Interview with Mark L.J. Wright
Senior Vice President and Director of Research on our new Institute, the minimum wage study, and fostering excellence in research | 2017 Annual Report Essay
Published March 26, 2018 | March 2018 issue
Region: You joined the Minneapolis Fed last May. Can you tell us about your background and what drew you to this job? What is it about the Minneapolis Fed in particular that interested you?
Mark L.J. Wright: As you can probably tell from my accent, I’m not from around here. I was born in Sydney, Australia, and in a lot of ways, I grew up in the 1980s, which in Australia was a period of tremendous economic change. Australia had been a pretty sleepy economy, tightly regulated. In the 1980s, a lot of industries were deregulated, the Australian dollar was floated, and the government totally overhauled its spending and balanced the budget.
So economics was kind of in the air. Everybody was talking about it; it was in all the newspapers. I felt like I had to study economics just to be a part of the conversation. That drew me to learn economics and started me on this journey.
After I finished college, I came over the U.S. to do my Ph.D. at the University of Chicago, then spent a bit of time in academia. I joined the Federal Reserve System, first in Chicago, because I was interested in policy and being able to use economics to make a difference. When this opportunity came up in Minneapolis, it was all the stars aligning. I couldn’t resist it.
The Minneapolis Fed is one of the most prestigious economics research institutions in the world. The Minneapolis Fed, for half a century, has been leading research on economic policy, specifically monetary policy. So it was such a wonderful opportunity to join an incredibly prestigious department that’s filled with really top-notch researchers. It’s an incredible honor to be here.
On top of that, our president, Neel Kashkari, has set a very aggressive and exciting agenda for our Research department. We’ve just started the Opportunity and Inclusive Growth Institute, looking at issues of inequality throughout America. This job is an opportunity to work with Neel to help him realize his vision and to participate in a really important policy initiative; that was especially attractive to me.
Leadership in research and policy
Region: You just mentioned that the Minneapolis Fed has a long, strong research tradition. Why is this kind of fundamental research valuable, in and of itself and for developing good policy? And how do you stimulate and support this kind of research?
Wright: Just about all economic research, even fundamental theoretical research, ultimately has a payoff for policy. It may not emerge for years, but eventually it does. So I think the strategy of the Fed as a whole, and the Minneapolis Fed in particular, has been to get as many really smart people as we can, put them in a room, stimulate them with important questions of policy relevance and give them the freedom to then pursue their own research ideas.
In the case of work that’s come out of the Minneapolis Fed, just about everything that central bankers do today can, in some way or another, be traced back to work that was done here in Minneapolis between the Fed and the University of Minnesota.
For example, over the past 10 years, the Fed has talked a lot about “forward guidance” as a tool of monetary policy. The whole point of forward guidance is that the Fed can use its communications with the public to shape people’s expectations of future monetary policy and inflation as a way of influencing their behavior today. This focus on expectations owes a debt to a revolution in macroeconomic thinking that was launched by Bob Lucas (a University of Chicago professor, Nobel laureate and long-time consultant at the Minneapolis Fed) and developed by our economists and consultants Neil Wallace and Tom Sargent (who also later won a Nobel prize).
As another example, one the most dramatic changes over the past three decades in the way central banks conduct monetary policy has been the widespread adoption of inflation targets and the increased attention paid to monetary policy rules. This movement arose out of work begun by our long-time adviser Ed Prescott (another Nobel laureate) with his co-laureate Finn Kydland, a visiting scholar here, on “time consistency.”
That work stressed the importance of adopting targets and rules as a way of binding central banks to honor their promises and to anchor the expectations of firms and employees. The problem of “anchoring expectations” comes up repeatedly in discussions by central bankers throughout the world.
As yet another example, the models that central bankers use to study the impact of monetary policy on the economy all owe a debt to Ed and Finn’s work on what are known (in economics jargon) as “dynamic stochastic general equilibrium models.”
Sometimes this research pays off very quickly. It took a little over a decade (pretty fast in the macroeconomic policy world!) for central banks to adopt inflation targets. Other times, it can take several decades. Bob Litterman pioneered powerful forecasting tools when he was here in the 1970s. But at the time, we didn’t have the computers to make full use of them. It took decades for his techniques to catch on broadly, but they’re now central to the conduct of monetary policy worldwide.
So sometimes you can have ideas that take a while to pay off, but eventually they do. I think that’s why we want to stimulate that kind of research environment.
How exactly do you do it? Again: Get smart people, get ’em together and give them a lot of freedom. You never know what the economy is going to throw at you. You never know what the next crisis or big issue will be. So we want to have really smart people who can handle anything that’s thrown at them, and just give them the freedom to pursue ideas that are attractive to them within an environment where we stimulate them with important questions about macroeconomic policy.
Region: An example of a current policy question you’re working on?
Wright: One of the biggest policy questions we’re trying to answer today is: How do we precisely measure the strength of the economy? Are we close to achieving our full employment mandate that Congress has set, or do we still have a way to go? Traditionally, we’ve thought of the economy getting close to full employment being dangerous, that it might lead to inflation taking off and bad consequences for the economy down the line. But that relationship seems to have broken down. So we’ve got people now thinking deeply about why that might be, whether there is a fundamental relationship at all or whether we need to rethink, from the ground up, the way in which monetary policy is conducted.
The Opportunity and Inclusive Growth Institute
Region: Earlier you mentioned the Institute that the Minneapolis Fed launched last year to encourage research on economic opportunity and inclusive growth. Traditionally, economic inequality has been considered outside the purview of the Federal Reserve.
Why is the Minneapolis Fed tackling this now?
Wright:I don’t think it’s a surprise to anyone to hear that inequality is a big issue for the United States at the moment. We’ve seen it with the Occupy Wall Street movement; we’ve seen it in terms of the academic research by people like Thomas Piketty who’ve pointed out that measures of inequality today are about the highest they’ve been for 50 years. So it’s a big issue for a lot of reasons.
For the state of Minnesota, the economy is doing very well, but that’s not been equally shared. Although Minnesotans rightfully take a measure of pride in the strength of the economy, we see across a whole host of measures that there are very big racial disparities in terms of access to education and differences in income. So even in a state like Minnesota, these problems are fundamental.
It’s true the Fed has not often looked at these issues directly, but I think that was more a consequence of the tools we had available rather than the issues themselves. As you know, Congress has given the Fed a dual mandate: a mandate to pursue maximum employment and stable prices. And for a long time, primarily because it was the only data we had access to, we thought of that in terms of two numbers: the unemployment rate and the inflation rate.
But behind the unemployment rate are the lives of millions of Americans that are affected by job loss and lack of opportunity to work. So to understand what maximum employment is, and to know whether we’re achieving our mandate, we have to understand the causes of unemployment for everyday Americans, and that means looking at barriers to opportunity and lack of inclusion.
Likewise with stable prices. When inflation’s high, or low, that redistributes income from one group of society to another. If inflation comes in unexpectedly high, say, that hurts savers who’ve invested at lower rates of return than they should’ve otherwise received and it helps borrowers. So it distributes from the elderly who have been living off their savings to the young who are perhaps borrowing to finance their education or to buy a home.
Just about everything we do, and why we care about it, is influenced by inequality. We’re looking at it now because now we have all this wonderfully rich data and these powerful computer tools. So we can actually dig into huge masses of data—big data—on the lives of Americans and the factors that influence them. We’re in a better position to study it now than we’ve ever been before.
Unique contribution to a long-standing problem?
Region: Many organizations have worked for years on research and policies to address poverty. What unique contributions can the Institute make?
Wright: That’s a great question because these certainly are long-standing issues. Lots of really talented and dedicated people have looked at the issues over time without making as much progress as we might have hoped. The Fed and the Opportunity and Inclusive Growth Institute realize that we’re not going to come in and be able to solve the problem of inequality immediately, to suddenly generate inclusion and opportunity for everybody in a short amount of time. We’re not going to be able to write a report and wipe our hands of the issue in a year.
This is something that we hope to make incremental progress on, over the course of decades. So this is not a short-term commitment; this is a long-term commitment on the part of the Federal Reserve System and the Fed in Minneapolis in particular. We have to be realistic about what we can achieve.
We also have to be realistic about what we can do. We’re not able to lobby for or against particular pieces of legislation. We don’t pass laws. We don’t write large checks to fund government programs. Instead, what we can do is research. We can identify programs that are potentially very useful ways of dealing with some of these questions. We can use our position to publicize and promote the programs we think are successful. And we can convene groups of people to talk about and learn from each other, and implement these policies.
Whether it be policymakers, community groups, academics or business people, we can often bring them together and get everybody speaking the same language and moving in the same direction to effect change for the better.
A role model: Early childhood education
Region: Of course, this isn’t the first time the Minneapolis Fed has pioneered policy research beyond the narrow confines of monetary policy.
Wright: Absolutely not. Another Minneapolis Fed program serves in many ways as a model for what we’re trying to do. Over several decades, Art Rolnick, one of my predecessors as Research director, and Rob Grunewald, one of our economists, were arguing that state and local governments weren’t spending money very effectively. The natural question was, “Well, how should we be spending it?”
Art and Rob identified early childhood education and development as particularly important areas in which government could be involved. They read and distilled the economic, education and neuroscience research, they did some research of their own and they were able to establish a very good case for investing in early childhood education.
In fact, they found a strong return on investments to both the children themselves in terms of higher earnings but also to society as a whole. For society, these benefits included their effect on government finances: less spending on later education, less spending on correctional services and so on. Plus, of course, you generated more tax revenue from the higher earnings these people were able to get.
That’s a huge return. As a private investor, I’m delighted if I could get 5 or 6 percent annually. They were talking about returns of 18 percent annually, which over decades can add up to over a 1,500 percent return on investment, just staggeringly enormous sums!
So they got people together, including researchers and policymakers, and told everybody about these findings. Eventually, they were able to effect real change.
Our hope is we’ll be able to do something similar with initiatives here at the Institute. The challenge is to find exactly what those areas are. At the moment, we’re spending a lot of time listening. We’re talking to a lot of people, trying to take a humble approach to it, not saying we have all the answers now, but trying to learn from a wide group of people as to what the best opportunities are before we throw our resources behind one or two of them.
The Institute’s people
Region: Who have you pulled together at the Institute?
Wright: The first thing we did was convene a group of academics, some of the best in the world, as our board of advisors to give us advice on how we might want to proceed in tackling some of these issues. We brought them together at a conference in May last year and, as academics are wont to do, they gave us many, many things we could look at. Based on those recommendations, we’re proceeding to investigate certain issues.
The second conference was on residential segregation; that was in October last year. This May, we’re going to be looking at labor market participation, poverty and the future of work. And this October, we’ll be looking at geographic mobility. It used to be that people would travel all over the U.S. in search of a better job, a better life and better schools for their family. And that seems to have declined a lot. We want to understand why that is.
So we’re beginning to look at different policies in the hope we’ll be able to identify something like early childhood education and early childhood development, the kinds of things we can throw our weight behind. It’s going to take a while to find the right ones, and so we’re casting a wide net initially.
Region: Can you tell us about the Institute’s Visiting Scholar Program?
Wright: Part of trying to identify barriers to inclusion and effective programs to combat them is encouraging further research, which means supporting people who are currently doing research in these areas and giving them incentives to come here and develop that work.
One step in that direction is our Visiting Scholar Program. Over the past year, we’ve had 17 individual scholars coming for various amounts of time to sit in residence here in Minneapolis, free of distractions to work on their own research, to interact with each other, to interact with our own researchers here and to use the resources we have to support them. The hope is that not only will they fertilize each other’s ideas and generate better research, but that their findings will then inform us as we move forward.
We’ve got people working on all sorts of issues: access to education, wage disparities across occupations, immigration, occupational licensing and noncompete clauses in contracts. These are all sorts of things that might affect economic opportunities and inclusion. And we’re going to be pursuing several of those lines as we move into the future.
In addition to our Academic Advisory Board, we’re about to launch a new Community Advisory Board with representatives of community groups from across Minnesota, focusing mostly on the Twin Cities, because we need to know what’s actually happening on the ground.
You can talk to academics and they’ll give you a good high-level view of things, but we need to make sure that what we’re doing is grounded in the reality of what’s actually happening in the communities we’re trying to serve. So we’re going to bring them to the Fed and have them hopefully educate us as to the most important issues they face and maybe even tell us about emerging issues that haven’t quite filtered through to the academics just yet.
Staying grounded: Minimum wage research
Region: Can you give an example of that: a pragmatic issue that keeps you grounded in the here and now?
Wright: A current policy issue we’re looking at is the minimum wage ordinance that Minneapolis recently introduced. Over time, it will raise the minimum wage to $15. It resulted from an initiative known as the “Fight for $15” that’s happening in a number of states and cities around the country, including, in the near future perhaps, the neighboring city of St. Paul.
We’ve also seen very aggressive campaigns to raise the minimum wage in Minnesota from its current state level of $9.65 an hour for large employers to $15 over the next four years. That’s a big increase, about 64 percent.
Much of this effort is based on research that shows an increase in the minimum wage doesn’t seem to have very big costs in terms of employment. But can we expect employment not to be affected after such a large increase in the minimum wage? Most of the research so far has looked at relatively small changes in the minimum wage, an extra 25 or 50 cents an hour. That research found small or perhaps no decline in employment. But it’s not clear that would be true if we increase the minimum wage from $9.65 to $15, such a big increase in such a short amount of time.
The Minneapolis city council wanted to study this. They put out a call for research proposals, so the Fed, and the Institute in particular, bid on the contract and were able to win it. So, for the next four years, we’ll be looking at as much data as we can to try to assess the effect of the minimum wage on Minneapolis and surrounding areas.
We’ll be able to track exactly what’s happening, including: Do people lose their jobs? Do they have hours cut back? Do people working in tipping industries like restaurants keep their jobs but lose their tips? Do firms lose profits? Do they close as a result, or do they just raise prices and pass it on to their customers?
It’s rare that you can identify an economic policy that is a pure “free lunch,” where nobody loses, so we want to track the effects of this policy. Is it going to hurt consumers with higher prices? Is it going to hurt firms with lower profits? Are firms going to close? Is it going to hurt workers? Or perhaps it’ll have relatively small effects on employment, profits and prices while having the big benefit of increasing people’s wages and reducing poverty on the job. So we’ll be able to analyze that. We’ll follow where the data lead us. And in the process, we’ll contribute to the local community but also, by sharing the findings, contribute to all the different cities and states across America that are following similar policies, or thinking about doing so in the future.
Diversity in scholarship
Region: The range of disciplines and national origins of the Institute’s scholars, advisers and conference participants clearly goes beyond just the U.S. and only economists. Why this geographic and academic diversity?
Wright: One of the things we set out to do as part of the Institute was to look beyond the narrow confines of the “same old economists” who are doing research on these issues, and to really broaden our scope and bring in a lot of different voices.
We’ve done that in a couple of ways. First, we’ve made this Institute explicitly interdisciplinary: bringing in people from other disciplines, such as sociology, law, political science, social work, criminology. They can tell us their perspectives, and we can learn from each other as to things that might matter in terms of making a difference for opportunity and inclusion.
Second, we’ve also looked worldwide for the best scholars we can find and invited people from Europe, Latin America and elsewhere who are bringing diverse experiences and perspectives as to what has worked in other countries, so we can learn about what might work here in the United States as well.
Third, we want diverse perspectives; we need people from backgrounds that have been underrepresented in the economics profession and in wider policy circles. We also want people with different political beliefs, from rural areas as well as urban communities and so on.
Lastly, our Community Advisory Board is designed to help us incorporate knowledge and experiences of people beyond the ivory tower of academia.
We’re trying to cast a broad net and talk to as many people as possible who can inform the discussion, and help us understand the problems and develop solutions.
Region: Does the Institute have critics? What do they object to?
Wright: For the most part, people have been extremely supportive. Within the Federal Reserve System, former Chair Janet Yellen and current Chair Jerome Powell have been huge supporters of the initiative from the beginning. So we’ve always felt very supported there.
There are probably people who argue that we shouldn’t be involved in these issues, but I don’t see how you can be a public servant in America and not want to be involved in them. As I explained before, these are really central to the mandate that Congress gave us. So I think we’re doing the job Congress asked us to do, and we’re trying to be the best public servants we can be.
Sustaining innovative research and policy
Region: Earlier you provided a short history of the Minneapolis Fed’s rich research tradition and policy leadership. And we’ve just discussed current research initiatives.
What makes this possible? What’s the formula behind the Minneapolis Fed’s long record of groundbreaking policy and research?
Wright: A great question. If we could bottle the atmosphere here and sell it, we’d make a lot of money, I think. There’s something special about this place. But I think ultimately what it comes down to is that we’ve had great leadership—people who have been prepared to collect smart minds together and give them the resources they need to flourish.
At the same time, we’ve really tried to encourage a certain diversity of thought, a tolerance for dissent and argument. We don’t want to have a group of people all thinking the same here. We need people to challenge each other, because out of that challenge, out of the competition, arise new ideas.
So, it’s about getting good people and encouraging them to innovate, explore, experiment and think radical thoughts without fear of needing to respond to some short-term deadline. That, I think, has been a big part of it. And that really starts with the leadership.
We’ve had presidents who’ve been great supporters of that kind of research effort. Indeed, that’s one of Neel’s most attractive characteristics. He’s set a very bold vision for us, but he’s encouraged us to explore a lot of things. He welcomes dissent. He wants to be challenged himself, and I think that flows through to the entire group.
It also obviously stems from our board of directors. Our board has been tremendously supportive of the contributions that the research community here has been able to make to society. So I think we’ve had support at all levels, a really tremendous group of people in leadership in various positions at the bank over time. And that’s really what’s facilitated, indeed nourished, the development of this strong tradition that continues today.
Future research initiatives
Region: Where do you think Fed research will be in five or so years?
Wright: Of course, if I knew that, I’d be doing that research now! It’s always risky to predict what the big issue is going to be, but I think certain important trends are emerging. One thing we hear about no matter where we go is that housing is increasingly unaffordable. So I think one thing we’ll be looking at over the next five years is exactly what can we do to promote housing affordability.
That may mean looking at issues like land-use zoning and how that limits the kind of housing that can be built. It may mean looking at regulations that limit the types of construction that can be done. We’ll also look at access to credit, and mortgage credit in particular, something that Congress has also charged us to do under the Community Reinvestment Act.
Another thing we’ll look at—intimately related to our full employment mandate—is barriers to employment and opportunity. We have researchers here who study occupational licensing, which has become an increasingly large and important phenomenon in the U.S. It used to be that relatively few professions required a license to operate. Now more than a quarter of all jobs in the United States require a license issued by the government. That’s made it very hard for people to work in those professions.
Moreover, these are state licenses, and you can’t just take your state license and work in another state. You have to apply to get a license there as well. This likely contributes to some of the declines in geographic mobility we've seen. That’s something we’re already working on and we intend to work on more.
So these kinds of regulatory barriers to finding jobs, obstacles that limit people’s access to employment, are definitely going to be one focus of future research, as well as regulations that limit access to affordable housing.
Research background, and future
Region: I’d like to close with a question about your own research. Your background is international economics, sovereign debt crises and the like. Are you able to find time to pursue that research?
Wright: Yes, I’ve done work on international financial crises, and borrowing and lending between countries, for a long time. One reason I was attracted to that was that these crises have tremendous humanitarian costs. All sorts of people lose their jobs and their life savings, many people become homeless, and there are incalculable psychological and noneconomic costs associated with that.
In a sense, being able to directly look at these issues with the United States is really a continuation of that interest, especially given that so much of that happened in response to our own financial crisis here.
So yes, I’ll keep working on those issues. You know, the world is increasingly globalized, and the U.S. is increasingly linked to the world economy. If we want to be able to forecast what will happen in the U.S., we need to pay close attention to what’s happening to the rest of the world.