotional. And then, over periods of our history, the facts have correlated more nicely with that aspiration, and sometimes they failed us. But it hasn't been that in the beginning of our history, it was great, and now in the later part of our history, it's less great. It's gone back and forth. All you have to do is go back to the Great Depression and see that it wasn't always glorious. So what I see is opportunities to leverage and amplify the things that work and fix and boost the things that don't. So if you look at the chances that someone born in the lowest income quintile can rise

• 17:20Speaker 01

  up to the middle or have mobility beyond the first or second quintile, they rise to about average chances that anyone can move anywhere if those kids get a college education. And so you think, wow, the American dream is alive and well. Fantastic. And then you look at how many kids born into the lowest quintile of the income distribution actually get a college degree, and it's less than 10%. And so then you think, well, that's not so great. So that's where the American dream gets complicated. Yes, it is absolutely true that get a college degree, you can become someone like me. But we haven't brought me to scale. We don't have so many examples that I become the norm and nobody asks me about my story

• 18:04Speaker 01

  anymore because they see so many people around them who have lived that exact story. And that's where I think the American dream, the aspiration, doesn't fit the data.

• 18:12Stephen J. Dubner?

  Daley was born in 1962.

• 18:17Speaker 01

  We were growing up in Missouri, and my father was a postman. My mom stayed at home. And we didn't even know that we were lower middle class. We just knew that we had to buy things at those big stores that sell the day old things. And if you go two days later, you get them even cheaper. But then what you don't know as a kid is that you're super close to falling through. And you're just one little hiccup away. And my family had a number of hiccups: health shocks, job shocks, marital shocks. And as a consequence, we fell through. And then falling through looks completely different than...

• 18:58Speaker 01

  I thought. So it becomes a shaming event as well.

• 19:02Stephen J. Dubner?

  I know that your siblings went to live with your grandparents, but you dropped out of high school and started working and you lived with a friend, yes?

• 19:10Speaker 01

  Yeah, that's right. Exactly. And I had a different series of people I connected with. The first people I lived with were my substitute teacher in seventh grade and they let me stay in their attic. And I worked and I sent money to my family and I helped myself. I paid them a little bit of money, even though, of course, when you think of it, it was absurd. The money I gave them probably was meaningless, but it was important to me. I did not have to feel like I was begging and not able to take care of myself. And they helped me build those little bits of confidence. I think that was essential, looking back on it, and really transformational.

• 19:47Stephen J. Dubner?

  Daly had planned to become a bus driver. It was a union job with benefits, but she had a mentor who suggested that she get her GED and go to college. Daly accepted the advice, along with a loan of $216 for tuition at the University of Missouri-St. Louis. She started off studying psychology, but switched to economics. She became particularly interested in labor economics and public policy. In 1994, she got her PhD from Syracuse University. But you get the sense that Mary Daly never forgets, even for a minute, the very long odds she beat to become president of the San Francisco Fed after starting out as a high school dropout.

• 20:29Stephen J. Dubner?

  So even in that bad fortune, you had the good fortune of having a kind of safety net arise up around you that you wouldn't have anticipated or couldn't have foreseen. But you know, I'm sure, that for many people, when they have such a misfortune, that safety net doesn't rise up. So I'm curious how that specific period of your life informs the way you've approached your economic research.

• 20:58Speaker 01

  It made me realize that we're leaving so much talent on the table. Think about full employment. If we have so many people sidelined and we don't take advantage of them, then we're restricting them for sure, but we're also restricting our economy. So it becomes a key theme in everything I do. And it goes all the way back to the time I fell through. If not by good luck and good fortune, I would have been one of those people. And I never would have been Mary Daly on Freakonomics.

• 21:24Stephen J. Dubner?

  What did your siblings end up doing?

• 21:27Speaker 01

  My sister is a medical receptionist and both my brothers have had episodic employment in construction or other things and, you know, just living on the boom and bust of whatever the economic cycle brings them and, you know, they're not in line to be the first people employed because they all dropped out of high school. We all dropped out of high school in the end and while we all were able to go back and get a GED eventually, it isn't something that's easy if you don't go beyond and get additional education.

• 21:58Stephen J. Dubner?

  I know there's a lot of research showing that shocks to the system as a child, and it sounds like your family had a lot of different shocks to the system, are really influential downstream in employment, education outcomes and so on. It sounds as though your family is, I guess, a median example of that in a lot of ways, yeah?

• 22:20Speaker 01

  Shocks you experience when you're young, they affect your parents and they affect you and they ultimately affect your children. And in my case, they have affected my nieces and nephews who are raised by my siblings. And so Shelley and I, my partner, have been, you know, trying to interject, but these are strong inertial pains essentially. And it takes escape velocity at every generation, even my nieces and nephews, to lift them out. And so you'll see more people in my extended family continue not to go to college than who go to college.

• 22:54Stephen J. Dubner?

  All right. So let's drill down a little bit on education as a driver of economic success. Obviously, the federal government is not in charge of education, although it does have a hand on it in a number of channels. So let's just take a couple examples that are problematic. One is, you know, US educational standards compared to other rich countries, it's relatively quite, quite poor. And then, you know, higher education, college is problematic from a financial perspective from no others. We've seen massive, massive college tuition debt skyrocketing. So if you're pointing to education as a big driver of success...

• 23:35Stephen J. Dubner?

  It's very easy to point to those touch points as not failures outright, but real problem points. It would seem as though things are not moving in the right direction. So make your best case that you and your colleagues at the Fed Reserve have some sense of what to do because otherwise it feels like, you know, you're saying nice words and thinking nice thoughts, but that the evidence for successful outcomes isn't there.

• 24:07Speaker 01

  Well, I'm undaunted by unsuccessful pasts. I just, it makes me work harder for the future. So it's more than nice words, though. Now, the jury's out about whether we move the needle, but we would quickly put the ones we've tried and didn't move the needle aside and start on something new. I go to low-income communities and not a single person in those communities says that a college degree isn't worth it. So then you ask low-income communities, what do we need to help your students get college-ready? They can teach them the reading and writing and the arithmetic part of it. What they need is the social fabric that supports those kids and allows them to see themselves in the future.

• 24:50Speaker 01

  And so here in San Francisco, we have a variety of educational programs, but one that we're really excited about right now is the first-gen program. And we're building a virtual bridge for people between high school and college. And in that, we're very influenced by the research, of course. You wouldn't be surprised that the most likely reason kids drop out in the first semester isn't the funding. It's fitting in. It's not feeling like they belong. And so we have over 150 first-gen employees, and we're building this basically virtual posse.

• 25:26Stephen J. Dubner?

  Coming up after the break, we ask Mary Daly to name her favorite Fed chair of recent history, and we find out why it's so hard to read even the near future of the US economy.

• 25:37Speaker 01

  The big question that I've been wrestling with is what's going to win? The data or the mood?

• 25:42Stephen J. Dubner?

  That's coming up right after this.

• 25:49Stephen J. Dubner?

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• 26:33Stephen J. Dubner?

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• 27:16Stephen J. Dubner?

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• 27:56Stephen J. Dubner?

  Freakonomics Radio is sponsored by Southern New Hampshire University. There's no hiding how convenient Southern New Hampshire University makes college. They offer over 80 career-focused graduate programs online. Classes have no set meeting times, so you can balance life and learning, and online tuition rates are some of the lowest in the country, making it all a little more manageable. A school this willing to work with you is worth the investment. Visit snhu.edu/freakonomics to learn more. Hey, let me ask you this. Who, in your view, is the most successful Fed chair in recent history and why?

• 28:37Speaker 01

  Oh, my gosh. I can't even pick a favorite movie. I really struggle to pick favorites.

• 28:43Stephen J. Dubner?

  It doesn't have to be a favorite. Maybe just, you know, describe some either actions or temperament or handling of a term of a Fed chair in, you know, medium recent history, last four, five, six decades, whatever, that you just particularly admire, but tell me why.

• 29:01Speaker 01

  Okay, okay. Let me talk about Janet Yellen, because I work so closely with her. So Janet's president of San Francisco Fed before she becomes vice chair, and we're in the financial crisis. And she's got all these economists all over the system, working on these issues, studying things, calibrating models, and we're giving her all the research. And we feel like we've done our jobs, in part because we've given her all the research. And at one point, and I won't use the phrasing she used, but at one point, she had just, frankly, had enough.

• 29:39Speaker 01

  And she puts both hands down on the table, like, and she says, "There are people," there was a word in between, "these are people's lives." And it was this emphatic call to, "We are not making widgets here." Like, what if this is your mom and dad out of work? What if you lost your home? What if you're not studying people losing homes? What if you're losing homes? And it was that level of vulnerability and humanness that I said, "Okay, then that's a leader." That I get. And so then she goes on to be the vice chair, and I saw her do this in her vice chair work.

• 30:17Speaker 01

  And when she was the chair, I saw her navigate very rough waters on should we raise earlier than we did as an institution? What does full employment really look like? And I, again, saw her stay steadfast and essentially say, you know, on my watch, I'm going to balance both sides of the dual mandate and think about financial stability all at the same time. So, you know, you asked earlier, do economists really believe that economics is about people? And well, Janet Yellen does.

• 30:51Stephen J. Dubner?

  So, current Fed Chairman Jay Powell has had an interesting tenure, to say the least, given the, I guess, iconoclastic nature of the Trump administration. There's never been a president, as far as I know, in recent history at least, who's been so outspoken about the Fed and its moves. Here's a couple of recent tweets. The president tweeted, "We have the greatest companies in the world. There's nobody even close. But unfortunately, the same cannot be said about our Federal Reserve. They have called it wrong at every step of the way." Another tweet, "The Fed has got to do something. The Fed is the central bank of the United States, not the central bank of the world." So, can you describe what it's like to be a central banker in a time when the president

• 31:35Stephen J. Dubner?

  is so willing to publicly rebuke the central bank's work?

• 31:39Speaker 01

  Well, let me first say that we all live in a much more open world than we used to, that we've always had disharmony. There've been times when people think the Fed's not doing something right, or this group isn't doing something right, another government institution isn't doing something right. The thing that's different now, and I would say it's globally different, is that things are just more accessible. You know, Twitter has made all the debates that used to be behind closed doors, and we'd learn about them long after people had departed their positions, have been them live.

• 32:10Stephen J. Dubner?

  But there's always been that unspoken-ish rule that the Fed, because of its political independence, the president was not supposed to be in conversation with the Fed, certainly in a public arena. So, that's changed.

• 32:23Speaker 01

  I don't, I mean, I'm not a historian, but I am a casual student of history. And when I go back and read periods of history... Things look as contentious and debatable. It's just very public now. And what I want to say about the Chair is that I admire the fact that the Chair and the Federal Reserve has not gotten caught up in conversations about are we worried about our independence? And instead has restated the principles that made us independent in 1913 and has continued to do the best work.

• 33:01Stephen J. Dubner?

  So let's just talk about the economy generally. It seems to me like it's in a really interesting and sort of strange place. Unemployment is very low. Wage growth is small, but it is positive. Stock markets are at all time highs. You recently told the Wall Street Journal, "We have good, solid domestic momentum. Consumer confidence is high. Consumer spending is solid. We see a strong labor market. So the fundamentals that keep the economy going are present." And yet, there is a great deal of anxiety over the economy. Some of it may be cyclical. It's been a long time since the recession. But what do you think are the sources of that anxiety over the economy? And do you think they are legitimate?

• 33:41Speaker 01

  Well, I think there is something to the idea that people get nervous when expansions last a long time. We have this whole group of literature that says expansions don't die of old age, and yet everybody thinks they do. So I think there's just general nervousness that when you hit your 10-year mark, the longest expansion in history, the natural human tendency is to think it can't last forever. Then you look at it in the data, and there's been a lot of uncertainty. There's trade uncertainty. There's Brexit uncertainty. There's geopolitical uncertainty. There's just the general financial volatility that comes from just markets trying to figure things out. That creates uncertainty. So this just creates a level of angst that makes people even more cautious than they

• 34:24Speaker 01

  would be if they were simply just thinking the expansion would run out of gas because it's old. So all those factors are ones that create mood issues. And you know, the big question that I've been wrestling with for the last nine months is what's going to win? The data or the mood? If you look at the data, the data are good. Apart from business investment, there really isn't any weak indicator in the US economy.

• 34:48Stephen J. Dubner?

  And the business investment is unpredictable because of the uncertainty largely around trade, would you argue?

• 34:54Speaker 01

  No, I don't think it's just that. I think that's a part of it for sure. But one of my ways I spend a lot of my time is to go out and talk to business leaders and community leaders. And when I talk to business leaders, and this has been going on since November, October of 2018. So I start talking to them about this uncertainty piece back when uncertainty starts to spike. And they weren't talking about trade. They thought that would be resolved. They were talking about the expansions getting long in age, and so we might just simply lose our footing. So then that uncertainty got replaced by Brexit. Then it became trade. Then it was the debt ceiling. Now it's trade again. So I think for businesses, they've been on the cautious footing for a long time. But most of the people I talked to are still executing on what they call their

• 35:38Speaker 01

  plan A's, which means I'm investing enough to continue growing, but I'm not going to invest in these marginal projects that are really going to take me to the next level until I see how the lay of the land shapes up.

• 35:50Stephen J. Dubner?

  You know, it's easy to focus on the problems or the fault lines or whatnot. But let me ask you something about the strength of the US economy. So if we were talking at the peak of the Great Recession, and you said that, you know, the US economy, which was a primary driver of the Great Recession and was hit particularly hard, that the US economy would be one of the world's strongest and steadiest economies 10 years later, would you have believed it? I mean, I wouldn't have. So I guess what I'm really asking is, what does that indicate? Does it indicate some intrinsic strengths of the US economy that are typically overlooked in the daily commentary?

• 36:28Speaker 01

  Well, I guess I disagree on that. I mean, I thought we were well positioned to get ourselves into a better position and out of the situation we had. But it's a good question about why did I have any of that optimism? We were really hit hard early on. So we were in the emergency room. And so when you're in the emergency room, you bring an all hands on deck approach. You know, it's easier to throw everything you have at something when you know it's a really bad problem. We were among the most severely affected early on, but that meant we put everything we had to it. And we worked hard to stimulate the economy. We had fiscal packages. We had monetary policy packages. We did, you know, a variety of moves outside of even the interest rate to try to stimulate the economy.

• 37:13Speaker 01

  So that was where we were. We recognized at the time that this was a long, hard slog. It wasn't lower the interest rate and then as soon as you saw any green shoot, you go back to normal. It was you've got to be lower for longer on interest rates. You've got to be stimulative on the fiscal side. You've got to be helpful on the relocation, retraining side. You basically had a once in a lifetime you hope shock and you have a lot of work to do to get you out of it.

• 37:40Stephen J. Dubner?

  There is a sort of rising sentiment among some economists. Raj Chetty comes to mind and also among the occasional presidential candidate. Andrew Yang comes to mind. The idea they're expressing is that as automation and AI and other technologies advance, the very nature of work will continue to change as well, the relationship between humans and work and that we aren't really well equipped to handle these changes structurally and we're not that nimble. So what's your and the Fed's position on that complicated problem?

• 38:14Speaker 01

  So here's the deal. Of course, we need to think about structural change. The economy is changing at a rate of speed that looks like something that I'm sure people who didn't have electrification and they got electricity and then we had assembly lines felt. But it's happening and so we need to think about what does our future look like? There should be a high bar for change because change is difficult and we don't want to tear down things just to say we did it. But there should be this considerable thought given to how do we not solve the problems of 50 years ago, but how do we solve the problems of 20 years from now?

• 38:48Stephen J. Dubner?

  Well, can you give me some specifics? What kind of structural changes specifically would you advocate for then?

• 38:56Speaker 01

  The question I have is, we haven't revised our social safety net in 40, 50 years. Should we take another look and see if that's the right thing to have at this point in time? In the modern workforce, are the systems of retraining, unemployment insurance, divisions between welfare programs versus entitlement programs, insurance programs versus entitlement programs, are those the right definitions? Is that really helping a family when they have an economic shock find their footing again?

• 39:27Stephen J. Dubner?

  I'd love to hear your thoughts on a universal basic income.

• 39:30Speaker 01

  You know, this was something the Nixon administration tried to get through, and we ended up with supplemental security income instead. And the reasons, they couldn't get Republicans and Democrats to agree, and they couldn't get lots of people to agree, because the concerns about universal basic income were that it would be a work disincentive. So, I like the principle of, let's think about what the social safety net should look like in the future, and let's make sure that we're taking care of people who really have fallen on hard times and can't take care of themselves. I think we oversimplify the problems to make them easy to understand, but they actually then end up not being very effective. And maybe it's time, in our future complicated world, to just recognize policies are complicated.

• 40:14Speaker 01

  Think about trade. The idea that trade is good for everyone is still true, but it's only true that it makes everyone better off in real time if we redistribute the proceeds from the trade more evenly against the people who got displaced by it. So, that's an obvious thing we could tackle. That's a part of the social safety net that we've only waived at, honestly?

• 40:36Stephen J. Dubner?

  What you just described, that disequilibrium is a kind of consequence of the globalization and shifting workforce, that a lot of economists... 20, 30 years ago, told us was going to work out better. Larry Katz, you know, one of the most well-regarded labor economists in the world, has admitted recently that, you know, we didn't get it very right. We underestimated the cost for people who would be misplaced. So to people who have lived that, what do you say to them when you, as a labor economist working at the Fed, now says, hey, this time, we get it. This time, we understand it. This time, we're going to make a better plan.

• 41:19Speaker 01

  So 30 years ago, economists writing about various problems were using what we now call partial equilibrium models. We were looking at the narrow slice, and some of the assumptions embedded in trade dislocations were that people would retrain. They'd get some subsidy from the government for retraining, and then they would easily reenter the workforce with a different skill. So there would be a painful transition cost, but there wouldn't be this very large friction that prevented them from ever reentering or displaced them forever. So we completely underestimated the costs because we were looking in this very partial equilibrium world. So the answer to people isn't, trust us, this time will be different, we got it right. The answer is, the public should be asking these questions.

• 42:04Speaker 01

  Okay, I get it. Trade is good if you redistribute the proceeds. How is that redistribution going to happen? How am I going to get retrained? Not economists simply got it wrong and we shouldn't trust them again. I think it's a revisiting of the social contract. What do we mean when we have a program that has winners and losers? Do we simply accept that cost? Or do we say, you know what? As policymakers, we have to find a way to mitigate that difference. And my work as a public policy person or public servant has always been, it's our job to serve the whole public, so we help mitigate that difference. We can't always do it, but certainly one generation from the time it happens, we should be able to do it. That should be our goal.

• 42:52Stephen J. Dubner?

  Tell me something that you believed for a long time to be true until you found out that you had been wrong. Or if wrong is not a word that resonates nicely, you know, tell me something substantial that you changed your mind about and why.

• 43:06Speaker 01

  The data tell us the whole story. I was a true believer in the profession of my training, that I could look at the data and if I studied it and I did natural experiments and used aggregate data and I read everything I could possibly read, that I have a real good line of sight into what the reality of a situation was. And I was totally wrong. And I had this hit me right in the face by going to East Palo Alto. So, East Palo Alto is a place that seriously, go out and ask economists what they think about EPA and they'll tell you it's terrible. They haven't listened to the podcast, obviously, but if you listen to the podcast, you find out. And that podcast was a real life experience for me.

• 43:53Stephen J. Dubner?

  The podcast Daly's referring to is her own show, Zip Code Economies, and a couple of recent episodes called Resiliency is a Mindset and Can You Love Yourself When the World's Against You?

• 44:05Speaker 01

  In this episode of Zip Code Economies, we return to East Palo Alto. We're going to sit down with a pastor running a homeless shelter, meet a principal and her students, and meet a police chief. And they're all going to talk about something that I was surprised about. They're going to talk about love. I have to say, I'm a little skeptical oftentimes when I hear people talk about love in these settings. I think, what does it really mean? Is it just a decorative word? But there it's not.

• 44:37Speaker 01

  I went to EPA and I found out that the data told a picture. That was more of how we feel about it than how they feel about it. And as soon as I saw that, I thought, Mary, you've just been wrong for a long time about a lot of things, probably. So at the beginning of the interview, you asked me about the data and the study of people. And that's how I came away with just this strong conviction that ultimately economics, if it's going to be really good, has to be about people. Because if we simply study things as data points from a satellite perspective, we will lose some of the context. So I was totally wrong about that, and the context matters.

• 45:25Stephen J. Dubner?

  That was Mary Daly, CEO and president of the Federal Reserve Bank of San Francisco. And I'm Stephen Dubner. Coming up next time, Steve Levitt, my Freakonomics friend and co-author, is on a crusade.

• 45:37Speaker 06

  I really think that we would do an incredible service to society if we rethought high school math and turned it into something that was actually useful.

• 45:49Stephen J. Dubner?

  The new new math. That's next time on Freakonomics Radio.

• 45:59Stephen J. Dubner?

  Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Zach Klapinski. Our staff also includes Alison Kreglo, Daphne Chen, Matt Hickey, Harry Huggins, Greg Rippon, and Corinne Wallace. Our theme song is "Mr. Fortune" by The Hitchhikers. All the other music was composed by Luis Guerra. You can subscribe to Freakonomics Radio and give it a nice rating, if you'd like, on any podcast app. Our entire archive can be found exclusively on the Stitcher app or at Freakonomics.com, where we also publish show notes and transcripts. If you'd like to hear our entire archive without ads, plus lots of bonus episodes, go to StitcherPremium.com/Freakonomics. We also publish every week on Medium, a short text version of our new episode.

• 46:42Stephen J. Dubner?

  Go to Medium.com/FreakonomicsRadio. We can also be found on Twitter, Facebook, and LinkedIn, or via email at [email protected]. Freakonomics Radio also plays on many NPR stations, so check your local station for details. Thanks for listening.

• 47:05Speaker 02

  Stitcher.

• 47:11Stephen J. Dubner?

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• 47:42Stephen J. Dubner?

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• 48:20Speaker 07

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• 48:23Speaker 07

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• 48:34Speaker 08

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