Prof. Cook, you are professor of economics, but you worked in previous transition teams, you served in the Council of Economic Advisers, and now you were part of Biden’s transition team. What is the story that brought you outside of academia and into policy?

Thank you for having me here. Actually, I have served on three transition teams. I served on the Clinton-Gore transition team as a graduate student. I hadn’t even passed my field exams at that point, so there was little that I could offer. But I’ve always imagined if I had the analytical tools that could help to answer a pressing question, like the ones I’m trying to answer with respect to innovation and raising productivity, I will do it. [And this is story of the paper that a lot of people refer to, from the Planet Money podcast, that I didn’t shrink from the problem, because people told me not to do it, that I wouldn’t get tenure because of it. But it was such a large hole in the literature, it was such a pressing question, I decided that I would do it because I had the tools.] So I am always willing to lend a hand if the tools, the knowledge, the experience I have can be useful. I’m always grateful to be asked to serve in this way and hope that I can make a difference.

Thank you. Can give help us understand the transition? It’s hard to exactly understand what happens. How is the team formed? What was your timeline? Let’s start before the elections and up to the start of the transition.

The timeline is quite important. The US is quite different from a lot of other countries. I think the most stark differences between us and the British. You barely get 24 hours to get out of 10 Downing Street: you have hours to get a moving van and get your stuff out. Here, we have two and a half months: much of November, all of December and then much of January, to figure out which policies you’ve promised that are actually going to be delivered. And you also have to figure out how they’re going to be delivered.
A big part of that is figuring out the personnel who will be delivering these policies. Because policy is personnel, as they often say in government. That’s even more true in the US: we’re not like many countries in Europe, in the sense that we don’t have a civil service that is so large that they just ignore the political is to come in and out. In the US here are a lot more hirings, a lot more recruiting. So it’s no small saying that personnel is policy. And that’s why it takes almost three months – and we didn’t have those three months, everybody knows, we were blocked from entering the agency. So we weren’t able to do the due diligence that we would have been able to do otherwise.
You work for the result that you’re seeking before the election. Then, if you’re lucky, somebody taps you and says “Come join the transition”. And that’s what I did. But before that, I was working as hard as I could to support with data and research the kinds of policies that I saw should be embraced by the next administration.

Let’s take a step back to make sure that everybody understands what is the work of the agency review team. In a nutshell, how would you describe it?

A team of experts is assembled for each agency. Because of your research, because of your prior government service, because of your work experience, you are selected to review a particular agency. The one that I did for the Obama-Biden team is probably more illustrative: we were in the middle of recession, we were working tirelessly to try to come up with a plan that that would get us out of the recession, with proposals that would help people who were already hurt from the mortgage crisis. There were so many dimensions to this – and there was so much suffering – that we had to think about everything. So for that one, I was on an international international finance team, and I was charged with reviewing the international multilateral bodies, like the World Bank, like the Inter-American Development Bank.

In general, there’s always a political appointee there, and you try to figure out: is that the right person to serve? And then you figure out if there are policies that would need to change. To do so, you need to get a current state of the agency. How’s it doing? Is it in deficit? Does it need a different financing structure? What’s the morale like? Have the civil servants been supported in that role? Is it in shambles? With respect to management?
So you’re trying to figure out what the state of the agency is, and how the next administration can improve it. And, at the same time, how to achieve the objectives of the next administration. So you are working to make sure that the next Secretary or the next US Executive Director of the World Bank is properly briefed on the state of the agency. That’s the goal. That’s what I have worked on. There’s a big binder that you give the nominee for that position, and you want to make sure you’ve covered everything, you know, covered the the managerial state of the place, covered the direction of the place, just everything about the agency. It’s soup to nuts, it’s really comprehensive. And then the person studies it and prepares for a nomination hearing by the Senate. And you just want to do the best job you can to make sure that person is fully prepared, fully briefed.

Former President Trump did not accept the results for several weeks. Now that the transition is over, how did it affect your work, especially compared to the other times you served in the same position?

I can’t discuss the particulars of what we experienced. But what you can imagine, obviously happened. Ascertainment, you heard it a lot during this period. I never heard that term before, because it was automatic. The transition from the Bush to the Clinton-Gore administration – I’m not going to say it was seamless, I was a grad student, I was kind of like an RA – it was automatic, it wasn’t a hurdle. And same true for the Obama-Biden transition. It was automatic: they were very helpful, preparing their own binders to help us prepare our binders. So that’s what we typically expect during a transition period: the outgoing folks to be helpful in that regard. So I was surprised, I didn’t realize that the GSA (the general services administration) had a role. But of course they have a role, because they provide all of the supplies for the transition team. You know, all the things that you need to run an office. So that was very different this year, as you can imagine. Everything being remote, very few people working in their offices, that was different in and of itself. What delay does is delay the agency review teams and collecting the data and information they need to be able to prepare this binder. That’s the long the short of it. And the implication may be that there are delays with respect to naming a nominee, scheduling the confirmation hearings and the votes, it may take a long time for the leadership to appear in the agencies. And that’s not good.
The reason I was mentioning the second impeachment trial is because, as Americans, we expect a peaceful transfer of power, we expect that this fairly long period of transition has been innocuous. But this year, it was not, democracy took a real hit in that period. I think that we have to put more guardrails on to make sure that there is a peaceful transfer of power and that future transition teams can actually do their work, some arguing for shorter transition periods. I am not so certain about that: we love tradition in this country. But I think that we can put some guardrails on so that it doesn’t depend on the whims of one person for there to be a smooth transition, we might have to become a little bit more like European, and that there may need to be civil servants who are actually able to make that call themselves, rather than that being a political decision. There’s a lot to learn going forward.

You were selected to be part of the agency review team (ART) in charge of the Federal Reserve, the SEC, the Commodity and Futures Trading Commission, the Federal Deposit Insurance Corporation, the National Credit Union Administration. Let’s call them the “money, credit, financial intermediaries”, a class that I taught. Your ART was composed of 14 people. 14 people to deal with a huge amount of information. How many appointments was your team in charge of?

That’s a good question, but it’s hard to answer. Because, typically, there would be more people appointed by now. But that’s what the delay actually resulted in. I was a deputy team lead, and the team lead was Gary Gensler and, as you know, he’s been nominated to head the SEC. I explicitly went into the transition team explicitly with a thought that it would be interesting to be offered something as a result of this process. But my real concern is to make sure that I can use the skills that I have to make sure that there is a smooth transfer of power, and that the next administration is fully aware of all the issues that that face that person.

More into the details of the process. Were you assigned to all the aforementioned agencies, or did you specialize in one of those? How was the practical work done within the team? Just to give a sense of this “magical” moment that happens once every four years.

I can’t discuss the specifics of how we organized ourselves or what we discussed. But I can tell you I was the deputy team leader, so I certainly had to be on the coverage of all of those agencies. The same is true for Gary, who was the head. It was fascinating, absolutely fascinating. Because I teach about financial crises, I talk about who regulates what, and that turns out to be quite important. I wish it didn’t turn out to be quite so important, because everybody learns about this after. But anyway, I think is my knowledge of those institutions has been helpful. And in doing the work like I was doing on the transition team. You’re right, it is magical, you see many of the issues that these agencies are dealing with, you see them at a level you wouldn’t be able to see otherwise. And I think that is useful for preparation, that binder I was mentioning.

Just to be clear about what guided us preparing that binder: the promises that Joe Biden made on the campaign trail, and the policies that they put on the website. As you know, climate, racial equity, worker empowerment. So we had quite a bit of guidance in this process, trying to achieve several objectives at once.

Going back to something you said at the beginning. The review team is mainly about personnel and policy. First, the personnel. Can you tell us what were the main challenges that you faced, especially in terms of technical and diversity background?

Let me let me give you a broad answer because I can’t reveal private information, some of these agencies are incredibly small. If we’re thinking broadly, different administrations come in with different priorities. Larry Summers was an academic before he became a Treasury Secretary. He had a very different style, very different skill set from the new Secretary of the Treasury who was coming in O’Neill, Secretary O’Neill, who was coming from Alcoa: not only the private sector, but a mineral extraction, very old economy firm. CEO of a Fortune 500 company, a very different skill set. After he was hired, there were things that were put in place that really spoke to managing the place like you would manage a corporation. And that has some advantages. Is it something that we need to maintain? Is this the most productive way to organize ourselves to maximize the output of every every unit within the Treasury? I think there was some good questions being posed, but obviously, there are limits to that, absolutely. The change was fairly dramatic going from treasury department that was led by an academic to one that was led by a person who’s a CEO of a Fortune 500 company.
So there are different qualities that you need to have in a leader depending on what needs to be done. If you need to reform human resources and how the place functions, then you probably have to have a leader like Secretary O’Neill. On the other hand, if you need to bring more academic resources to a unit, you might need somebody like Larry Summers, or Janet Yellen, to attract a lot of fire-power in that regard. So and I’m not saying that I was, they attracted me. So it must have been like modifier power that they were getting, I’m just saying they were trying to attract the best talent and the best minds to put to problems, then you might want to focus on on on that. So in that sense, it’s not that different from running a university or a corporation. Right. Think about personnel who’s appropriate for which, which role?

Thinking like an economist, we can try to retrieve the preferences by looking at the choices. Is this a good approach?

I think so.

So the appointment of Yellen, and the team in general, reflects what Biden’s preferences are.

As a general matter. When, let’s say, the president of a university is chosen, we look to see what that person’s comparative advantage is. And then we surmise that person was chosen because of that comparative advantage. And that may be what the university needs at the time. So, I think we’re doing exactly what other sectors do.

In terms of diversity, how much is this important in the choice of the personnel of the federal agencies that you worked on, and why?

I’ll explain it this way: I think Janet Yellen does a much better job than I do. She said that the cause of the financial crisis was the fact that the people who were analyzing it – I’m not quoting her precisely, but I’m summing this up – people paying attention to the indicators related to the crisis, they didn’t have the lived experience of most Americans. They were trained largely the same way, recruited from the same schools, which means they were asking many of the same questions. Interpreting data and information in the same way. I think she speaks with conviction when she says that this leads to group-think. So group-think is what got us is in the crisis. And it’s really difficult to get us out of crises, if people can’t think out of the box.
I have my eyes open in places where a lot of my colleagues wouldn’t, because they’ve never been in that situation before, or they’ve never experienced hyperinflation themselves. Right, I lived in a hyper inflationary environment, it was around 48 to 50% inflation rate on a per annum basis, the back of the envelope definition of hyperinflation.
This presents a whole different set of incentives. You have to think about the state space, right? You have to think about different states of the world. And if you’ve never experienced that state of the world, it’s going to be hard to incorporate into your modelling, your your forecast, or your understanding of the world.
I think the lived experience is actually very important. That’s why diversity is important.
Let me just give you one other example. Many of the people being given these exotic mortgages during the crisis in 2007/2009 were under-represented minorities, Latinos and African Americans. Well, when the San Francisco Fed, that Janet Yellen was leading at the time, had meetings with community members, they were finding out about this, and they took full advantage of having more information in that way. Remember that data on mortgages were reported, I think, every three years, and in 2008 when the crisis became full fledged, you can’t do that every three years. Regulators were either unaware or, we found out in many cases, they just decided not to do anything, they thought it was a small enough sector that they’ve just decided to ignore it.
So my view is that we want to prevent such damage to the economy. It’s not just financial stability, that that sounds like, you know, mom and apple pie. We want to prevent the damage to people’s lives, their hopes and dreams, that goes along with a financial crisis or financial instability.

Talking about credit: a couple of the agencies that you helped transition deal with regulation of credit. I’d like to talk about something that comes up quite often, the Community Reinvestment Act. It’s a program trying to overcome redlining, pushing banks to give credit to low and middle income neighborhoods. The outcome of this program is kind of a mixed bag. Some people argue that it does provide credit to people, what it was designed to do. Other people claim it does so in a predatory way. Where is credit access in Biden’s agenda, especially given the need to restart the economy?

I can give you a concrete example: the PPP program. A lot of the ideas that are in the current version of the CARES Act and the rollout of the PPP are consistent with the Biden’s COVID relief plan. PPP was quite similar in the sense that a lot of a Latina, Latino, and African American businesses were shut out. The money ran out within two weeks of the PPP being open in the first iteration, right? So why is that? That is because of redlining. That is because of racial discrimination and the big institutions. Big institutions are the ones that were able to get these loans, process these loans and get them out quickly. So this actually led them to being at a big disadvantage from the very beginning. But even before that, if you look at Federal Reserve Bank of New York data on small businesses, by the race or ethnicity of business owner, black and Hispanic businesses were already in trouble. I’m going to get the magnitude right, but probably not the exact point. Let’s say 55% of African American businesses were considered somewhat in dire financial trouble before the pandemic, largely, again, because of them being shut out of the regular access to credit. And for Hispanic businesses, I think this is closer to 49% or so now. This is relative to about 25% of white businesses that were already in trouble. So, if they were already in trouble, and then you exacerbate this by really vesting this program in large financial institutions that have a history of racial discrimination against African Americans and Latinos. This really was a bad formula. So they tried to correct it in the next round, the second round of PPP. So they kept the window open for these firms, gave them a day or two ahead of the others to try to make up for that.

I think that the administration is trying to make sure that the smallest of these banks, and the smallest of the borrowers actually get access to this kind of funding. It’s a general principle, they’re trying to shore up access to credit on both sides, the supply side and on the demand side, because African American business owners don’t even want to go to regular banks, because they have this history.

One thing I’ll just say as an aside: I’m really worried about the PPP program. For bank funding, or SBA funding that is negotiated through banks, you need two years of financial statement. And if we’re talking about the newest firms, they typically don’t have that. And why should we be concerned that the newest firms didn’t have access to credit? Well, that’s where a lot of our innovation comes from, our newest firms, an innovative way of doing things or an innovative product.

Something related. Mian, Staub and Sufi argue that GameStop is just first part of a bigger problem, which they call the “saving glut of the rich”. There is excess saving which remains in the financial sector, the financial sector has lost its ability to channel savings to investments. Is there any broad idea to regulate, if any, how the financial markets operate?

Well, first, the GameStop issue came up after the transition team finished his business. But to your broader point, that is what the agency review is partly for, to review policies and practices. And because there was an overarching theme related to racial equity, that would be one of the areas that I think we could anticipate having a look at. If you’re talking about worker empowerment, you’re talking about making sure that people have access to the American dream, that’s going to be a part of the conversation. It might be too much access to the American dream or not enough information. I mean, we’re still learning about who those day traders were who the the Reddit folks were, right? I think it’s safe to say now that they were not 100% teenagers sitting in a basement banging away their parents are retirement funds. So I think that there’s a lot to learn there. But I agree with Atif, savings are no longer intermediated in the way we expect.

In capitalist society you need to get rid of some of these barriers that you and I were talking about. [Getting rid of] discrimination could help with getting savings to some of the best projects. I’ll give you another statistic that supports this what a Atif and his co-authors and I are saying, you know, I work on innovation. Only of the founders who received venture capital are women, and only 1% are African American and 0.2% are black women. So that that is a stark example of the best projects not going to the best people. Because if we use other metrics, like pitch competitions, for example, you have more sprinkling of investment to these farms that deserve a sprinkling of this kind of investment funding. So there’s a lot more to do in that regard to make sure that that the VCs are better stewards of the capital in their firms. If you diminish discrimination, you will start seeing some of the best uses of the savings. If you’re not doing that, you’re truncating the possible investment. We’re beginning to see some of these stories, like Fyre Festival you remember that that was based on an app; there were so many parts they didn’t try out, from the documentary that I saw. So I’m saying that if you asked all the questions that you ask of black and brown and women entrepreneurs, founders, if you ask all those questions of everybody else, you might get some better results. Or maybe you stop asking some of the crazy questions that you ask them, and ask the real questions in a genuine way. And you might be able to invest in a way that is normal for everybody. Discrimination creates some of these distortions.

We talked a lot about regulation. Part of my personal research is monetary policy. The Fed is a different object compared to the other agencies. Can give us a sense on how the transition team worked in terms of the inflation and employment mix, both in the short and the long run?

Let me let me start by saying this, that average inflation targeting (AIT) monetary policy stance was adapted in late August, it was announced at Jackson Hole conference. How long does it take for everybody to understand whether we’re talking about households or bond markets, to understand what that actually means? They’ve been doing a lot of refinement. Whether we’re talking about Jay Powell or we’re talking about the presidents of the regional Feds. They’ve been doing a lot of refinement of what AIT means, and the kind of commitment they think they’re making. We still have to better understand how it shapes our inflation expectations, and it depends on which inflation expectations you think matter. If it’s the bond market, or whether you think it’s households; it’s going to take time for us to really understand how the policy is going to play out.
Some are afraid of the economy running hot, and there’s no threat of it running hot. I think we’ve hit 2% twice in the last 10 years [very close: FRED data, Editor’s note]. There was this kind of talk in the 2008 recession. I just think that there is not an appreciation for how the economy has changed since the last recession: supply linkages, for example, have fundamentally changed.
So anyway, I think that there was a lot to try to understand from the very beginning, when we were doing our work, and I think we moved on from the three days of fighting about the minimum wage – on Twitter – to fighting about this [inflation].

What was the result?

Well, I think that the Biden administration is pushing back on Larry Summers and Olivier Blanchard. I don’t see the kind of inflation that they’re talking about being a real threat, and certainly not a sustained threat. Maybe in the short run, just like we had short run supply constraints for toilet paper and for hand sanitizer, but the economy adjusted, and you can find those things now. So I think that the inflation worries are overblown, just like they were in the last recession.

So you don’t have an inflationary pressure on the price of real goods, partially because it’s absorbed in the financial sector. There are added concerns that might derive from that.

That’s certainly true. But I think the other thing that is being underestimated, and this is why I am saying that lived experience just matters so much: is a lot of analysis seems to be coming from the upper branch of this K shaped recovery. You, me and our friends, right here, who can stay at home, who are possibly refinancing or buying homes, that thinking is very different from the thinking that is guiding where the marginal propensity to consume is a lot higher. So I just think that that we’re thinking about the wrong kind of runs on things and where you could see inflationary, probably won’t. Let’s say, with respect to computer chips, firms are instituting delays, rather than raising prices. The consumer is the one who will have to absorb this, but it’s not going to be seen in inflation data. It might be seen on customer dissatisfaction data, it might be seen on ratings on Yelp.

Following up on the K shaped recovery. Was inequality part of the discussion when the transition team was debating the personnel and the policy within the Fed? Or is it something that is still left to the fiscal side, to the Treasury?

The agency review teams don’t really have influence on independent agencies. We can talk all we want, but you know, they’re independent agencies. But I will say that you’ve heard, everybody has heard, about how they would like to address inequality. So I think it certainly was ever present and are thinking about the economy.
If you if you were paying attention to Twitter for the six months before I got on the transition team, you know that I was talking about inequality. And this the same is true for a lot of people who were on there as well. People who represented entire think tanks who are setting inequality at their core. Heather Shea used to be president of the Washington center for equitable growth. That is based on the work of Emanuel Saez, Gabriel Zucman and others. So, even if it wasn’t stated as explicitly as climate or racial equity, it was there. And it still is there. The literature on what inequality does to economies, whether we’re talking about new recent literature, or let’s say, the literature of the late 90s to early 2000s, how it undermines the social fabric and social cohesion. In a pandemic, it’s even more imperative to think about inequality.

Thank you. Anything else you want to add?

I think that’s all, I think that they are really well set up there, the administration is really in a good position to take off and to do a good job for the American people.

So the big binder has been given to the administration.

I’m done. I don’t know what other people are doing. But I’m done.

Lastly, I think it’s important to tell people that you were there as a volunteer, right?

Yeah, it’s definitely a volunteer. They tell you that you can expect to work about 40 hours a week, and you can’t take a leave of absence from your job, you can’t use the time that you would be using on your regular job. So we can just say that my weekends and evenings were really, really busy.

So now you go back to your academic work. Are we going to see you in both in East Lansing and in DC?

I am just catching up on a lot of research, I have several papers that I’m working on and excited about all of them. My last conversation when I was leaving Washington, when I was at CEA with Janet Yellen, who at the time was the vice chair of the Fed. And the question I posed her was this: What have we missed in macro? What should we be taking back as macroeconomist? What are the big questions that are still outstanding, that we still don’t understand from the recession?
And she and I talked about some of the issues that we’ve already talked about, say, supply leakages. Given the work I do on innovation, I really think that macroeconomist should scrap all of the models, and use machine learning to figure out what the new relationships are. And then back out the theory from the new relationships. There’s a meme going around among to kind of make fun of macro, you know, what is it? What is its role? I think we have to rethink what its role is, because these relationships have fundamentally changed. And I think that AI can help us understand this, because we’ve got so much data that we can leverage. And I think this is what machine learning is good for picking out the correlations, the most important ones.
So, I’m finishing up a lot of papers. I was hoping to finish them up before I started working on the transition team, but I’m finishing them up now. So I appreciate the opportunity to do that.

Good luck with that. And thank you for your time.

Thank you so much for asking me and thank you for the great conversation.

Giacomo Romanini

[image cover: IMF]