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- As we approached the one-year anniversary of COVID's lockdown, officially, we revisit, also, our last guest in the studio.

I'm Chris William and welcome again to the most widely watched and longest running source of Carolina business, policy, and public affairs.

And on this program an executive profile and an in-depth conversation with the president of the Richmond's Federal Reserve, Tom Barkin.

We start right after this.

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(upbeat music) On this edition of Carolina Business Review, an executive profile featuring Tom Barkin, President and CEO of the Federal Reserve Bank of Richmond.

(upbeat music concludes) - And welcome again to this dialogue and this conversation, we are glad to have with us, once again, and we had him, interestingly enough, a year ago.

Our last guest in the studio before the COVID lockdown, the President of the Richmond District of the Federal Reserve, Mr. Tom Barkin.

President Barkin, welcome again.

And I'm glad to see you looking happy and healthy, I hope?

- Thanks, Chris.

Glad to be back.

And I look forward very much to being back with you in-person.

- Well, thank you, Tom.

Tom, let's start, as we look back over the last year, and here we are almost a year since the lockdown began, I think it's not overstating it to say over the last year we've had epic unknowables about the market, about our community, about our public health.

How have we done so far?

- Well, it's awfully hard to answer that question because we've done two things that are just completely unprecedented.

One thing is we shut the entire economy down and that was literally the week after I was with you last March.

And of course we'd never done that before.

And the second thing we did that was unprecedented is we threw three, $4 trillion of fiscal stimulus into the mix.

And the way those two interacted, I think, has been really quite telling.

Obviously, when you shut the economy down, a bunch of people lose their jobs, a bunch of small businesses are in trouble.

Segments like aerospace, and oil and gas, and hospitality all struggled, but at the same time, all the stimulus ended up in people's pockets.

Savings rates are elevated massively and people with money, locked down at home without much to do, actually found themselves rotating their spending into goods.

And so we saw a huge increase in the sales of really anything related to the house.

Paint, or wallpaper, or patio furniture.

I was in Hickory a couple months ago and the furniture business is just through the roof.

Golf clubs, boats, all that stuff is up.

Credit card balances are actually way down.

Normally in a downturn they would be up, but now they're down because people pay down their debt.

And so you've got this situation where, if you want to think about it this way, there was a big valley and we just threw a ton of money into the valley so that people could make their way across.

And so, in total, the economy's done actually incredibly given what's happened.

There's obviously huge dichotomy, both in terms of industries, like I talked about, aerospace, oil and gas, leisure and hospitality, and entertainment, but also individuals.

There's still 10 million people more unemployed or out of work than there were a year ago.

And those 10 million people are disproportionately from these low-end, low income, personal contact service jobs.

People are disproportionately young.

They're disproportionately women.

They're disproportionately people of color.

- There's so much there.

Is this a reset of expectations?

Is this a moment in time?

Can you extrapolate out, Tom, with some degree of confidence that this new norm, the way we spend, the way we save, the way we interact, even the jobs and those available to work, is all of this changed?

Is this how it's going to be?

Or some semblance of how it's gonna be?

- I'm always hesitant to declare a massive sea change.

I was around for 9/11.

I traveled a ton in my old job.

But three months after 9/11, we were convinced we were just not going to travel the same way again and then three years later we were all traveling.

And so the vaccine is here, seems to be effective despite some of the supply chain issues, is being rolled out.

It's quite easy for me to imagine, and certainly my core assumption is, we're gonna have the vaccine, it's gonna be rolled out, it's gonna be effective.

And by and large people are gonna be able to go back to work the way they used to.

Now, some things will be different.

I think businesses will be more open to flexible work than they used to be and I think that'll be a good thing.

There's obviously a lot of small retailers and maybe small restaurants that are out of business and aren't gonna come back.

And so some of that sector is gonna migrate.

We've accelerated a move to online retail.

Tele-health, which in many cases wasn't even paid for by insurance is now a more accepted thing.

So there are business changes that are happening but I'm not one of those people who think we're never gonna travel again and I certainly hope I'm gonna be able to go to a ballgame again.

- But you talked about the epic stimulus at the time of the beginning of last year, three or $4 trillion.

And here we are even more.

Is there too much credit?

Do we have too much liquidity?

How do we start to even think about paying this back?

And then we'll get to, of course, the inflation question, but let's start with the massive amounts of stimulus now that are part of the debt load of this country.

- Well, so when you think about debt, I start really broadly, so I look at all kinds of debt.

And actually, despite what you might see.

the total debt in this country today isn't meaningfully higher than it was 15 years ago.

Now the mix has shifted a lot.

Financial debt, banks have a lot more capital than they used to and so their debt is down.

Personal debt is actually significantly down, 'cause people de-levered, as I said, in this crisis but also coming out of the financial crisis.

Corporate debt is up and now government debt is up.

So, to me, this isn't an issue of the level right now, it's the issue of the trajectory.

And of course the trajectory of the federal deficit is significant.

It was 38% debt-to-GDP in 2007.

It's over 100% projected for this year.

And so that's not a trajectory, that's sustainable.

And so the question is not, should we be spending now to build a bridge over this chasm that we've just gone through?

The question is, are we gonna have the institutional will to on the other side of the chasm rationalize the government spending and the government deficit?

I think that is an important question for us.

- So what's the answer?

- Well, it's in the future.

The legislators have in their hands the power to do it.

There's a piece to reduce in the federal debt and the deficit, which is growth.

And there are a number of pro growth things we can and should be doing, including expanding the size of the workforce, and bringing more people in, and investing in productivity and the like.

And then there's a set of things around spending and revenue collection.

And again, you can't look at this year's budget and say we're doing much on those two things.

But I think if they even have it in their hands to do it going forward and I certainly hope we will.

- So you don't have to go far to understand the inflation connectivity to all of this liquidity and flush with cash, both personal and corporate.

It seems like the fed has telegraphed more than once that there is some tolerance for a higher level of inflation.

Does that go along with the idea that all of this money, and this is not very technical, Tom, but all of this money sloshing around could absolutely push inflation higher.

And what would a high-end tolerance be for inflation by the fed?

- So let me make the case for inflation and maybe the case against inflation, because you obviously don't know what the future is gonna be.

I talked about an elevated savings rate because of, you called it the money sloshing, but the fiscal stimulus that was put in.

There's right now a trillion and a half more money in people's savings in this country than there was at the beginning of the crisis.

And so you can think of that as deferred stimulus or spending yet to come, so that's gonna be powerful.

And it's easy for me to imagine that, in the context of a vaccine, people like me, who haven't been spending the way we used to, we're going to say, great, I've got some excess savings, it's time for me to spend again.

At the same time, there was an article recently about some of the challenges the automakers have had trying to get chips.

Maybe a lot of industries will have constrained supply.

It's hard to predict demand.

And so, if elevated spending hits constrained supply, that's part of the case for inflation and you can put other things, declining dollar, minimum wage, you can put a lot of those things into a case for inflation.

There's also a case against inflation.

The case against inflation is, inflation is not a one-time move in the price level.

It's a continued move in the price level.

And the fact that over the last 25 years inflation has been quite moderate means that businesses and consumers actually have their expectations pretty much set.

If you see something and the price goes five or 10%, do you accept it or do you shop it?

And now you have tools to shop it, whether that be online or otherwise.

And at the same time you've got these big retailers, Lowe's is a great example, Home Depot, who have a lot of purchasing power.

And I talked to suppliers.

They don't wanna increase prices to these big suppliers.

And the big suppliers know that, part of big retailers know that part of their businesses is to provide everyday low prices.

And so there's a lot of power holding inflation down.

Just as a reminder, it's been 1.5% for the last 10 years, which is a pretty moderate pace.

It's been 1.5% for the last 12 months.

And so you can make a case for inflation, but, I have to say, there's also a pretty strong case against it.

And of course we watch it closely and the federal reserve has the power, we've proven it in the past, that if we do see inflation beyond the moderate levels we're comfortable with, two, 2.5%, then we have the tools to do something about it.

And that willingness to act on our part is also a constraint on inflation because people aren't gonna imagine it if they think we can stop it.

- So it's moral leverage to some degree.

We talk about the large dynamics of the economy.

Obviously in the early days, the big losers were those that work in restaurants, or entertainment, or airlines, or even transportation.

How do we know, and this is not insensitive, President Barkin, but the idea that the economy has a way of wringing out excesses, with the size of stimulus packages, are we allowing enough of the economy to do its job is a free market economy to ring out excesses, to allow some businesses to fail, and other businesses to create and grow?

- I do think one of the challenges when you put this much fiscal stimulus into the situation is that it's not perfectly tailored for the situation and it never will be.

So the PPP is a great example.

It's a very popular program but it went to really all businesses.

It went to businesses that had really significant needs and it went to businesses that the criteria was, had significant uncertainty, but actually turned out to be just fine.

And a lot of this has been reported.

And among the businesses that really had the need, some of them were gonna go out of business anyway, some of them will still go out of business.

And so I take your point.

There are businesses that have been helped along and maybe shouldn't.

You see this in other places, a lot of states have eviction constraints.

And so you've got people who haven't paid the rent for many months and now have a very significant back rent due.

But the state's saying no eviction.

Well, in the end, what's gonna happen there?

I've talked to utilities.

People that don't pay the utility bills, but in various states, Virginia is a good example, the utilities have been told you can't cut off service.

So, again, you've got a significant level of back utility bills.

And so all of these, I'll call it marketing interferences, are gonna come to roost at some point.

Either with the rent or the utility bills being forgiven.

There's a significant part of the recent stimulus package that's tenant assistance.

Or people get evicted and those sorts of things.

And so, whenever you artificially interfere with the mechanisms of the market, you're gonna have this kind of issue and I don't think this is any different.

- It's interesting you bring up the housing, and the mortgage, and the rent.

Has that become, and this is my term, but has that become a personal battleground for folks that have been caught, for no fault of their own, but have been caught in this web of an economic, has it become a, and I hate to get too fancy here, but a socioeconomic battleground for folks who can't make their rent, can't make their mortgage, but still need some type of support, and how much support do we give it?

And, oh yeah, by the way, is this a social justice issue or is this an economic inequality issue?

It's a big question, but how do you tease all that out?

And what's what?

- Well, there's a lot in that question, so I'm not sure I've seen the social justice issue, but what I do see loud and clear is that we're in a world where there's a high chance that more and more people are gonna be spending more and more time in the place that they live.

And that's part of the reason why housing related spending has been so robust.

Because there's nothing like understanding the flaws of your house than spending all day in it.

And a huge thing that's come to pass is the emphasis on technological connectivity.

Broadband is the shorthand for that.

It's just like not having electricity.

I think there is a huge proportion in our smaller towns and in our inner cities of people who haven't been able to get deployed this sort of online connectivity.

And without that, I think that is a real gap.

And you see it most clearly in the classroom.

I was in West Virginia talking to parents who were taking their kids to the parking lot of the McDonald's to sign into wifi so they could do their class schedule.

And that's just not okay, I don't think.

We've got a program, actually, if I can cross market just for a second, called Scarring in the Classroom, which starts this month, it's a online video series.

And some of the things our researchers are seeing in terms of the impact on kids of remote learning, the risks of being unsufficiently connected, or insufficiently engaged, and what that does to future job prospects.

For people who are interested, on our website.

But I really do think, technological connectivity, that's really where the rubber hits the road here on this.

And maybe that's the social justice point you were making.

- Do you get the feel or did you get the sense that we are a lot closer or maybe even accelerating to in-person class again?

- I do think so.

And I think about it the same way that, in April, everybody's shut the economy down because it seemed like the right thing to do.

And in the absence of an alternative plan, that's where you went.

I think if you look at cases over November, December, they were three, four times more elevated than they were in April.

But very few political leaders shut their economies completely down.

I think that's because they saw the cost of shutting it down in March and April, and they saw that there were alternatives that actually could get us to the other side.

I think it's the same way in schools.

When you don't know for sure how the infection process works, when you don't have confidence that you can operate a school in a safe way, it seems like a much easier decision, Today, I think the downside risks of remote K to 12 education, I think have gotten increasingly clear.

And I think the upside case of, we can operate this safely, has gotten clear as well.

And so I think the trade-off bends more toward getting people back in the classroom in a safe way, in a hybrid way, whatever.

But again, every jurisdiction is making their own decision on that.

But I do see a trend towards that.

- And to apply that to something you just said and talked about, we all thought, back in April, March, May of last year, and June and July, that the idea that the whole game's changed, we're all gonna be working remotely, and how great it is that we're much more, or at least as productive.

Have you changed the way that you feel about the percentage of people that will be working from home or some type of remote location, then versus now?

- I wrote an essay on this in the last week or so, and I think we've proven to ourselves that we can work remotely.

I think if we're honest with ourselves, it's not 100% comfortable, and it's enabled by the fact that everyone's working remotely.

I always tease manufacturers that I talked to, when they talk about their salespeople as being just as productive from home, I say, well, what are you gonna do the first time you lose a sale because one of your competitors was in somebody else's plant?

And they go, yeah, I'm probably gonna go back in the plan.

So I think the real thing we're gonna have to figure out is how to work hybrid.

And how to work hybrid is not the same as working in-person, it's not the same as working remotely.

And the best way I think to illustrate it is, think of the last time you were in a meeting with five people in a conference room and two people on the phone or video.

The five people in the conference room dominate the conversation.

There are conversations that happen on the way into the meeting.

There are conversations that happen on the way out of the meeting.

There's actually a lot of work that's been done on how trust and collaboration works when you are together versus remote, and you can read body language, and signals, and those sorts of things that would suggest there's real value to being able to do the in-person body language thing.

And as a company, if you believe in culture as being your advantage, and if you believe that it's critical to bring in younger people and train, and mentor, and inculcate them in that culture, then I don't think we've yet figured out how to do that remotely.

But that doesn't mean we can't be flexible.

And so the trick to this is figuring out how to operate in a hybrid environment.

Part of that is figuring out which days it actually matters to be in-person and programming those days.

Part of is a set of protocols for my seven person meeting.

Maybe you call on the person on the phone or the video first.

Part of it is expectations, maybe even rebalancing.

I think actually being clear on why you as a company care about people being in-person and then delivering that.

I think there's a chance, if people are more systemic on it, we're actually gonna get better culture, better mentorship, better development with less time in the office.

And then that would be the win-win.

- We've got about three or four minutes left and I do wanna ask you some capital market questions.

And I certainly understand, sir, as a sitting member of the Federal Open Market Committee and a voting member, that about setting monetary policy, you have to be careful about any statements around capital markets, but you, like everyone else, saw a lot of the drama that happened around GameStop, and Reddit, and Robinhood, and these huge market swings in specific equities.

What does that portend?

Is that rigging out excesses?

Is that posting on social media?

Is that some more sinister thing that's going on in the markets?

What's going on?

- I read it as the kind of euphoria that happens somewhat late in the cycle.

There were similar stories back in the 90s.

I think there were similar stories in 2007, 2008.

It seems relatively small to me, though.

It's a few stocks, it's buyers.

I imagine those valuations aren't connected with reality.

And of course they're moving around day by day, as you and I speak.

We'll see where they are when this is aired.

But I didn't take much out of it.

There's a great book, "The Madness of Crowds."

It just seems like a little bit of a tulip mania over here.

And those things seem to come up in a recurring way in our society over and over again.

- For different reasons, cryptocurrencies like Bitcoin are driven with the same kind of volatility, different reasons most likely, but what will it take central banks, like the Federal Reserve but the global central banks, to sanction, and again, that's my term, sir, to sanction a cryptocurrency before we see some baseline cryptocurrency that becomes, not a standard, but pretty close to standard?

- Right, so think of Bitcoin, or any cryptocurrency right now.

as the value proposition right now is as a store of value.

It's being traded, it's being thought of like gold, or like silver, or like art, or like baseball cards.

Something that's an alternative asset that you could put your money into and that you hope it will retain or grow its value over time.

And I don't have much of an opinion on whether that's a good investment or not a good investment, but that's sort of how I think about it.

It's not a currency.

One of the core aspects of a currency is that the government stands behind it.

It's just a piece of paper in your wallet, but it's worth more than that because the government stands behind it.

I don't know who stands behind Bitcoin and neither do you.

It's an algorithm run by a set of people that you are choosing to trust.

Some of the things I talked about gold and silver, maybe even art, they have their value because people want something on the other side.

There are uses for gold jewelry.

There are uses for silver in industrial applications.

So there's value to having it on the other side.

I don't know what the value of Bitcoin is other than that.

Finally, without the government standing behind it, you don't have it, and so for the government do that, you'd have to have a use case.

And I just haven't heard what a good use case would be yet.

I'm open to it, but haven't heard it.

- Okay.

All right.

That's final word.

Thank you, Tom.

Well said, in a short period of time on a complex issue.

As always, thank you for joining us and back in the studio, hopefully next time we have you, but nonetheless, we appreciate your leadership and all of your comments across the Carolinas.

We hope you stay well and healthy.

- Look forward to it.

Thanks, Chris.

- Thank you, President Tom Barkin.

Thank you for watching our program.

Carolinabusinessreview.org for any questions or comments.

Until next week, good night.

- [Announcer] Major funding for Carolina Business Review provided by High Point University, Martin Marietta, Colonial Life, The Duke Endowment, Barings, Grant Thornton, Sonoco, Blue Cross Blue Shield of South Carolina, and by viewers like you, thank you.

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