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Interview with David W. Mullins Jr.

September 1, 1991

Interview with David W. Mullins Jr.

Even though the The New York Times has billed him as one of the "new intellectuals at the Fed," new Fed vice chairman David Mullins is no slave to academic ideology. "I don't adhere to a doctrinaire, rigid, simple theory of how monetary policy is supposed to work," he says in the following interview.

"The real job of doing monetary policy, as opposed to writing about it, has to do with the pragmatist viewpoint and the managerial process of trying to make judgments with incomplete data," he says.

Although a newcomer to the board of governors, Mullins has already established himself as a central player in the policymaking process. His immediate influence is owed, in part, to his tenure as assistant secretary of the Treasury for Domestic Finance, 1988-90, where he helped shape recent administrative policy designed to address the savings and loan crisis. Upon leaving the treasury department, he received the Alexander Hamilton award, the department's highest honor.

Mullins also served as associate director of the 1987 Brady Commission, which was formed to make policy recommendations following the October 1987 stock market crash.

Prior to joining the treasury department, Mullins built his intellectual reputation during 14 years of economics teaching at Harvard, where he served as faculty chairman of the corporate financial management program. He received a bachelor of science degree from Yale University, a masters degree in finance from the Massachusetts Institute of Technology (M.I.T.) and a doctorate in finance and economics at MIT.

The Federal Reserve System has made a strong first impression on Mullins, who likens the System's decentralized, yet unified, structure to that of a fine university. "If you have a career such as mine in the academic world of finance and economics, you always look with respect on the Federal Reserve—even more so once you're here."

Region: In a speech you delivered earlier this year, you said that the U.S. economy was poised for recovery in the spring and it would not be "an overly robust upturn." It is now July, is that still how you see the recovery?

Mullins: Yes. I would define "overly robust" by the standards of normal recoveries. Normal recovery in the first year after a recession means an average 6 percent or 6 1/2 percent real growth in GNP. We're right at the turning point now and it's hard to tell what trajectory will emerge. But I think it's fair to say, with the condition of the economy, we will be less robust primarily because of a number of moderating influences such as the conditions of state and local governments, the fact the dollar is a bit higher, which in time will reduce the growth in exports, and the condition of commercial real estate as well as lingering concerns about credit availability. Consumers are not heavily indebted, but they still have higher debt ratios than they did coming out of past recessions. I think all that adds up to a healthy recovery year but not quite the 6 1/2 percent that we would get on average.

Region: When you first joined the Federal Reserve, one Fed watcher noted that you might well be a "mole" for the Treasury since that's where you worked previously and have obviously developed strong loyalties. Did you sense that concern when you first arrived at the Fed?

Mullins: No, I didn't. We have a good relationship with the Treasury, and Manuel Johnson had come over before, of course, from the Treasury. Secretary of the Treasury Brady has good a relationship with Chairman Greenspan as well as the other governors, so I guess I didn't notice any concern. Of course, I had known the people here for some time. I worked with them closely when I was with the Treasury and had known a number of them for a number of years going back to the academic world and also to the Brady Commission world, so I think that's more of a fictional concern and less a reality.

Region: Speaking of the Treasury, it's been argued that the Treasury should have a seat of its own on the Fed Board. Does that argument have any merit?

Mullins: The Secretary of the Treasury used to sit on the Board of the Fed a number of years ago, but I think it's useful to have them separate. We have adequate political accountability through the appointment of the members of the Board by the president with confirmation by the Senate and with close consultation. I think history has shown that it's useful to have the central bank independent from the government, and we've had that system for a number of years now. It's worked pretty well, and so I would not support Treasury having a more direct role.

Region: At the Treasury you were deeply involved in work on the future of the financial services industry. Has that interest and work carried on to the Fed?

Mullins: Yes, and on a number of different fronts. The most obvious is the banking reform legislation. I was head of the project at Treasury, and then when I came over here the people at the Fed were also working on the same topic in consultation with Treasury. Our staff spent a lot of time doing the background work that went into Treasury's study. We have a rich and deep staff compared to a lot of the other departments in government so we were heavily involved there.

The Board of Governors and the presidents were involved as well. Governor LaWare, whom I would view as the leader in this effort, ran a project with governors and presidents getting ahead of these issues of banking reform. Then we at the Board spent quite a few hours and days and weeks debating the issues, and the chairman was involved in that process. Governor Angell brings a lot of input from his perspective; Governor Seger did as well. She had been, of course, a banking state supervisor in Michigan, which a lot of people had forgotten. So she had an interesting perspective, and I think Mike Kelly did as well.

The perspective I brought was a policy perspective both from the academic world and from the practical world, at Treasury and the thrift legislation, and some insight also into the political process since I was the point person on the Hill for Treasury during the thrift legislation. So I think we've all been heavily involved in it.

It is true that the final decisions on the legislation were made by the administration, not by the Federal Reserve, and I think we're pretty pleased with the package. We had some concern about certain components of it, but in general we thought it was a good package.

Region: Michael Boskin [President Bush's chief economic adviser] once asked you if you were a monetarist, and you told him you were a pragmatist. What does that mean?

Mullins: It means I don't adhere to a doctrinaire, rigid, simple theory of how monetary policy is supposed to work. It means something else as well. I think many of us pretty well agree on what you're supposed to do in making monetary policy—help determine interest rates and monetary conditions so that money and credit grows at a fairly stable rate, fast enough to allow the real economy to grow approaching its full potential but not fast enough to engender inflation. And there are a lot of simple statements of what we should do; the problem is it's extraordinarily difficult to do it.

For quite a few years now the problem in a lot of central banks has not been the intellectual understanding about what you are supposed to do, but the practical pragmatic management—the difficulties in carrying out that policy in a complex world financial system.

Much of the job has to do with looking at all the indicators and trying to get, in a very practical, pragmatic business judgment sense, a notion that you're moving in the right direction, that the general policy is adequate for growth but not so easy to inspire inflation. Indeed in this environment we continue to want to have a policy which puts a downward thrust on inflation.

So it seems to me that the real job of doing monetary policy, as opposed to writing about it, has to do with the pragmatist viewpoint and the managerial process of trying to make judgments with incomplete data and look ahead six months to when these policy actions will actually have their full effect on the economy. That's one of the things that attracted me to the position, as opposed to being an academic or someone else who takes a very strict and rigid formula-oriented, theoretical approach to the job.

Region: When you first arrived in Washington after having taught 14 years at Harvard, you were described by one journalist as content to "blue sky" ideas while other officials concentrated on the politically possible. Do you agree with that assertion and have your years with the Treasury and now the Fed changed that implied label of political rookie?

Mullins: No, I wouldn't agree with the assessment. I thought those sorts of assessments were generally floated by the people who were opposed to the thrift legislation. Those opponents had been very successful for quite a number of years in defeating any attempts to require S&Ls to have real capital standards and the like. So this was their way of coming after us.

We were successful in getting the legislation; indeed, I was the point person on the Hill involved in shepherding the bill through Congress, doing all the negotiations and the markups and the like. Of course, I had been involved as a consultant in quite a few practical situations before, in fact, I had focused on fairly large, important problems as a consultant. So not only did we do the thrift thing at Treasury but we also were involved in a number of other political initiatives and practical activities. Indeed I managed a pretty large group there as I was also the person who issued the bonds every week. We had to decide what to issue and how much to issue.

Region: The importance of competition in the marketplace seems central to the rationale you give on your various policy positions. Is that correct?

Mullins: Yes, I think it is correct. The experience in eastern Europe and the Soviet Union is actually an extraordinary experiment of trying to take an approach that is not based upon markets and competition and perhaps is one of the most dramatic failures of any such experiment in history. And the outcome is I think fairly clear: Markets work. They don't work perfectly and indeed you need certain regulatory processes and other requirements to ensure markets work safely and soundly. But market-oriented approaches have proved, especially as the world has gotten more complex, to be far better than the alternatives.

Region: Your answer leads well into the next question. In your Senate confirmation hearing, you said that we ought to let the dollar be based on economic fundamentals rather than trying to manage it. Would you expand on that idea a little?

Mullins: First is the issue which comes up periodically on whether we should do intervention to try to affect the value of the dollar, and as an economist I think the record is not so good on that. There may be times in which there are disorderly markets and intervention is useful. More generally, I think we should focus as a central bank on doing the best job of producing good economic fundamentals—getting rid of inflation, therefore allowing interest rates to settle down to sustainably low levels and growth to rise. Low interest rates will also lead to growth in productivity and employment and higher standards of living, and I think focusing on those fundamentals the dollar will follow.

Moreover, it has been popular in some circles over the recent past to suggest that our route to competitiveness in the United States is a lower dollar, a constantly depreciating dollar, and I think that's sort of fool's gold. I think the way to be competitive is again to focus on fundamentals and on the efficiency and effectiveness of businesses here, as well as our management processes. Also we must increase productivity and deal with improving our education system. I think that's the real route to competitiveness.

Region: Regarding personal saving. You said saving is learned behavior and we need to give people the incentive and to teach them how to save. What did you mean by that?

Mullins: I think savings rates may be a cultural phenomenon. People get used to saving or not used to saving. We got out of the habit for a number of reasons. Of course we've had a long expansion. We've also had credit availability expand dramatically; auto loans went from a maximum of three years to five years. That's quite a big difference. What I was talking about is one of the reasons real interest rates are high is that we have a large deficit and a low savings rate compared to some other countries. We know what to do about the deficit, doing it is again another matter. On the private savings side, I think there also are things we can do. The academic research on trying to increase private savings through tax preference programs, IRAs and the like, is not exactly clear on whether that works. I think the reason it doesn't work often is because it's done in the wrong way. At Treasury I helped design an administration proposal for savings, a family savings plan like an IRA. But you wouldn't have to wait until retirement; you would just have to wait seven years, and there was tax preference and the like.

We need a stable system which people can depend upon for a certain period of time. When that happens, the private sector will market to it as they started to do to the old IRAs so that mutual funds, savings banks and insurance companies will advertise and try to get people to save. After a number of years what started to happen with IRAs is people started to feel guilty if they didn't put away their $2,000. Your brother or sister would say: Have you put your $2,000 away? You got used to putting away your $2,000.

I think we have the potential to gradually raise the savings rate of the country, but tax preference programs need to have the characteristic of stability. It cannot be something we're going to change every year, and it cannot be a windfall like the all savers one-year program. It may not be easy to do, but I think it's worth trying because the only way we're going to do it is to encourage Americans to once again get into the habit of putting away so much each year.

Region: You worked for over two years on the Brady Report on the stock market crash. Some of the report's recommendations are in place. What do you think was the most important outcome of that work?

Mullins: Working on the Brady Commission was an interesting experience for a couple of reasons. First, it was the first time I worked closely with Chairman Greenspan, and I got to see how the Fed responded in a crisis situation. One of the things we did was to make a number of proposals, all of which were seen as politically unrealistic at the time and about all of which have been enacted. Virtually all of our recommendations have since been implemented in one form or another. I still get letters from people saying our proposals are working pretty well, and they're sorry they were so opposed.

The Brady Report was interesting in terms of educating people on the nature of markets today. Before that report people had all sorts of hypotheses on what was going on during the crash, the foreigners were selling stock or something of this nature, and so the report was useful in just educating the world on how the markets work today and the relationship between stocks and futures markets.

I think some of the things that have been done, like the circuit breaker mechanism that's in place, have worked better than we could have hoped. And nowadays it's not uncommon for information to hit the market and cause an immediate down draft, but it doesn't then go into an uncontrolled free fall. Instead, there are some adjustments that take place. People have time to check their wallets and assess whether they want to be buyers or sellers, and then the market just goes on from there, sometimes it continues down in an orderly manner, sometimes it goes back up.

In the end, running the Brady Commission was not only an interesting intellectual and managerial experience, but it also gave me insight into the Federal Reserve, which is one of the things that engendered the interest to come here later on.

Region: You've been widely published in the field of public finance. Now with your public policy experience one would expect that a book might be on the drawing table.

Mullins: My drawing table's pretty full unfortunately, and I haven't given a lot of thought to that. But one of the things you get out of doing this for a period of time is a lot of insight into problems that you would not get from studying them very carefully and diligently in an academic institution. And so down the road as I leave it might be worthwhile to see if I can draw upon some of that experience and write about it. It's difficult though to think I'll be able to find the time until I leave.

Region: It's been over a year now since you've been at the Fed. What continues to surprise you about the institution?

Mullins: Well, I think compared to a lot of other institutions, the first thing is the depth and quality of the staff. We probably have 200 economists. I don't know if anyone should have 200 economists. Certainly Harvard didn't have 200 economists. But this is an extraordinarily diverse staff with expertise over a wide range of issues and that makes my life much easier. Even coming from Treasury, where I think the staff was a lot leaner, and from Harvard as well, where I could hire research staff and faculty, this has been a real joy. I still think this has to be the best staff I've been associated with.

The second thing is just the nature of the institution—its breadth and the stability of the institution allowed for by its decentralized structure. There are a lot of different institutions within the Federal Reserve, even within the Board of Governors, yet it all holds together and has an institutional identity and a culture. It's one of those few institutions in the world which is dedicated to the pursuit of excellence but which also has an impact. It's in some ways like a fine university, but there are many fine universities and there's only one Federal Reserve. This is one of the reasons, if you have a career such as mine in the academic world of finance and economics, you always look with respect on the Federal Reserve—even more so once you're here because' you learn so much more about the Fed than what you imagined.

I think the System is designed quite well to be an institution with an identity and a clear purpose that is able to act decisively, but one which is also very rich and includes a variety of different points of view and expertise. So I think the richness and quality of the institution as a whole is the thing which I continue to be surprised by.

Region: The Fed is often given as the model for central banking in the western world. Of course it's a less than perfect model, it could be improved. How would you change it, better it?

Mullins: From the expert knowledge of one year's tenure, I would not have any strong opinions on how we should change. I have a healthy respect for institutions that have survived and prospered and that have worked effectively during very dramatic changes in the environment and changes in the moods of the constituencies and the like. And the Federal Reserve is one of the few institutions around which really works and has worked for a long period of time. I think it's useful as you stay here to try to understand why it works. It certainly helps in designing other organizations. Indeed one of the things I had to do in the thrift situation was to design some new organizations. We knew how difficult that would be. This notion that you can easily put together organizations and that you can draw them on the blackboard and they will somehow spring up as effective organizations, is now impacting some of the banking reform. I think it's quite a difficult thing to do. So I enjoy working at the Fed and learning about it, and perhaps through time I may have some marginal suggestions, but I think the proof is all around us that the design is pretty robust.

Region: For those who try to understand which economic indicators the Fed officials are following, you've said that price and labor cost indices are important. Do you hold with that and why?

Mullins: Yes, they provide insight into inflation. Indeed, for some of the most deeply rooted sources of inflation we have, labor costs and the like, we do not have good market indicators like those for commodities. Market indicators are usually better indicators because they send clear signals as to what's going on in pricing. But unfortunately something like labor is probably 60 percent to 70 percent of GNP, whereas commodities is 5 percent to 10 percent of GNP. Also in terms of the persistence of inflation and the deeply rooted nature of it, those are problems within labor markets and they, as well as many other components of the overall price level, are only seen in these indices.

An interagency effort which was spurred by Michael Boskin over at the White House is to try to increase the quality of the economic data. With our interest in inflation, I think we need to try to improve the indices and also to try to understand them, and I think we're not going to be successful in simply ignoring them and relying solely on other measures like commodity prices.

Region: I understand that with other family members you own a farm in Arkansas. Is farming a strong interest of yours?

Mullins: I think it would not be fair to say it's a strong interest. That's one of my ties to Arkansas. I grew up in Arkansas and my family grew up in Arkansas, and so I enjoy having that tie. The way we got the farm is my father—when he was getting his doctorate up at Columbia—wasn't that confident in the employment prospects within universities and so felt he'd like to have something to fall back on. He bought, for taxes, this land in the Mississippi Delta in Arkansas and cleared it himself during the summers. And it is one of the things that brings me back to Arkansas, although I don't think I would really qualify as a farmer.

Region: What kind of farming do you do?

Mullins: Primarily cotton and soybeans, and we may get into the rice program. It's very good soil and it's still a fairly small place. Most of the farms there are much larger now. There are very interesting technology and management styles these days, in which huge machines farm thousands and thousands of acres. So if you have a smaller one like we have, you can't really farm it yourself. You get someone to do it.

Region: You're often described as quick-witted and humorous. How do you plead?

Mullins: Hey, I would plead not guilty on that one but I'd have to think about it a while. I think given the number of difficult situations we have to deal with I think it's useful to have a sense of humor about you.

Region: If you're away from your office, we understand, as an avid sailor, you'd be somewhere on the water engaging in your favorite sport. "Avid" sounds serious.

Mullins: I think avid really overstates it. It also suggests some expertise, which I would give no credence to as well. In fact, I like to do a variety of things and am not really dedicated to any one avocation. I sail a little although I haven't been able to do much of it down here, play a little tennis and a little golf, run a little. So I prefer to do a variety of things and then I have an excuse for not being very good at any one of them.

Region: This next question comes from one long-standing bachelor to another long-standing bachelor. I understand that you're about to change that status of bachelorhood.

Mullins: Yes, and I think now that I've been working in the government for a while I feel poor enough so that I can take that step. It's been a long time but I think I'm about ready.

Region: This is my last question. You were a leader at the Fed and in the push for easier credit. Why did you take that leadership position?

Mullins: I wouldn't quite plead guilty to that one either. The situation as I saw it in my first few months at the Board was that money had started to grow more slowly and, indeed, in some months the growth was below our lower end target range which the FOMC had set. So, in a slowing economy with recession risks ahead, I thought it was not wise to be tighter than we had intended and argued for a return to M2 growth which had been intended and agreed upon. What was going on, in part, was a shift in the relationship between interest rates and money growth. We expected the money to grow at a faster rate, but it actually grew at a slower rate due to, I think, credit constraints and other sorts of things. I knew that especially as we went into a recession, my viewpoint would be seen as an argument for easing, but I wasn't arguing for easy money but rather a return to the policy in terms of money and credit growth that the FOMC had agreed to. Moreover, I believe this position was fairly widely shared within the FOMC.

In general, I'm not a big believer in aggressive countercyclical policy actions by the Fed and more a believer in trying to get money and credit growing at a steady pace sufficient to allow the real economy to grow to its potential but not sufficient to engender inflation. One way to present my position is that I was arguing for a technical adjustment to pursue and maintain the current policy rather than any fundamental change in policy toward easy money.

Region: Thank you, Mr. Mullins.