Transcription
We are thrilled to be here today. My name is Manoj Mohanan and I'm the interim dean of the Sanford School of Public Policy at Duke. This lecture is made possible by the support of David M Rubenstein. We thank him for his long time engagement with Duke and Sanford, and for creating this lecture series in particular, and a special thanks to our co-sponsors for today's lecture, the Department of Economics at Duke. Steve Medina, thank you so much for your collaboration on this event. And now it's my pleasure to introduce our speakers and get our program underway.
First, our distinguished guest, Doctor Gita Gopinath, is the Gregory and Anna Coffey Professor of Economics at Harvard University. Her research focuses on international finance and macroeconomics. And she's a leading voice on dollar dominance, exchange rates, trade, investment, international financial crises, monetary policy and debt. That's a long list.
From 2022 to 2025, she served as the first deputy managing director of the International Monetary Fund, the IMF. That's not the Tom Cruise version. So she was the official number two at the IMF. And in that role, she oversaw the work of senior staff, represented the IMF at multilateral forums, maintaining high-level contacts with member governments and board members. She also led the World Fund's work on surveillance and oversaw large IMF programs, such as those for Argentina and Ukraine.
Miss Gopinath previously served as the chief economist of the IMF from 2019 to 2022. And as chief economist, she helmed 13 releases of the World Economic Outlook, which included forecasts of the impact of the Covid-19 pandemic on the global economy. Her research is widely cited and has been published in many top-tier journals in economics.
We're very pleased also to be joined by David Rubenstein, who is a Duke alumnus, 1970 graduate of Duke. And he's also the co-founder and co-chairman of the Carlyle Group. Duke David then went on to the University of Chicago's law school, where he got his law degree in 1973. He's a Baltimore native and chairman, CEO, and principal owner of Major League Baseball's Baltimore Orioles. They just had a great victory yesterday. Mr. Rubenstein is a recipient of the Presidential Medal of Freedom and chairman of many educational and nonprofit boards. He's an original signatory of the Giving Pledge and the host of the David Rubenstein Show, The Bloomberg Welt with David Rubenstein, Longevity with David Rubenstein, and Iconic America: Our Stories and Symbols.
So with that intro, we look forward to the conversation. Thank you, both of you. Thank you very much. And thank you all for coming.
So thank you very much for coming. So you are a professor at the Duke of the North, Harvard. So that's fine. Let's talk about your background for a moment. Where did you grow up?
I grew up in India.
Okay. And then you say, as a little girl, you wanted to be an economist?
Absolutely not.
So what do you want to be?
I, when I was, this was back in India in 1989, and I was figuring out what to do with my life. And at that time, no Indian kid says they want to be an economist. I mean, that was like a failure, right? You wanted to be an engineer or a doctor was what was the standard path to go? My parents thought it would be a good idea for me to try something else, which is to join the Indian Administrative Service, which is the leading civil service in India. And therefore, economics would be a good subject for it. So I was basically pushed into it. And then I stuck with it because 1990 and 91 was when India had the so-called external account crisis, a sort of balance of payments crisis. And that's how I got into economics.
So you went to college and you got your undergraduate degree in India, right? And then you wanted to do graduate school in the United States. What did you say to your parents about, I want to leave my country and go to school in the United States. Were they happy with that or not?
It was actually a common thing to do. So it was not out of the ordinary. And I wanted to get a Ph.D. and it was considered like that was a good way to get a Ph.D. in economics. And so that was nothing surprising.
But you ultimately got your PhD at Harvard, at Princeton, at Princeton, and at Princeton. Who were your faculty advisors?
There were a couple of people you may never have heard of. One is Ben Bernanke and the other, Ken Rogoff.
And did you think they were as smart as their reputation, or do you think they weren't as smart as you thought they had?
Yeah, they were phenomenally smart.
And then you spent some time at the IMF, right? For those people that aren't familiar, what does the IMF actually do?
Great. So the IMF is one of the institutions that got created after, actually just before the end of the Second World War, with the idea that we need to find a way to avoid countries going into wars with each other. And maybe that can happen if we work together, have more economic interactions, and find a way to resolve the differences. And so the more interconnected we are in economics and finance, the more stability we have in the world. You know, we may have fewer such crises.
So there are three things that the IMF does. The first, which is its most famous for, is it's a lending institution. So it lends only to governments. So it doesn't lend to the private sector. It lends only to governments. And these are to countries that are in a crisis. So countries that are running out of dollar reserves, foreign exchange reserves, they can't pay for their imports or they have, they borrowed in dollars and they can't repay it and nobody's willing to roll it over. That's when the IMF comes in. It's the lender of last resort. It helps the country with the funding, also helps put the country on the path to a better place in terms of macro policies, so that you don't have a repeat crisis. At least that's the hope. So that's the one that the fund is famous for.
But it does two other things which are really very important. One is surveillance, which means basically the IMF, it has 191 member countries. The IMF goes to each of these countries, and every year provides a report card on your macro management of your economy, your fiscal policy, your monetary policy, your financial reforms. What what are you doing? And this is quite unique because this is the only institution that every country who's a member of has agreed to. This is a part of their obligations to the IMF, is that they subject themselves to this, you know, article that's called the Article IV. So that's very important, which is why the IMF, I think, has a unique vantage point in terms of what's happening in the global economy.
And then the last is what's called capacity development, which is helping countries, for example, countries in sub-Saharan Africa on how to just build institutions to have a good macro environment. Right. So, for example, if you're setting up a central bank, how do you set up a central bank? What exactly does a central bank do? If you want to target interest rates, how do you actually do that? What do you wake up and do the first thing? So those are the things that the IMF does.
Not to state, IMF give grades to economies like the United States. Does the IMF ever look at the United States economy?
Well, yes, absolutely. It has an Article IV. It just came out. The IMF say that the United States has too much debt. Has been saying that for several years now.
So speaking of the US debt, right now we have how much US debt? $38, $39 trillion. Is that sustainable for the US economy to have that much debt?
So the thing with the US is, it's not just where the US is right now in terms of the debt levels, which is if you take the general government, that's 120% of GDP, but is expected by 2031 to hit 140% of GDP. And if you keep looking ahead, the US economy is going to be running deficits and you're looking at debt continuously growing. So while there is no crisis at this current moment in the sense of if you look at markets and the rates at which they're lending to the US, you know, there's a lot of appetite still for US debt. And we can talk about where that comes from. But yes, at this, the way the trajectory of this looks unsustainable. And that's a point that has been repeatedly made. The question is how are you going to fix it? It's going to take actions on both sides, both on revenues and on entitlements.
I should have asked you, why did you want to be an economist and why should anybody? Let's say students here want to be an economist. What's so good about being an economist?
Just squeaked by, by the way. It's I can answer that question better now after having done my job at the IMF, which is it is hugely consequential to large, you know, millions, billions of people on the planet, whether you do good economic policy or not. You know, it's just when I, when you track countries, starting at 191 countries, the countries that work, they work because they do the simple first principles. They get the first principles of economics right. And therefore, it is hugely consequential. When countries fail, they fail because they can get some of these big questions about how to manage inflation, how to manage your debt wrong. In addition to obviously other the other structural aspects, which is on making sure you have good education and healthcare, it is remarkably consequential. And I think that's why.
Well, if somebody has an economics background, why not do something more important like private equity or investment banking? Why would you want to be an economist? Have you ever thought about going to private equity or or investment banking? Something useful?
I think I've been doing something very useful. But the, yeah, I have, I mean, absolutely all of these different lines of work that you can get into in terms of the financial sector. Phenomenal. Get into it. There isn't where you need all of these different institutions. One of the things that, you know, developing countries still have a deficit in is well-developed financial markets. And so I have full respect, and I think that that's a great line if you want to go into. So I have no problem with it. I personally do love research, too, which is why I'm back at Harvard.
Let's talk about the US economy again for a moment. Historically, the US economy goes into recession on average, maybe every seven years or so. We haven't had a recession for quite some time. Aren't we overdue for a recession? And are you worried about a recession coming soon?
We did have the pandemic in 2020 when the US economy shrank, but that was the the pandemic. And you're right, the business cycles in the US and then pretty much other parts of the world tend to be once in eight years. Can you say that there's going to be a recession happening? Nothing that's happening right now points to that. There could be a recession in the near horizon. Consumption is strong. US households are in good shape as a whole in terms of consumption spending. In terms of their balance sheets. Banks have fairly strong balance sheets, but there are a bunch of areas where things can go wrong and their risk is building up.
So some of them are, one, I would say, in terms of AI is a big driver of the US economy right now, both in terms of the scale of investment that's happening, but also the appreciation in the stock market that you had over the last couple of years. That's helping raise wealth and consumption through that. That's a space where you could see a correction. You know, one of my, the question I ask myself every time when I look at these companies is what is going to generate, what is going to give them the kinds of profits they will need to justify the very large scale of trillions of dollars of investment being made in AI. This is not a statement about the technology itself. I actually think it's profoundly transformational. I think it's going to have a very discrete effect on productivity. I personally use it. I think it's really great, but I think there's a lot of competition and you could see another company, another deep sea like event that, you know, for a fraction of the cost is able to provide the exact same product, in which case the incumbents right now may, may be highly overvalued. Right.
So if you were to read a standard economics textbook, it would say in every economy has some inflation, maybe 2% or 3% is fairly standard. Our inflation for recent years has been higher than that. Are you worried that we are in a cycle where we're going to continuously have 3% or 4% inflation or you think inflation is coming down and it's manageable now?
I think we are in a world where we are suddenly being exposed to a lot more shocks that are what look like supply-side shocks. So it's not that demand is too weak or too strong, but supplies too weak or too strong. And we saw that, you know, the pandemic was a big supply shock, when Russia invaded Ukraine and you saw oil prices and gas prices shoot up, that was a big supply shock. We're seeing in Iran, a Hormuz, that's another supply shock. The world fragmenting is also another supply shock. So I think we're going to be in this world where we will see more volatility in inflation. I don't think that translates necessarily into the on average inflation rate drifting up decisively. I suspect the Fed at this point is okay with inflation, as long as it starts with the two and number two at the start, you know, but maybe 2.8, maybe 2.9, but maybe it's okay with that as opposed to a three number. So I don't think there's a reason to expect that they will drift to 4 or 5% on average inflation. But we could easily have months. And I think this, the month inflation for March will pop at right over 3%. 4%.
US government set up the Federal Reserve System in 1913, and it's designed to separate the management of the money supply from political considerations. But do you think it's a good idea for the president of the United States to tell the chairman of the Fed, and many presidents have said this, lower interest rates. Do you think that's a good thing or a bad thing when presidents want to lower interest rates because politically it's helpful to them?
Right. So by the way, this is classic because every politician in the world wants to lower interest rates. I don't know a single politician who doesn't want lower interest rates. And there are many occurrences where you will have politicians say that publicly that they would like lower interest rates. All of that is talk. I think it's a huge problem when you are using the machinery of the state to put more pressure on the central bank. Now, again, nobody's saying that the central bank is completely unaccountable. I mean, that's not the way central bank independence is defined. Central bank independence is you are accountable, which is why the head of the central bank goes to Congress, explains what's happening. They get the mandate from Congress in terms of what the goals are, which is inflation, stability and price stability, and full employment. It's the operational side, which is how do you get accomplished those targets. That is where the central bank is supposed to have independence, and that's critical. And we've seen, and I think this is where the IMF can really speak to, because when you see countries going off the rails, it is because you have these attacks on central bank independence.
So, right now, the inflation rate in the United States is roughly, I don't know, around 3% or something like that. So what do you think is ideal? Is should be inflation should be for 25 years or so. After Paul Volcker, we had about 2% inflation, more or less on average. And now we've got about 3%. Is 3% more or less acceptable? Where do you think we should go down to the Fed's target of 2%. Or is that going to slow down the economy if we go down that level?
If the Fed could credibly communicate that 3% is where we're going to stay at and this is this is it, then that works. But the problem with, with anything of this kind is that once you're at three, then the sense is, well, maybe we'll go to four. And the, this, the expectations shift in terms of where inflation may settle. So I think that the Fed will not say that this is we're okay with 2.8 or 2.9%. They will not publicly say that they are okay with it. They may allow for periods of of that level of inflation, but they will want to come back to 2%. It's just, you know, you use the fear of drifting away as a problem.
Now, since the end of World War Two, the United States has had the currency, which is essentially the only reserve currency in the world. Do you think it's good for the world to only have one reserve currency? And do you think there is any challenge to the dollar in being the reserve currency in the future?
It's always been the case that there has been a dominant currency. At least, you know, the last 200 years you've had the British pound that was the dominant currency. And then the dollar took over decisively after the Second World War. There are good reasons to have a few currencies, not to have, you know, they're about 180 currencies in the world. You don't want all of them being used all the time in international transactions because there are network effects. It helps to have all of us using. It's like sometimes speaking a common language is helpful. Having a common currency for a lot of international transactions is also helpful. What are the problems with it? Of course, the problems come if you do end up, if there is any kind of weaponizing of the currency, if you have sanctions that are being imposed and, you know, taking into account the fact that you have this monopoly power of your currency in the world market, those are the times when it is particularly worrisome.
To your question of what about the dollar? I mean, what's likely to be the case? It remains the case that the dollar is the dominant currency. So if I were to, I think in terms of a few facts for you to keep in mind, the dollar is about 60% of trade transactions, 60% of foreign exchange reserves, 60% of international bank claims. The US economy is about 2, 24% of the world economy. So it's about, you know, it's significantly, it's its share in all of these international transactions is very high. It's been around there for about the last ten years and moves around a lot. Where have we seen any kind of meaningful changes? One, I think people should know that when it comes to China, about 15 years ago, China in the renminbi in its use in China's transactions with the world was a 0%. So zero. China was doing entirely, most 80%, 20% other currencies, 0% renminbi. That was 15 years ago. Right now, 50% of China's transactions with the rest of the world is in renminbi. So China has internationalized in terms of their own transactions. Russia has clearly moved away from the dollar, but these are all on the fringe. And the other currency that's gained a lot of attention is gold. Gold has gotten more attractive. And central banks are also acquiring more gold reserves. But these are many of the changes otherwise are at the margin. And, you know, and we saw this also during the the Iran conflict is everybody moved to the dollar. There was a safe haven effect.
Now, historically, at least since the time Bob Rubin was Secretary of the Treasury, Treasury Secretaries are told, you can only say one thing about the dollar: we want a strong dollar. But in this administration, no one wants to say that because I think some people say they want to lower the value of the dollar, which makes it easier for our exports to go overseas. Do you view the value of the dollar as being at risk, and do you think the dollar will further decline as it has in the last year or so?
Right. So two things. One, I think it's a very flawed argument which has persisted for a long time. And several people in this administration have pushed this view that the dollar, being the reserve currency of the world is what makes it end up running these deficits, because it's just a strong currency. And the dollar strength is a big factor behind. That's simply not not the case. If you just look at the data and you look at what are the main drivers of deficits, trade deficits in the US, it's not coming from the, from the exchange rate. The reason I, I'm making that point also is because if you think of which are the big episodes of global imbalances of trade, big trade deficits in the world, one was in the 1980s. Then there was the night 2000, which was before eight, before the great financial crisis. And now. So I think those are the three major episodes. Before the 1980s and before you went for the Plaza Accord and so on, the dollar was appreciating. Before the great financial crisis, the dollar was depreciating, and now it did depreciate for a bit, but it's gone sideways. So that logic is incorrect. Your question of whether the dollar could weaken against the dollar, just like business cycles, it also has these cycles, and it's had about a 15-year period of continuous, fairly continuous appreciation. Usually when such a cycle happens, you have another period of about for several years when the dollar can depreciate. So there are reasons why you could expect the dollar to depreciate. But I think it has nothing to do with, you know, what the administration says should be the direction of the dollar.
Now, the president has been concerned since the time he got into public public office about the trade deficit. And now the United States has roughly a $1 trillion annual trade deficit. Do trade deficits really matter that much, or are they really things we could ignore?
Trade deficits matter to the extent that it tells you about what the problems that may be underlying it. It's a great deficit, just mechanically as an identity is tied to the fiscal deficit and the household saving investment deficit. Right. And so I worry about the US trade deficit, because I think it's a reflection of unsustainable fiscal deficits in the US. That is a problem. It is also a reflection of China having an unbalanced growth strategy, which is reliant mainly on export and investments and not enough on domestic consumption. And so trade deficits are a problem because they represent unbalanced growth strategies, us relying too much on not relying, but having excessive fiscal deficits, China having too weak domestic consumption. This is not sustainable. And therefore that's a sense in which it's a problem. But tariffs are not a solution. They just don't work.
Let's talk about unemployment. Economists will often say that our economy is at full employment. If you have 3% or 4% unemployment, what do you think is the right rate for an unemployment rate to be for an economy to be doing reasonably well? And can you realistically get unemployment down to 2% or something lower than that even?
But so obviously this varies by country. It depends upon what are the structural features you have in your country. And there are countries, for example, where it is very hard to, you know, labor markets are not very flexible. If you hire a worker, it's hard to fire the worker. Those economies tend to have higher unemployment rates. There's, you know, people are afraid to hire people because they think they're not going to be able to lay them off if something goes wrong. And the other way. So there's structural aspects. So every country's structural level of unemployment is different. In Europe, it's higher. It's around five, six, 7%. In the US, the structural unemployment rate is more like closer to four, 3% to 4%. That's where we are now. Can you go to 2%? Well, there's a trade-off because if you go to 2%, the sense is then you are having to live with high levels of inflation. And there was a time before the pandemic when everybody had the sense that somehow that we could run the economy hot. In fact, the Fed talked about that. They talked about running the economy hard because it seemed like you could reduce unemployment and still not worry about the effect on inflation. The inflation wasn't showing up. But I think what we've seen in the last few years is that that's that's, you know, not really the ideal model of the world. And unemployment rates, if you're trying to push unemployment rates down to 2%, then you're going to have to accept higher inflation.
Some people say that the father of modern economics was Adam Smith. He wrote a book in 1776 called The Wealth of Nations. What did that book actually say and what was so significant about it?
Well, firstly, I think what was very important about that book was to basically say, you know, what is the wealth of Nations, right? So this was an issue. It was writing at a time of mercantilism, and everybody was trying to run surpluses because that was a way of accumulating gold. And the idea was you were a rich country if you had more gold. And what Adam Smith said was that, no, no, the metric of whether a country is rich or not is not whether it has gold, but it's about how productive its population is. And it took it. He took it back to the point of what are you know, what? What do the typical average person who lives in the country, what work do they get? How productive are they? How much do you get paid for it? That was the relevant metric of, of the wealth of a nation, not the amount of gold that's being accumulated.
Now, modern economic theory was said to have been reinvented by John Maynard Keynes. What did he say that was so significant when he came out with his famous treatise in, I think, late 1940s?
What we would, what Keynes basically pointed out was that there was it wasn't a good assumption to assume that the economy was self-equilibrating. Right. So prior to that, there was a sense in which if demand exceeds supply, prices will rise, supply will increase. We're all in a good place. And the other way around, if demand crashes, prices will fall, supply will adjust down. And therefore we're all good in a good place. But he says you can go through periods where you are. You don't have this equilibrium mechanism working. You have all kinds of rigidities in the world. And he focused on wage rigidities and price rigidities. That was one. So to basically explain how you can end up with the Great Depression because you, you know, our models would otherwise have told us that that's an odd thing that should not happen. So how can you have systematically long periods of unemployment? And therefore a very important role for demand management in the world, which is you do need, you do have a role for the government to be able to, you know, spend and, and therefore raise demand because that will be necessary.
The other thing which I think really resonates through time is he spent a lot of time thinking about sentiment and about euphoria and so on. Right. Which is how people feel about the world economy or of their economies. Matters as much as some of the details of what paychecks they get. That, I think, is playing out, very strongly in these days. What's the effect of uncertainty? What effect of sentiment? I mean, those are the kinds of things you brought to the table.
So in the 1960s and 70s, another economist came along named Milton Friedman, and he said John Maynard Keynes was all wrong. Money supply is the most important thing. If you're measuring how economy's going to do and you want to impact an economy. Was Milton Friedman correct? And has he been, now agreed? People now believe that he was correct or people now think he was wrong?
I think Milton Friedman is what happens through a lot of these cycles of, of economic thought is sometimes then what happens is you got to go to the extreme on each side. And Milton Friedman's point was firstly, him and a few other people was to basically recognize that the, you know, if you in a world where all you're trying to do is demand-side management, you could end up with people expecting more and more of this kind of demand-side management, and you just end up with then higher inflation. So there is a relevant trade-off that you have. And of course, he was famous for making the point that inflation is everywhere and always a monetary phenomenon. On that, I can tell you that that's not correct. Having worked with many countries in the world.
While since the 1940s, presidents of the United States have felt they should have economic advisors, and we have something called the Council of Economic Advisers, which advised the president. And Harry Truman famously said, I would like to have a one-handed economist because economists are always saying, on the one hand, this, on the other hand, this. He just said, give me an economist has only one hand so I know what he really wants or she really wants. What do you think about that observation?
Yeah, I've heard that one. When push comes to shove, you have to make a decision. And that's what we did. Oh, you know, when I was at the IMF and we were helping a country in the middle of a crisis, we were not telling them, on the one hand, you can do this. On the other hand, you can do that. We were telling them, here, here is what we think will help stabilize the economy. But I think it's an honest recognition of the fact that it's a social science. Economics is a social science. So there's no, you know, clear, absolute, clear prediction of what if you take this action, you will have that outcome.
Now, no discussion of any subject today is ever complete unless it has a discussion of artificial intelligence. So what is the impact of artificial intelligence on the economics profession in terms of predicting where economists are going to go?
Okay. So it's first of all, yeah, you're right. AI is now in every conversation, even about conversations about how to manage the unsustainable debt level. Right. So let me walk through it. It is a transformational technology, which means that if it works out, we could end up with discretely higher growth rates instead of the US economy, which on average tends to grow around 2%. You could end up with even if it went up to 3%, that would be fantastic on a on a steady-state basis. Right. On for many, many years. There's this, there are estimates that say that it could go even higher. We could be talking about 4% growth anyway. So that's the pluses. A sense is that that could generate a lot of productivity improvements and therefore higher growth. Why is that helpful? Besides the fact that growth has many virtues, but also that's one way to repay the debt where, you know, we don't have to tax anybody more because we're just going to grow faster. And through that, we're going to be able to repay the debt. Second is always questions on the job market. Oh, to the first one, if you ask me, what is the effect right now of AI on the economy, I would say that the main channels, it is affecting the economy, but it's mainly through the investment channel, which is through all of the data center build-up and through the effect on the on stock markets and through the wealth creation. Right. There are some anecdotes of how it's affecting productivity, but at least right now, based on the data we have, you just really can't look at it and say, well, AI is leading to productivity even though productivity is stronger. But there are many other aspects, as obviously on the job front, what could happen with it? But there's also now, you know, national security concerns, you know, people using it for, you know, for nefarious reasons. Many areas can go into those.
So, Winston Churchill famously said that democracy is the worst form of government except every other one. But he could well have said that capitalism is the worst form of economic structure, except every other one. Why is capitalism a good economic structure? And does capitalism inevitably leave some people behind? So you have wealth inequality that's far greater in capitalistic systems than you do in socialist systems.
So I think, again, besides these broad labels of what we call capitalism, we can all debate about what we call capitalism, the capitalism of socialism. Today, I think what is true, it remains the case, is that having market-based mechanisms for a lot of economic interactions remains the best way to do things. You know, as, as an anecdote, I can tell you that when I was, I was overseeing Argentina and that was one year in 2022 when I was working with the Argentine government. And they were Peronists, who were of the belief that the market was just could not be trusted in everything, could be determined by we will set the price for soybeans and we will set the price for everything. Right. But that changed in 2022, 23. I think it was when President Milei came in and he called himself in a narco-capitalist, which was the other extreme, which has said that, you know, the government is the source of all evil. So obviously both are extremes over here. But recognizing the importance of market mechanisms about fiscal discipline, all of that has helped put the Argentine economy back on track. So it's, it's not one simple set of recipes. Country circumstances matter. You know, history matters. The culture matters. But in terms of broad strokes, it works.
Now to deal with the problem of people being left behind in capitalistic systems. Europe has developed a new type of capitalism where it's the gigantic social safety net. And do you think that that system is one that is a much better economic system for everybody? When you have a big social net underneath at the bottom of the society, or do you think the American system where you basically, you know, sink or swim all largely on your own is a better system?
Yeah. So firstly, I think, you know, again, relative to many other countries in the world, the US also has a good social safety net. Again, this is a relative statement. It's not as large as what it is in Europe. So having well-designed mechanisms that when you, if somebody loses their job, that they have access to unemployment insurance, you have healthcare and you have, you know, retirement benefits and so on. That's, I think all of that is very important. The problem we're seeing right now, and the problem that I dealt with over many years, is that these, these systems have just grown, right, without any limits. And with every crisis there have been, there's been more of the social safety net that's been built up, not necessarily done smartly, not done in a targeted manner, you know, only for the most vulnerable in society, but just more broadly. And it's very hard to reverse those kinds of policies. So I actually do worry about being in this, equilibrium where every time there is a negative shock, governments come in and promise certain things which they then aren't able to unwind.
Now, under the Biden administration, something called industrial policy was reinvigorated. And we basically put a lot of money into manufacturing semiconductor plants in this country. The Trump administration has also indulged in what's called industrial policy by, let's say, taking a stake in Intel or doing other things to help or hurt certain companies. Do you think industrial policy is generally a good policy for the United States government to pursue, or is it usually not produce the kind of economic results that people want?
So we have now this reemergence of relying on industrial policy. There was a period when that lost favor. And so I think sometimes we have to remind ourselves of why that lost favor over the last, you know, the 80s and the 90s. And, and therefore, when we do it now, if we're going to do it, how do we do it the right way? So the standard thing that happens with industrial policies is, of course, you're helping one industry, and that means you're taking resources away from another industry. Now you can decide as a country that because of national security reasons, we absolutely need certain kinds of manufacturing at home. So for that or to build resilience in your supply chains, you need certain kinds of factories and certain kinds of industries. That is an argument to be made. Historically. What has happened is what, at least from the economy-wide perspective, is that when you favor one industry, you are just favoring another sector, and that therefore the economy doesn't grow as much. There are good, good ways of doing it and bad ways. You're doing it. So again, temporary and targeted is always the best way to do industrial policy, which is okay, you provide the support if you have to target particular industries, you do it, but you have to have a sunset date, which is it's not that we're going to keep giving you subsidies forever. You have a period of ten years or so where we provide you with subsidies and then those end. And the problem again is unwinding those is very hard. But I recognize that the world that we live in, given all the geopolitics, calls for more production at home in certain areas. And, and therefore, you can, you know, providing subsidies again in a way that you don't favor some companies, you don't end up with crony capitalism is important.
For the students in the audience, why should they want to major in economics? It's complicated. It doesn't necessarily get you a better job. Why should anybody want to major in economics? And how do you know if you're majoring in economics or studying that you're any good in economics? If you're not getting A's, should you go pursue some other course? Or if you're getting only B's or C's, should you conclude you're not going to be an economics PhD?
So firstly, I, coming back to the point I made, which is economics is super relevant. And sometimes you don't see that when you're in a classroom setting and you are solving a cost minimization problem, you may ask yourself, okay, well, this, this doesn't sound like it has anything to do with the world. It does. But and you do need to learn the tools. It is super valuable. You, you know, it doesn't matter how you apply it. If you go into the finance industry or you're going to consulting, or you go into policy world, or you go into academia, it is a, I think it's a very valuable training for the mind in terms of thinking about trade-offs, thinking about also, by the way, please understand general equilibrium because the world sometimes forgets what general equilibrium is, which is if I move x, y happens. But not recognizing the z can also change at the same time. That's a way of thinking that is super valuable. And I think there's plenty of remuneration for for a good economist.
Now, you presumably supervised some people that want to get PhDs in economics. The people that are getting PhDs in economics, are they really good in math? Are they really good in in English? What are the subjects make somebody really good as an undergraduate that makes it likely they're going to get a PhD and be a good, good candidate?
Yes. I think you do absolutely need to have some love for math and the technical aspect of it. Right? So I'm not saying that you have to be good enough to get into a math department, but you do need some. You should enjoy the process of working with equations, simulating and so on. I think that's a part of the training. So enjoying that is very helpful. You could be doing empirical work, but there is certain levels of math that you absolutely need. Second, I think it's very important to besides taking your classes to keep up with the world. Sometimes it's pretty shocking that you can see students, especially some of those PhD students who may not know there's a Iran conflict happening because they are so into your problem sets, into getting the next exam. You know, you just disconnect from the world. Don't do that. Read the headlines. You know, if you have five minutes, read the headlines. I'm going to plug for the IMF Publications World Economic Outlook. Again, don't read the whole thing. Read the executive summary. It gives you a sense of where the world is, what the questions are. So in terms of PhDs, you also need ideas. And I would say in the world of AI where, you know, you could take a paper and you can say, can I tweak some assumptions and rederive the out the solutions? You know, we have no AI to do that. So thinking creatively about the kinds of problems in the world that there are being able to frame it properly is going to be very important.
Right. So you've teach undergraduates from time to time. Yes. How do you know that they're not using AI to answer the exams that you might give them? How can you be sure they're not using AI to kind of answer your exams? What's that?
So I'm going to I'm going to find that out because I just came back to to Harvard. And the first class I've taught was to PhD students, not to undergrads. I will be doing that next for the PhD class. One way for figuring this out is we're giving oral exams as opposed to any kind of take-home problems. That's not a problem. So we give is so the oral exam. Well, it means that I have to give more time to it because we're actually asking people. But that's a way of figuring out whether do you really know what you're talking about?
Suppose somebody says, I don't want to get a PhD in economics, but I like the economics. Is there any reason why somebody should major in economics if they're not going to get a PhD in it? What advantage do you get by having an economics undergraduate degree?
Yeah, I mean, the vast majority of people who major in economics do not do a PhD. And so there's that. There was a lot of demand. You seem surprised. But there was a lot of demand for undergrads, people who, you know, do their undergraduate work in economics. What does it teach you? I think it, it is because it's a social science field. I think it's just great. It gives you the frameworks to think about the world. And obviously you won't know the answer to every question. You will develop that over time. But asking the right questions is a huge part of solving problems in the world. And I think that training in economics will get you to ask the right questions, and we'll give you the tools once you have the, once you develop that thinking about how to actually solve those.
Now, most of the Nobel Prize winners in economics have been men. Do you think the Nobel Committee is discriminating against women because very few women have won by themselves the Nobel, economics prize? Do you think it's discrimination or they just aren't enough women in economics?
So no, I don't think it was discrimination. By the way, my colleague, Claudia Goldin, won the Nobel Prize. She's a PhD from the University of Chicago. Yes. And, this was relatively recently. So it has been a field that has been unbalanced it since the 1990s. The number of women doing their undergrad degree in economics and PhD has gone up. So there's a bit of a lag in terms of the supply of women economists. But what is unfortunate is that in the 21st century, that ratio has completely stagnated. So about, if you look at the US PhD class, students who take a PhD in economics, women are at around 35%. And it's been that 35% for the last 25 years. It's been stable at that level. The amount number of tenured faculty in any PhD granting departments has drifted up to like 18%. But again, it's building up slowly. So for some reason, and I don't have the, the best answer for it, is that we in economics, this flatlining is worse than, for example, if you look at the math department where there's many more women, but we're much better. The engineering department is way better than engineering, right?
So if economics is a good thing to study, how come you couldn't convince your son to study economics and he didn't want to get a PhD in economics?
First of all, I don't, I'm not going to tell everybody that they should be doing economics. I think you do economics if you enjoy it and if you enjoy it, that's a good reason to stick to it. I think my son probably got sick of listening to economics growing up, and decided he wanted nothing to do with it.
All right. Now, you were at the IMF. Can you explain to the average person here the difference between the IMF and the World Bank? What do they do that's different?
So very simply, the IMF has a shorter horizon, if you want to think about it, versus the World Bank, which is more looking more long term, or in
In other words, the World Bank is about development, about how does a country, you know, move from low income to middle income and keep growing? How do you develop your economy over time?
The IMF is more about how do we help you in a crisis? So how do we get to you? You know, if you are having a financial crisis of this moment, how do we help you get out of it? How do you stabilize your economy? So it's much more short term. So the IMF will never, it doesn't work on areas of education. It doesn't work on, you know, how do we have better schools. And we don't fund education. We don't work on, you know, water or sanitation. We don't do anything on health except during the pandemic when we were helping during at that time. These are much more long. These take time to develop in countries and so that more longer development perspective is the World Bank. The IMF is much more crises, monetary policy, fiscal policy, macro management, which is more short term.
So today, talk in your native country India, how would you assess its economy and its economic structure? And what do you think can be done to improve the economy of India? So India is doing well. It is, you know, one of the, it is the fastest growing major economy in the world. It's growing at six and a half, 7% and is expected to keep, keep growing at that level. What it's doing right is that one, I think over the last decade and a half, it's really pushed on building up public infrastructure in terms of roads, building up connectivity, airports. And so one that has been super valuable. The other big is the digital infrastructure. It's called United Payment Interface, UPI, Unified Payment Interface, UPI, which is again very super helpful. And people have built new technologies on top of it. The digital infrastructure is is strong. Now.
There are many, many more reforms that still need to be undertaken. Something just very basic like land titling, land reforms, because it's very hard even now to sell or buy land in India, and that prevents factories from being built. The labor market again is is very high, does not very flexible. That's another big area. The ease of doing business is still pretty tough. There are lots of bureaucratic hurdles one has to go through, so there are many areas that require further reform. But I think, you know, what I recognize is that despite the turbulence of the last six years, India's economy has done well in terms of maintaining macro stability. It has low inflation at this time. And there's, you know, macro management as best as possible.
Now, one of your colleagues at Harvard, Ken Rogoff, wrote a book essentially saying, we're moving towards a cashless society where we don't have cash anymore. Is that a good idea that we don't have cash anymore? And you think we actually are moving towards that? Just in terms of the the data, we certainly have over a long period of time moved towards a cashless economy. But it's not as if cash has disappeared. I think cash and the share of US GDP is like around 8% or so. There are countries, Switzerland has a lot of love for cash for discussing about why that is. Japan has a lot of love for cash that's still there. But there are countries like Sweden where you simply can't use cash. In China, you can't go in buying any market or sell any market with cash. It's pretty remarkable, actually.
Is that a good thing? There are good reasons why we like moving away from cash. One, because cash flows, there's very high levels of anonymity, you know, money laundering, financing of terrorism and so on, which is probably where most of the cash in the world is being used at this time. And so governments around the world have, over time, basically got rid of high denomination notes and moved towards, you know, people relying more on basically bank money.
In recent years, we've seen the development of something called cryptocurrencies. Is that a, good thing for society to have cryptocurrencies, or is it really a, scam that's waiting to collapse at some point? So cryptocurrencies is a big bucket. You have obviously the the bitcoins of the world. And then you have the new kid on the block, which is I guess relatively new stablecoins. And, you know, unlike bitcoins which whose value can fluctuate whichever way it wants to go, the stablecoin is supposed to be maintaining a fixed value relative to any fiat currency. And since the US dollar is the one that's the main stablecoin in the world right now, basically one stablecoin USD stablecoin should give you $1 the development over there. So there's in terms of Bitcoin itself and crypto, if you if you see who's putting their money in it, there's a lot of, you know, you're trying to speculate. You're trying to see whether you can make a fast buck. The gambling markets, a prediction markets or another space where people are doing this or this competition for bitcoins of the world. Stablecoins, on the other hand, is supposed to be the more serious thing, which is it's going to be okay. Suppose we indeed move to a world where we have no cash whatsoever, and we are relying on bad payment technology. This is a payment technology that can can work.
So why is this good for society or not? There's one way in which I think the, you know, the emergence of stablecoins is good is because it is putting competitive pressure on banks. Banks for the longest time have been charging pretty high rents on cross-border payments, not within the country, but when you look at cross-border payments. So I like the fact that there is a technology that now exists and a form of payments that provides competition to the banking sector. That said, and I think maybe we don't appreciate this enough, is if you're worried about cash, because cash was very anonymous and you couldn't really track transactions. Right. Most stablecoin transactions are also not traceable, that you don't have the standard know your customer, requirements. So there is I think in that sense, there is an important there is an important trade off over there, which is you're bringing back a level of anonymity that you were trying to kill by getting rid of very high denomination currency notes.
Now, President Trump is a Republican, and the founder of the Republican Party is often said to be Abraham Lincoln. Yet President Trump got rid of the penny, which has Lincoln on. It is that a good thing for our economy to get rid of the penny? I mean, because how do you make change without a penny? No, I think it's a good thing to get rid of the penny. And also, again, since we're moving away from cash, I'm okay with, getting rid of, the penny. I mean, the cost of pennies. Just minting those penny was way more than the value of it, and there's no reason for that. So.
So observing a college students and observing graduate students, what is your observation about how to succeed in academic life as a student? Is it the study all the time? Don't study all the time. Suck up to the professor. What do you what is the best way to get along academically for student? Okay, so firstly, I don't like taking a page from my own life is that it's not as if you wake up every day and you know exactly what you're going to do and who you're going to turn into and what you're going to become. I was completely clueless. I took one day at a time, and I took one class at a time, and I learned some things and life threw some opportunities at me. And I think the, the one thing you can always do is make the best of whatever opportunity comes your way. If you're at this fantastic university here, you have a ton of opportunities, way more than I had in terms of what classes you can take, what experiences you can get. That's what you should be, thinking about and making sure you it's not like you're taking the easiest class or the one that you get can get in a very quick, easily. So challenging yourself, putting yourself in situations where you know, by challenging yourself means that there's going to be times when you are not fully comfortable with what's happening in your life and you're pushing yourself. It's a bit of it can be stressful, but that's part of part of learning. And and then you'll figure it out. I mean, what is it that you actually want to do? The kinds of opportunities that have come up in are coming up where, you know, there's new new ones. You are better place than any of what you and I are telling you what to do.
Now, if you study the history of the world, very rarely do civilizations, dominate the world for forever or for. For centuries, the U.S. economy has been the biggest economy in the world for, let's say, since the end of World War one, or more or less. How much longer do you think the U.S. economy will be the dominant economy in the world, or do you think we can do it for another 100 or 200 years, or it's inevitable that somebody will pass us? And who do you think is more likely to pass us? If anybody is up? So if you if you were to look at the big shifts in terms of the US's role in the world economy, so and an absolute scale, it is the dominant economy in the world. And I don't like forecasting very far out. But for the foreseeable future, there's every reason to believe that it will be the main economy of the world. But in a relative sense, what's changed is the emergence of China. And China is a very large economy. It is just in terms of, you know, just the overall size of the economy, but also in terms of the its weight on the global stage, it is punching more. That is a big development. That's an important development over the last, you know, 30, 35 years that's happened. That means that the world has become it used to be I would describe it as unipolar for about 50 years after the Second World War, maybe 50 or 60 years. The US was really the one pole of the world economy, and now it is becoming more bipolar, I would say even multipolar. And you can see it in how different events are playing out in the world. There are multiple, countries that have enough power that they're able to, you know, not, you know, withstand pressure from when there's and, for example, when India got subjected to tariffs, increasing tariffs by the U.S, then they didn't Russian and tried to negotiate and ended. So there is more power, there's more dispersion of power around the world. And, you know, 30 years ago. But the US overall I suspect will remain you know, may measure economic progress or success by something called GDP, gross domestic product, GDP.
But some economists have invented something called a gross happiness product. And do you think it's possible to measure happiness? And is that should be something that our economies take into account when they're measuring their success? Then the level of happiness in a society as opposed to just a GDP. Yep. So firstly, and and this is based on what I've seen in terms of research, is that if you look at if you put plot countries in terms of their happiness relative to their GDP, it's a very strong positive correlation. So countries that have high levels of GDP tend to be countries where happiness indices are higher. The only time when it kind of it it's pretty it's increasing. Right. But right at the very top when you become a really rich developed nation, then there seems to be some flatlining or some suggestion that maybe you're not just every additional GDP increases making you happier. I think the best way to do this, and we do it all the time, even when we were working with countries, I don't care about happiness index, but not that I don't care what happiness, but I don't know what to do with the happiness index. But I think you always want to look at multiple multiple indicators, right? So GDP, I think of it as a great measure. It's one piece of information that you have. But then you were also looking at other measures like you're looking at the level of financial conditions in the country. You're looking at environmental shocks at the economy, you're looking at overall health of the people in the, in the, in the population and so on. So you have a dashboard whenever you are as a policymaker, you're working with countries.
Who do you think adds more value to society? Hedge fund people, private equity people or economists? I mean, I don't know who these people are, these people who do hedge fund and private equity, many of them are. I probably did an undergrad in private equity in in economics. That's what I think, too. Okay. So, if you were if you hang out with economists all the time and when the economists are hanging out with each other, they talk about economics, they talk about anything but economics with. So, you know, depending on who I'm talking to. But there was a wide range of topics, you know, what would you mean by we talking about economics all the time? So. Well, I mean when, when you talk with your colleagues at Harvard, do they talk about sports or they talk about the weather and they talk about economics? Well, overwhelmingly economics, but we do talk about other things, just like you guys. You don't talk about everything all the time, do you?
All right. When you've got your PhD at Princeton, what was your thesis? And could you describe it in two sentences about what you wrote about your thesis? Or is it too hard to describe? It was not a great thesis. So that's why it's not easy to describe. It's it was about looking at capital flows into emerging markets and tying it to the behavior of their exchange rates. It was an okay thesis.
Now, as we get towards the end of our conversation, I wanted to ask you, are you an optimist about the U.S. economy in the future, over the next one, 2 or 3 years? Or are you a pessimist because of our trade deficit, our budget deficit, our total indebtedness? Other reasons. Are you an optimist or you're your pessimist or you're like most economists, you're in between. I'm not worried about the US trade deficit in the US fiscal in the next few years, about concerns that arise from the fact that the US has trade deficits or US fiscal deficits. I am concerned about the risks that are arising by the policies that are being rolled out in terms of engagement with the rest of the world, which in terms in terms of attacks on central bank independence more generally, institutions of higher learning, those are the things that I don't expect will show up in the next 2 to 3 years. But if we keep at it, we could be in a really bad place 10 to 15 years from now. That's what worries me more now.
Is there an economist that you greatly admire? Somebody over the last 50 years you think has had the greatest impact on the world? Positively, who happens to be an economist? Well, all of the people you mentioned, we went through the long list, you know, Adam Smith and Keynes and Friedman and and, you know, several who are living right now. I mean, Bob Lucas passed away recently, but he was a phenomenal economist. No, I think there were many.
All right. So let's suppose you you're at Harvard now, but let's suppose somebody comes to you and says you were the chief economist for the IMF. Would you like to go back and be the head of the IMF? Would you like to go back and be the head of the World Bank, or be, chairman of the Federal Reserve Board? Which job would you rather have? I think well, in terms of a rank ordering, I would, chair the Federal Reserve would be very exciting. IMF chief would be up there, too. Probably the World Bank would be would be something else.
All right, well, look, you've been a very good sport putting up with my questions, and I appreciate your doing it. I will just ask you one final question in the end, do you think you made a mistake by going to Harvard versus Duke? Yeah, well, Duke never offered me anything, so I didn't have a choice to make. All right, well, thank you very much. Thank you. Please join me once again in thanking our guests, David Rubenstein and Geetha Gopinath and, Professor Gopinath. Point taken. If Duke has not reached out to you, we should correct that pretty quickly then. Thank you again, everyone for joining us. This was the last distinguished lecture of this academic year. We invite you to check your emails or online evaluations for today's event. And we value your feedback and comments on the form. And, as well as suggestions for future speakers. If you're interested in learning more about the Sanford School and our programing, please join us online@sanford.duke.edu. Have a great rest of your day, and thank you so much to all the students who are here.