Welcome and Opening Remarks

Texas is the largest exporting state in the country, and a lot of our work here at the Dallas Fed is particularly focused on trade, immigration and energy—given the characteristics of our district—as well as on monetary policy. We spend a lot of time focusing  on cyclical developments—GDP (gross domestic product), employment, inflation, the monthly PMIs (purchasing managers indexes). There’s a lot of cyclical data that come out with high frequency. But my own bent, coming from the business world, is that we also spend a lot of time on the longer-term, structural drivers that help explain some of those day-to-day and month-to-month and even year-to-year cyclical results.

Let me explain what I mean by that and why trade and immigration are so critical.

There are four big drivers that we talk about at the Dallas Fed. Let me start with the first, demographics. The U.S. population is aging, and U.S. workforce growth is slowing. We’re not the only country in the world with this issue. Europe has got a significant demographic issue. Germany is much more challenged than the United States. Japan is similarly affected. China has got a significant demographic issue. But why am I talking about this as a key driver? GDP growth is made up of growth in the workforce plus growth in productivity.

Add those two things together, and you get GDP growth. If the workforce is aging, and workforce growth is slowing—before you even get to talking about productivity—that’s a headwind for GDP growth.

There are a few ways to talk about the evidence of this. One is the labor force participation rate. Much has been made of the fact that in 2007, the U.S. labor force participation rate was about 66 percent. The participation rate, for those who don’t know, is the percentage of the population, (age) 16 and older, that is either working or actively looking for work.

That was 66 percent in 2007; it is around 63 percent today. In our view, the bulk of that decline is due to aging of the workforce and demographics. And by the way, we think it’s been a pretty tremendous accomplishment to keep that labor force participation at around 63 percent over the last three or four years. It’s our own view at the Dallas Fed that over the next 10 years, because of aging, this participation rate is likely to decline further, heading toward a low of 61 percent. For those who watch economic statistics, if that actually occurs, that is a significant headwind for labor force growth and for GDP growth.

You can imagine there are a number of things that can be done to address this. Over the years, getting more women to participate in the workforce has been helpful to labor force participation. That’s why there’s a lot of talk in this country regarding child care, transportation challenges, skills training and other policy changes that could bring people into the workforce. But the other one that is a significant issue is immigration. The only comment I’ll make about immigration is immigrants and their children, based on our research, have made up as much as 50 percent or more of workforce growth over the past 20 years in the United States. If you look out over the next 20 years, they are going to be a much higher percentage of workforce growth. Why is that?  Because we know native workforce growth is going to be negative on net.

Again, I’m a business person. I like to think about distinctive competencies and strategy. What’s one of the things that has been distinctive about the United States over all of our lifetimes and before? We have been a magnet for talent from around the world. We have attracted and assimilated and brought in people from all over the world who have become leaders of our country and active, productive citizens. My grandparents were not born here; they came to the United States. I’m not unusual. Immigration is critical. If we’re going to improve workforce growth in the United States, this is critical. This is why Japan has such a substantial temporary worker program. Germany has had its challenges related to immigration, but this helps explain why Germany has tried to tackle the subject of immigration—although it’s not gone terribly well. They’re worried about slowing workforce growth. So, that’s the No. 1 driver.

The second big structural driver is a combination of technology and increased technology-enabled disruption, which is a global phenomenon. It has implications in the United States at least for lagging educational achievement—math, science and reading, as well as lagging skills training. Why do I talk about this? Productivity is the second part of GDP growth; labor force growth is the first part. Interestingly, labor force productivity growth in the United States has been sluggish relative to what it has been historically.

Why is that? It’s particularly confounding because we see investments in technology and technology-enabled disruption that improve productivity. I’m a student of corporate results. I was trained to read corporate results, and I still do in this job. If you look at companies and industries, you’ll see that just about every industry that you can follow is much more productive today than it was 10 years ago. So why are we not seeing it show up in aggregate measures of labor force productivity? Our thesis at the Dallas Fed is that technology and technology-enabled disruption cut differently by educational attainment. What I mean by that is if you have a college education, while you may be traumatized during periods of your career by technology and technology-enabled disruption, you probably have the skills and the training and the ability to benefit in terms of growth in your income and your career prospects.

If, on the other hand, you are one of the 46 million workers in this country who has a high school education or less, you’re likely seeing your job increasingly being either disrupted or eliminated. Think of the call center worker who makes $55,000 a year today plus benefits. Those jobs aren’t going to exist five, six, seven years from now. And by the way, the workers in those jobs know that. If you’re doing a middle-skills routine type of job, over the course of your career, unless you get retrained, you may actually see your income and your career prospects deteriorate. Which is why in this country there’s so much discussion about, “Is capitalism working for everyone or is it just working for some?” We think that heavily cuts by educational attainment.

We’ve looked at a number of studies that have shown that if we could improve math, science and reading—we rank 25th out of 35 industrialized nations—that would improve workforce productivity. And we certainly believe strongly that there’s a big skills gap, if you’ve heard that term. Over half of all small businesses in this country report they cannot find skilled workers to fill jobs. We think if we did more to beef up skills training, that would also improve productivity. And why is it so urgent? It’s so urgent because of the first point: Workforce growth is slowing. We are not compensating for that by improving productivity. And if workforce growth is slowing and productivity growth remain sluggish—not negative but sluggish—we’re going to have low or lagging GDP growth. We’re talking about this trend all the time.

The third big driver is globalization. Globalization has been a fact of life for most of our lifetimes. The company I joined in 1983—I joined a primarily domestic company—had very little business outside of the United States. By the time I left that company, we had over half of our revenues outside the United States, and we were unusual. Today, nearly 45 percent of S&P 500 revenues come from outside the United States. The U.S. economy is much more integrated now with the rest of the world. The leading companies in the world are much more globally integrated, and we know that capital flows are much more globally integrated.

If you’re an asset allocator in this world, you think globally. Your asset allocation is global. And the issue is this: The U.S is less than 5 percent of the world’s population. Our work at the Dallas Fed suggests that globalization is an opportunity for the United States. However, the narrative in the last several years has been that if your job is being disrupted in Wisconsin or Ohio or anywhere, it’s probably due to globalization. Either an immigrant may have affected your wages or taken your job, or trade is the reason your job has been disrupted. Our analysis suggests that may have been true 15, 20 years ago. It might have been a more credible argument then, but today if your job is being disrupted or eliminated, it is far more likely happening due to technology and technology-enabled disruption and, probably, the education system— your math, science and reading proficiency or the fact that you don’t have skills training—those are far more likely the reasons that your job is being disrupted or eliminated.

The reason we flagged this is that if we get that diagnosis wrong, we’re going to make poor policy decisions regarding trade and immigration. That means we’re going to grow more slowly.

So, we spend a lot of time in an apolitical way at the Dallas Fed trying to understand how, for example, the trade relationship with Mexico and Canada (operates). It’s our view that the trade relation with Mexico, which is heavily an intermediate goods relationship, is actually critical to U.S. companies domiciling here and to them being more globally competitive. Basically, it has contributed to more jobs in the United States on net. It’s allowed companies and businesses to stay in this hemisphere and to stay in the United States. There’s a reason the Ford assembly plant is called assembly, not manufacturing. It’s an assembly plant. Across industries we very effectively use trade and sophisticated supply chain and logistical arrangements to improve our competitiveness, and it’s our own view that we’re taking share— or at least we were taking share— from Asia. We think that’s critical to GDP growth in the United States.

On immigration, we’ve done a lot of work, which I’m sure we’ll talk about in this conference, and (Dallas Fed Vice President) Pia (Orrenius) and her team have done a lot of research that indicates the U.S. would likely be well-served to adopt a more skills-based and employer-based immigration system, more similar to Canada. To put it plainly: In Canada, they survey companies around the country, they figure out where the job gaps are—where the skill gaps are—and they backward integrate that into their criteria for immigration.

However it’s done, if you think you’re going to actually cut the number of immigrants and grow GDP, those two things do not quite go together. If you’re going to grow, you need to grow the workforce, and you can restructure the immigration criteria.

Some may say we’re actually going to cut the number of immigrants, and that’s going to be great for the United States. Our comment is, “Not if you want to grow GDP.” Our research has also indicated that we don’t believe that immigrants have materially, negatively affected wage growth at the low end and certainly not at the high end. We find that immigrants have taken jobs at both ends of the skill distribution where domestic workers are scarce, and we have benefited as a nation. That is not the narrative you hear today (in public discourse), and one of the reasons we’re very excited to be doing a conference like this. I think we need to do more to make clear the various aspects of immigration and the various aspects of trade.

I think we’ve also said we would do well to segment our trading relationships and our thinking between those that are intermediate goods and those that are final goods relationships. The trade relationship with China is primarily a final goods relationship. I’m sure we’ll talk more about that, but we think that’s an opportunity for growth.

Now, the fourth big structural driver. None of this would be that big of a problem if we weren’t so highly leveraged at the federal government level. And so, the last big driver is what’s happened with U.S. debt-to-GDP.

Since the Great Recession, the household sector has deleveraged. It’s not that households have reduced debt so much; they haven’t. But they haven’t increased their debt, and their incomes are growing. Household debt-to-GDP is in much better shape than it was 10 or 12 years ago. People may not have realized, if you go back to 2006 and 2007, which were pretty good years, household debt-to-GDP was historically high, and the reason we didn’t notice it was because people were focused on household debt-to-asset values. We know what happened with housing. It’s been a long, slow grind for households to get their balance sheets in better shape. A strong job market has helped.

The corporate sector is more leveraged today than 10 years ago. Triple B debt has tripled. Corporate leverage has increased dramatically, but, critically, the financial sector has deleveraged. We’ve written a lot about this at the Dallas Fed and said why corporate debt-to-GDP is something we should be watching carefully. It’s not a “systemic risk,” but in a downturn, it may well be an amplifier, meaning if we slow, companies will have to allocate a greater percent of their cash flow to servicing debt. It means they won’t be spending on capital expenditures and other things. It’s something to watch, but we think it’s more an amplifier than a systemic risk.

The third sector we look at—the government sector—is dramatically more leveraged than it was after the Great Recession. Debt held by the public now is approximately 76 percent of GDP, and the present value of unfunded entitlements is now in excess of $55 trillion and heading north. Even before the recent tax legislation, deficits, we believe and the CBO (Congressional Budget Office) believes, are going to start exceeding $1 trillion a year. And normally you would not increase your debt-to-GDP late in the economic cycle. The point of all of this is we think the path of U.S. debt-to-GDP is likely not sustainable.

So why aren’t you reading this on the front page of the paper every day?

It seems like years ago, five or 10 years ago (with the) Simpson-Bowles (deficit reduction plan), you had a lot more conversation about this. The situation is worse today, but interest rates are low. I think implicit in the calm about this is the belief that the dollar will remain the world’s reserve currency for the foreseeable future, which means people have to be overweight to the dollar. Our concern at the Dallas Fed is that if you’re relying on that as heavily as we are, that’s a dangerous thing to do, and we would be well-served to moderate our debt growth.

People ask me, “What’s the ‘black swan’ event, the thing you just can’t imagine happening that could hit us in the face?” My definition of the black swan event is an event that stares you right in the face and is so obvious that you willfully decide to ignore it. This (the dollar no longer being the world’s reserve currency) for me is the potential event; it’s so obvious and it’s so clear, and we are willfully deciding not to pay attention to it.

That’s the fourth issue, and the reason I mention it is to put everything in context. Now, what do you do about it? One, we can grow faster. Obviously, we can do entitlement reform, a very sensitive subject. We can find other ways to moderate our debt growth. But then if you go back to start with immigration and trade—the subject of this conference—you’d kind of have a little bit different conversation. About immigration, for example, if you put it in context, then unless we grow the workforce, we’re creating greater and greater demands on our children and grandchildren that they’re going to have to pay off the debt. It might change the context of that debate and the trade-offs you’re making. And right now, we’re willing to tolerate a little slower workforce growth and maybe we’ll make up for it in productivity even though we’re not quite making the investments in education and skills training as aggressively as we need to. But if you later on acknowledge the fact that we’re historically highly leveraged, you might change that debate.

So, those are four of the big drivers. Of the other big structural drivers we talk about, climate change would be the most notable. We think that these once-in-a-lifetime (weather) tail events are starting to happen every year or two or three, and they are very expensive. It is a big topic in the state of Texas, which is why we look at it as it relates to the health of our ports, the city of Houston and the need for infrastructure along the Gulf (of Mexico), given floods, drought and other major weather events. And if you believe the National Climate Assessment is even close to being accurate, these events are  going to intensify. But we’ll leave that for a broader discussion.

I think in the context of those four big drivers, trade and immigration loom very large. We, at the Dallas Fed, believe that, (these are) opportunities for the U.S. to grow faster as opposed to threats. We view them more as opportunities if we make the right policy decisions. You’ll notice a lot of things we’re going to talk about today might cause somebody to say, “Those are very interesting, but what the hell does that have to do with monetary policy?” And the answer is, it doesn’t have that much to do with monetary policy. We see our job at the Dallas Fed as more than just to make good monetary policy decisions and provide good analysis of the economy. We also believe that part of our job is to share our research with elected and appointed officials and to call out that it’s going to take more than just monetary policy if we’re going to improve growth and increase the welfare and prosperity of our citizens.

As important as monetary policy is—we’re central bankers, we obviously must think it’s important, and it is—it’s not the be-all, end-all. We need broader economic policy. Trade and immigration are part of that broader economic policy, which will help us grow faster and have a better future for our children and grandchildren.