Moody's Talks - Inside Economics - Alan Blinder’s Wile E. Coyote Moment

Episode Date: November 21, 2025

The Inside Economics crew welcomes Alan Blinder back to the podcast. The Princeton University economics professor and former Vice Chair of the Fed offers his perspective on the outlook for artificial intelligence, the risk of a bubble in equity markets, and the potential implications of current threats to Fed independence. The team also breaks down the much-delayed September employment report.Guest: Alan Blinder – Professor of Economics and Public Affairs at Princeton UniversityGet more information on Alan Blinder's book - A Monetary and Fiscal History of the United States, 1961-2021Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' and BlueSky @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-host, Chris DeRides and Marissa Dina Talley. Hi, guys. Hi, Mark. You're wearing a tie. I am. You know, under duress. You know, actually, all good. I had a conversation on AI in the macro economy with Michael Barr.

You know, Michael's on the FMC, former vice chair of supervision at the Fed. And he's been writing a lot about AI and its impact. And so I had a really good discussion with him. But, you know, I contemplated while I was getting dressed this morning, should I wear a tie, not wear a tie, should I wear a tie? And you know what? I'm glad I wore a tie. I'm glad I wore a tie. You look sharp.

Do I? Okay. Very good. No hair, but, you know, a tie. Anyway, and we got Dante. Dante, this is Jobs Thursday. Good to have you on board. Thanks, Mark.

Good to be here. Yeah, you're going to dig into the data for us. We'll do that in just a second because I want to bring in Alan Blinder. Hey, Alan. Hello, how are you? I am very well. You all good? Yeah, everything's fine.

Of course, everyone knows Alan. Alan is a professor of economics of Princeton. How long have you been a professor of economics of Princeton? Around 100 years. More than 50, actually. More than 50. You've seen a lot of business cycles, my friend. Yeah, quite a few.

Quite a few business cycles. And we had you on, it feels like a long time ago, but it was a year ago, and you had just published a book on the monetary and fiscal history of the U.S. from, I think it was 1961 to 2021, if I'm not. Yeah, that's right. Covering quite a few business cycles. Yeah, yes, indeed. How is the book doing? How did the book do?

No, for a, you have to grade these things for what they are. If this was a trade book, which it was not, it would be horrible. But for a scholarly book, which is what it was meant to be quite well. That's great. I'm glad to hear that. It's a great book. You know, scholarly books don't sell that many copies, but by that standard, it's almost a bestseller. That's fantastic. I'm well-deserved. And, of course, you were vice chair of the Fed back during the last technological revolution, right?

That was the Internet. Yeah, but the beginning of it. Yep. The beginning of it, right? And I think it's fair to say you may have engineered or been on the Fed that engineered really the only soft landing I can actually ever. Yeah, it depends how tough you want to be as a greater. but it's often, I think it goes down in history so far as the only perfect soft landing. Perfect soft landing in the 1990s.

And you were in the Council of Economic Advisers under Bill Clinton. So I know that's going back. Before the Fed. Yeah. Well, so good to have you back on. I really appreciate it. Thank you. Glad to be here.

And a lot to talk about. Before we get to all that good stuff, you know, this is a big day for economists with a government reopening. We are now getting data and the Bureau of Labor Statistics released the September jobs numbers. And I'll have to tell you, I don't know how you feel, but I was going through what I might call data withdraw. I was having a real, real kind of existential problem. Although it's liberating in one sense, I might have said this before on the podcast. You know, with no data, you can make stuff up. It's pretty easy. Well, I think that's the administration's basic idea.

All right. There you go. There you go. I didn't say it. You said it, Alan. I didn't say that. I said it. I will say it again. Yeah. Yes. Yeah. Yeah. Very good. Well, let's turn to Dante. Dante is our jobs maven. And Dante, make it good. What's going on with these job numbers? I was a little surprised. The top line was a little surprising. Yeah, it was a little surprised as well. Obviously, I think the top line game was 119,000. That's certainly higher than we were expecting higher than consensus expectations. You know, it doesn't do a whole lot to sort of wipe out the pretty poor performance in the four months leading up to September, but it's certainly a little bit of an upside surprise. Yeah, still a huge amount of concentration on an industry basis, you know, half of that top line game was in health care, which is not surprising given what we've seen over the last two years, really. And then you had, you know, leisure hospitality, government construction sort of as the other main supports there that accounted for almost all of top line growth.

So that story really hasn't changed that job growth is. is still fairly weak and it's still fairly concentrated in just a couple of industries. If you look at revisions to prior months, obviously those revisions are now pretty old at this point, but you've got a down revision in August that turned that headline gain negative. So now we have two negative top line prints this year in June and August. As I alluded to, if you look between May and August, right,

that four-month period, job growth average less than $20,000 a month in that four-month period. So September was, I think, a nice surprise, but it doesn't do a whole lot to offset that, you know, sort of really weak period of growth that we had. For four months, I don't think it, you know, sort of buffers us against a continued slowing in job growth moving forward. I think particularly for October, you know, I'm expecting pretty downbeat number. We should see a lot of those federal government workers rolling off of payrolls in October. And so I think, you know, we're probably headed for a much weaker October number than we saw in September.

Hey, Dante, in my mind's eye, it feels like, because I haven't had a chance to really look at the this data today because I've been running around D.C., but it feels like the economy hasn't created many, if any, jobs since April of this year. Is that, is that right? Yeah, that's right. I mean, you're looking at an average that's well south of 50,000 a month, probably south of, you know, 30,000 a month since April. You know, it's a pretty weak average. Okay. And I pick April because that was so-called Liberation Day, right, when the reciprocal tariffs were put into place and created a lot of drama and up and down and all around an uncertainty.

Would you feel comfortable link connecting the dots there between what's going on with jobs? Because if you look at the sectors that are losing jobs, those are the ones that you would expect to get hurt by tariffs, right? Trade and transportation and manufacturing. Is that fair? Yeah, I mean, it's fair if you look at the industry composition,

right? Manufacturing's lost jobs for several months in a row. Transportation and warehousing was the biggest loser in September, even though the top line number was more favorable. We lost about 25,000 jobs in transportation and warehousing, and it's been down over the last several months as well. So, I mean, it certainly feels like there's a link there between what's going on with trade and the job market.

Got it. Given the 119K gain, has your, you know, because it was on the high side of, it was well above expectations, I think, which was 50K and higher than ours, our expectation. Has your view of the job market changed at all? I mean, it's soft. Is your view that it's still soft? Yeah, I think my view hasn't changed because of this one report, right?

Especially given that it's basically two months old at this point. I mean, I think we'll hopefully learn a little bit more when we get September and October data here in a couple of weeks. Right. Well, we're not getting, are we getting in a couple weeks? October and November data. Well, mid-December. So, I mean, it's a little less than a month away. Oh, yeah, you're right.

Yeah, it's a little less than a month away. Okay. And what about the household survey data, which we won't get, you know, for the month of October, but the unemployment rate is now 4.4% creeping higher. What do you make of that? I mean, just a lot of volatility on the household survey side of things. When we saw the labor force grow by a significant margin again, which obviously is very different from what we saw earlier in the year. So really over the last two months, that's what's been pushing the unemployment rate a little bit higher, which is sort of opposite of what we had seen in the first half of the year, where

labor force was basically flat. And so it was helping keep the unemployment rate, you know, sort of steady. You've got big swings in both the labor force and household survey employment. So I think it's hard to read into it too much. You know, household survey employment is up by over 500,000 over the last two months, but it's still down over the course of the year since January. So you had some big downward swings in the first half of the year, and now you're getting some rebound from that.

But I don't think it's sending a strong signal by any means. I think it's just volatility on a month-to-month basis. And one more question before I get the other, bring Alan back into the conversation. conversation. Four-four, would you consider that to be above full employment? Or we're splitting hairs here at this point? Yeah, I mean, I think we're still in the neighborhood of full employment. I don't think I would argue strongly one way or the other. Right. Okay, got it. Hey, Alan, what do you make of all this? You know, what's going on in the job market, you know, specifically and then the economy more broadly? It's just a very open-ended question. How are you feeling about things? Well, I was pleasantly surprised by the employment report, as you guys were. as seemingly everybody was.

I mean, if you remember, excuse me, if you remember how things looked when the data lights went out, I don't want to say it was grim, but everything was sort of pointing in a not-so-great direction about the labor market,

both on the supply side where there was constrictions from the immigration policy, if you want to call it that, and on the demand side. and there was a growing belief that we weren't going to see numbers, monthly numbers, over 100,000, that that was going to be rare now, the norm was more like 50-ish.

And relative to that, this was quite a surprise, I think. Now, I do agree with what Dante said. I must have said a million times that I don't make much out of one monthly tick. for the reasons he said. But, you know, we watched them. It would be better if we had three. That's when I start paying attention. If you get three in a row that are telling you something that's almost the same thing,

I start believing it. Got it, got it. So you're, well, you'll take it. This is, you know, this is good, but it's still early, two early, too early, conclude that we're not we're the job market's getting any of its legs back that it's still yeah conclude it would be much too strong yeah yeah right okay um and about the economy more broadly Alan how do you feel i mean you know just maybe i'll frame it this way uh you know at the start of the year uh i it really when president trump was elected and started implementing his

tariff and immigration policy i thought this year would be a much weak year. And it ended up, so at least so far, job market aside, I mean, certainly if you look at GDP, it feels like it's ending up to be kind of better than anticipated, at least what I thought. Is that kind of sort of your perspective as well? Yes. I have the advantage, Mark, unlike you, I'm not a numerical forecaster. So nobody could go back and say what number was I posting in January. But if I was, I'll confess, I would have been too high. I would have been too low. that the economy has done better.

I think the tariff shock has had a smaller effect on the economy than many of us thought. Not zero, but a smaller effect. There are probably many reasons for that, not the least of which is the on and off nature of the president's proclamations. Like one week, the tariff on China

is going to be 145%. The next week it'll be, well, 15 for the moment or something and then it'll go back to 100 or something and many other cases like that that you're familiar with but the ones

I think you probably want to come back to this later I would point out that a great deal of this growth is investment in AI and maybe too much that it's not what do we really know it's not

Even. It's very uneven. Is it too much? We'll probably know the answer to that in five to 10 years. I suspect that it's too much. But we can come back to that. But that's one, I would just want to bring it up here. That's certainly one of the reasons and maybe the biggest reason why GDP growth has been higher this year than we thought in January. Right. So you, you, two reasons you called out. One is AI and the investment spend. related to data centers and the electric power and chips and everything else that go along with it. And the other is perhaps the pass-through of the tariffs to consumers may have been, at least so far, less pronounced, just because the stated tariffs are all over the map and businesses just don't know where they're going to land. And as a result, they're gun-shy in passing through. That's right. That's why I've said to a number of people, if you're running a business and you don't know if your tariff rate by the time it gets to consumers,

This is going to be 10%, 15%, 80%, you may just hang in there. There's an irony there, Mark, because many of us were pointing out, and I know I was guilty of this, the real side of that, that when you create this pervasive uncertainty, people are likely to pull back and not invest and not promote their products as much as they otherwise would and so on. But the nominal side of this goes the other way. And I think that's, in retrospect, I wouldn't have, don't think I'm such a genius, I could have told you this in January, I couldn't.

But in retrospect, it looks like the nominal side effects of the pervasive uncertainty have been dominant. Oh, I see interesting. And on AI, you mentioned the investment spending. What about the surge in equity prices for these AI companies and the resulting, potential wealth effects, you know, for consumers, the wealth to do that own the stocks. Do you think that's been a big part of what's going on to? Oh, yeah. Yeah.

Although it's, you know, it's very, I don't know to tell you, it's very concentrated in wealthy households whose marginal propensity to consume out of wealth is probably not that high. Nonetheless, the amount of new wealth has been enormous, and some of it has been spent. I believe the data, you know, you watch this closer than I do. I believe the data showing that an unusually large part of the increase in consumer spending is coming from upper income households. And they've enjoyed tremendous capital gains, which in turn have been concentrated in the so-called magnificent seven.

I saw a chart the other day. You probably see these 12 times a day showing the magnificent seven against the other 493 and it's it's very dramatic very dramatic yeah both in terms of stock prices and investment i mean i think if you do the arithmetic the magnificent seven or maybe expand it a little bit to include like the palanteers of the world and those kinds of things so i'd say a dozen AI companies over 90% of the capital spending that and r and d investment that's been done since chat gpt back in November of 2022 has been by those companies, which means only 10% of the CAPEX is by everybody else. Yeah, it's amazing.

Pretty amazing. It's amazing and a little bit worrisome, I think. Yeah. Chris, on this topic of this year turning out to be better than anticipated, same with you. Has it turned out to be better than you would have thought at the beginning of the year? And the other reasons you would describe to that kind of operational? performance relative to expectation. And by the way, I should, I should say it's done better, but it hasn't done that great, right? I mean, even if Q3 GDP comes in at 4%, which it might,

given movements and trade flows, your growth in GDP real is still 2%, right? Which is, you know, not a bad year, but it's not a great year. But anyway, Chris, anything else? Do you agree with that? Did you have the same kind of forecast error? And what do you describe? Yeah, same confession. that same confession uh economy has done a much better uh certainly given the policies all right uh i guess i still have this uh in the back of my mind though i still think of the column before the storm that there's another shoot to drop here the full effect of the tariffs has not been fully realized so perhaps this year did a little bit better but next year may do a little bit worse than anticipated as those full effects really come to the four immigration policies

finally really start to take an effect if we've established that with AI in the it's come on very dramatically here this year and has been a key part of the better than anticipated performance of the economy that does raise a question and Alan you've already alluded to this a bit already, what we're observing here is sustainable, both in terms of the actual investment that's going on, but also in terms of the run-up in equity prices and the impacts that's having. You sound, at least to my ear, you sound very, what's the word, cynical or cautious or questioning of whether that's going to continue here going forward.

Let me say two things that at first are going to sound contradictory, but they're not. one is I think AI is a very big deal transformative in many many ways at least half of which we can't even come close to predicting now probably way more than half that we can't come close to predicting but a big deal and so when people talk about an AI revolution I don't sneer at that idea second however and I hardly hear anybody ever mention this. It would be completely contrary to the history of capitalism if this was not a bubble. I tell people things like this. People were starting automobile companies in the 1890s and around 1905 and so on. That was a good idea. They were going to catch on. automobiles

almost none of the companies that started back then still exist move up to radio move up to computers PCs are one of my favorite examples when I bought my get this Radio Shack PC in I remember Radio Shack

in 1980 there were about a hundred companies making personal computers the only one of those that still exists as Apple. So if you invested in a beautifully structured mutual fund of PC

companies in the year 1980, you lost your shirt basically. If you invested in Apple, you did great. And it goes on and on. The history of capitalism is like that. So that's why I think this is, I both think this is something

real and transformative and important and also a bubble. Well, it's almost the case you can't have a bubble unless there's something real and transformative underneath, right? I mean, that captures the imagination. Well, it could all be, excuse me, it could all be fantasy, but I'm talking about the ones that aren't. Yeah. The PC was not a fantasy that was going to catch a. Imagine if you told people in 1980 when I bought my TRS 80 that by a year, 2005, almost everybody would have a PC in there.

house. Yeah. You'd have been thought crazy. I never would have said that. But it happened. It was real. Same with radios. I left out televisions. So, so if it, and I think you used the word bubble, right? Did you use the word bubble? I think, or am I reading? Yeah. Yeah, you were to use the word bubble. If it's a bubble, and again, you, Harking back to history, more often than not, bubbles burst, right? I mean, and so... An unpredictable times. Right.

So it sounds like that you're saying in the most likely scenario here going forward, AI is, as you say, a big deal, and it's a game-changing technology, and it's going to have all kinds of implications for the economy. but there is a very high probability better than even odds that at some point we're going to see some correction, some significant dislocation in the stock market and the equity market. Yeah, I think so. And also I would add it's implicit of what I said before. Some of those great looking companies now will go bust.

Right. We'll look back from the perspective of 2035 and say, why in the world did people, will have such a belief in I don't want to name a company because I don't know which it's going to be. It probably won't be Navidia because they're making the chips that everything runs on.

But there are a lot of others, including even OpenAI. I mean, Open AI may be the Apple of this cohort of firms or it may not be. I have no idea. Right. Now, of course, If you go back to the internet period, the period of the internet, and again, you know, using history as a guide here, and of course, that ended with a bursting of the bubble.

But if you go back prior to that when you were at the Fed and during the late 90s after you had left, there was a same kind of handwringing about the equity market. I remember Greenland gave that famous speech back. It was 96. Was it 96? Yeah. Irrational exuberance speech. I do remember. And of course the market.

Listening. Were you? Did he really say that? And he did. Yeah. And I guess the intent was to try to deflate the bubble or take a little steam out of the bubble. So that, yeah, that was the idea. Yeah, I think so.

Didn't work. Didn't work. I mean, maybe briefly there was a little bit of a correction. Yeah. It worked for a day. but that was 1996-97 the bubble didn't burst until 2000 2001 really you know what i i teach about these things and i show a slide in lecturing about that of wiley coyote going off the cliff right and there he is out in air and at some unpredictable moment he looks down and goes right down to the earth

and I do that to make the points that bubbles do burst but when they burst is completely unpredictable. Right, right. I guess the other lesson from that period, the Y2K bubble and the bursting of the bubble, was the actual recession that ensued was pretty modest, right?

Very. I mean, in fact, I would even argue that if it hadn't been for 9-11, which was, you know, September of 2001, there might not even been a recession where the National Bureau of Economic Research may not have dated that period as a recession. I call it the recessionette.

Recessionette. Okay. Okay. Okay. Very good. So, and I guess my narrative there, and I'm curious what you think, and you probably said this a gazillion times, but in my own mind, I think it's my thought, that that was equity, not debt. So that was a big difference between.

Absolutely. I've written about this. I couldn't agree with you more. Yeah. Equity bubbles burst much more gently. It's concentrated on rich people that own the equity. Right. But it doesn't necessarily...

Bubbles, bring down banks, financial institutions, and all the things happen. Right. So I guess in the current context, it feels like if the bubble were to burst today, it would feel more like the Y2K bubble bursting because it's more equity than debt. I think so. Yeah, but there's reason to be. Isn't there? Because it feels like increasingly the capital investment that's occurring among these companies is, you know, private credit firms are getting involved and they're bringing leverage

to the to the deals. Yeah. I'm reading, I don't have personal knowledge of this. I'm reading now and then about even big tech firms borrowing a lot of money, which was not what we were used to in the year in 1999 and 2000, that was all equity finance. There was hardly any dead involved at all. Right, right. But still, your point is right. It's mostly equity. Mostly equity.

Okay, so that's, that, it sounds like, it sounds a little ominous. It says, you know, we have a wily coyote moment in our future. I think so. Near term future. The other, the other thing I worry about is, jobs. So here we are. The job market is soft. We're having struggling and create jobs. You know, lots of reasons for that. There's supply issues because of the restrictive immigration policy and the foreign-born labor forces declining. Part of it is maybe AI is having some

effects, but all this is happening before AI is really, you know, kicked in and generated significant productivity gains, right? And that feels like that's coming too. So couldn't it be another real threat here is that we start really seeing the productivity gains in 2026 and 27 and that means actual given where we are in the job market today actual job loss does that sound yes yes but also actual job gain come back to I was talking a moment ago about the broad history of capitalism we've had many technological revolutions that destroyed jobs, but also created jobs. At least up to now, it's always created after some severe disruptions.

I don't want to minimize this. I mean, the Lullites were smashing machines for reasons. They weren't just crazy people. So this can be a difficult and severe and maybe long-lasting adjustment. But the history suggests that more jobs will be created than destroyed. right okay so you're saying i want to emphasize that advert yeah yeah eventually yeah it could it could be the case so you know the one concern would be that and now i'm speaking you know as a business person with a couple hundred economists around the world you know

we run a business and you know it feels like uh there and i look at my peers in in the financial services industry, it feels like everyone, no one's firing anybody, but no one's hiring anybody, you know, head counts are going down. And that's before AI is really kicked into any kind of gear in terms of productivity gains. I mean, everyone's talking about productivity games and we're all trying, but it doesn't feel like there's some game-changing productivity enhancing thing. But if that actually happens, it feels like that could result in some pretty big job loss before those job gains you're talking about actually come to fruition. Yeah, it could be. But I think, well, I'm not sure about this, but I have a hunch that the sector you're

talking about is among the most vulnerable to AI replacement. Yeah. You know, the leisure activities, medical care. I almost said college teaching, but I'm not so sure about that one, or less vulnerable to replacement by AI? I mean, it'll vary a lot across sectors and across specific job types. But my hunchmark is that the kinds of jobs

you're talking about on Wall Street are among, have high vulnerability rather than low vulnerability. Yeah, it makes a lot of time. Yeah. One other aspect of AI that, you know, I worry about is its impact on the income and wealth distribution, you know, the so-called

case-shaped economy. Obviously, this has been a long-running, you know, problem, the skewing of the income and wealth distribution, but it feels like it's in hyperdrive, you know, with AI. Is that on your- But the question is, will it last? I mean, think about what we were just talking about. Right.

We were talking about the potential destruction or at least end of growth of very high-paying jobs. and, you know, the gardeners and janitors and hotel staffs of the world are not going to be replaced. Not that they're doing great, but, you know, the lower 25% of the employed labor force is probably not going to be impacted very much by AI. They have enough problems that we're familiar with, but I don't think AI ranks highly on that. But for people that work for hedge funds and investment banks and places like that, your clientele, I would guess, the vulnerability looks a lot greater. Before we move on, I want to talk about monetary policy, you know, in the context of

AI and, you know, some of the other things that are going on at the Fed. Marissa, maybe I'll bring you into the conversation. Anything here you want to add that, you know, we kind of missed in the AI discussion? Anything at all? I agree with Allen. I mean, I think that short-term pain in terms of job loss, but I think with any kind of technological disruption, you always have jobs created that we can't even imagine right now, right?

We can't even envision what they might be. So I think in the long run, it's going to create a lot of jobs. And I would say that in terms of this sort of case-shaped economy that everyone's talking about in the income inequality, you're right, the destruction of jobs, direct destruction of jobs from AI, I agree. It's going to be more white collar tech, finance, professional service type jobs. I was talking to bankers a couple days ago. You know, they're looking at what they're going to do with their headcount. because they can do a lot of stuff now with AI that entry-level, you know, credit analysts would be hired to do, right? I think the replacement of more manual labor, that's going to be robotics, and I think we're a long way away from that. But that's something to think about for the very long-term future. I think in the near-term AI is going to replace high-paying jobs. It's going to be robotics that replaces some of the service jobs. You know, let me make a distinction between the very near term and the longer run.

So like when I think I'm worried about what's happening to the job market, it's not, you're right, longer run, the economy will adjust and will create other jobs that we can't even imagine and, yeah, I think it'll all work out. And that's the lesson of history and technology. That's generally how it works. But it just feels like to me in the current AI boom that we could see in the very near term, meaning next year, you know, or the year after, just pretty substantive productivity gains that happen so fast that the economy can't adjust or the job market can't adjust. And I wouldn't worry about that too much if we were creating 150,000 jobs a month on average. we're not. You know, we can't because there's no labor supply. So we're very close to zero job growth,

maybe slightly positive. And then you, and AI hasn't really played much of a role there. I think we can all agree. Maybe on the margin, there's some younger folks are having a higher time finding jobs because of, you know, the effects of AI. But it's on the margin. What happens, though, and is it a reasonable concern that, you know, we kick in, that productivity growth goes from one and a half to two percent to two and a half to three percent in the next year or two. And then we get outright job loss. How does, I'm having a hard time. Is that a reasonable scenario, Alan?

And if so, I'm not, how does that, how does that work? I don't know how that plays out. I'm having a hard time in my mind right. Well, your question, is it reasonable? I said at the beginning of this part of the conversation, and I don't know what to stick make about AI. And so I can't answer that. But is it possible?

Absolutely, it's possible. Look, Mark, as you well know, you can go back over the productivity numbers of the United States since, pick whatever you want, World War I, and there have been fluctuations of the magnitude that you just said. When I was just getting started in this profession a gazillion years ago, we saw, we were in a world of about 3% annualized productivity gains in the United States. United States, and it lasted for several decades. Then it ended pretty abruptly. And then as you were alluding to in the 90s with the Internet and other technological advances, we got a surge of higher productivity growth again. That helped, by the way, the perfect soft landing, because

supplies started growing faster than we thought. And so the demand was not out of line with the with the supply. So sure, some things like that could happen to productivity growth. But again, if you look back at the history, and with the important footnote, there's plenty of disruptions along the way because people have to change jobs and things like that. But if you look back at the history, those periods of high productivity growth, like, well, let's take from World War II to 1970, were not periods of

high unemployment. There was periods of of faster GDP growth. So the same people working, however many there were, let's make up a number, 100 million. People working were producing

more stuff. And Americans as is their want were buying it. I never bet against the American consumer spending money. Yeah.

I think we say never underestimate the hedonism of the American consumer. Well, that too. Yeah, too, yeah. Okay, so just kind of to summarize, there's really, in the near term, kind of three scenarios here. And I think that's the way to handle this uncertainty around AI. I mean, because as you say, Alan, who knows. But the most likely scenario is kind of a more sanguine one where the diffusion, the adoption of the AI occurs in a way that it doesn't completely disrupt the labor market

and become a problem for the business cycle, that we kind of, you know, it diffuses, it helps productivity, but the rest of the economy is able to adjust, demand for other things are created and off we go, we're fine. Can I put in an important footnote to that? Yeah. Think about what's happened to manufacturing employment over the last four decades. There's been a tremendous shrinkage that's caused a lot of angst, that's caused a lot of problems for a lot of people, but it hasn't made the national unemployment rate go up, up, up. And we may be seeing things like that.

Yeah, right, okay, got it. Sorry, I interrupted you. Not at all. No, that makes sense. And then the alternative scenarios is the one I painted where the adoption rates are so fast. and the productivity gain is so strong that generates some starts generating job loss and then we got there might be an issue obviously there will be a fiscal and monetary response to that so but that that's the second scenario and then the third which seems to be your baseline Alan is that the real

risk here in the near term is a correction in the kind of equity market because of valuation and what that implies for you know everything else that's the real the real risk the real threat and the and the sectoral, excuse me, disruptions that we've talked about. Got it. Got it. Okay, well, let's change the topic a little bit. Unless, I'm sorry, guys, Chris, Marissa Dante, you have anything else to add? No.

Can I ask a question, Alan, if you thought about what does this mean for education going, you know, this rapid introduction of AI, how does this change how people are education? educated, what levels of education they get, what they're studying? I mean, do you have a view on that? I do and I don't. I don't have a solution, but I have a view. I'm a college teacher, and I'm thinking now about my course in the next semester of how in the world am I going to examine my students when they all know how to use

chat GPT, and we don't have good software that you could put it through and say this was generator with chat GPT. So I think the danger of rampant cheating, which is not a good way to learn, instead of learning something, you can cheat. And if you've got good tools like chat GPT and others,

it sort of has a danger of tilting the balance strongly in the direction of cheating. So that's my current worry. as I design I can be a little more specific the course I'm going to teach next term is on central banking

and it lends itself very strongly and this is what I've done for years and years and years to a final essay which is a policy conundrum I give them make up often based in reality some situation

and ask them both politically and economically and any other way they think they should to address what ought to be done. Can I sign for that class? You would do well. That's a forecast, though. I promise not to cheat.

I would not cheat. That's all we have is having the kids promise not to cheat. But I'm now thinking I may have to go back to, you know, a 12th grade sit in a classroom with a pencil and paper and write an answer, which I don't want to do. I'll have to tell you, Alan, this is a side note. The only thing, I don't really have nightmares. You know, I sleep pretty well.

The only time when I have nightmares is when I start thinking about those damn blue books. Yeah. Prince's economics department for its undergraduates department for its undergrad. graduate courses, I'm talking about a graduate course, but for its undergraduate courses has mandated everybody go back to that in class exams, write

the answers in a blue book. Wow. And that's because of AI. I mean, there's a case of technological regress because of the AI. Right, right. Wow. Very cool. Well, obviously a lot of unintended consequences of

AI all over the place. Well, let's talk about, you know, monetary policy, what the Fed's doing in the context of what's going on here. The debate now is, will the Fed continue to lower interest rates? I mean, it's been cut rates a couple times here. And the expectation in markets is that, at least until maybe today's report, that they might cut in December when they meet in a couple times next year. That might be changing here as we, you know, chat. But what do you, how do you, what's your sense of how the Fed is doing here and navigating, you know, all these cross currents? Do you, do you feel like they're doing the right thing? I think that they are with the important caveat that it's hard to know what the right thing is right now. This is the kind, I talk to the press a lot about monetary

policy as you do. And at intervals over the past decades, and this is one of those for sure, I emphasize that there are certain times when because of the macroeconomic conditions, you should expect tremendous disagreement on the FOMC because it's not clear what the right thing to do is. I'm not frankly sure if I was on the FOMC today, which I'd be favoring in December. would probably be favoring a cut of 25 basis points, but not with great conviction. And if the FOMC is split on that question, that seems about right to me.

They'll meet and they'll try to reach a consensus. My guess is it's about 50-50 for December right now, including today's employment report, but that's not a very informative. That's like Wiley Coyote, right? 50-50, I don't know. That's a fancy way of saying, I don't know. And depending on what happens after that,

including with AI and investment and things we've just been discussing, it's not obvious to me that there is going to be enthusiasm for much further rate cutting in 2026. On the other hand, if the economy looks like it's staggering a bit, there will be enthusiasm for that. And let's not forget, we have Donald Trump on the sidelines bellowing this and that, and more importantly than that, putting people like Stephen Moran on the FOMC. Right. This goes to the question of Federal Reserve Board independence.

Yeah. And, you know, the one thing that has struck me is how seemingly indifferent everyone is to this. I mean, investors have not responded. There's no, no, maybe they have, and I just haven't observed it. No, they're way underresponded. Right. So. This is a great contradiction to Blinders Law of Speculative Markets, which you may have heard me.

say before, which is that the mark, I've written and said this, that the markets generally get the direction right and exaggerate the magnitude by a factor between three and ten, that's blinders law. It's grossly violated. This is one of the biggest under-reactions of the financial markets that I've ever seen in my life. I think this is a very big deal, central bank independence under threat. Right. And, I mean, there's some clear examples that the Fed's independence is already under pressure, right? You brought up the fact. And no comment on Stephen Moran. I'm not commenting on that, but the fact that... I will, but never mind. Yeah, Chair of Council of Economic Advisers under President Trump and now on the FMC, is that smack of loss of independence, that move? It does the way he did it. It does the way he did it.

He's still on leave as chair of the Council of Economic Advisory. That's outrageous. I made the transition from the CEA to the Fed. Right. It was sharp. I mean, until I severed everything with the White House, they wouldn't let me in the building at the Fed. It was completely sharp.

The idea that you wear both hats at the same time is crazy, I think, and is a violation of Fed Independence. And then there's the Lisa Cook case is heading for the Supreme Court. If she loses, that's another violation of Federal Reserve independence, a serious... And just if you're under Iraq and you don't know what's going on there. So the President Trump wants to remove her from the FMC because of some issues around our mortgage loans, whether she provided the appropriate information. Oh, that's an open question.

I don't know whether that's a legal question that they're debating. But you're pointing out that the fact that he's doing that is a sign of his efforts to impair the independence of the Federal Reserve. It's never been done before. No president has ever tried to remove a governor of the Federal Reserve. Right, right. I guess maybe the catalyst for markets waking up and investors saying, hey, we got a problem, is the president now needs to nominate a new chairman for the Fed, right? Because Chair Powell rolls off in May, and I guess the nomination process will begin here relatively soon.

And maybe markets are waiting to see who the president nominates because that might go a long way to giving them a sense of how impaired the Fed will be. could be you have to be pretty optimistic to think it'll be somebody good you know that the interview that that person gets from the president if he or she gets an interview at all president will basically have one question and it will be will you do what I say yeah right we all know that right right so just to spell it out for everyone. If the Fed loses its independence or its independence is severely impaired, you know, what's the worry here? I'll preface this by saying, you know, I was at a dinner with a bunch of CEOs and the CEOs of these different types of companies expressed the

collective view. Not everyone was involved in the conversation, but generally, the kind of the general consensus view was, look, the president is the CEO of the country, he should be able to set monetary policy that, you know, you need all the levers and tools that you can muster to be able to, you know, manage the economy and operate the ship. What's wrong with that perspective? The wrong with that is that politicians, let's just leave Donald Trump aside for a second. speak generically. Politicians generically have short time horizons, limited, not only short, but dictated by the electoral cycle. So short is one thing, and that's not good for monetary

policy. But the electoral cycle every four years or every two years and then every four years does not correspond to the business cycle. And if you're dominated by the electoral cycle, not the business cycle, you're likely to do the wrong thing. And it's not going to be just wrong randomly. It's wrong too loose. And if it's wrong too loose, that's a recipe for inflation. I'm going to give you, here's a quiz question for you, Mark. You might get this right.

Most people wouldn't get this right. When's the last time fiscal policy was used to rein in aggregate demand because of worries about inflation? in the United States Oh my goodness probably Kennedy was it Kennedy? Oh you're almost

it was Johnson 1968 you were very close 1968 1968 1968 wow great point it's not going to be used the politicians

don't use their aggregate demand control weapon for that purpose they don't right right So the concern here is that with the impaired Fed, the predisposition is too low for too long, which means inflation is ultimately the issue here.

And in your book, actually, you write, I think, quite a bit about Nixon, Arthur Burns. Arthur Burns was here at the time, and he was captured by, and we know this from the Nixon tape, so it's just on tape, so there's no debate here. And that obviously was back in the early 70s, and that was a very inopportune time because inflationary pressures were already developing and they took off at that point. Correct. Right. That's the best example in the United States of what happened when you lose central bank independence.

You go to other countries in the world, and you see more dramatic examples than that. well is this your wily coyote moment that it sounds you sound pretty pessimistic in this regard that yeah i'm screaming about it every turn i have a column coming out in the wall street journal whenever my turn comes up i've had it before i'm doing it again right it's a very big deal very big deal yeah um so but but let me let me when i say a very big deal think about this mark if he succeeds and who's to say he won't because of the supreme court in removing lisa cook from office the new regime is the president can remove any fed governor from office any time he wants that would be our new national policy that's a horrible thought

Yeah, yeah. Chris, you're going to say something? Yeah, so does it come down to the Bond vigilantes? Is that the... Yeah, where are they? Yeah, where are they? They should be worried. And that's why I brought up blinders law of speculative markets.

They should be overreacting to this risk, and they're way underreacting, I think. When do you expect they would wake up or what event? trigger them to start to... You know, I don't know. It may be an adverse ruling. The Lisa Cook, Trump v. Cook, is coming up in the Supreme Court in late January. And depending on how the judges, the justices sound in questioning the two sides,

if they sound like they're going to find for Trump, which they typically do, That could be the moment of panic. I don't know. It's really a Wiley Coyote. You asked me when a Wiley Coyote fall to Earth. Right. Right. Right.

All right. Well, that's sobering. It almost feels inevitable, right? I mean, the way things are going on. Well, it's not inevitable if the Supreme Court finds the right way. I see. I should. Truth in talking.

disclosure, I've signed an amicus brief. There are many. I sign one of them, pushing them in the right direction. But they may sign in the right direction. That would be very helpful. But even then in that case, I mean, over time, the Fed Reserve,

because as you said, you know, in your narrative, whoever is now pointed to the Fed is going to have to swear to follow whatever the president wants them to do. Absolutely, I'm worried. It's just a matter of time then, right? It's inevitable, it feels like. Well, it's a race for a time.

It depends on when governors and presidents resign. And in the case of governors, can Trump get his nominations through? You may remember in Trump won't name names. there were several names broached that were basically rejected by the Senate he was going too far now the current Senate and the Senate then looked like two different animals to me

so I wouldn't bet a lot on that but so yes it's mostly a matter of time and no I was speaking about it's a matter of time by the time we get there the Trump administration will be have about two years or so left to go and now I'm letting my partisan proclivities show

but you know what they are anyway he may be a lame duck by then because of the midterms in 2026 we don't we can't know that now but if you were going to bet which side of the coin it's going to fall you would now bet

on the Republicans losing the house and that'll make a huge difference he'll still be president he can still do things and he has the appointment powers he'll still have that yeah okay so it sounds like

the Lisa Cook case is like really critical here then maybe that's the Wiley-Carrayton moment yeah that might be the Wiley-Callied Amendment okay All right. Well, we've kept you almost an hour, Alan. And I do want to end by asking another, I started with an open-ended question. I want to end with an opening question. And I hesitate to do this because I have to say you kind of, this conversation has brought me down a little bit. I'm just saying. Just a little. In fact, I think we're going to call it the Wiley Coyote podcast, you know, something like that. But what else out there, or if anything is out there that is kind of, bothering you on your radar screen, you're kind of concerned or worried about. Is there anything

else out there that? Yeah. Yeah. Well, many things, but in the context that you're asking the question. I told me you, you're going to bring me down. Go ahead. All right. Fire away. What I'll gracefully call, but should have a much less graceful name, our immigration policy. We are doing things on the streets of America that are completely, when I say, say we, our country, the force of the federal government, completely unconscionable, horrible, nothing I ever thought I would see in my lifetime. Mast men without identification, either on themselves or in their vehicles or grabbing people off the streets, some of whom turn out to be American citizens. They don't seem to care about that. And from the purely

economic perspective. So the moral perspective is much more important. But from the purely economic perspective, this is now causing and will continue to cause even more shortages of labor in the kinds of things that immigrants do, construction, farm work, hotels, and restaurants. The last one I saw last night on TV is a car wash. They raided someplace in beginning what's state now. Ohio maybe. It doesn't matter which state it was. I grabbed

to people working in a car wash. And it goes on and on. I mean, this does not look at all like we're being very carefully selective in going after criminals that shouldn't be in the country

and if they are, they should be in jail and we should deport them. This is not what this looks like at all. It looks like going after people that are defenseless, whether they're illegals or illegals. And that has an economic impact in the ways I just mentioned and others. Yeah, it seems like to me, my humble opinion is that the one game-changing macroeconomic policy we could implement as a rational immigration system.

You know, we need immigrants, you know, of all skills, low, middle, high. Yeah. But we get the right skill levels and allow those immigrants in the country. That's not only about labor supply, but it's also about labor productivity because these folks, they're enterprising. You know, you don't pick up and leave one country come to another unless you're a risk taker, and that's what you need to start companies and innovate and everything else. Totally.

Okay. I'm not going to end that way, though, Alan. So here's the opposite question. Lift us higher, please. What could go right that we're not thinking about? Well, inflation could resume its downward drip. It was going down, down, down slowly. And lately it's going up, up, up again slowly.

It wouldn't take too much to make that go down. That would be a good thing. and this AI phenomenon, at least in the near term, could turn out to be quite benign, raising productivity, which is a good supply shock. Yep. Yep. All right.

I feel a little bit, a little bitty, bitty, bitty, better. I'm glad for that. Yeah, I appreciate that, though. And I really do want to thank you for, you know, spending time with us. Always learn a lot. And the conversation is always very engaging and thoughtful. So really do appreciate that. And guys, anything else before we call it a podcast?

Marissa, Dante, Chris, anything? No. Okay. All right. All right, Alan. Well, I hope you have a wonderful Thanksgiving and Christmas and holidays and all of that. And good luck with that. with those blue books and, you know, the efforts to stop those kids from cheating, you know.

I could, I had this image of you, Alan, was like a ruler sitting in the classroom. It's the opposite. At Princeton, we have an honor code. The professor's not allowed to be in there practoring the exam. Okay, there you go. Okay. Really? Yeah.

Yeah. Okay. All right. Okay. Okay. Don't get into trouble, Alan, now. Well, at my age, I can get into trouble. It's okay. Okay. Fair enough. Thank you so much. With that, dear listener, we are going to call this a podcast. We'll talk to you next week. Take care now.