What’s Holding Back Inflation?

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The labor market is tightening. Wages are rising. And yet, despite very aggressive monetary policy efforts, United States central bankers have been unable to hit their inflation target. For more than 4 straight years, the Federal Reserve’s preferred measure of inflation has been below its target of 2%.  This has happened despite an explosion of assets on the balance sheet of the Federal Reserve, which rose from 6 percent of GDP to 24 percent between 2008 and 2016.

And it’s not just here in the US that prices are stubbornly refusing to rise. They’ve been treading water across many of the world’s major economies, including in the Eurozone and Japan. The ECB has been missing its mark for over three years, and the Bank of Japan, which has been fighting deflation for 15 years, has similarly struggled to increase prices.  Meanwhile, between 2008 and 2016, the ratio of central bank assets to GDP hasgrown from 22 percent to 90 percent in Japan, and from 14 percent to 35 percent in the Eurozone.

Under conventional wisdom, quantitative easing and other unconventional policies should have produced extraordinary inflation, quite possibly even hyperinflation. So what the heck is going on? Three important trends are drowning the global economy in deflationary waves, thwarting the best efforts of central bankers: (1) the slowdown in China, (2) a technology- and globalization-driven decline in manufacturing costs, and (3) aging populations in the developed world.


Under conventional wisdom, quantitative easing and other unconventional policies should have produced extraordinary inflation, quite possibly even hyperinflation.


China’s transition from investment-led to consumption-led growth has not been smooth. It’s exposed massive overcapacity that the country built up in industrial sectors like steel, cement, and aluminum, and significant over-investment by global mining companies. As demand growth has slowed, prices have fallen across the board. Since June 2011, the price of iron ore has dropped nearly 70 percent, and the prices of copper and crude oil have fallen by half.

In response to the sputtering economy, Chinese policymakers have focused on pump-priming the country’s export engine. Specifically, they have been devaluing the currency to increase the competitiveness of Chinese goods in global markets.  Since last August, the yuan has dropped 7 percent against the dollar.  By devaluing their currency, China is importing inflation via higher prices for imported goods. The flip side of this dynamic is that Chinese goods are cheaper to foreign consumers. Let’s not fool ourselves, China is exporting deflation.

A related issue is the declining cost of manufactured goods thanks to technological progress and globalization.  According to the Financial Times’Matthew Klein, 88 percent of US inflation since 1990 has come from healthcare, prescription drugs, housing, and education.  Meanwhile, Klein points out, the prices of high-tech goods like televisions and computers have fallen at a rate of 12 and 18 percent per year, respectively, while the cost of low-tech goods like luggage and linens has also dropped dramatically.

The Millennial generation, which has never experienced broad inflation, now expects regularly declining prices for consumer goods.  This may be one reason why their inflation expectations are consistently lower than those of older people. And as the ranks of Millennials overtake those of other generations, these dynamics will be increasingly problematic for the Fed, which is trying to get the population to expect regularly and modestly rising prices.

Another potential long-term driver of deflationary pressure is demographics.  As Breughel’s Jérémie Cohen-Stetton summarizes, in the last decade, population growth rates were positively correlated with inflation rates, and there are some reasons to believe this is more than just a coincidence.  For instance, aging populations in the developed world may lower growth expectations and investment, thereby depressing demand.  Or they may give policymakers political incentives to keep inflation low in order to protect the purchasing power of those on fixed incomes. Take Japan, a society that is rapidly aging. Might it be that the population actually wants deflation?


Aging populations in the developed world may lower growth expectations and investment, thereby depressing demand.


At the same time that the developed world is aging, the population of the emerging world is exploding. But because the purchasing power of these individuals is meaningfully lower than those of developed world consumers, the impact on demand is not nearly large enough to offset the impact of the aging developed world.

The persistence of low or negative inflation can become a self-fulfilling prophecy.  As central banks consistently miss their stated targets, they lose credibility, making it likelier that they will miss their targets in the future.  Bank of Japan governor Haruhiko Kuroda recently compared this dynamic to the story of Peter Pan: “the moment you doubt whether you can fly, you cease forever to be able to do it.”

While deflationary pressures run rampant, recent data suggest the possibility of rising prices. This month’s census report showed a tight labor market drove a 5.2% real increase in the median household income last year. According to Goldman Sachs, wage growth is now running at an annual rate of 2.6 percent. Analysts like Goldman Sachs economist Daan Struyven have argued that we are underestimating how quickly the tighter labor market could speed along the Fed’s meeting—or overshooting—its target.  If we do see a wage-price spiral take hold, American Millennials may get the first dose of rapid inflation in their lifetimes.

Suffering a trend like missed inflation targets for so long, there is always the risk we’ll grow complacent and pay dearly for a rapid reversal. With all eyes on the prize of 2%, we must be careful we don’t overshoot dramatically.

The UN’s Moon Sets

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As any New Yorker knows from the traffic disruptions, last week marked the opening of the 71st General Assembly of the United Nations. At the end of the year, Secretary-General Ban Ki-Moon will step down after a decade of service, making this the last time the former South Korean foreign minister presides over the event.

It’s also the last General Assembly for President Barack Obama. In his speech yesterday, Obama made an impassioned defense of liberal democracy and globalization while acknowledging that countries need to combat rising inequality. In addition to this broad ideological vision, he also discussed a number of specific challenges the global community must address together in the coming years, including climate change, human displacement, and pandemics.

The Secretary General is also stressing these mounting problems. One of Ban’s top priorities for his final meeting is climate change. During the Assembly, he has beentrying to get countries to accept the Paris climate accords as legally binding. In particular, he wants the US locked in before the presidential election, which Donald Trump, a global warming skeptic, could win. To ratify the agreement, Ban needs “at least 55 countries representing 55 percent of climate-change emissions,” according to the New York Times.


One of Ban’s top priorities for his final meeting is climate change.


The US and China have signed on, but India, the third biggest emitter, has been reluctant. Nevertheless, Ban is expected to announce today that he has succeeded in getting enough support for the agreement, thanks to unexpected backing from countries like Poland and the United Kingdom. If it does go into force, the Paris accord wouldcreate a framework for limiting emissions and setting temperature goals as well as providing aid to less developed countries.

Another major concern hanging over this year’s General Assembly is the migrant crisis. The UN estimates that today there are 65 million people displaced worldwide, more than at any time since World War II. It is appropriate that migration and climate change are sharing the spotlight this year, since global warming is an underappreciated factor driving the rise of displacement.


Global warming is an underappreciated factor driving the rise of displacement.


During a Monday session devoted to refugee and migrant issues, world leaders adoptedthe New York Declaration, a resolution to be more proactive in helping refugees. Prior to the meeting, Secretary of State John Kerry announced that America would voluntarily accept 30% more refugees in 2017 than it did in 2016. And the private sector pitched in as well, led by a $500 million commitment from billionaire George Soros to invest in helping refugees and migrants. 51 other companies, including Airbnb and Western Union, said they would help improve access to jobs and education for refugees across 20 countries.

A third headline issue at the General Assembly is antimicrobial resistance. The rampant use of antibiotics in medicine and agriculture has enabled the rise of drug-resistant bacteria known colloquially as superbugs. The phenomenon already claims700,000 lives each year. If left unaddressed, the cumulative global cost of superbugs could reach $100 trillion.

The UN recognizes the magnitude of the problem and is trying to raise its profile. According to Scientific American, “this month’s high-level UN meeting representsonly the fourth time in the international body’s history that its General Assembly…has held a meeting to tackle a health topic.” Officials do not expect anything legally binding to pass, but member states could formally declare their commitment to addressing the issue as a step towards more formal measures.

Reflecting on his decade of leadership, Ban is proud of the progress he helped drive on issues like these. But his tenure has not been without its frustrations. For example, the Secretary General has pointed to leaders threatening to cut off funding for UN programs if he did not remove Israeli and Saudi Arabian forces from a list of armies that kill and maim children. In both cases, he relented.

Ban defends his actions as partly due to inherent limitations in the way the UN makes decision. As he recently stressed to the Associated Press, because the UN is a consensus-driven organization, individual countries have outsized power to blackball issues they don’t like. This constrains what the UN can accomplish. Unsurprisingly, the Secretary General recently hinted he would like to see the decision structure of the UN altered to increase its effectiveness.


The UN is a consensus-driven organization; individual countries have outsized power to blackball issues they don’t like.


Institutional shortcomings aside, Ban himself is not without critics. The Economist called him “painfully ineloquent, addicted to protocol and lacking in spontaneity and depth,” adding that he is “widely regarded as a failure in both administration and governance.” Critics say he has at times failed to stand up for human rights.

He’s also been called a “powerless observer” in the face of tragedies like the 2009 civil war in Sri Lanka, and more recently in Syria. And it took Ban six years to publiclyacknowledge the role his organization played in bringing on the 2010 cholera outbreak in Haiti that claimed 9,000 lives. So while Ban believes the institution of the UN requires reform, others see a more assertive leader as an equally urgent need.

So who might the next leader of the UN be? Ban’s opinion is that it should be a woman. Unfortunately, countries have to date failed to rally around a female candidate, despite a record number vying for the post. I strongly agree with the need for gender diversity, particularly in high profile positions such as this. An organization representing humanity should have a leadership that is representative of humankind.

Leadership Lessons From Sully

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It’s been almost eight years since Captain Chesley Sullenberger miraculously landed US Airways Flight 1549 on the Hudson River. It began on a chilly day in January 2009 when his plane encountered a flock of geese upon departure from New York’s LaGuardia Airport. Both engines lost thrust, putting 150 passengers and 5 crew members at serious risk. Roughly four minutes later, Sully ditched the plane on the Hudson River. Every soul aboard survived.

As one who thinks about navigating uncertainty, I was immediately struck by the decision prowess of the pilot. I wanted to find out what led Sully to flourish amidst such radical uncertainty and pressure. Sullenberger’s book, Highest Duty, and Sully, the new Clint Eastwood film about his triumph, helped me understand why he was the right person for the job.

Here are three things I learned from Sully’s story.

Use checklists as tools, not rules. Checklists are an important tool in a pilot’s arsenal. And with good reason: they help to reduce human error in aviation, just as they do inmedicine. Sully himself is a checklist advocate. As he wrote in Highest Duty, his wife has to remind him: “Sully, life is not a checklist!”

Sully and his co-pilot Jeff Skiles made careful use of checklists when things began deteriorating. But the situation was unprecedented, making strict adherence to the checklist’s script a liability. As Sully wrote, “Not every situation can be foreseen or anticipated. There isn’t a checklist for everything.”

In the movie, we see investigators interrogating Sully and his co-pilot about the steps they took. They have to explain why they did not follow the standard emergency protocol, which, while useful in the abstract, was not appropriate for the situation at hand. So while the standard protocols checklists codify are useful, they are not rules that leaders must follow at all costs. As Sully eloquently summarizes: “Compliance alone is not sufficient. Judgment…is paramount.”


“There isn’t a checklist for everything.”—Chesley Sullenberger


Keep advisors on tap, not on top. Soon after both engines fail, Sully and Skiles relay their status to an air traffic controller who offers an emergency landing at LaGuardia. Sully responds that the plane may not make it and might land on the Hudson. The pilot also proposes New Jersey’s Teterboro Airport, where the controller quickly secures him a runway. Throughout this conversation, Sully notes, the controller did not try to steer him in a particular direction: his “choice of phrasing was helpful to me. Rather than telling me what airport I had to aim for, he asked me what airport I wanted. His words let me know that he understood that these hard choices were mine to make, and it wasn’t going to help if he tried to dictate a plan to me.”

Twenty-two seconds after Sullenberger proposes Teterboro, he abandons the possible destination, quickly concluding a landing on the Hudson is likely to save the most lives. Even after Sully's decision, the controller keeps offering suggestions, unable to stomach the thought of a water landing.  Ditching a plane on water is a risky maneuver, one best avoided if possible.

At this point, Sullenberger tunes him out: “I knew that he had offered me all the assistance that he could, but at that point, I had to focus on the task at hand. I wouldn’t be answering him.” Too often, we let trusted advisors take the wheel, thereby abdicating our responsibility as leaders. Sullenberger succeeds in part because he knows how to leverage his advisor without ceding control.


Too often, we let our trusted advisors take the wheel


Question assumptions. The drama of Sully revolves around the National Transportation Safety Board’s investigation of the incident. Initially, investigators believe that the plane’s engine could have restarted and pilot error was to blame. And computer simulations suggest that Sullenberger could have made it to LaGuardia or Teterboro instead of landing on the water. To convince the NTSB that he made the right decision, Sully arranges for human-operated simulations of these scenarios to be streamed live at the hearings. When those don’t go his way, he argues—convincingly—that neither the computer nor human simulations are using realistic assumptions.

He asks how many times the pilots in the simulator had practiced. The answer, which is met with a great gasp: “17.” Sully and Skiles hadn’t practiced once. The lead investigator then asks for new human simulations under more realistic assumptions. This time, the pilots must wait 35 seconds after the bird strikes before turning back to LaGuardia or Teterboro. Under these more realistic conditions, they crash, vindicating Sully and Skiles.

Today, we are all too ready to trust the apparent conclusions of computer simulations or controlled social-scientific experiments without questioning how valid their application is to the real world. While Sully may have exaggerated the antagonism between the investigators and the pilots, the film is a useful parable about the creeping propensity to trust models over human testimony, despite the fact that the models themselves are irreducibly human as well.


Models themselves are irreducibly human.


Sully is the quintessential leader. He is respectful of procedure while acknowledging its limits. He takes responsibility without being overconfident. And he tackles moments of radical uncertainty with composure and appropriate judgment. We can all learn from him.

Billionaire Goals: Live Forever, On Mars

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Today’s billionaires regularly channel their wealth into traditional areas of philanthropy like education and public health. For example, Bill and Melinda Gates’ efforts include spending billions to eradicate polio and malaria, Warren Buffet has pledged to give 85% of his Berkshire Hathaway wealth to the Gates Foundation and other charities, and duty-free shopping magnate Charles Feeney’s giving includes almost a billion dollars of donations to his alma mater, Cornell University.

But the richest of the rich are also devoting significant resources to futuristic moonshots. Critics call it self-absorbed. Fans call it visionary. Two billionaire fixations have caught my attention: space travel and life extension. It’s the stuff of science fiction, which makes sense: the nouveau riche grew up inspired by the likes of Star Trek (Peter Thiel, Jeff Bezos)and The Hitchhiker’s Guide to the Galaxy (Elon Musk).


Critics call it self-absorbed. Fans call it visionary.


Last week, we witnessed the explosion of one of Elon Musk’s SpaceX rockets as it prepared to carry a $300 million satellite into orbit. It was a setback, but the fact that it even happened is a testament to how far the private space industry has come. And despite inevitable hiccups, private space pursuits are yielding clear results. Just last month, the Federal Aviation Administration for the first time gave approval to a private company, Moon Express, to land on the moon.

Billionaires like Musk are devoting huge amounts of time and resources to creating a viable private space industry. Collectively, Musk, Virgin’s Richard Branson, Amazon’s Jeff Bezos, and Microsoft’s Paul Allen have invested over a billion dollars of their own money into space ventures.


Billionaires like Musk are devoting huge amounts of time and resources to creating a viable private space industry.


SpaceX has been successfully running supply missions to the International Space Station, and Musk is expected to announce plans for a human mission to Mars later this month. Starting in 2018, Bezos-led Blue Origin will bring tourists—and, eventually, science experiments—to suborbital space. Branson’s company, Virgin Galactic, recently received authorization to restart flights to space after a tragic crash in 2014. And Paul Allen’s Stratolaunch Systems will send satellites into orbit using the biggest airplane in the world.

Extraterrestrial resource extraction has also caught the eye of starry-eyed billionaires. Google’s Larry Page and Eric Schmidt have invested in Planetary Resources, a company hoping to extract commodities from asteroids. Richard Branson is also an investor. Moon Express, a prospective moon miner, is competing for Google’s Lunar XPRIZE, a $20 million award given to the first team that can put a robot on the moon and transmit information back to Earth.

While some billionaires are focused on outer space, others are fixated on living forever—or, at least, extending human lifespans dramatically. Oracle’s Larry Ellison hasdevoted almost half a billion dollars to anti-aging initiatives. “Death makes me angry,” he says. “It doesn’t make any sense to me. Death has never made any sense to me. How can a person be there and then just vanish, just not be there?”


“Death has never made any sense to me” —Larry Ellison


PayPal co-founder Peter Thiel is another high-profile would-be death-defier. According to the New Yorker, Thiel too “sees death as a problem to be solved, and the sooner the better. Given the current state of medical research, he expects to live to a hundred and twenty—a sorry compromise, given the grand possibilities of life extension.” Thiel has invested in anti-aging technology, expressing interest in approaches like parabiosis—injecting young people’s blood as a means to longevity.

Meanwhile, Google co-founder Larry Page has long supported immortality research, and in 2013 he announced a life-extension startup called the California Life Company, or Calico, now part of Alphabet. I consider it a leading candidate to become the world’s hottest company within the next five years.

The other original Googler, Sergey Brin, co-founded the Breakthrough Prize in the Life Sciences, which “honors transformative advances toward understanding living systems and extending human life.” 23andMe’s Anne Wojcicki, Facebook’s Mark Zuckerberg, and Alibaba’s Jack Ma have joined Brin to support the prize.

And even more out-there, five years ago, Russian billionaire Dmitry Itskov founded the 2045 Initiative, an effort to upload consciousness into a machine to achieve immortality. Itskov’s vision looks forward to the “singularity,” a point in the future when technological progress accelerates dramatically, potentially enabling nearly unthinkable developments like eternal life. Google hired the concept’s biggest booster, Ray Kurzweil, and Page and Google have backedSingularity University, which Kurzweil co-founded.

While the lavish lifestyles of the rich and famous may capture our attention, it’s their ambitions that may ultimately affect us more profoundly. As science policy analyst Steven Edwards told the New York Times, “the practice of science in the 21st century is becoming shaped less by national priorities or by peer-review groups and more by the particular preferences of individuals with huge amounts of money.”


[Billionaires’] personal whims and visions are shaping the direction of scientific progress.


And so while many of us may not relate to billionaire lifestyles, let’s hope their ambitions overlap with society’s needs, because for better or worse, their personal whims and visions are shaping the direction of scientific progress.

Fortunately, regardless of the merits of their moonshots’ immediate goals, ambitious projects like space exploration and life extension are likely to provide invaluable spillover benefits. In the last century, geopolitical objectives stimulated funding forNASA and DARPA, whose research and development helped spur countless innovations, including solar panels and the Internet.

Might Calico crack the code for cancer as it seeks immortality? Or could findings from space research yield unlimited energy? It’s impossible to know, but fantastic moonshots like those being pursued today might just make breakthroughs like these happen.

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