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ECONOMIC COMMENTARY
EZRA KLEIN AND JASON FURMAN What the Heck Is Going on With the U.S. Economy? A booming economy or spiking inflation? Original article: https://www.nytimes.com/2022/02/08/opinion/ezra-klein-podcast-jason-furman.html OR Original article: https://www.nytimes.com/2022/02/08/opinion/ezra-klein-podcast-jason-furman.html?showTranscript=1 Burgess COMMENTARY Peter Burgess | ||
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What the Heck Is Going on With the U.S. Economy?
Jason Furman helps me understand what matters more right now: A booming economy or spiking inflation? Tuesday, February 8th, 2022 [MUSIC PLAYING] Ezra Klein I’m Ezra Klein, and this is “The Ezra Klein Show.” [MUSIC PLAYING] So I’m going to be honest about my motivations for this conversation. This one is borne of frustration. I’m frustrated covering the economy right now. I’m frustrated by the conversation around the economy right now. There’s this palpable desire for it to be just one thing. For pundits like me, for analysts, for economists, for politicians to be able to wrap it in the comfort of a single narrative. It’s a good economy. It’s a bad economy. But no, no, it isn’t. And we don’t like that. We don’t like that it’s a confusing economy. We know how to talk about booms, like in the ‘90s. We know how to talk about busts like after the ‘08 financial crisis. We know how to talk about normalcy, about stagnation, a bit of progress, a bit of backsliding. What we don’t know how to talk about is contradictory extremes coexisting together, but that is the economy we have right now. An economy that defies a lot of our models. An economy that surprised a lot of our forecasters. Last year, the US economy grew 5.7 percent, the largest annual increase since 1984. Since 1984. Unemployment plummeted. Workers, and especially low-income workers, they saw massive wage gains. New businesses formed at record rates. Poverty fell below prepandemic levels. It’s wild. Savings skyrocketed. Bankruptcies are way down. This is great news and not expected, not inevitable and definitely not to be taken for granted politically or economically. Although, many are sure as hell trying. But then there is inflation — also real. Year and year inflation is running at 7 percent, the highest rate in decades. It’s going up now faster than workers’ wages are, at least for most workers. And it’s not just price increases. It’s shortages of goods, of workers that was supposed to be temporary. It’s empty shelves, shipping delays, long lines, just a sense of worse service and a worse experience in the economy. Obviously, a lot of that is mediated by coronavirus. But how much? How much? And I think it’s important to say this — that most forecasters, and economists, predictions got this wrong. The forecasts and the market thought inflation was going to be low. They thought unemployment was going to be a lot higher. So new thinking is needed and it has to begin with a confrontation with the economy as it actually is, which is why I wanted to have Jason Furman on to talk about this. Furman is an economist at Harvard University. He was chair of Barack Obama’s Council of Economic Advisers from 2013 to 2017. But more than that, there are two reasons I thought he was the right guy for this conversation. First, he was closer than most to calling the economy right. He certainly took the risk of inflation more seriously than most did. And second, he’s been far better than most at admitting and tracking the complexity of the economy — its fundamentally confusing and uncertain and contradictory nature right now. So this is a wonky conversation. I just want to skate on the surface of this thing. And I also want to note it was taped before the new data from January, which just showed a huge amount of new jobs added, so I think it fits what we’re talking about here quite well. But if you’re here, I think wonky economic conversations are probably what you like. So buckle up, buttercups. As always, my email ezrakleinshow@nytimes.com for guest suggestions, thoughts, recommendations of things I should read, or listen to, or watch. Here is Jason Furman. [MUSIC PLAYING] Jason Furman, welcome to the show. Jason Furman Great to be with you. Ezra Klein So how do you tell the story of the U.S. economy over the past two years? Jason Furman It’s a crazy story. When Covid hit, the economy just collapsed. A very different type of collapse than you would normally get in a recession, something more like a natural disaster. At the time, the big question was, how long would this last? Would it be like a natural disaster, where you just pop right back once you contain the disaster, or would it be more like a financial crisis, which tends to have very lingering effects? We’ve snapped back a lot further and a lot faster than I would have expected when, Ezra, you and I started talking about this when the pandemic hit. We have an amazingly low unemployment rate after such devastation a year and a half ago. Ezra Klein If I go back to that conversation we had — now, it feels like 1,000 years ago — but if I go back to that conversation more towards the beginning of Covid, where we were talking about what would happen to the economy, if you had asked me where we are in January of 2022, I would have guessed a significantly higher unemployment rate. I would have guessed significantly lower wage growth and I would have guessed significantly lower inflation. Which would be to say, I would have guessed what most forecasters guessed, what the Fed guessed, and what turned out to be wrong. So how do you understand the misses in our predictions over the past couple of years? Jason Furman Yeah, and Ezra, that’s what almost everyone would have expected. I think there are two sets of misses. And I’m not sure of the exact ratio of the two. The first set of misses was that— by the way, we’re not out of this. We’re really deep into it right now. But in terms of people’s economic behavior, we are mostly out of it. People are mostly spending as normal. They’re living a normal-ish life, or at least they were a month ago. And I think they probably will a month from now. So when I say out of it, I’m not talking about out of the human tragedy. I’m talking about out of it in the very narrow sense of the economy. So I think one miss was that this had more in common with a natural disaster. That when the virus came, it would derail activity. When the virus either left, or some of the dangers of the virus, or people got used to it, that that would come back. The second part of it is the policy response was gargantuan. $5 trillion I did not imagine being spent. And basically policymakers said, yes, there’ll be a recession in the economy, but we’re going to give you so much money that for most people you’re actually going to get more money than you would have made if you had stayed in your job. And so they, in some sense, immunized people from the recession. And it’s probably the combination of these two — the natural disaster-like features plus the enormous policy response — that got us where we are today. Ezra Klein So I want to hold on that for a minute. So between all the stimulus that got passed, some of which was direct transfers to people— like the stimulus checks, the child tax credit, the expanded unemployment insurance, which is now over — some of which was just pumping money into the economy through businesses, through state and local government support, et cetera, the tighter labor market, which has led to a fair amount of wage increases, and the rise in inflation, which was 7 percent year over year in the most recent numbers. What is your guess on whether the median worker is better off today financially than they were a year ago? Jason Furman It depends what you mean by today. If you mean the year 2021, the median worker probably got about $6,000 of transfers and probably lost a couple thousand dollars to inflation, and so, all in, came out ahead. If you’re looking at where that person was just in the month of December and going into 2022, the transfers are mostly gone, but the inflation is still here. So we’re going into 2022 with about 3/4 of workers having wage increases that aren’t sufficient to keep up with inflation and the transfers being in the past. Ezra Klein So you might expect from that that attitudes on the economy are going to get significantly worse. A lot of people have noted — I’ve noted — this difference between what people say when you ask them right now about their personal financial situation and what they say when you ask them about the economy. And people say my personal financial situation is pretty good. I think the economy is pretty bad. You’re suggesting there that those things might be on a path to converging. Jason Furman I think that’s possible. I mean, sentiment is affected by the pandemic. It’s affected by partisanship. It’s affected by all sorts of things outside the economy. But I think the economic data does move it as well. And yes, in December, most households had more in their checking account and less rolling over on their credit card balance than they had prior to the pandemic. But with prices what they are and wages not having kept up with them, those cushions — we’ve been seeing them fall month after month after month. Ezra Klein I’m going to be very honest here about the problem I’m having just even talking about this on the podcast, writing about it in columns. I don’t think I’ve ever covered as bifurcated an economic story as this one. And I genuinely don’t know what sentiment to apply and what weighting to apply when I’m trying to explain it, because some of the data is so good. More new business formation than we’ve ever seen. A poverty rate that fell during this period, which I never would have expected, not in a million years. Genuine, as you know, wage increases. Very high quit and higher rates, which is a good signal that there is at least some worker power, people feeling like they can get better jobs. But then there is this inflation story, which really, really dominates. And as you say, it does — it’s big enough now. I don’t think that you can wipe it away or say that it’s just going to be overwhelmed by wage increases. And yet, the inflation story also — you could imagine reasons why it might be more temporary. And so I’m curious where you fall on that. How do you try to balance both genuinely good news — and genuinely good news I think against a counterfactual, right? It’s very easy to imagine us under-powering the response here and people really suffering — versus the risks and genuine problems we see from inflation. Jason Furman I’m also a little bit confused, Ezra. I don’t have an exact answer to your question, but I’ll try to. First is just glass 2/3 full. A 3.9 percent unemployment rate, workers with this degree of confidence willing to quit, and the fact that wage growth is so fast, and I think inflation probably will come down— I don’t think it’ll come down as much as others do. We can come back to that. Are all a very positive thing. But only one third, because for most people, the most important thing is how much money they have after taxes. And right now the amount they’re getting month after month is lower. When I evaluate the policy response, I think there’s two different questions. One is would I have voted for the American Rescue Plan in an up-or-down vote? Absolutely yes. A lot of what we’ve seen — the amazing things we’ve seen in terms of, for example, poverty overall and child poverty — and we haven’t gotten the data for 2021. I think that’ll be even better than it was in 2020, and that itself was down— is thanks to the American Rescue Plan. There’s then another question, though, which is if I could have redesigned it and cut it in half, could I have gotten 95 percent of those benefits and a decent amount less of the cost? I think the answer to that question is probably yes, too. And so then the question is every bit of legislation is imperfect. Everyone always has the way they could have improved it. How harshly should one judge in that circumstance? Ezra Klein It’s funny to have this conversation with you, because, I mean, we spoke many, many, many times in the 2009 to 2016 period. But particularly in ‘09, ‘10, ‘11, ‘12, there was this constant debate discussion over whether the stimulus then could have been bigger. And the thing that lingered was that we did too little at the time when we could do something. And so we underfilled what then got called the output gap in the economy. And for me, as well as for others, there was a sense of, well, this time err on the side of too much. If you don’t know what’s coming — and you don’t know what’s coming — don’t err on the side of doing too little, because very likely you cannot go back to the well. The idea that the Obama administration had had in 2009 that, well, if the economy’s bad, you can get a lot more — a little bit more passed over time. But there wasn’t a real ability to turn the dials in response to the economic news. And so I think the Biden administration went in and said we’re going to get almost everything we can get and hope for the best. Do you think that was the wrong political bet to make? Do you think that was too much of fighting the last war? Jason Furman I think by March it was too much fighting the last war. In 2020, who knew what was going to happen in the economy? If you went back and said in retrospect the CARES Act was too big, you had no idea how to put together a size. A year later things had settled down more. We’re improving more. And to some degree I think the too large, too small is almost the wrong question. You want to ask, how many dollars per month and how many months? So the CARES Act, which was passed in March 2020, it was a huge amount of money. But the big problem with that was it didn’t last long enough. It was designed for a short, sharp pandemic. Then we had basically no support for the economy. And then we did another round that was a ton of dollars per month and itself didn’t last very long. There’s not really very much assistance going out now when people still need it. So I would focus in the future on the way to not make the error we made in the financial crisis of too little, not make the error here of doing too much. Try to do more automatic stabilizers, things that last automatically as long as they’re needed, come back when they’re needed, but also go away when they’re not needed as much. Ezra Klein So these are things like you have expanded U.I., but only so long as unemployment is above X, or you have a boost to this particular plan, but only so long as wages are Y. Jason Furman Exactly. And in the current circumstances, you might have done it ad hoc based on the number of Covid cases. We had a pandemic unemployment assistance program that if you lost your job because of the pandemic, it would pay you. It’d be really nice to have that back right now. And I’m not, by the way — I think there are people that would have wanted to write — so this isn’t necessarily criticism — but the better policy would have been any time the caseloads are above blank, if you lose your job because of the pandemic or need to leave it because of the pandemic, you can get unemployment assistance. Because you’re always uncertain. You never know how long these things are going to last. You never know how deep they are. And I think you can make errors in both directions, both too much and too little. Ezra Klein Let’s drill in on the inflation. So there are a couple schools of thought on what this inflation is and why we have it. Do you want to just describe as fairly as you can what the sides in the debate are? Jason Furman Sure. One side focuses on what I would call a microeconomic bottom-up perspective, and it tries to explain the anomalous things about different prices. For example, used cars. All the car rental companies dump their fleets in 2020. They needed to put fleets together this year. At the same time, there aren’t a lot of microprocessors and used car prices have gone up. You can then tell other stories like that. From that perspective, these are a sequence of anomalies, most of them caused by the pandemic. And as the pandemic goes away, the anomalies will go away. And there’s a good reason why the freakish price increases, like in used cars, will go away. That micro bottom-up perspective has tended to be more sanguine, has tended to see a slowdown in inflation right around the corner. The second perspective is more of a macro top-down perspective. And it says people have a lot of money to spend. We don’t quite know what they’re going to spend it on. Maybe they’ll spend it on cars. Oh, if there aren’t enough cars, then they’ll spend it on something else. And this will all express itself somehow in prices being higher, because people overall want to spend more than the economy is able to produce. And when aggregate demand is too high, aggregate supply is too low, you’ll see inflation. From a macro perspective, you’re worried that we might have more inflation this year, because labor markets are tighter now than they were a year ago. Inflation expectations matter a lot. They’re higher now than they were a year ago. Wage increases are economywide. It’s not just a used car thing. That will pass through. And that macro perspective would say maybe even expect more inflation in 2022 than 2021. Ezra Klein So I’ve been spending a lot of time sitting in these two arguments in preparation for this podcast. And they have a strange quality to me, where the deeper you dig into them, the less different they begin to appear. So I want to try to do that here. Let’s start a little bit with the more microeconomics. Listen, we’ve got a series of supply chain areas that are having pandemic-related problems. And as people try to buy cars or they try to buy a ton of goods, because they got these stimulus checks, you’re just not being able to keep up in this moment and so you have a lot of inflation. But the supply chain is going to adjust and we’re going to figure it out. I think the key question there is, are you dealing with supply chains that can adjust? Either supply chains that can adjust because the company simply mismeasured or misforecasted demand in the way a lot of other people did or that they will adjust because it is various frictions of the pandemic, disruptions of the pandemic, confusions of the pandemic that have made supply chains rigid. And that as those ease or as companies become better at adjusting to the pandemic — they got better testing policies in their plants, and they understand how to ship in this period, and they make better forecasts about their own demand — that they’ll go away. So where do you fall on that set of questions? That supply chains are the problem here. They are problem-driven by the pandemic and they will adjust. Jason Furman I think people have overstated the supply chain part of this. One great example of that is ports. We’ve seen endless footage of all the ships waiting to dock at ports. We’ve heard all the terrible things about our ports. But our ports are processing nearly 20 percent more now than they were two years ago. That’s a big jump in two years. We would have liked them to process even more than they’re processing, so we are running up against a supply chain problem. But the problem we’re running up against isn’t that our ports have gotten worse at processing things or Covid is shutting down our ports. The problem is actually that demand is really high and our supply chains can’t cope. That’s not the only thing going on, but that’s a lot of what’s going on. I love looking at spending every month on sporting goods, hobbies, musical instruments and books. It’s a strange category, but it’s all stuff no one really needs but we all love to buy. Spending in that area, in real terms adjusted for inflation, is 40 percent above where it was prior to the pandemic. Even an economy not hobbled by Covid is going to have a hard time ramping up production 40 percent if that’s what people want to spend their money on. Ezra Klein But this is what I mean — that when you lay this out, the stories begin to feel a little less different. So as you described it to me earlier, the other story is that we just have too much demand in the economy. We made some policy mistakes. Also it was a quicker snapback. It’s an old story about inflation. Too much money chasing too few goods. And yet, what’s odd about that, if you look — Paul Krugman, my colleague, calculated that overall consumption is up 3.5 percent since the pandemic began. It’s roughly in line with normal growth. But then as you say, just a huge amount of that consumption has moved over to goods. Just a tremendous amount has moved over to instead of you go see a baseball game, you buy a baseball bat. Instead of you go see — I used to go to a lot of shows before the pandemic. I love going out to see live music. I have not gone out to see live music in more than two years. Now, I haven’t bought musical instruments, because I’m not a very musical person. [LAUGHTER] But one could imagine that, yeah, I definitely had the thought that it would be nice to learn to play the guitar again during this period. And so that sounds to me, again, like a story of the pandemic shifted consumption in a strange way. But as the pandemic eases, consumption is going to shift back. I have gotten now into a period, which I take as a sort of measure of things getting back to normal, where instead of not buying tickets to shows, I buy tickets to shows and then I don’t go because the pandemic has gotten bad again. [LAUGHTER] But clearly the next step is I’m going to go at some point. And so you’re just going to have an adjustment backwards. But that’s a place where it seems like you’re still dealing with a pandemic story that has a pretty clear adjustment, whether you think the problem came from the demand side going up too fast or the supply side coming down too sharply. Either way, the causal factor was the same — the pandemic shifting what people wanted and the chains breaking down along that line. And that should, I would think, make you more optimistic. Jason Furman So here’s where the two hypotheses will differ and how we can distinguish between them. And the question is, what happens to prices in the non-freakish areas over the next year? So one mental exercise is what would inflation be if used car prices hadn’t gone up so much and everything else was exactly the same? That’s the micro-perspective. The macro-perspective says what if used car prices didn’t go up so much, maybe people would have had more money to spend on something else and some other price would have gone up. Or to make a prediction over the next year, it would say that service price inflation is going to be faster over the next year than it was over the last year. So yes, the freakish stuff on the goods side will end, but now people will have more money to spend on services. We’ll see more inflation there. And one of the issues is services are so much bigger than goods. So it only takes a one percentage point increase in the inflation rate for services to undo a five percentage point reduction in goods. So that to me is the big difference. Do you think of your story as in everything else being equal, which is the micro-story, or as, yes, you deflate the balloon here, but it pops up there. That’s the macro-story. And the way to distinguish will be to look at service prices over the next year. Ezra Klein But then jump to service prices, because it does not seem implausible to me we’re going to see inflation in services. But it would seem to me to come from a different place than goods. So when we tell the goods story, we’re telling a story about supply chains not being able to produce as much as people want to buy right now for the prices they were buying it before. It’s pretty standard. And on some level, well, we got to fire up more factories, or print more books, or whatever it might be. If you would see service price inflation, I think what — you’re looking at two things. One is that you’re going to have higher wages in the service industry, because workers have more power, or these jobs have become more dangerous, a little less desirable, and in order to attract people to them, you need to pay them more. It’s just a different feel to wearing a mask all day and knowing you can get infected with something from before when you didn’t have some of those considerations. And that in order to make these jobs safer, they need infrastructural upgrades. They can’t take as many clients. To start there, is that where you think service inflation would come from? Jason Furman I think a few different places for service inflation. Some of it would be what you just said. Some of it is a tight labor market. Services are mostly delivered by people. People are not in unlimited supply. And if you need to put on a lot more performances, you’re going to have to find more people to pay and staff arenas and the like. So people in some ways are a supply chain issue and they’re always a supply chain issue whenever the unemployment rate starts to get low. There’s some idiosyncratic things on the surface side, like the price of rent and then this weird thing called owners equivalent rent, which is where the government tries to figure out what rent you’re paying to yourself and they put that in the Consumer Price Index. That’s likely to go up. Health prices have been relatively moderate for the last two years. I think they’ll go up more, but I’m not remotely confident in saying that. So there’s different micro-stories on the service side. But the overall most important macro-story is that services are made by people and people’s wages are going up because the labor market is tighter. Ezra Klein And this is what I mean when I say some of the story that’s getting told begins to be unnerving to me. Because you look back over everything we’re talking about here. And the first step is, well, during a pandemic, we made big transfers particularly to working class people. Most people who make a lot of money weren’t getting the U.I. plus $600 checks. And if they did, it didn’t matter to them. The labor market got tighter. And now the increased demand of those transfers plus the tighter labor market might also lead to service sector inflation. And you’re seeing an economy that on some level seems to me to be fragile against an increase in worker power, a sharp increase in worker living standards or a significant change in the kind of wages workers can demand, which at least looks to me like it poses some real problems for those of us who think the economy’s been pretty imbalanced. You really see, well, if you tried to balance it in a different way, here’s where the economic problems and the political problems would come from. How do you think about that? Jason Furman For me a lot of it comes down to how quickly you think you can solve these problems. We’ve had two remarkable periods in the U.S. economy. One was in the late 1990s. One was in the period right up until the pandemic. In both of those, the unemployment rate seemed like it was below where most people thought it could be and then it just kept falling further and further. And mostly good things happened as a result. A lesson some people took from that is you can always go further. I think that lesson might be right, but with a very important qualification. In both of those experiences, each year we improved a bit. We cut the unemployment rate by half a point per year. I think of it as a hot economy, but heating it one log at a time. So there’s no point where I’d say, oh, I’m so nervous now, let’s raise the unemployment rate. I think we can always— not always do better. At some point maybe I’d say that. But I think we can do better than where we are now. We probably could have continued to improve before the pandemic from the 3.5 we had then. But there’s a difference in terms of how quickly you’re trying to improve. If we tried to lower the unemployment rate to 2.5 percent over the next six months, I have no doubt we’d run into tons and tons of problems — supply chains, inflation exploding, et cetera. If we try to lower it by half a point a year for three years, we might see some wonderful things happen. So I know it’s hard to talk about patience when you have a big problem. But if the economy is — we’re trying to solve it too quickly, and it blows up in your face with inflation, and you lose support for it and things become destabilized, you’re not going to be able to make that slow and steady progress. Ezra Klein Let me ask you about the future then. I saw you say on Twitter that you expect — so much econ analysis now is on Twitter — that you expect around 3 percent inflation next year, although 1 percent or 6 percent wouldn’t shock you. Is that still your prediction? Jason Furman Yeah, there’s different ways to measure inflation. So I am roughly in the 3 to 4 percent range, but that is not a super scientific forecast. So as you said, 1 to 6 percent wouldn’t shock me. 3 percent would be more for the thing the Fed is targeting — the personal consumption expenditure price index — 4 percent would be more for the CPI, which tends to get most of the press attention. Ezra Klein So one of the interesting things about the inflation debate to me right now is that there’s pretty different views about how we got here. And then those views seem to narrow quite a bit as to what we should do in the near future. So let’s say the difference between you and my colleague, Paul Krugman — Paul is more on team transitory inflation, that the inflation has been pandemic-induced, it’s going to work itself out. You’ve been more of the view that there’s a big demand side problem here. But I think both of you want to see the Fed raise interest rates at some point this year. And the Fed at this point says it’s going to raise interest rates at some point this year. So how much of a policy debate are we really having? Do you think there’s a big argument over what we need to do? Or is what we’re going to do pretty set, and we’re going to do it and this is a bit more diagnostic than prescriptive? Jason Furman I think the policy debate has narrowed over time. Part of why it’s relatively narrow is that most of the players in the policy debate actually are fine with and supportive of monetary policy being expansionary in 2022. And the debate is over how expansionary it is. One way to think about it from the Fed’s perspective, 2.5 percent Fed funds rate is a neutral interest rate. And anything below that is expansionary, anything above that is contractionary. Ezra Klein Can you explain that a little bit more? Jason Furman Yeah, so there’s something called the neutral interest rate. We don’t directly observe it. We don’t quite know exactly what it is. But it seems to be maybe the Fed thinks around 2.5 percent. I wouldn’t be surprised if it was lower than that. If your interest rates are set to that, then in a normal economy at full employment, where everything is synced up the way it’s supposed to be, the amount that people want to save will equal the amount that businesses want to invest and credit markets will clear. When you lower the interest rate below that neutral rate — and certainly zero is below any estimate of the neutral rate — you essentially have the accelerator on. You’re pushing businesses to invest more, households to borrow more. And when you’re above that neutral rate — I don’t know, 4 percent would certainly be above it — it’s like having the brakes on and you’re slowing the economy down. So what the Fed is doing this year is better described as pulling back on the accelerator rather than tapping on the brakes. And all the debates are should you go from pedal to the metal to the accelerator down halfway or the accelerator down 3/4 of the way? Ezra Klein And so tell me a little bit about what is implied by so many people in this debate feeling comfortable with continued expansionary policy, even if somewhat less expansionary policy. Does that mean that people think, hey, the inflationary pressures we’re seeing remain modest and a relatively modest intervention plus adjustments from the pandemic and so on can more or less do what’s needed? Is that a way of understanding actually how hard people don’t think this will be to repair? Jason Furman Yeah. I mean, one is it might be wrong. So it might be a year from now, oops, should have done something more dramatic. I wouldn’t rule that out at all. The Fed has a lot of chances to correct over the course of the year. And I think they’ve shown in the last few months that they will make changes if the data changes. Another thing is I think we’ve spent way too much time fighting the last war, but we also can’t forget what the economy was like before. And in the year 2019, the U.S. economy did pretty well. But it did pretty well only because it had a lot of monetary stimulus and some fiscal stimulus as well. And so I’m just not prepared to believe that the U.S. economy can be fully self-sustaining without some additional support. And so I wouldn’t want to pull it away too quickly. Ezra Klein Yeah, that’s an important point, because one thing that has been disorienting for me about this debate is if I back up four years, there is an ongoing and now long-running debate about why the U.S. economy seems to have structurally low demand. Why we always need this hyper — not always, but in recent years — always need this very, very expansionary monetary policy. Larry Summers, who has now become, I think, one of the more leading inflation hawks. He’s got a theory of secular stagnation, which is about this very, very low ongoing demand. And so I would have said at that point that it’s really unclear how we fix the ongoing demand problem. And one thing that has not been clear to me is if people believe actually the demand problem wasn’t as hard to fix as we thought or simply the pandemic is so weird that it interrupted this structurally low demand period, but when it actually does drain out of the system, which God willing it will — although it keeps taking longer than I think — that then we’re going to have the demand shortfall we’ve been observing and the high level of marginalized workers we’ve seen again. Jason Furman Some of this is about magnitudes and timing, I think even more than the pandemic. We put about 15 percent of G.D.P. in fiscal stimulus into the economy in the first half of 2021. That is — the economy — yes, it was demand-deficient — I’m making up a number — it was 3 percent of GDP demand-deficient before. Well, we way more than overcompensated for that in the first half of this year. But you look forward a year or two and you’re not going to have anything like that type of fiscal stimulus in the economy. The Fed has more degrees of freedom probably at this stage than Congress does. And that’s where I start to get a little bit more worried. So I think some of the aha, is it demand-constrained, is it not demand-constrained — these things are all numbers. In the year 2021, the US economy was definitely not demand-constrained. We poured a ton of money into it. The Fed right now is setting policy that’s really more about the year 2023, given the lags in monetary policy. What’s demand going to be like in 2023? I’m not as sure. And to have a little bit of extra help there, which we’d get even with four rate hikes this year, would be, as a prudential matter, worth trying out. Ezra Klein You’ve said that the mistake here was treating the economic problem of the pandemic as a demand side problem and not a supply side problem. So when you look at what we’ve learned since then, do you think we are persistently supply-constrained? And if we are, what can we do about it? Jason Furman I love what you’ve been writing about the supply side of the economy. There needs to be more of almost an explicit — people saying their supply side and being proud of it. That’s so important to what we do. Now, supply side doesn’t mean you cut taxes and deregulate. But reclaim the word. My ideas tend to be less creative than yours and more conventional — so more investment in research, in education, in infrastructure. I’m more of a fan of when you need something, the government will offer to overpay for it. Tell people we’ll pay $30 a test. Tell people will pay $50 a shot. And Pfizer will figure out how to improve its advertising campaign, because it’s going to make that much more profit from all of it. So I don’t know exactly what the right supply side policies are. But having the debate and discussion about those is really important and it’s been probably underdone on the progressive side. [MUSIC PLAYING] Ezra Klein One of the points you made a few times is that you can think about the supply chains of goods, and then in a very, very economist way, you could think about the supply chains of people. And we’re seeing very high quit rates across the economy. We’re also seeing very high hiring rates. Something my friend and past colleague Matt Yglesias has observed is the ratio there doesn’t look that abnormal. Do you buy the narrative of the great resignation? Jason Furman There is something going on in labor markets, but it’s definitely not about quits. The quits that we see are roughly what you’d predict in a labor market as hot as the one we have with so many job openings and so many abilities to find other jobs. Most of the people quitting are quitting in order to take another job. It is the case, though, that the labor force participation rate is surprisingly low. There are about two million people that you’d normally think would be in jobs or actively looking for them who aren’t. And when you try to look at who those two million people are, it’s about half men, about half women. You look at their age — about half of them are above 55, half of them below. There’s not really a strongly unifying story. One possibility is continuing psychological effects and physical effects associated with Covid have prevented people from coming back to the work force. One possibility is people can afford to wait an extra month or two to find a job both because they have a bit more money and they have more confidence that a job will be there for them when they want it. So I don’t like the word great resignation. I don’t like it at all in the context of take your job and shove it — people quitting. There is something, though, about people who haven’t returned to jobs in a way that normally you would have expected by now. Ezra Klein So I was joking earlier in our conversation about buying tickets to shows and wanting to go, which that wasn’t a joke. But something I expect is that when I do go back, I’m going to find it very uncomfortable. And laddering this up a little bit, something that worries me in the narratives around the great resignation that I think could become a structural thing in the economy is that Covid has made a lot of jobs where you deal with a lot of people under close and not always well-protected circumstances just scarier — much scarier if you are immunocompromised or have vulnerable people in your household, but also just scarier, weirder. People seem like biological weapons now in a way they didn’t always before. And I think one place you see this is in places where workers have power, like teachers unions. There is a lot of friction about going back into the classroom and under what circumstances. It’s not that people never want to go, but they don’t feel safe going unless the classrooms change quite a bit. Now, there are a lot of places in the economy, workers don’t have that much power and can’t demand all that much in terms of changes to the way their workplace is designed. But something that I wonder about just going on the great resignation is people just being more afraid of these jobs. These just have become structurally worse jobs. A lot of jobs in the economy have become structurally worse jobs. And I mean, you could pay people a lot more to do them. That’s one possibility. But people don’t want to do them. And I think sometimes I see on the left this being framed as an exciting issue of worker power. But because the support is draining out of the economy, I’m worried a lot of workers are about to face a pretty miserable choice between jobs are now afraid of and poverty or economic evisceration. And this great resignation narrative is going to come to a pretty unhappy close. Jason Furman There’s no question that people have more demands for their work now, whether those demands are safety. There’s also a lot more people that want to work from home now that discovered they liked it than was the case prior to the pandemic. So there’s some resorting based on different characteristics of jobs going on. Some of this is a great thing, but there is a certain amount of scarcity in the economy. People’s wages are, in part, determined by their marginal revenue product — how much they are making per hour for the firm they’re working for — and, in part, determined by their bargaining power, which might mean you get 20 percent less than that or 5 percent more than that. And so the bargaining power can help. But if businesses are having to spend more money, if they’re getting fewer customers, and there’s only so much room in the profit margin, these aren’t all fully soluble problems. Ezra Klein But then let me go back to the inflation conversation for a minute. A lot of the inflation we’re talking about is in things you see in the economy or deal with in the economy a lot. Inflation as a political problem tends to be gas prices, food prices, all these things you consume regularly. But obviously there are things people buy less frequently— a home, higher education, health care, which they buy a lot, but often the true cost of it is hidden from them — that have had huge, huge, huge price increases now for decades that have just been going up way, way, way, way, way higher than they should be. And one of the things that Biden is arguing is that his Build Back Better proposals are long-term disinflationary. That they are trying to address the productive capacity and the prices in the economy in some of these markets, also particularly in energy — I don’t want to say climate change to be understood as an inflationary problem, but we are definitely not producing enough renewable energy. Do you buy that version of Build Back Better, that interpretation of Build Back Better? Jason Furman I think to some degree it’s semantics. There’s one question is what would Build Back Better do to the Consumer Price Index, the official measure of inflation? The answer to that is on a 5 to 10-year horizon, very, very little would change, because it’s mostly paid for, there’d be time for the Fed to offset it. It’s not that much money per year. And various independent experts have come to that same conclusion. And there’s then a second question of what would happen to after-tax income and purchasing power for households? And for households with children, it would go up. They’d be getting money every month. They would be able to buy more things, basically because their income went up. And so I don’t call that second one inflation. If somebody wants to say you can afford more stuff, so it’s as if stuff is cheaper, that doesn’t bother me a lot. It’s a semantic distinction. Ezra Klein There’s pretty big housing and child care and education components to the bill. How do you see those? Jason Furman The child care, in part, raises the gross cost of child care by improving quality. I don’t think that price increase is going to be that large, but I’m not completely confident that I fully analyzed it or read an analysis I find credible. And then the after-tax and transfer costs will go down if you’re a household roughly in the bottom half of the income distribution that is getting money for it. So child care is something where they’re effectively saying the problem isn’t that we’re producing it inefficiently and spending too much on it, we’re actually doing it too much on the cheap. We need to spend a little bit more and we want to protect your household from the extra spending, which will get extra quality and bring more people in. So in many ways, that’s different from health care. Health care — you’re trying to drive the cost down and then subsidize people. Child care — you might be trying to actually drive the costs up and subsidize people. [MUSIC PLAYING] Ezra Klein You’d said earlier in our conversation that you feel you could have designed the American Rescue Plan to have most of its positive effects at roughly half the price. Funnily enough, that is the question that seems to be facing Democrats on Build Back Better. Joe Manchin is — if he votes for anything, he’s not voting for what has already been offered. He has said it’s got to cost actually $1.75 trillion over 10 years, not have a bunch of weird expiration dates inside of it to maybe hide the 10-year cost. If you were putting together a bill trying to get a lot of this done at $1.75 trillion, how would you do it? Because it’s still quite a lot of money. Jason Furman So first of all, from an economic perspective, Build Back Better is very, very different from the Rescue Plan because the money is spending out over time and it’s addressing structural needs, not just ephemeral cash in people’s hands. So I would have been fine, probably even enthusiastic, with $6 trillion from Build Back Better, and would have wanted to pay for a lot of the $6 trillion, but not all of it. I think we could have afforded to borrow some. That’s my economic perspective. So my answer on size is very different if you’re talking about major structural changes going forward for preschool, child care, education than if you’re talking about ephemeral cash. That’s the economics. That’s obviously not particularly relevant at the current moment. If I was assigned a budget constraint of $1.75 trillion — I think that’s a mistaken budget constraint. But if that’s your constraint, then I think Joe Manchin is right. You should have fewer things that should be done better and they should be permanent. I think that less for the reason Joe Manchin does. I’m not that worried about the deficit. I’m petrified the programs would end. That you’d get one year of a child credit and then it would expire. You get three years of preschool. No states would take it up. And at the end of those three years, it would go away with Republicans’ decent chance being in charge of at least something when these programs expire that I just wouldn’t count on them continuing. So figure out how to prioritize. I’d probably do climate change, some stripped-down version of the child tax credit that focuses especially on lower income and younger families and preschool. Ezra Klein When you think forward to 2022, which we’re in, what to you is the plausible good case scenario — if we’re talking in a year and 2022 went quite well economically, what do you think will have happened? And what is the plausible more pessimistic scenario? Jason Furman The good case scenario is the economy ends the year with an unemployment rate around 3.5 percent, the labor force participation rate has come back to roughly what it was before the pandemic, and the inflation rate is in the 2 to 3 percent range. That’s a real possibility for the economy. I don’t think that’s a wild-eyed pipe dream. I think it’s a plausible good outcome. The more likely case is something like what I just said, but inflation more in the 3 to 4 percent range, and it hasn’t really left the national conversation and people are still bothered by it. And then the bad cases are — the worst one would be an actual recession where the unemployment rate starts rising because it’s been derailed by the virus, or the rapid movements of the economy up down every which way, or the financial system has had a problem as rates rose. That’s far and away the worst. And if we end the year at 4 to 5 percent inflation rate, I think that’s pretty bad. People would hate that and it would greatly constrain the Fed’s abilities going forward. That’s probably the most plausible bad outcome is that higher inflation one. Ezra Klein When you think of the risks that if something happened here that we’re not exactly talking about, are there risks that you feel are underrated, like a sharp China slowdown or some kind of geopolitical risk? When you think about something that could waylay everybody’s best laid plans, is there something you wish policymakers were paying more attention to? Jason Furman Anything large with China could be huge for the U.S. economy, the global economy, and for much, much more than that. If it’s just a garden variety Chinese property markets collapse and their economy goes into recession, I think that’s probably a couple tenths off of U.S. G.D.P. Probably the biggest risk other than the virus is that our economy is built around low interest rates. I think that’s roughly the right bet and I expect interest rates to be low. But if I’m badly wrong in that bet, a lot of other people with a lot more money at stake are badly wrong in that bet, too. And that could have knock-on consequences throughout the economy. Ezra Klein And then let me try to get you to throw the long ball here and talk a little bit more about the 2020s. And I’m particularly interested in this from the standpoint of productivity. So one theory right now is we’re in an era where a long period where technology actually wasn’t, whether you think it was advancing quickly or not, it wasn’t changing the economy all that much. A lot of things had remained vaporware. Maybe that’s over. Maybe this is we’re really getting the remote work and all that that could unlock. mRNA platforms, along with a lot of other biotech looks really, really promising for a bit. There’s incredible things happening in renewable energy. There’s interesting things happening in A.I. and bringing a lot more cognition and computing power online for a lot of different services. When you look at all this, do you think, oh, we might be on the cusp of a really exciting economic period or do you think we’re going to muddle along, more or less, as we have been? Jason Furman I’m closer to the muddle camp and would distinguish between inputs and outputs. The inputs to the economy will get more and more impressive, but the outputs won’t be commensurately so. So for example, if you want to make progress in agriculture now, you can have the most cutting edge A.I. and robotics in order to have a machine that can pick soft fruit, like strawberries and blueberries. The problem is all the genius in the world that goes into mastering the soft fruit mechanization problem is going to make very small difference to an economy where the vast majority of agriculture, in things like corn, soybean and wheat, was mechanized, much of it, 150 years ago. You see the same thing in cancer. It is much, much more impressive to make progress on cancer today than it was in the early days of chemotherapy, radiation and surgery. But the gains we get from that really, really impressive research just aren’t as big as we had before. So this is the good ideas are hard to find theses. Nick Bloom, an economist at Stanford, and other co-authors have written about it. And for me, it’s the right way to square the really impressive advances in how we do things versus the actual magnitudes of the gains we get from those things. Ezra Klein One read some people have had of the Nick Bloom kind of arguments is that, well, it’s not that good ideas are so rare, it’s that it’s hard to deploy them. And it’s hard to deploy them for a bunch of different reasons, and some of them are political, and some of them are just people are used to doing things, some of them are it takes time to understand how something actually works — this is the old line that you can see the computer revolution everywhere except in the productivity statistics and then eventually you could. So new things are happening. There’s a malaria vaccine. There are all kinds of things that could come out of mRNA vaccines. We do seem able to vaccinate against things that are pipe dreams pretty recently. So you’re not convinced we’re on the cusp of an era that is going to look pretty different. Like maybe it’s — I guess I should ask how much crypto you now own, because I hear a lot of excitement about web3 and how it’s going to upend the monetary system of the whole world. I’m a skeptic, but certainly a lot of other people aren’t. But you’re not convinced that we’re on the cusp of a new kind of technological era. You think it’s going to be more incrementalism. Jason Furman I try to be thoughtful and balanced on most topics. But my efforts to do that on crypto so far have not succeeded, and I’m just an unbalanced skeptic and mostly deriding of it and hold none of it. I’m only 90 percent proud of that and 10 percent embarrassed. I’m not confident about anything about the future. I used to hold those two theses — the we haven’t figured out how to make use of our general purpose technologies, and once we do, just like electricity, we’ll figure out how to wire everything and get light bulbs and changed the way factories are shaped, then everything will take off versus the running out of good ideas. In the last decade, I have downweighted the optimistic one and upweighted the pessimistic one, because we haven’t seen the optimistic one happen yet. You gave the productivity — that was 1987, I think, when Robert Solow said “We’ve seen productivity everywhere except in the data.” Some people made fun of him, because, oh, you just needed to wait a decade and you saw it. But you actually only saw it for a decade. So if you look at the full 35-year period since he made that prediction, you actually don’t see it there. You just see it briefly and it averages out. So unfortunately that prediction wasn’t just right until it was wrong. It was right, then wrong, and then in retrospect actually probably right again. Ezra Klein I think that’s a good place to end. So always our final question — what are three books you’d recommend to the audience? Jason Furman I’ve gotten so excited about questions of how psychology is shaped in a social manner and what that means for our politics. The first thing I read in this was a long time ago and I’ve read it a couple of times since, which is Bryan Caplan’s “The Myth of the Rational Voter,” where he takes apart this idea that everyone’s rational and talks about the implications for our political system. The most recent version of it I read was a colleague here at Harvard, Joe Henrich’s book called “The Weirdest People in the World,” that tries to understand why people in the West really are quite different, and, in his terms, weird compared to others. And points out many of the psychology experiments we’ve done for years aren’t on humanity as a whole, it’s on college students in Western universities. And they’re not exactly the most normal. Finally, we’re trying to peer into the future. It amazes me how much better we can look at the past. And “Who We Are and How We Got Here” by David Reich, another professor here at Harvard, is just an extraordinary look using ancient DNA, like Neanderthal DNA, to find out things about humanity hundreds of thousands of years ago that I never would have dreamed we could have understood. Ezra Klein Jason Furman, thank you very much. Jason Furman Thank you. Ezra Klein That’s the show. If you enjoyed it, there are a few ways you can help us out or shape the next episode. You can rate the podcast on whatever play you’re listening on now, or send this episode to a friend, family member, if you didn’t like it, an enemy who you think deserves it, or you can tell us who you think we should have on the show next by emailing me at ezrakleinshow@nytimes.com. We really do get suggestions for guests we have on from the email. And though we can’t respond to every message, we really do read every single one. [MUSIC PLAYING] Speaker “The Ezra Klein Show” is a production of The New York Times. It is produced by Rogé Karma, Annie Galvin and Jeff Geld. It is fact-checked by Michelle Harris, original music by Isaac Jones, mixing by Jeff Geld. Our executive producer is Irene Noguchi. And special thanks to Shannon Busta and Kristin Lin. [MUSIC PLAYING] Feb. 8, 2022 Produced by ‘The Ezra Klein Show’
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