Central Air - Inflation Grades

Episode Date: June 30, 2026

This is a free preview of a paid episode. To hear more, visit www.centralairpodcast.comThis week: Jason Furman joins the show this week for an economy-focused discussion. We start by looking at why public views about the economy have gotten so negative, the persistent economic problems people are so mad about, the obvious solution (it's fiscal consolidation — that is, tax increases and spending cuts), and what it could take to get us there. We also discuss Kevin Warsh's first actions as chair of the Fed.For paying subscribers, we talk with Jason — who co-teaches Harvard’s largest undergraduate course — about the university’s efforts to unwind the rampant grade inflation that led to two-thirds of undergraduate grades being straight A’s. And we have another edition of cocktail hour, in which Megan, Ben and I reflect on our experiences of skipping grades in elementary school, we rank the best six New England states, I offer provocations about grilling, and we share our plans for celebrating America’s 250th birthday.Upgrade your subscription at www.centralairpodcast.com.

Welcome to Central Air, the show where the temperature is always just right. This is Josh Barrow. I'm here with Megan McArdle, columnist for the Washington Post, and Ben Dreyfus, who writes the substack newsletter, Calm Down. Ben, do you know where the temperature has not been just right this week? Certainly wouldn't be my house. My house has been perfect. Oh, yeah, you live in the United States, so you have modern climate control.

But Europe, it's been very hot in Europe. And there's been a lot of coverage about this. The New York Times had some great photos of people swimming in, I believe it's the Canal San Martín in Paris, which they're very proud of. They've cleaned up some. I mean, not, they haven't cleaned it up enough that you don't find algae covered bicycles and, and shopping carts at the bottom of the canal. But people still feel that it's a good place to swim when it is hot as hell in Paris. Only 20% of households in Europe have air conditioning. And I've found that if you talk about this as American, Europeans complain about how boring you are. And then also

insist that the whole thing is made up about there being some like resistance to AC there. They say, well, it's just it didn't used to be so hot. And it's getting hotter and people are changing. And it's not like there's some, like, cult of believing that there is thermal shock if you walk into a room that's too cold or government's trying to stop people from air conditioning. And then you point out to them examples of this happening, like the NHS in England has guidance saying don't put air conditioning in hospitals unless there's sensitive equipment. People, whatever. Equipment, maybe the equipment needs air conditioning. There actually are parts of London where you need planning permission to put air conditioning, in spite of what Andrew Sullivan told us on.

this show a couple of weeks ago. And you had the deputy mayor of Paris out there saying that, you know, the air conditioning puts out forever chemicals, which is a new one that I had not heard, and that it's, you know, it's part of the problem and that they're looking, they look for alternate ways to deal with the heat. And so they're, they're sweating and they're also pissy when we point out why they're sweating because they're doing something stupid. I'm quite curious to know what the alternate ways are. Well, they jump in the canal. When you, yeah, I mean, when you didn't have air conditioning, right, there was, you could, you could frolic nude. in the sea.

Or you could have ice, which they don't have. No, they don't have ice. No compressors in Europe. The city of Ghent in Brussels. Well, not in Brussels. In Belgium, sorry. Had a website that said, the best air conditioning is a tree.

Oh, that's like the Kate Boss line about how, like, nothing tastes as good as skinny feels, but for sort of like self-righteous environmentalism. There was some funny online, like, yes, and the best toilet is a lake and the best refrigerator is a cave. In fact, D.C. has the best tree cover of any city in the United States and probably better than any city in Europe. We have excellent tree cover here in America. And it is not a substitute for air conditioning. Let me tell you. And so I looked up the provenance of this ridiculous claim. And it turns out that what they're doing is they're calculating that a tree will transpire X amount of water and that will result in atmospheric cooling. And it's like, no, but the tree is doing this over like the entire.

higher outside atmosphere. Yeah, the tree's outdoors. It's like trying to air condition the outdoors. Yes, it is not producing local cooling that will make you cooler. Claiming that like this is somehow a substitute just seems based on totally dodgy and made-up statistics just seems very on-brand for the home of Brussels. I mean, trees do provide shade. I'm in favor of trees as a heat mitigation strategy, but not to the substitute of air-cant. We are rich countries. We can do both of these things. We can have trees and AC. Yeah, they're not substitutes. They're compliments. They're compliments. I want to bring in our guest this week. Jason Furman is joining us. Jason, first of all, welcome, Jason. Thank you for being here. Good to be with you. And I was in Paris recently. Oh, yeah. How was that? It was great, but it was so hot. You'd go into a restaurant. It wouldn't be air-conditioned. And then I gave a breakfast talk, and there was this guy wearing a scarf. It was very fashionable, but it was pretty thick and totally covering him. And afterwards, I'm like, weren't you hot? you know, wearing that scarf during my whole talk.

And he's like, well, it's so air conditioned here. And I'm like, what? It's air conditioned. I didn't even realize the room was air conditioned. I was just sitting there super hot. And he evidently thought it was a bit much and needed a scarf. Yeah, sometimes they'll have air conditioning and then they'll set the air conditioning to numbers like 24 degrees Celsius.

And partly this is sneaky. They use a counting system that nobody understands. So you don't realize that 24 is really inappropriately hot for a room inside. But they like, it's like just a teeny bit of air conditioning as a treat that you're allowed to have. And, you know, sometimes they correctly point out that you'll go into some retail store in the U.S. And it's 63 degrees inside and that's too cold. And it's like, fine. You can air condition a little bit less.

But then they want these like high temperatures so that even when they have comfort, they're not really comfortable. So should we do washer drawers next or did you have other topics you wanted to discuss with me, Josh? You know, this is a weekly podcast and we, you know, we named it Central Air. So, you know, this is a topic that we've visited in the past and we'll visit the future. We had actually, we had we had Sam Bowman, who's a right of center guy in Britain, used to run a think tank called the Adam Smith Institute to give you an idea of his politics. And he even is against dryers. He has one and he believes it'll burn his house down. So if he uses it, the rare occasions where he feels compelled to use it, he has to watch the thing to make sure it doesn't light the place on fire.

These are these are dysfunctions that span the political spectrum on the other. side of the ocean. I also love the idea that they told you that they were like, none of us believe in thermal shock. It's nonsense, except for about a hundred million of us who actively do. I love that because the people will come in and they'll be like, no one actually believes that. And then people will be like, thermal shock is real. The shock termique. I'm just going to let you guys argue it out. So I'm, I could go on about this all day and I will, I'm sure, in the future. But since we have Jason here, Jason, for those of who don't know him, is the Etna professor of the practice of economic policy at Harvard

jointly in the Harvard Kennedy School and the Department of Economics at Harvard University. He was also the chairman of the Council of Economic Advisors under President Barack Obama. And one of the things we want to talk about with Jason this week is how is the economy doing and how do people think about how the economy is doing right now. So before we get into like, are people ragging on the economy too much? What grade would you give it right now and a real grade, not like a Harvard inflated grade? hopefully we can get to that topic last. Oh, we will.

Excellent. I'd say overall, it's doing pretty well. You know, the last couple months have been a real blow in terms of the inflation, but we've had the unemployment rate at or below 4.5% for 56 consecutive months. The last time that happened was the 1960s. Up until this recent Iran blow to oil prices, and gasoline prices. Real wages had been rising about as fast as they have in a long while. And so it's hard to imagine things being that, that much better on a sustainable basis than

they've been over the last couple of years. And it's, you know, the period that you're talking about there is a period that spans presidential administrations, a Democratic administration into a Republican one. And attitudes about the economy have been really negative during that period. And frankly, my sense is they've been really negative around the world and other countries. that, you know, went through the same COVID shock that we did, but have come out of it. People are very dissatisfied and remain very dissatisfied. And I'm wondering, you know, what you make of that? And is that just, you know, like Democrats just hate on the economy now and Republicans

hated on the economy when Biden was president and people are detached from reality? Yeah. So, again, the economy has had this big disruption in the last couple months, which has been real for people. But I like to almost rewind the clock to February just to think about what people were thinking then, so we can abstract away from Iran and the recent increase in oil prices. And to a first approximation, the economy in the year through February was doing about the same as it did in the last year of Biden. So the first year of Trump, last year of Biden, similar growth rates, similar

unemployment rates, similar inflation rates, similar real wage growth, similar mortgage rates. You can go down the line. And also similar negativity about the economy in aggregate, although if you look, of course, it reverses, and it was Republicans that were negative under Biden and Democrats that became negative under Trump. If you go one level deeper, you discover that Democrats appear even more irrationally negative about the economy now than Republicans were under Biden. They also seem more irrationally not to understand facts about the economy, like what the inflation rate is. Republicans under Biden would overstate the inflation rate if you ask them what it was, just an objective fact. Democrats do the same now to an even to greater degree

than Republicans were doing it under Biden. So part of the problem we have is just, you know, prices went up a lot, and no one likes that, and nothing is going back to what it cost in 2019. But the other part of it is just a very, very deep, effective polarization we have in the United States where the parties define themselves not by what they're for so much as what they're against, and what they're against is the other party and the other party can do no right. That is a thing that happens more strongly in the United States, and I think it's also part of why Americans are more negative about the economy than you see in other countries. Even though our economy is probably doing a little bit better than most of those

comparison countries, right? Yeah, absolutely. And that's one of the strange things. You go to another country, and I go talk to, you know, economists and policymakers around the world. And all they want to talk about is, what's your secret sauce in the United States? How did you figure it out? How did you make everything so good? We wish our country, you know, the United Kingdom, France, you know, you name it, could be like the United States. And then you come back to the United States and it's like no one here quite understands that. Now Biden for a while was trying to message,

oh, you know, it's even worse overseas. That wasn't the world's best political message. But it still is interesting that the objective facts here, especially on the employment side, inflation's more mixed, but especially on the employment side and the wage side have been as good as you could possibly ask for. And it's just not enough. One of the things that I, it's always talked me about this sort of divide that happens where people obviously have this layer of partisanship thrown into their opinions about, you know, macroeconomic data, is that, you know, on some level, like, it's a survey methodological, like, problem that can be solved. If you ask them then about, like, how they're personally doing, they'll respond differently.

And you can get sort of closer to this pure number that sort of, like, tries to get away for some of that. But the fear that I always have with doing that too much is that then you risk sort of forgetting about or having a blind spot with the self-fulfilling nature of pessimism about the economy. Like, if a Democrat is doing quite well in their bank account, but they are just convinced that Orange Man Bad mean economy go down soon, it's going to have like ramifications for what they spend on and how they invest and blah, blah, blah. And in aggregate, that's going to actually hurt the economy.

And so I wonder how when you identify this divide and look at it and try to like sort of like cut the noise from the signal, how you don't go too far with it. What you just said was actually an empirical claim that you can test, and so far is not true, although I agree with you, I keep expecting it to be true any day now. So let me just explain what that means. You can build a model that tries to explain consumer spending by certain real variables, like how much income people have and what interest rates are and how much wages are growing, you know, things like that.

And then if you add into the model what they say about consumer confidence, and you run that before 2019, you find that consumer confidence is sort of a small positive predictor. On top of the other variables, it adds some additional predictive power, and when people are more confident, it means they're going to spend more,

and when they're less confident, they're going to spend less, holding everything else equal. Take exactly the same equation and estimate it over the last five years of data, and weirdly enough, you actually get a large negative coefficient, on confidence, which is to say when confidence goes up, people spend less, and when confidence

goes down, people spend more. Now, five years of data is not enough to make a confident statistical statement. So I would not be here asserting when people are more negative, they go spend more, although that's what the data for the last five years shows. I think some of that's just a coincidence that it happened to be that a period of pretty fast income growth, especially from the transfers people got, and a lot of negativity came at the same time. That being said, at the very least, I don't see any evidence that I'm even spending less because of this. Does that mean they understand at some level that this is symbolic, right? That they have their real beliefs about the economy, and then there is their symbolic belief

that given that Orange Man is an office or non-orange man, if you're a Republican, the economy must be bad, and therefore I have to say that, even if it's, you know, like, or do they at some level believe that the economy is really bad. It just happens to be that, like, their little industry is fine. I don't know, but I tend to agree with you that this is cheap talk. You can tell a survey or anything, but when you have to actually make a choice, you think harder about things. And look, I get this with people in financial markets who are more Democrats who say the market should be more down because of Trump. And then you say, well, how are you investing? Or what do you think about the earnings of this company or that stock price? And Trump doesn't figure very large

in any of those decisions and choices. Now, again, it's possible that this will become self-fulfilling, or maybe I'm reading the evidence wrong, and people do spend less. So I don't find that a crazy notion, but it does seem to me more like cheap talk. Now, the one place where there was an interesting paper published in a good journal found that Republicans under Biden expected more inflation,

and that in more Republican areas you ended up getting more inflation, and they argued it was self-fulfilling, actually extended the statistical analysis, to the last year and a half. And you see the opposite. Democratic areas expect more inflation. I've actually gotten a little bit more. So I'm not sure how far I'd go with that, but it's possible that expectations of inflation become self-fulfilling and the partisan part of that has actually mattered. I wouldn't like go to the bank on that, but there is some evidence for that. Could there be an extent to which a reason that Democrats feel unduly negatively about the

economy under Trump or especially the economy under Trump? before he decided to go to war with Iran, is that Trump did a bunch of other things that looked like they were supposed to be bad for the economy, and often not just in ways that Democrats would say, but there would be a consensus or that, you know, before Trump, it might have even been Republicans who would especially say that, you know, if you launch a global trade war, that's going to be bad for the economy, if you introduce uncertainty on all sorts of dimensions that's going to hurt business investment. If you undermine the independence of the Federal Reserve, that will, you know, risk higher inflation and discourage business investment. He did all these

things that were supposed to be quite bad and that did not appear to have really large effects after he did them. Now, the Iran War had really large, at least near-term effects on oil prices and therefore on inflation, and we'll see whether that can just be unwound over the next few months. But up until that point, you know, there were a lot of things that I expected to have more negative apparent effect than we actually saw. And I don't, I mean, one reason I think is that people who pay a lot of attention to the economy probably have emotional feelings about tariffs that exceed their actual importance given that most of the economy is services. And I periodically have to remind myself that most of our, most of the economy is not internationally traded.

And however dumb, trade policy is I need to shade down my expectation of how much that matters. But more broadly, I don't know, it looked like he was going around doing a bunch of stuff that should have been bad for the economy. Yeah, that's certainly part of it. And the media climate and how, you know, negative it's been. Just in general, it has a bad. news bias. I don't think it would be fair to say the media does not make an exception for President Trump and the things that happen under him to its longstanding bad news bias. I do think the tariffs probably did add half a point to a percentage point to inflation. So that actually is something real. Now, in terms of how that looked, it looked like the inflation rate stayed the same

when otherwise it would have fallen back to the 2% target. So it wasn't, you know, the inflation rate was higher than otherwise would have been, as opposed to the inflation rate itself rising. The economic growth probably was negatively impacted there. My guess would be sort of maybe a quarter of a point or something like that. That's a rounding error in all the puts and takes we have in the economy and definitely a smaller one than what we've gotten out of the data center boom and everything associated with it. But yes, ex ante the expectations. Not just the media, by the way, but financial markets too.

people are rational with a lot of money at stake who were not just engaged in cheap talk, they're engaged in very expensive talk, was that this is going to be truly horrendous. And partly because he pulled back, partly because of the service economy point you correctly made jobs, partly because we lucked out with other good things in the economy, it was not truly horrendous. I want to ask about the Europe-American growth discourse, given that you have been in Europe and talking to policymakers there, where do you fall on the Garikano to Krugman's spectrum of this debate?

For those who haven't been following it, this is a debate about, are living standards really higher in the United States than they are in Europe in the way that, like, a crude look at the GDP statistics will tell you? Yes, living standards are higher in the United States, and the United States has been growing faster for about a quarter century now.

Up until 2000, Europe was catching up to the United States. Poor countries should grow faster than richer ones. They have a certain amount of potential to catch up. But that potential is not something that's automatic. It's like a latent thing that's there if you get your policies and institutions right. And Europe isn't. Everyone there that I talk to, maybe it's a limited slice of people, believes and thinks that. None of them think it's helpful to use a concocted, not a concocted, but a low-quality set of numbers that was designed for a very specific purpose that wasn't this one to answer this question. And, you know, when I think about European economics, there's some places where there's a trade-off. Maybe you want to have more vacations and you're willing to have a lower living standard. And I don't know the right answer to that. And I think maybe Europe might have the right one and we might have the wrong one. There's other things that really are just much less of a

trade-off, like can an Italian bank operate in Germany? You can have the full European lifestyle while Italian banks are operating in Germany, and if Italian banks could more easily operate in Germany, you'd have more companies with access to capital and growth, jobs, etc. And so, I think there's a whole set of reforms in Europe that just don't involve any trade-off with their social model, and almost all of them they should do, and then have a hard discussion about which parts of the social model are worth the cost and which aren't. And I think some of them are worth the cost. Yeah, how far would that get them? Because, you know, like some of the stuff that people talk about, for example, the incredible difficulty of firing workers means that it's very hard

to do a startup on a risky idea, right? If you're going to do a startup, start like a restaurant where you have a pretty known cost model, et cetera. But if you start a web business, a tech tech business of some sort. And then in six months, you realize that you've, half of the people, you need to do something different. Half of the people you have are not the right people. And you need to get rid of those people and get different people or maybe just fewer people. In America, that's a pretty easy process. In Germany or Spain or France, it's basically impossible. And so what you see is these businesses that don't start in that mode. And then Europe's like, well, why is America dominating AI? Well, you decided that it was more important.

to have employment security than it was to have a lot of risk capital in play. And that that is a tradeoff that you made. And it seems to me like 20 years ago, right, I would debate the European model versus the American model. I was an American model fan, not a surprise to a listener or indeed to you, Jason. But I felt like I had to work harder at it 20 years ago. And now it seems like a lot of those tradeoffs that were pretty much what I thought they were.

and which other people didn't believe are becoming more and more apparent and also more and more difficult to fix. Right? That it was harder, it was easy to believe, like, oh, well, we'll just have higher hourly productivity and we'll get almost the same growth and it won't matter if we take a lot more vacation

and we aren't at the office after five. But now it's like, oh, over time, that slight decrement in growth has accumulated to a pretty significant gap and your pension systems are all in trouble and you don't have the demographic growth to replace them, also a problem in the U.S. But you also don't,

you don't have the productivity growth to replace them. You don't have the, like, dynamic firms you really, really needed if you wanted a generous welfare state. Is that fair or am I being too, like, I told you so? No, no, I largely agree with you. It's certainly easier to make this argument than it was 20 years ago because the economies have diversed. averged. Up until 2000, Europe was growing faster than the United States, and it hasn't been

true for a while now, measured correctly, measured in the way that almost anyone would measure it. Paul Krugman aside, he's made a different argument. Not using this bespoke purchasing power parity measure that Paul Krugman concocted for the purposes of arguing that they hadn't. Right, exactly. Sort of lifted out of a different context and put it into this context. On the, it being hard to fire people, that. That would be on the opening a bank, an Italian bank in Germany side of the ledger for me. It's part of what actually causes their unemployment rate to be higher. Their unemployment rate is above 6% right now.

Ours is around 4%. You know, I don't want, you know, if we had 6% unemployment, people would be going nuts here in the United States. They'd be quite unhappy with that. It's funny because that used to be considered a sort of acceptable number. Well, that's also part of the difference. I mean, when, when Megan is talking about 20 years ago versus now, we've had a much more sustained period of lower unemployment. In the last couple of years, we had it also in the run-up to COVID, and that's part of what's made it a little bit clearer. You know what?

Rather have the U.S. 4% unemployment than whatever they have in Europe. The ones that the two sets of things that I think are a legitimate trade-off are things where you work less hours and you get less money. And so how do you value leisure versus the thing you did? I could argue about distortions in the tax system and other things that might read to the wrong point choices. But maybe there's some rat race in America, and if we all took all of August off, and didn't feel we'd be getting behind our neighbor by doing it. That wouldn't be so bad. I'm not sure. I'm open up to arguments on either side because I think leisure is valuable, and I think wages are valuable. With things like the not being able to fire people,

you don't really have a trade-off like that, and that just feels like a stupid policy that should change. So when I think about this, you know, the great global derangement that we've had around economic conditions since, you know, since 2019. It seems to me like basically what happened is, you know, we had this global burst of inflation that was at a level that had not been seen since before I was born in 1984. You want to rub it in? Yes, I do, actually. And so, you know, you have about half the population with no memory of inflation like this.

And you have other people like, I mean, Megan sometimes talks about, you know, going to the grocery store when she was seven. And seeing, you know, the tail end of that period. But it's, you know, you have to be, you have to be quite old right. now to have like real adult memories of that kind of inflation. You have to be a senior citizen. And so people are not used to this. And I think people have had this, first of all, they've had this expectation that the price level is going to fall, literally. And that's not going to happen. At some point that will get beaten out of people. But I don't know how, like, that appeared to take at least a decade in the 1970s for people to get to a point where they were

satisfied simply with a decline in the inflation rate. And then the other thing is that you have a set of economic policies where, you know, governments around the, the world and very much including in the United States are running inappropriately large budget deficits that are inflationary. And the way that we've dealt with the fact that we have inflationary monetary policy is that we've had to have higher interest rates. And that's something that doesn't get picked up in the inflation rate, but I think was a, you know, a key part of why were people still unhappy in 2024, even though inflation had come down a lot. One of the reasons was that interest rates had gone up a whole bunch to make that possible. And it meant that it was really expensive

to get a mortgage. And again, we were seeing mortgage rates that people had not been used to for some time, although not as long ago, it's the 70s inflation. And so basically, it seems like if we're going to try to, like, undarange the public. I mean, one thing is that over time, people will, like, come to terms with the fact that the new price level is the new baseline price level. But the other thing is that we need policies that make it possible for inflation to come down the little bit more that it's supposed to and for interest rates to come down somewhat. And I assume that looks like a fiscal consolidation, that you raise taxes and cut spending and reduce the federal budget deficit, and that's what makes it possible to have

lower interest rates that are not inflationary. Is it that simple, Jason? Is that like, am I right to think that's like the number one economic policy task for the next five, ten years? Economically, I think it's that simple. We can come back to the politics if you want to. But, yeah, I mean, the United States is doing something extraordinary right now. We have a deficit that's nearly two trillion dollars a year. If you measure that as a share of your, you know, the economy. It's about 6% of GDP. When in our history have we had larger deficits than that? Three times. World War II, the financial crisis, and COVID. And what we're going through now is just it's not World War II, the financial crisis or COVID. So this is the deficit we're running

in pretty much good times with strong growth and low unemployment. After World War II, our debt went up to a little bit over 100% of GDP, but almost as soon as the war ended, we started to reduce it as a share of the economy. Here, it appropriately went up during the financial crisis in COVID, but now that those are behind us, we're continuing to increase it as a share of the economy. So we're just running fiscal policy in a pretty extraordinary way. Some of it looks like free money, but as you correctly said, Josh, it's part of why mortgage rates are as high as as they are. And it'll be hard to lower mortgage rates without lowering that. You know, the Fed started cutting rates and got stuck. Part of that is because inflation was more stubborn for all sorts of

reasons that are internal dynamics to the inflation process itself. But part of it is what the Fed calls the neutral rate. What the normal interest rate is is probably higher than it used to be. Why? When the government's borrowing tons of money, the interest rates, the price of money, the interest rates, the price of money. So the demand for money is high because the demand for credit is high because the government wants a lot of it. It drives the price up. It makes it harder for everyone else, whether everyone else is businesses or households. Now, the biggest unknown here is there's a set of linear relationships for every percentage point on the debt, maybe interest rates are three basis points higher. And so debt's gone up, you know, 30 percentage GDP. So interest rates are

maybe a percentage point higher. And you know, you could argue over what the exact linear relationship is. The open question is what the nonlinear one is. At what point do you hit something where you go into a fiscal crisis where you have something more dramatic? And I don't know the answer to that. No one does because we're in an unprecedented situation. So you can't study similar experiences. But, you know, the chance my house will burn down this year are pretty low. And I still buy homeowners insurance. So a little bit of insurance against this doesn't seem like a crazy thing for a country to be taking out. But of course, we're not doing that. I think more than Megan and Josh, who are smart about the economics and are a little further to the right than me,

I came up like in a normal liberal, doesn't know anything about economics environment, where I've got some talking points from the... You grew up in a normal environment? Yeah, right. I don't know how normal. The Dreyfus household, yes. Yeah. Well, they don't, in the driver's household, we lose all of our money. Spend it way too wrong. But just in liberal circles where, you know, the general idea was that essentially all the fears about the debt were bullshit.

And that there was no, the stuff that you would hear about from conservatives was nonsense. And this obviously can lead to crazy things like modern monetary lunatics. But it's interesting that in the last few years since, COVID, a lot of those people who I used to read and who were sort of with me in this sort of like area and have have themselves become a little concerned about this debt situation. And I feel like that's one of the most shocking things I can imagine. You know, if you go back 15 years or 20 years, I just can't imagine those exact same people ever talking about how these interest payments have actually gotten too high and they're leading

to all of these problems and blah, blah, blah. And I just wonder how much, I don't know how much it matters that actually there is this center-left group that is more cognizant now of this. Maybe it doesn't. I don't know. Yeah. So I'd say a few things. First of all, on this issue, you know, if you have had the same exact view every year for the last 30 years, you have been wrong for at least some of those 30 years. And so there's the stopped clock people.

There's the deficits don't matter, you know, MMT types. and there's the fiscal scold. Some of them are good friends of mine, so I won't name any of them. And, you know, they're sort of all been wrong at various points in time. As opposed to me, who at every point in time has been exactly right. You know, facts have changed. Deficits in debt are much larger than they were before. Interest rates are much higher than they were before.

So whatever you thought 10 years ago, you should be more concerned right now. And, you know, how much more. concerned, I don't know. You know, the other thing I'd say is most liberals I know who, even the ones who aren't concerned, you ask them, if you were czar, would you be running a deficit in debt like this? The answer is, of course not. There's no way you would be doing big tax increases 20 years from now rather than doing a smaller tax increase today to deal with it. So, you know, you might have a view that if we do something about it, the consequences will be bad for people I like. So yes, if I'm czar, we should deal with it. But in reality, once you open up

the can of worms, it'll blow up in our face. I don't think that's true, but that's certainly possible. And you could argue either side of that. But arguing that anyone who was running a country would want to run it this way is something that I think very few people would defend, but not none. So as one of the fiscal scolds, let me make the argument that I have now been making. That you were right all along and that I was a lapsed bad person a few years ago? No. Look, some of the Obama stimulus I supported, like certainly any of the direct relief payments, right? And similarly, the COVID relief, I supported it on the ground.

Look, I don't think we should have been giving people unemployment checks. There were higher than they had when working, but I understood there were, like, technical reasons that they could not make the state unemployment. employment systems disgorge the correct checks. Because the state unemployment systems could add numbers but not multiply numbers. Yes, literally. Yeah. Yeah. So I supported that too.

I supported the Paycheck Protection Program. I did not support the Joe Biden and Donald Trump bonus checks after we had a vaccine and the economy should have been recovering. And I didn't support some of the Obama stuff that seemed more about like rewarding democratic interest groups and like doing their vision than it did really about needing to repair aggregate demand. I understand that many people disagreed with me and thought that we were under-stimulating the economy,

that the output gap was too big and we weren't doing enough stimulus. I get that argument. But my argument in return was always like, look, I get that argument. Here's the thing. If you do this, here is where you are going to end up,

where we are right now, is that, yes, in theory, the government could do this perfectly, could stimulate the exact right amount that you want, and then they could turn the taps off as soon as the emergency is over, get us back to balance. But in practice, they're not going to. In practice, we are going to end up in a situation where we have way too much debt and

two big deficits. We will have gotten in this habit and we won't get out of it. And it seems to me that like that argument, which was not about precisely calibrating exactly where the output gap was and trying to precision manufacture a stimulus that matched to that. I think a direct assault. This is like the most insult. thing anyone has ever said to me in an interview. But go on, go on, keep attacking me.

Jason, I, you know, I love and respect you. No, but like, my argument was just kind of more of a political economy argument, was that you were going to end up in this place where we would have too much debt, too big deficits, and we would be driving towards a crisis because no one was ever going to want to turn the taps off after you had done this stuff. Indeed, that is where we've gotten. And I understand that there are individual, Donald Trump has been. very irresponsible. Joe Biden was also very irresponsible. Everyone was irresponsible. That was where this was going to end up. And therefore, we should not have tried to fully close the output gap. We should have tried to relieve the direct misery of unemployment. We should have supported the banking

system. We should have supported businesses to keep them from going out of business during the pandemic. But at the end of the day, that kind of engineering then gives people license. The attempts to do bigger, like we need really big, bold stimulus, et cetera. I'm first of all somewhat skeptical that had we done much bigger stimulus under Obama. We would have had a much better economy five years later. But I'm second of all skeptical that that could have been done without just bringing us to where we are sooner. But tell me why I'm wrong. So I hadn't really studied and prepared for this topic for this discussion today. But let me just see what I can do off the top of my head. I hear you. and having rules that are transparent that people can understand and follow and monitor that aren't perfect

can be better than having discretion that can go badly wrong. So that general idea I agree with, the idea that your rule is if your unemployment rate is 10%, you're allowed to temporarily run big deficits, and when it's not 10%, you have to pay for everything, doesn't seem that harder rule to understand and patrol. In terms of the Recovery Act, we probably had similar opinions about it. All the direct transfer stuff I loved, and things like the high-speed rail were foisted on us

by other people in the process who shall not be named. Otherwise, they would yell and scream at me, like they used to yell and scream at me. And, you know, but no piece of legislation is perfect. And even there, if your principal is, you're allowed to do stuff without paying for it, then, you know, we had 10% unemployment. when it came to something like the Affordable Care Act that really genuinely was paid for,

the numbers actually did add up. You could debate. Well, sort of. I mean, the Class Act, taking the student loan program into Obamacare in order to tabulate the revenue as part of, like, if you take that stuff out. All right, Megan, all right. Let's come to this another time. Because it was more than paid for on the bad accounting,

and then when you adjust for the bad accounting, it sort of becomes roughly paid for, but we can talk about this another time. You know, the other thing, though, that I think has gone a little bit wrong in recent decades is sometimes the plague on both your houses when one house is quite bad and the other house is imperfect, doesn't reward you for doing any better because you all get tarred with the same brush. So I think that Clinton and Obama were considerably better than Bush and Trump when it came to fiscal policy. Biden was not a whole lot better than Donald Trump when it came to fiscal policy. And in some ways, you want an incentive system that rewards a politician for being not so terrible rather than requires them to be at your standard or my standard to get your price. It seemed to me like we went through this making different mistakes each time and sort of like the worst possible mistake at each turn. I do think the stimulus was undersized in

2009. And I agree with that, by the way. Certainly, I, you know, I share structural critiques with you, with both of you actually, because Jason, clearly you have structural critiques. But, you know, I think that we erred on the side of not stimulating too much and we could have borrowed very cheaply at that point in a way that would have paid for much of itself by causing us to come out of the economic crisis faster than we did. And that was a mistake. And then we made big mistake again in 2021. I think, you know, in 2020, we didn't do that badly. I mean, we did turn the taps off. Those, those unemployment payments that were more than people's original salaries ran for all of four months. And then there was not an agreement to extend that. That was an

instance where actually the partisan gridlock in Washington, I think, helped us. The problem is that Democrats did better than we thought we were going to do in 2021, ended up with full control of the government, and ended up with more ability to move priorities through those narrow majorities in Congress than we expected, and did a bloated stimulus bill in 2021 that was oversized relative to the problem. And that was, you know, one of the two big founding errors of the Biden presidency, the other being on immigration policy. But the fact that we did that, I think, was driven in part by the last mistake that Democrats were convinced that, you know, the biggest mistake you could make was to understimulate. And it was better to err on the side of stimulating too much. And if you got some excess inflation, well, that's better than having high unemployment.

And I think what we have learned is, you know, both, you know, we miscalibrated on that and stimulated more than we should even if we were trying to air that way. But the other is that we learned that people really, really, really, really, really get angry about the higher inflation and don't look and say, well, look, the unemployment rate's under 6%. That's great. And I'm happy to pay a little bit more at the grocery store for the fact that almost everyone is employed. We learned a political fact that people really will not put up with a lot of inflation. And Jason, I mean, one thing I wonder about that is that maybe that limits our toolkit in future crises in that we have to say that maybe we do have to accept a higher level of unemployment than we thought we had to, because because it is such a problem to overshoot on the inflation side. So, Josh, first of all, I have more sympathy with your view than Megan's view, which is let's try to figure out the dials and how to set them each one of these times and do an output gap calculation or inflation calculation. And by the way, there's some people I know who will privately say, Jason, you're right when you criticize the 2021 stimulus for being too large.

But what about next time? Aren't you worried it's not going to be large enough? Which was the worry you just expressed. And I say, yeah, I am worried that next time it won't be large enough. We'll probably need to do more and people won't want to. And I'll be out there saying, hey, here's my reading of the dial now. And this is what it was last time. This is what it is this time.

So, yeah, I'm worried we will underreact to something coming in the future. The other thing with inflation is when your economy is roaring back because of the vaccines. They completely agree with Megan on that. And by the way, people have more money in the bank. at the end of 2020 prior to the new round of stimulus and they'd ever had before, you just didn't need any money. If we're ever back to 8, 9, 10% unemployment and people's bank accounts are depleted, I just am not at all worried that giving them money will be inflationary.

And that was a thing that there was this stupid taboo in 2020 and early 2021 against pointing out things that were going well in household finances. Like, you know, the data would be coming in showing that, you know, people, they were getting all of these transfers. They were spending less money because they were sitting at home not doing anything for a few months in a lot of cases. And so household finances looked great. And so that definitely cut against the idea that you needed to send out a lot more stimulus in 2021. But it was sort of, it was almost like, if you pointed that out, it was like negating people's lived experience and look at all the terrible stuff that people are going through and how dare you

say that household finances actually look pretty good right now. And I think in addition to being like, you know, sort of part of a long string of stupid, you know, lefty taboos that came down through the media during, you know, a year's long period there. I think it also cost Democrats' situational awareness. They failed to understand how strong household finances were and therefore came to believe that more stimulus was appropriate than really was. Yeah. I mean, one more that's like that I find even more peculiar is state finances were in really good shape by the end of 2020. and they ended up including $500 billion for states that already had surpluses. And this wasn't because the voters in Georgia in the Senate special elections demanded $500 billion for states.

I mean, you can make an excuse that the checks you had campaigned on and you had to do. It doesn't make a good policy, but maybe it gives an excuse for doing it. But denying that states were in good shape when you could tell they were and giving them all that money was just bizarre. Yeah. I want to ask about looking ahead a little bit because there's a question of, you know, what will force us out of this regime of 6% budget deficits that force unduly high interest rates? And, you know, there could be real economic crises that force us to move. There's also a legal crisis that's on the horizon, which is that the Social Security Trust Fund

is going to be exhausted probably in 2031. And what the law says is that when the Social Security Trust Fund runs out of money, Social Security can only send out as much in benefits as it's taking in tax revenue. given year. And so that means somewhere in the ballpark of a quarter reduction in Social Security benefits if you don't change the law at all. And I expect that we will change the law because that would be a huge political disaster. People would be very angry if you haircut Social Security benefits by some large amount. But that might be a forcing mechanism for a fiscal conversation in Washington where you say, okay, we will pass the patch law that gives people social security benefits that are the

same or substantially similar to what they were expecting. But then we're going to do other things that address the budget gap. Having been in the White House, do you see that as the sort of thing that ends up driving the policy agenda in the 2030s? I think it's our best shot at a forcing mechanism. How good a shot it is, I'm not sure, but the others are even worse. So, you know, and by the way, when I say forcing mechanism, there is a forcing mechanism, which is if there is a fiscal crisis or something like that, that's one possibility. That would be a bad forcing mechanism. There's another, which is our politics change, and running as the candidate of deficit reduction, all of a sudden becomes a popular thing to do.

And I wouldn't rule that out as a totally impossible development. It's not where our political system is today. But that was Ross Perrault's issue. That's been a popular issue at some points in the past. But to me, the most promising exactly is using this law where the retirement trust fund runs out of money in 2032. You get this benefit cut of nearly a. quarter that you talked about. The last time something like this happened was in 1983, and it brought both parties together in divided government that, in retrospect, feels like a

functional time. Didn't feel super functional at the time? I mean, Democrats and Republicans had very big differences, and were really at odds with each other. But ultimately, President Reagan and Tip O'Neill came together and did something about it, and they did it right up to the which is when Washington does things. So, you know, I'd rather we do something tomorrow than wait, but if we waited four or five years, but you told me for sure we're going to do it in four or five years, I'd feel okay-ish about that. Just to be clear, Megan, don't worry. It's not that I think everyone can go out and say, great, I'm going to go crazy because I'll clean up the mess five years from now. No, I was going to ask, how sure are you? Because like I...

Today is better than five years from now. Absolutely. And I've been harping on this for 25 years now. And I remember Paul Krugman being in my lab. Well, because I started blogging in 2002. Okay, okay. And I remember Paul Krugman saying like, oh, the trust fund's not going to expire until 2037.

Like, it's forever away. I was like, okay, well, I'm sure that sounds that way to you, Paul Krugman. That's when I'm supposed to retire. And of course, now it's moved up five years. The gap has gotten big. figure, and we have still done nothing. We've, like, completely failed to address this in a way that I am surprised by. Like, I did think we were going to put it off, but I didn't think we're going to put it off quite as long as we have. And now it seems like we're just going to put it

off for five years, and I'm not sure I'm entirely confident that when that date arrives, we're going to do anything other than punt. And I guess, like, how likely do you think it is that we're actually going to do a fix rather than doing this kind of, like, if you remember, the doc fix where every year they would fix the doctor reimbursements, right? Because the cuts, there were mandatory cuts, but the cuts were like, they were politically completely infeasible. So you mean the fix would just be like having the general fund cover the gap? Yeah, every year they would come in and they would vote. There had been this thing called the sustainable growth rate that was supposed to hold down doctor's fees. And then when it finally

bit, they were like, okay, well, we're going to, you know, they told the AMA, like, well, we're just going to give you, we're going to fix this for a year. But then, like, they had to fix it every year. It kept getting bigger and bigger and bigger because it compounded until they finally did a permanent fix. Not that, like, I can't remember what year they did it. But anyway, like, are we going to end up in a similar place with Social Security? Or do you think there is any chance that we're actually going to fix it when the time comes? Right. So first of all, to just one up you on, you know, when we started paying attention to this issue, during the Clinton administration, it was the first big public policy issue I worked on. Yeah. He had just said, save Social Security first. And he was

talking about it as if it was almost this dire problem that needed to be dealt with soon, and we couldn't afford to wait because it would become too big a problem. And that's when the problems were 30 years in the future. So what happened? Why didn't we fix it? I don't know. I mean, I, you know, there's one theory that it was related to his scandal with Monica Lewinsky, but for that we were on track to doing it. He really was doing a good faith bipartisan effort. I remember, you know, once there was a Republican plan and I did a memo about how it was a bad plan. And I sent it to my boss, and my boss was like, called me up and yelled at me, and it's like, wait, I'm like, I wrote Republicans for bad. What's wrong with that? And he's like, we're trying

to build up a space for bipartisan reform. We don't want anyone thinking that if they put out a plan, we're going to, you know, criticize them. And so he really meant it. He really was bipartisan in that approach. But yes, his presidency might have gotten derailed by other choices that he made with George Bush. You know, I wasn't such a fan of his approach. So maybe that. was the problem that he chose that approach rather than a bipartisan one. Maybe it was the Democrat's fault. I don't know. We don't need to litigate it now. But if you want to, we can. But as we get closer and closer, it gets harder and harder. So in some sense, it's weird to me that as we get closer, people pay less attention, not more. And then Megan, to get to the question

you said, do I think we're going to punt on this? If I had to bet? Absolutely. That's what I would bet on. Do I think this is more likely to force action than anything else out there? I also think that is true. Now, is more likely, you know, 35% or 4%? I don't know, but the alternatives are less than 35 or 4. And by the way, the final thing I'd say, I think the better analogy here isn't the SGR, but is the gas tax to pay for the highway trust fund.

When the highway system was established in the 1950s, it was really important that the users would pay for the system through a gas tax. In 2008, the gas tax hadn't been raised since 1993, it wasn't enough to cover it. And so there was a temporary stop gap. And then there was another temporary stopgap. And now it's been 18 years, and the spending on highways is largely disconnected from the gasoline tax. The gasoline tax keeps falling in inflation-adjusted terms. And a system that was originally established as a self-contained user-paid just has become a general revenue, different type of system. And at no point did anyone make that decision or have

that debate at every point. It was one or two years. And then we'll deal with it. And then we never dealt with it. So I think that's the really precise analogy here. Let's take a quick break here. We're going to come back and talk about everybody's favorite topic, the Federal Reserve, which the Supreme Court saved this week. So, Jason, we, you know, just this, we're taping on Monday, June 29th, just this morning we got that Supreme Court decision, protect. Lisa Cook, one of the Federal Reserve governors who the President tried to fire for now, but probably for good. A lot of Pians there from John Roberts and Brett Kavanaugh to the importance of independent monetary policy and the special, unique, historic position the central bank

occupies in our government that is different from the Federal Trade Commission or anything else. So I think this is a positive sign for monetary policy. We also have a new chairman at the Federal Reserve, Kevin Warsh, who had been a Fed governor appointed by George W. Bush, who just had his first meeting at which the Federal Open Market Committee chose to keep interest rates unchanged with zero to sense. That was a 12 to zero vote. I'm wondering what you're making of Kevin Warsh's tenure at the Fed so far, because people have been wondering, you know, is he an inflation hawk like he used to be? Is he an inflation dove? Like he was making it look like he was during the period he was trying to get Donald Trump

to name him to the Fed. He seemed to almost try to say as little as possible at this first meeting And, you know, there wasn't a lot for the markets to go on on figuring out which direction he's going to take the Fed. So, first of all, let me just say I'm friends with Kevin Warsh, and I think he's very smart and very capable of doing the job. I was a little bit nervous about his independence because he had to say and do a set of things to get the job, the likes of which, at least in my memory, no one has said or done before to get the job. but mostly I do think he's a person with a combination of both integrity but also a set of incentives, a community that he operates in that would not look very well on his just abandoning the statutory job of the Fed. So I was cautiously optimistic on the independent side. So far, the data is reinforcing of that. And of course, the Supreme Court decision helps a lot. Monetary

policy is set by the majority vote of 12 people. And, you know, if some of those people are going to have very strong antibodies to any argument they think is being made in bad faith, just repeating or on behalf of what Donald Trump thinks. And so Kevin Warsh is either going to need to be credible and serious and persuasive, and it's probably going to need to do a little bit to prove that he's on side with the Fed and that committee. Now, if President Trump could fire people, you you could have a new committee, I'd like to think that Kevin Warsh would stand up and do the right thing even in that environment. And I think he, this decent chance he would. But in this environment, it's almost overdetermined that he does. The bigger challenge that I'm worried about for him is he

has been a fierce critic of the Fed, basically almost everything they've done and every way they've gone about things, but has done much, much less to say what he would do differently. And making the transition from critic to leader is hard. So far, we can't judge how that's happened, because, as you said, he said very little. He punted a lot to these task forces. I think that's the right thing to do when you step into a place. But is he going to figure out his own way to address all the problems he raised? He doesn't like the way they use data. Doesn't like the way they use models, doesn't like the way they do their balance sheet. You know, fine. All sorts of stuff is imperfect, but plan beats no plan.

And we still don't know what his plan is. And I'm not sure he knows what his plan is. But again, I think it'll be a smart, good faith effort to figure one out. But that's what I see as his challenge more than independence. I guess I keep wondering, how long is it going to be until Trump is dragging him on truth social? You know, the one thing that I know about Donald Trump, you know, in my bones is that like he's not, he's not interested in data and, you know, guidances and all that stuff. what he wants is lower interest rates. And, like, sure doesn't sound like he's going to get him many times soon.

It's like, how long does it go before he starts, you know, pulling a Powell on him? That I don't know the answer to. You know, I would like to think that somebody could look out and see that the unemployment rate has basically stabilized. The inflation rate remains very high. That is sort of not the environment in which you cut interest rates. But I agree everything I just said relied on a certain. amount of rationality, and I don't think I would attribute that to President Trump, at least on the topic of monetary policy. I'm sure on everything else, he's completely rational. But on monetary

policy, he has this odd blockage. So, yeah, I don't know when he gets dragged on it, but when he does, you know, I don't expect him to do a high-profile political fight back. Powell also did not do high-profile political fight back until the Justice Department. Until they subpoenaed him. Right, until the Justice Department investigation. So he held his fire and then used it quite well. I think that was smart of Powell. And Warsh has extraordinary political skills. I expect he'll develop and has a very good relationship with the treasurer and Secretary Scott Bessent.

I don't think any of that is enough, quite enough, for the situation he's in, but it's probably better than anyone else would have been positioned to deal with these issues. I was actually wanted to hearken back to our earlier conversation about interest rates and just ask like what do we think the natural rate of interest is now and what would the natural rate of interest be if we get our budget deficit under control? Like how do we explain that weird period between the global financial crisis and the pandemic and how do we explain why it ended? I have like a good explanation for the early part of that, right?

Like everything's in the toilet. No one wants to invest anything anywhere. Treasuries are, you know, safe harbor, and the government is doing its best in some ways to support the mortgage market and their tightening credit standards rather than raising interest rates to compensate for what had become at apparently much higher default risk. But I'm not sure I have a good explanation for like 2015 to 2020. And I wonder if you could explain it to me like I'm five. So first of all, just asking that question, I think is really important because there's a lot of people who blur that whole period and say, oh, the central banks were artificially keeping interest rates low. That's actually Kevin Warsh's theory. And if that was true, you would have seen lots and lots of inflation, and we weren't.

So I don't think central banks were artificially doing this. They were accepting a reality about the world, which is to say that the neutral rate was low. I would list broadly four factors. Some of them was the supply of credit was high. Some of that was coming from China. Some of that was coming from wealthy people in the United States where inequality helps with more supply of credit because the rich people can't spend all their money, so they save it, which is the same as credit supply. And then the other pieces were credit demand were low. The types of business investment we had was a little bit more like Instagram, where you barely need any equipment, you barely need any equipment. You barely need many people, and you have tons and tons of customers, which is different from AI right now, which is quite capital-intensive. And then the budget deficit was actually on a declining path. So the debt was higher, but it was sort of a little bit more under control than where we are now. So now we have less Chinese capital. We probably still do have a lot of supply of credit from high-income people, so that part hasn't changed so much. But the demand has gone up

quite a lot from the private sector with AI and everything associated with it. And the, you know, government now is taking a lot more of it than it was before. And so those are the factors that I think the fundamental deep underlying drivers in the economy that are different now than what they were seven or eight years ago. Now, one of those we can change, which is the government budget deficit. And if we did, maybe we could take, you know, one percentage point, a percentage point. point and a half, something like that, off of interest rates. Some of those we can't change. They're part of the global economy or the choices people make or our own economic situation. But, you know, as always, you control what you can and the net result is the combination of all of it.

Jason, you mentioned the task forces. Chairman Warsh announced the creation of five task forces to look into various aspects of how the Fed operates. And, you know, I'm, I'm sure those task forces are going to do, you know, real work. But it's also a, it's an effective way to stall. You come in, you're expected to make a lot of changes. It's a good way to be able to say, well, I'm waiting for the task force. And indeed, he did say that at the press conference after his first FOMC meeting in response to a number of questions. One of those is on how the Fed communicates. And a longstanding criticism that Kevin Warsh has had of the Fed is basically that the Fed talks too much. It says it gives too much guidance about how it's thinking about what it's going to do in the future.

It ties its hands. It basically interferes too much in the markets by doing that. And that the Fed should say less. And it was a really sharp turn in terms of how much less he was saying. It's not just a matter of like not giving forward guidance about what they expect the Fed will do with interest rates at future meetings. He was even ducking questions about how the Fed is going to think about various possible events or data points as they come in the future. And that's left a lot of people basically saying that the markets now don't know how to model the future path of interest rates. And in theory, that should be costly, that it's another source of uncertainty. when businesses make decisions about how to invest, they have less clarity about what the likely

future path is for inflation and interest rates, and it's harder for them to make those decisions. And I'm wondering what you make of that, what you make of his criticism and sort of what the right balances for the Fed to be striking there in terms of how much detail it should give about the ways it's thinking about the future. Yeah. So he has been passionate about this topic of Fed communications for years. And I don't think he's grappled with. This goes a little bit in the it's easier to be a critic.

than to be a leader. I think he's fully grappled with, you know, three big challenges that it faces. Number one, the Fed chair can communicate less, but you're still going to have Reserve Bank presidents and some of the governors out there all the time giving speeches. So do you want to have all of their noise and not provide greater clarification? The second thing is if you speak less, every time you speak, it becomes that much more important.

And so, you know, think about it this way. something happens in the economy such that interest rates are going to move by 50 basis points over three months. You know, in one extreme, it could be like, you don't talk for three months. And at the end of three months, you're like, make your statement. And they go up 50 basis points that day. The other is you give a statement every day. And every day they go up one basis point and they end up 50 basis points.

You know, which of those is better. It's not totally clear. But the last thing is, and this gets to the lack of a what's called in the jargon a reaction function, which is what you were talking about in your question, you know, how, if blank happens, then what we'll do is that the Fed has relied a lot on what's sometimes called open-mouth operations to move the economy. You know, hey, we think we're going to be cutting the interest rate over the next six months. Because of that, some interest rates start to go down right away, not the ones the Fed controls, but other ones that are affected by it.

And then, you know what, if it turns out you were wrong, you could be like, oh, you know what, oops, we're actually not going to cut rates. And the Fed knows. never actually needs to change the Fed Funds rate. Once you go down the path of not using words as much, you probably need to start doing action. So rather than say, hey, we're going to cut over the next six months, you actually need to cut the Fed Funds rate right away. And then if it turned out you made a mistake and you couldn't afford to do that, you need to say, oops, oh, now we're raising it. And so if you want more less talk, you actually need to accept more volatility of the Fed Funds rate itself. That's the way to actually make it work. That might be a better system. I think in some

ways it would be a better system, but I haven't heard anything to indicate that Kevin Warsh and the Fed have understood and accepted that if you use words less, you have to use actions more. So the idea that there's some free lunch here from just speaking less and everything will be smooth, it's way, way more complicated than that. Is that about to come down the pike now? I mean, the one thing that he was pretty loud about at this press conference was that they are going to get inflation back down to the target. And he kept talking about that. And the markets read that as mildly hawkish. And they started pricing in a little bit higher likelihood of near-term interest rate hikes as a result of that. And so, you know, Ben was asking about, when is the president going to start

raging against him on truth social? A lot of market participants think that his first interest rate move is going to have to be a hike rather than a cut. And as you're describing there, you know, the Fed, they did some relatively recent rate cuts and ran into a wall where they couldn't because of inflation conditions and such. Is Kevin Warsh going to have to, you know, lead the Fed in a direction where they say, actually, we cut interest rates too much. And, you know, the new Fed chair the president was so psyched about, the thing he's going to be doing is pushing interest rates up. Yeah. So in terms of communications, you can go from the highest level to the lowest level. The highest level is what your goals are. Are you being clear about those goals? He was very

clear at the press conference. That goal was inflation. That's been his goal every time I've ever heard him speak. I've actually never really heard him talk about the employment side of the mandate. I've only heard him in private life talk about the inflation side of the mandate. So in terms of goals, the highest level, he was super clear. Then there's an intermediate level, which is reaction function. If blank happens, then what you will do, that's where he offered nothing. And then there was a third level, which is at the next meeting, we're going to do X, or at the next meeting we're going to do why. We didn't hear anything about that either. I think not hearing anything about that third one. It's probably a good thing, not a bad thing, constantly talking about what

you're going to do at the next meeting and then you don't do it is, I don't know, sort of unnecessary. But there's something in between the high-level goals where he was excellent and the very specific tactics that probably I would have liked to have seen filled in a bit more. I want to talk about something and, you know, you are. an expert on the economy, and you day-to-day, one of the things you do with that is that you teach principles of economics, the introductory economics course at Harvard University, which is that back to being the biggest undergrad course again? Has computer science sufficiently fallen out of favor? That Act 10 is now the number one thing that Harvard undergrad is? We are the biggest

class at Harvard, yes. Mazel to. So, yeah, so I give more grades than anyone else at the college. A's everyone. A's to everyone. There's a new cap that's going to be imposed on you and all the other professors teaching undergraduates at Harvard starting next year that no more than 20% of grades can be flat A's or, well, in small classes, it's 20% plus four students. So in a seminar that matters a lot, in Act 10 with whatever it is, 800 students, the plus four doesn't matter very much. He'll only be able to give out about 160 A's. And the reason that they're doing this is that something like two thirds of grades at Harvard are straight A's, which I was just flabbergasted when I read. Because when I was an undergrad at Harvard 20 plus years ago, there had already been,

a lot of grade inflation, but it was still relatively unusual to get a straight A. I don't know what it was. That's it for this week's free episode of Central Air. We have much more for paying subscribers. This is actually a supersized episode this week in celebration of America's 250th birthday. We have a conversation with Jason about grade inflation at Harvard. He teaches the largest undergraduate course at Harvard, principals of economics. And he was involved in the decision-making that led to a cap. Only 20% of grades for undergrad. at Harvard will be allowed to be straight A's going forward. That had gotten up to a preposterous approximately two-thirds.

We talk about the decision-making that led to that and why you have such rampant grade inflation and how colleges can overcome collective action problems and actually get back to having grades that mean something and how that might actually even improve students' psyches because, you know, at some point they have to get used to being ranked. We also have a conversation about our own childhoods. Did you know Megan, Ben and I all skipped a grade of elementary school? we were big nerds. And we talk about that.

I think you should rush through childhood as fast as you can because it's way better to be an adult than to be a child. But Megan has a slightly more nuanced view on that than I do. And then finally, we talk about July 4th. We talk about my legendary infamous anti-grilling take. Admitted, grilling is bad, which I published for Business Insider in 2021. And that drew a lot of somehow negative reaction. People are very emotional about their disgusting, filthy, poorly temperature-controlled

grills. But, you know, the future that we live in is indoors. Just like air conditioning is the essence of modernity. Also, modern kitchen appliances are amazing. Way better than grills. And, you know, the best way to cook, you can eat outdoors. It's lovely to eat outdoors on a nice day. But, you know, your stove is on average, the best thing to make food on.

So we talk about that and, you know, how we settled on the idea that that should be published on July 1st. You know, important to schedule things right in media. And then we talk about what we are up to on this July 1st. Megan has all her bunting out to celebrate America's birthday very close to some of the Revolutionary War sites in Boston. I'm going to Yellowstone National Park to celebrate our nation's birthday and our nation's greatest national park. And Ben has exciting plans in Idaho.

So anyway, if you want to hear all of that, go to centralairpodcast.com. You can upgrade, become a paying subscriber. You'll get that full episode. You'll get every full episode of this podcast. It'll be part of our community. We'd love to have you.