The central bankers’ rodeo

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Ethan Wu (0:36)

Thank Pushkin.

Imagine if Central Bankers designed a music festival. Except instead of music, you had economics professors lecturing you on their papers for an hour. That would be Jackson Hole, the annual monetary policy conference that takes place at a beautiful resort in Wyoming. Jackson Hole has just wrapped up, and today on the show, we're talking about two headlining economics papers that we hear were total face-melters. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu here in the New York studio, joined today by FT AlphaVille editor Robin Wigglesworth, who has an entirely healthy, if above average, interest in the things that take place at Jackson Hole.

Robin Wigglesworth (1:25)

Look, I'm just going to come clean and just admit that Jackson Hole is my kind of jam.

This is the Grand Teton Mountains, economics papers, central bankers, a bit of booze, log cabins. I mean, what's not to love really?

Ethan Wu (1:40)

Yeah, your face was the one that was melted.

Robin Wigglesworth (1:42)

Oh yeah, from jealousy from not being there.

Ethan Wu (1:45)

Well, Robin, let me ask you then, what is Jackson Hole, just for people that have not been inducted into the Central Banking Hall of Fame, like you?

Robin Wigglesworth (1:53)

Well, so, I mean, most people know Davos, right? Davos is this massive carnival. It's thousands of people from finance, business, celebrities, and so on.

Jackson Hole is kind of the cool thinking person's Davos, but just for central bankers and economists. So it's smaller, it's more select, but maybe even more elite. And I'd argue far more important because people who actually matter get together there. So these are the heads of, or the deputies in some cases, of all the world's biggest central bankers. They fly in once a year to do a bit of fly fishing, do a bit of drinking, and listen to economic papers get presented and discuss all the challenges the world faces.

And because it's kind of intimate, stuff actually does get done there. Like what people say there, the papers that presented there, kind of tend to set the tone for the economic debate for the year to come. And that's why people like me are always very envious of everybody who gets to go.

Ethan Wu (2:52)

Yeah, so Robin, we're talking today about two papers that certainly will set the tone for the economic debate in the next year and maybe many more years to come.

One from a UC Berkeley professor, Barry Eichengreen, and one from Stanford professor, Darrell Duffy. So to start with this paper from Eichengreen, this is primarily about US public debt, though I'd say maybe not entirely. It's called Living with High Public Debt. And this is an old debate, Robin, that we've been having in the US for a long time.

Robin Wigglesworth (3:20)

Forever, right? I mean, what's new about this paper? I feel this has been kind of the theme of our economics conference for the past, what, 20, 30 years now?

Ethan Wu (3:29)

Yeah, I mean, certainly after the rise of the Tea Party, it was unavoidable in the US to talk about how much debt the government has, and every billboard in DC has a debt clock and all this stuff. But I think there are possibly three things that are different now. One is we massively increased spending during COVID, which is somewhat normal in a crisis time, but this was pretty extreme in terms of how much we spent during COVID using borrowing. That's one thing. The second thing is that we never really cut spending after the crisis passed. In some ways, we actually increased spending. Joe Biden has embarked on this round of industrial policy subsidies.

There were some tax increases, but not fully offsetting the spending impact of Biden's packages. And then the last and possibly most important thing is that interest rates have gone up. We've gone from a world where it's basically free for the government to borrow to one where it costs them four to 5%.

And that's a fundamentally different world from the perspective of government finances. If it costs money to borrow money, then you have to worry about how much of the government budget is going to service interest payments as opposed to being spent on, you know, social security or Medicare or the military or whatever your priority is.