Second of two articles

Arthur Rolnick, who will retire in July after 40 years at the Federal Reserve Bank of Minneapolis, believes the economic work he and his colleagues do is an important “tool to help better civilization, better the United States [and] better world economies.”

Through taking a few economics classes, “I saw how the math could help me understand the real world,” Rolnick, the Minneapolis Fed’s director of research for the past 25 years, told MinnPost. “I was always interested in public policy and I realized ... whether it was issues of poverty or business cycles or unemployment, economics had something to say about how we design public policy.”

On Monday, in the first part of his interview with MinnPost, he credited his colleagues at the Fed for raising concerns about the “Too Big to Fail” philosophy as far back as the late 1970s.

Here is the second part of an edited conversation with Rolnick, in which he also talks about the impressive return for society when it invests in early childhood education.

MinnPost: Has the public's understanding of economics changed?

Arthur Rolnick: When I started at the Fed, very few people knew anything about the Federal Reserve. Starting with ... the severe recessions in the in ’80s with interest rates up to 20 percent — and what Paul Volker [Fed chairman, 1979-87] went through to get inflation down leading to many years of healthy growth — it put us on the map. And media coverage on business expanded dramatically over this period.

While there is still a lot of misunderstanding about what the Federal Reserve does — and comments you hear from Congress reflect that — people know about the Federal Reserve. They know we’re the central bank; they have a sense that we influence interest rates and the economy. Increased awareness is a double-edged sword ... How sophisticated that knowledge is, is questionable. The Fed gets blamed for things that we have nothing to do with, what we’ve done or what our powers are.

MP: What makes economic research so interesting to you?

AR: I started out as a mathematician but was frustrated because I couldn’t see how I could use it in the real world until a mentor encouraged me to take few economics classes. I saw how the math could help me understand the real world. I was always interested in public policy and I realized ... whether it was issues of poverty or business cycles or unemployment, economics had something to say about how we design public policy. So I view economics as a tool to help better civilization, better the United States, better world economies, and it gave me a higher mission to strive for.

I came to the University of Minnesota for my Ph.D. because Walter Heller [chief economic adviser to Presidents Kennedy and Johnson] was there. Walter was a liberal Keynesian economist, very influential in the idea of using economics to influence public policy. He was also a good friend of Milton Friedman at the University of Chicago. And he’d bring Freidman in, and he would also talk about using economics to influence public policy, but from a much more conservative point of view. So I got a great education, and I’ve drawn from both sides to try to improve public policy.

MP: What will you be doing at the Humphrey Institute?

AR: Over the last eight or 10 years, I’ve gotten very interested in the economics of early childhood education. I realized economics had a lot to say about both that field.

There’s research that shows if kids are far behind in kindergarten, on average they can’t catch up,  and they are more likely to drop out. If they drop out of high school ... a high percent of those kids are not very successful in our society and a high percentage end up committing crimes, with all the problems that brings. But if you get kids ready for kindergarten, they’re much more likely to graduate from high school, get a job, pay taxes ...

The benefits are huge, not only to the child but to society. We did some calculations and found a 16 percent inflation-adjusted annual return, if you invest well in high-quality early-childhood education. That research influenced some business people to create the Minnesota Early Learning Foundation, which has raised $20 million. We’ve created a parent-awareness rating system for early-childhood ed program and opened up a pilot school in St. Paul with scholarships for at-risk kids and parents.

What I’m hoping to do at the U is raise another $15 million to $20 million to do a pilot in Minneapolis, and something similar in my hometown of Detroit. There are other cities around the country very interested in these ideas as well.

I also want to promote research in early childhood development. Neuroscientists are just scratching the surface. But they’re finding that much of brain development occurs from age zero to 3 and that environment matters. If you look at families in poverty — a teenage parent raising a kid where neglect is a big issue — we know how to fix that. We know with mentors we can make that environment much better, but we need more research. We need to know how this occurs and how best to intervene.

MP: Have you read "Freakonomics"?

AR: I haven’t read it cover to cover. I’ve read bits and pieces. I wouldn’t call it the deepest economics. There is not fundamental economic theory underlying it. But I think [co-author] Steven Levitt is very good at using basic economic principles to explain some real-world experiences that economists can explain. He always gets me thinking when I hear him talk. I think he’s a very clever, very imaginative economist.

MP: What are you reading now?

AR: My wife gave me this amazing book, written by a Bloomington cop, Richard Greelis, called “Cop Book.” It’s an incredible read. He’s a very good writer, and he gives you another side of this world, this life that you normally don’t see. And, of course, I’m interested in the economics of crime because that gets into the economics of early childhood development.