Moody's Talks - Inside Economics - Blinder, Baseball, and Business Cycles

Episode Date: July 29, 2022

Mark and Cris welcome Alan Blinder, Professor of Economics and Public Affairs at Princeton University, to discuss the prospects for recession, inflation, monetary policy and financial conditions.Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight. 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 Sandy, the chief economist of Moody's Analytics, and I'm joined by my co-host, Chris, Chris DeRee's, the Deputy Chief Economist, and we're missing Ryan. Chris, where's Ryan? We are. Ryan went up to Boston, went to the baseball game with his family. Ah, is it a road trip? That's what I hear. Yeah, unless he made a last-minute decision, but he was planning to drive. I think going to Fenway Park is kind of like a religious experience for Ryan. I'm pretty sure. Yeah. I'm sure. I'm sure. I've never been.

You've never been to Fenway Park? Nope. Oh my gosh. You've got to go. The real monster, yeah, the bleachers. It's really an experience. Not that I'm a Red Sox fan. I can't stand them, but still. Still. Still.

Still. And we've got Alan Blinders. Professor Bliner, good to see you. Good to see you. I'm very far from a Red Sox fan, but I haven't to Fenway Park. So you're right. You're not a Yankees fan, are you? You're from there. Of course you are, yeah.

What else is there? Well, if there's one team I hate more than the Red Sox, it may in fact be the Yankees. Oh, my, I'm sorry. Maybe we should cut this interview right here. I knew you'd say that. I knew you'd say that. Well, it's such an honor and pleasure to have you. You know, I've gotten to know you over the years.

I was trying to remember back. I know we wrote one paper together. Do we write more than one? I can't remember. You did. They both came out as Moody's papers on the financial crisis. Financial crisis, right. You know, Alan, it's funny when I've talked about you,

I talk about you all the time on the podcast in different venues. And in fact, I just met, I gave a speech in South Carolina to the housing finance agency heads. And there was a woman who just took over the HFA for Pennsylvania. And she knows you. I wish I could remember her name. But she was talking. She goes, every time Alan says something or I read something around, I agree with them. And that's exactly my experience.

Well, good. Yeah. It's like, it's weird. I mean, I don't think you've ever said something that I disagree with, which makes, make this for a very boring podcast. Yeah, it's a little worrisome. Maybe we could find something. Well, we just did the Red Sox. Well, there you go.

There you go. For the Phillies, I guess. Yeah, well, yeah, I do. You know, I'm a. All right. Yep. I'm fine about the Phillies. I just speak the Red Sox.

That's because we always lose against the Yankees. That's why. Not a threat. Not a threat. Not a threat. But, you know, before we kind of dive into the matter at hand, and, you know, obviously, top of mind here is recession, inflation, monetary, and fiscal policy and all the subject matter that everyone's talking about. Maybe we can talk a little bit about your career. I was, you know,

I've known you for many years, but I never actually looked at your Wikipedia page, get a better sense of your bio. And it's like, it's incredible. I mean, you know, you've been at Princeton since the early 70s. In fact, you were undergrad at Princeton. I was in. And then got your PhD at MIT, and I didn't realize that Bob Solo was your advisor. Oh, yes, he was. And a wonderful one, wonderful one, a wonderful man.

What I'm doing right now, if I wasn't on this podcast with you, and I will go back to shortly as writing a bio of Bob Solo. who's still alive and kicking at age 98 is amazing. I didn't realize that. Is that right? Yeah, I mean, he's just a force, you know, really an amazing intellect and has driven a lot of economic thought, you know, over his career. And then the cool thing about your career is you've been able to kind of move gracefully

back and forth between academia and, government working in policy circles and at one point you were in the council of economic advisors and then you went off to be vice chair of the of the Fed back in Bill Clinton era in the 1990s. I'm just curious how does how does one do that so gracefully? I mean well I hope it was graceful I'm not sure Alan Greensman thought it was so graceful but there's a point On the way in, it was kind of natural since I was involved in the Clinton campaign, the original Clinton campaign in 1992, and a lot of people that were so involved wound up. That happens in every presidential race. The winning team winds up with White House and other positions.

So that seemed kind of natural, though I must say, I'm glad you said gracefully, but from my. point of view, and I'm sure this is true of most people that enter a White House from academia, it's a different world. Young people as Fed staffers, you know, very good small people. I used to give them as part of their introductory briefing, oh, well, I said, we've got three runs over here. The short run means I needed it yesterday. The medium run means you've got an hour to do this because I've got a meeting that I need the paper. The long run, it means that I need the paper. The long run, means you got till Friday. Right.

I don't know you. That is not the tempo of life in academia. So that was a gigantic adjustment. Moving back to the Fed was a little bit, a little bit like moving back to academia in terms of the pace, except in terms of crisis, which you'll probably want to talk about. Right.

Rare blissfully. the Fed moves at a kind of a stately pace and doesn't release papers until they're ready and doesn't opine on things until it's ready and thinks about it and does research. You know, this one-hour timeframe is an unknown thing to the Fed most of the time. And then for me, then it was back to academia

where... That's the right way to put this. I think the thing that was the hardest adjustment to me, though it had to been a little bit hard prior to by government service, was going back to Never Neverland. You know, academics get embroiled and interested in things that you wonder, why are they doing this sometimes? What does this have to do? I've more than once written that talking about a particular paper that the only contact with the real world this paper makes is the title. They usually have titles that sound like, oh, this is about something. This is going to be interesting, yeah.

Although I think I just lost patience with that after three years ago. Yeah. Although I get the sense, you know, some academic departments are becoming more focused. on more practical issues, you know, seem more topical and relevant. Yeah, I think there's a little bit, yeah, I think that's right. Yeah. There's more, even in macroeconomics, which was probably the worst offender of this. You'll remember the various and sundry intellectual wars we had an academic.

Oh, yeah. Yeah. many of which blissfully left no trace in the real policy world right so they were watching these analytics or something not the journal of political economy well when you were vice chair you actually pulled off a unicorn i think a soft landing for the economy that's in my right is that the only time the fed kind of sort of pulled off a fall of oh i've just written a I've started with a webinar, now it's a paper that's going to come out in the Journal of Economic Perspectives. The short answer to your question is it's probably the only, quote, perfect soft landing.

But there have been a number of other landings that are kind of softish, the word I used. I noticed Jay Powell picked up that word. By softish, I mean either led to no recession at all, just kind of a slowdown, or a very very very, small recession you'll remember the recession that followed the in 2000 forgetting the NBR 2001 yeah I think almost nothing it disappeared manual data you don't even see it yeah so there been a number of episodes like that but I think the mid 90s was the one perfect soft landing and just for the for the listeners who don't follow this as carefully as we do.

The soft landing being. Oh, yeah, that you pull down the economy, you take the steam out, either to stop, either to bring inflation down or to stop what you think is incipiently higher inflation in its tracks

without doing much damage to the real economy. Yeah, and 94-96, when you were vice chair, that was a period when the economy felt like it might be overheating, inflationary pressures were developing, And you kind of calibrated policy just right to bring the economy and slowed it down, quell the inflation, but not push the economy into recession.

I think we do. I think that's right. Yeah, very good. Which obviously is apropos to the current environment. I get asked about it a lot. I'm sure you do. And I saw your op-ed in the Wall Street Journal, too, about that, about navigating. We'll come back to that.

But I do want to kind of just round out your background in your history. You're also a business person. You started a company. Is that a company still operating, the promontory, your financial? They both are. I'm out of both for years now. I see. So there were two companies, and each one was sold in one case to a bigger company

and one case to private equity. Got it, got it. Well, that's a good way to end. I feel I was two for two. They were both. That's really good. And here's the other thing that struck me about your career. You're just incredibly energetic and prolific.

I said I was going to try to figure out how many books you wrote, but I kind of lost count. It's hard to count because some of their edited books. I'll give you an example, which makes it most difficult to account. My textbook, which was originally with Will Malmol, who's now deceased, is now in its 14th edition. You want to count that as one or 14? There you go. I'd count it as 14, just personally. Well, if you count it at 14, you're probably in 35-ish.

There you go. Oh, my gosh. There's there like 20 others, but some of them are edited volumes and some of the regular books just by me. And you have another book coming out? Yeah, in October. You want to talk a little bit about that? That sounds fascinating. I think the title is self-explanatory, especially.

to professional economists. It's called A Monetary and Fiscal History of the United States from 1961 to 2021. Freeman and Schwartz wrote this very, very famous book called A Monetary History of the United States.

It ends in 1960. So I didn't want to take issue with them. I sort of picked up after but other than the dates, the two most important words in the title are and fiscal. You don't find discussion of fiscal policy in Friedman and Schwartz. You find a lot of it in this book of mine that's coming out in October.

And that much more than monetary policy pulls you into the political milieu. Because I don't have to tell you or your listeners, fiscal policy is made in the political world. Absolutely. Not in a technocratic world. Is there one anecdote that, that's in the book that you that kind of you would call out something that's particularly interesting that people don't really know about or eating yeah yeah i guess so there's a hard question if i had been able to see pages before you asked that i might do better but yeah one thing i thought of and

i've quoted this elsewhere i came upon a passage this goes back to the 60s okay You were born then, right, Mark? Oh, yes, indeed I was. Back in the late 60s, when the government was fighting the Vietnam inflation, there's a passage in the 1968, I think, so that would have been in February 68, economic report of the president, in which it says, get this, that battling inflation is mainly the job of fiscal policy. Oh, really?

Can you imagine anybody entertaining that thought now? Wasn't that sort of monetary, modern monetary theory, sort of? Well, maybe. I don't know what that is, but I was shocked. When I came, I was looking for something. When I came upon this, I sort of blinked and read it three times. That is interesting. Maybe you'll say that.

Yeah. Wow. What a change in thinking around that. Absolutely. Absolutely. Here's another one that I thought of back in the early 70s. This you may know. Both Milton Friedman and James Tobin, who agreed on basically nothing ever, were opposed to the independence of the Federal Reserve. Both for very different reasons thought it should be under political control. Yeah. There's another thought that you don't hear from economists. That is really surprising.

Milton Friedman. Wow. In particular. Do you recall the logic, his logic? Milton's was he didn't think unelected bureaucrat, technocrats should ever have that much power in the democracy. I see. And Jim Toler's was more that these unelected bureaucrats were not representative of what the society really wanted. They were much tighter on monetary policy and more inflation-phobic and so on than people. he was and then he thought about apolitic well it's amazing how the general thinking around that has

changed wow has it ever and for i think you would have a hard time finding more than two members of the american economic association which has what 20 000 members that would be against the independence of the federal reserve now maybe president former president trump maybe or he's not a member he's okay that's good to know that's good to know maybe peter navarro i don't know yeah peter navarro his advisor his former advisor anyway hey we should get down to business uh and you know i didn't ask you the most important question but i don't you know maybe you don't want to give the secret sauce where does all that energy come from my goodness i mean what is that all about i don't know it's inherited my mother always told me i should work hard uh

Right. But I think actually, Mark, if there's a secret sauce, it's efficiency. Minimizing the wasted time, trying to get things right the first time or at least the second time and not let yourself get distracted on a whole lot of things that are potential distractions, keep your nose to the grindstone. I don't exaggerate. It's not like I spend all my waking hours working. I watch Yankee games, for you know. But I must say I didn't when I was a young man in trying to do all of this. I didn't watch Yankeye. I didn't have time to watch Yankees. I'm an old guy now. I feel I've earned the right to watch some Yankee games. Well, you certainly have. And what a career. But let's get down to business. The economy recession is, And before we dive in, GDP obviously came out this past week and it declined in the second quarter.

Hey, Chris, can you give us a kind of a rundown on the GDP report? You know, what's your view of it? What's your sense of it? Sure. So the GDP came out yesterday on Thursday. It was a, well, if I have to classify or use a single word, I would say it was lousy. Lousy report. economy did contract by negative 0.9% in the second quarter.

Probably the best thing we can say about the report is that that was better than the first quarter, which was down negative 1.6%. The biggest drag in the second quarter was inventories. So that contributed or subtracted 2% from the GDP figure. So you might discount that. We've talked about that in the past on the podcast, given the volatility in the swings in the inventory. in the inventory cycle, especially now as we transition from goods to services, you might not read too much into that. But there are other parts of the report that were equally troubling.

Consumption growth is slowing. It's not negative, but spending is slowing relative to the first quarter. Investment was actually negative. It did contract. So fixed investment, residential investment, in particular, down about 0.7%. And of course, this was the second quarter report through June. We already know in July that housing, construction, and sales are down, so that doesn't bode well. And then government spending also subtracted a bit as well as a bit of a drag as we move from the fiscal stimulus that we had last year to this year where there isn't that additional support.

net exports was actually positive this quarter. We had, again, talked about this in the past. In the first quarter, we had a big drag from net exports. This time, we actually got a bit of a boost. Again, lots of volatility in this number, perhaps subject to some revision. So you don't want to read too much into that, but still, it is part of the overall GDP calculation.

So let me stop there. Okay. Well, lousy, that's a pretty good word. Is there anything redeeming in the report? Any silver lining? Anything positive? Could have been worse. It could have been worse.

Okay. I hear you. Let me answer that. Chris's answer is right. So how's it could have been worse. The one redeeming factor I thought was the continued movement in the consumer away from goods and taught services. Because that initial move and the slowness to get out of it is a good share of what people are calling supply problems.

Consumers stopped buying services and only wanted stuff that came in boxes. So. Yeah, that makes sense. So there's this during the teeth of the pandemic, we're all sheltering and placing and buying a lot of stuff. Now that things have reopened, we're traveling. going to restaurants, we're going to the Yankee games. Some of us are and not spending as much on stuff. And so this pivot in terms of what people are spending this money on was evident in the report. And you're saying that's a very positive thing because a lot of the inflationary pressures

were observing now is on the good side of the economy because of the strong demand and the supply chain disruptions. And this may ease some of those pressures. Yes. A lot of people, including myself, who love them in sloppy and saying there are the supply constrictions. And there were some in China when factories shut down and things like that. But for the most part, it's not that the supply went to hell. It's that the shift from goods services to goods, all of us, there weren't fewer ships, there weren't fewer containers, there weren't fewer trucks, there weren't fewer boxes. but the demand for all those things just soared. It wasn't enough to go around.

Well, let me ask you. Getting out of that will help us. That makes a lot of sense. Let me ask you, and we'll come back to inflation in just a second, but before we do, just to complete the conversation around GDP, because we had two consecutive quarters of negative GDP, and historically that's pegged recessions, I think, pretty well. I mean, I think it's got it exactly right.

right since World War II. And it's a rule of thumb. It's not the arbiter is the business cycle dating committee, a group of academic economists at the National Bureau of Economic Research that look a lot of data. But nonetheless, so you want to weigh in on this debate we've been having collectively around are we, did we experience a recession? I think it's a close call. I think the way things look now, I wouldn't call this a recession, though it does, meet the media definition of the two negatives in a row. When you have an unemployment rate that's 3.6% and hasn't budged up and jobs being created

well above the replacement rate. I don't know what you guys recommend, the replacement rate is, but I think. Yeah, that's about what I think of it. And instead we're getting 300 plus, okay? It's hard to think of that as a recession. Having said all that, and this this sort of leads into your next question.

I think a recession in, let's just say in the early part of next year, I don't know the exact timing, is more likely than not. And if in fact we start go, let me give you some hypothetical numbers. Suppose Q3 comes in positive two, which is a Wall Street forecast that just popped into my- That's our forecast. About two for Q3, yeah. But then we go negative in Q4 and Q1. I believe the National Bureau will look back to the two negative quarters and date it back there.

Now, will that happen? I don't know. So that's what I meant by it's very iffy. But right now, the tone and feel of the economy is certainly not like a recession. Yeah. I mean, when you're creating, I think in the first half of the year, on average, we created close to a half a million jobs per month. And as you pointed out, 100K is kind of what's consistent with stable unemployment. Layoffs at record lows are pretty close, unfilled open positions at record highs. Hard to square that with the idea that we're in recession, right? Absolutely.

Yeah. Okay. But you make a great point. You're saying, look, if maybe we, weren't exactly in recession, but if six, nine months down the road, we get some negative numbers again, maybe the NBR dates it all the way back. Let me give you a concrete example that you're very familiar with. Lehman Brothers collapsed came in September 2008, and the whole economy fell off the table. Right. The National Bureau then looked back and dated the recession as starting in December of 2007.

which i frankly think is a mistake i dated i did my the blinder dating which nobody pays attention to yeah september 08 but that right okay but the national bureau dating is december uh 2007 uh i think that's based on jobs though is i think we started didn't we start losing jobs as i think it was maybe but you know it was little and on the gdp there were small positive growth numbers in those quarters? Yeah. It's a week. Yeah, no, it's a good point.

It looked like what we used to call in the old days, a growth recession, you know, slow growth, but not an actual recession. And then Lehman Brothers came in, boom, but they look back to December. So I can imagine something like that happening if we have a real recession. It's kind of like the 2001 recession similarly, right? We had a negative kind of we started all, we had to collapse in the equity market, the bubble burst. It was a little negative than a positive than a negative, right? Yeah. And then I think if we had not had 9-11, which obviously crutched the economy in that period,

we might not even, they may not even call it a recession. Yeah, it's possible. Yeah. Possible, yeah. Well, you know, in terms of recession, risks, I mean, the kind of the most obvious reason why we're in this predicament is this very uncomfortably high inflation that we're suffering from. And, you know, to avoid recession, that inflation has to come in here pretty quickly, I think. Otherwise, the Federal Reserve is going

to continue to jack up interest rates quickly and ultimately push us in. To understand where, and I'm really curious where you think inflation's headed. But before we do that, I'd really like to get your diagnosis on why this high inflation, you know, and should we have predicted this high inflation a year ago, which most people did not. I certainly did not. I certainly did not. Yeah. I was a prominent member of Team Transitory, as you may remember. We're burning our uniforms now.

I've done a mea copp. I think you've done a mea coppa. I have several. Several mea culpa. But here's the irony, Mark, and it's just to answer to your question. The reasoning that Team Transitory had was correct, and it's still correct. The unfortunate thing was picking transitory, the word transitory, thinking that these things would dissipate quickly.

They are not, they have not dissipated quickly. So here are the four reasons. for high inflation and this is familiar to you one is excessive demand which I think is way overrated as a cause but it needs to be on the list so that's what we say that again way way overrated okay got it but I wouldn't put it a zero yeah so that's part of the fiscal stimulus that we had in continuing into oh one And monetary policy being laid off the mark, letting it zip along too fast. The Fed's admitted that.

So that's one. Second is what we were just talking about before, about post-pandemic adjustments, frequently called supply chain disruptions, which, as I just said, is mostly a misnomer. But you know the basic idea. Yeah. Third, the oil shock. Yeah. Which was moderate until the war in Ukraine and then got very severe and now looks to be dissipating a bit.

I'll come back to that. And then again, associated with the war in Ukraine, the food shock. So you know, you were mentioning my book on economic history. evokes the 70s and 80s when we had these oil and food shocks. Oil and food shocks lead to stacflation and that's what we're having now. Now why do I see Team Transitory had it right, quote, unquote? The supply problems will naturally and with some help of businesses adjusting dissipate. And I think that's happening now. But it wasn't happening six months ago.

The oil shock looks already, you know, knock on wood to be dissipating. But who knows what's going to happen? And ditto with the food shocks. We've got these nice sounding straws in the wind about opening the ports in the Ukraine to grain shipments and some good reports. about good harvest elsewhere in the world that they bring down grain prices. So I think the reasoning behind Team Transitory was correct, and I think it will be proven so. Hopefully soon, I watch every CPI report, hopefully, okay, this is the worst. So far, it's just been a hope, which is why Team Transitory has been so, so wrong.

You know, I think our my rank ordering of the causes for this high inflation are similar. I put the excess demand for the current inflation, not the inflation we were experiencing a year ago, but the current inflation excess demand at pretty minor, modest. That's what I said. Oh, okay, okay, just I just wanted to, okay, we still agree. I still agree. You're looking for a disagreement. It was the word I choose.

I think in the popular discussion, it's being overrated. Overrated. Yeah, I'd say pretty close to not really important at this point. Yeah. I mean, it uses evidence for that and you probably do too. We have the same unemployment rate now we have before the pandemic. Yeah. And we lived for about two years with unemployment rates like that with not the slightest hint of inflation.

if this was being driven by excess demand like in the Vietnam episode, I think you would see the unemployment rate going down, down, down. Well, and the other thing is if you're going to blame it on fiscal policy, you know, exit that, and that's what most of these folks blame it on, the American Rescue Plan, the $2 trillion legislation that was passed in March of 2021. one, how can you connect the dots to all the very high rates of inflation all across the, certainly in the developed world? You just, I mean, how do you explain that?

That's got to be Russian invasion, oil prices, act prices. That's got to be supply chain issues. You know, I can't produce vehicles because I can't get chips. Therefore, you know, vehicle prices are going to go skyward all over the planet. You know, these are supply shocks. Yeah, yeah, it's going to be global. now convince the Republican Party of that. Yeah, exactly.

Good point. Okay, so therefore, if those are the quasi, mostly Russian invasion. Oh, here's the other thing I just want to pass by you, see what you think. And this is a thing that really surprised me. And by the way, I don't think the high inflation we're suffering now is a surprise. What is the surprise was the pandemic and the Russian invasion? And that ultimately that created this high inflation, which, so it's not that we were wrong about inflation abating at this point, but we were wrong about the pandemic going away.

And we were wrong about, well, the Russian invasion wasn't even on the radar screen. But here's the thing I want to pass by you. The thing that I think really sent this to DefCon 1 for the Fed was the fact that the Russian invasion, the spike in oil prices caused. inflation expectations to become seemingly unanchored and tethered. And that's when the Fed said, oh my gosh, you know, I was going to raise rates, but I was going to do it in a more steady way. Now I got to go and jack up rates very quickly.

And that really is what brought the things to where we are today and why recession risks are so high. Yeah. Yeah, I think that's a lot of truth, especially if you include in that the car, that it started showing up in wage increases. Yeah. Now, I mean, they're way below inflation, but they're well above, let's call it the steady state.

If we want to go back to, if we think we're going to eventually go back to 2% or so inflation and 1% or so productivity increments, let's say 1.5 and 2, then you want wage settlements at 3.5. Yeah. And not five and a half. Yeah. And that's probably has to do with those expectations. Blissfully and coming back to my theme that team transitory will eventually be proven right. Yeah. Those inflationary expectations peaked and then have come down. Exactly. They're right where the Fed would at least the bond market measures of expectations or the ones I think are most important. They're back in.

They're right where the Fed wants them to be. Yeah. you know something everybody on earth almost except you forget is that the tips are based on cpi inflation yeah exactly see inflation yeah tips tips being uh inflation protected security so that you calculate break even inflation and expectations based on tips comparing it to uh treasury yields um i was going to ask you one other thing about that um shoot oh here i know i know i know you don't do explicit forecasts. No, I leave that to you. I know, but I'm sure you'd be fantastic at it.

But this generally speaking, let's say we're 9%-ish CPI, consumer price inflation year over year through June. When do we sort of get back, do you think, to something that's in the kind of the Fed target range? And for CPI, that probably is as high as 2.5%. But kind of sort of, when do you think that would, if everything sticks to script here? Yeah, that's the clinker, of course. Things are not sticking to script.

I can imagine getting... No, let me put a footnote to that. Okay. And change your question a little. There is, as you know, a humongous way out of historical experience spread between CPI inflation and PCE inflation right now. So I'd like to change your question to PCE inflation, which is worth of that.

is after. I think we could, I can easily see us getting back to where the Fed would like that to be in the second half of next year. Oh, really? That fast. Okay. Yeah. Okay. Is it also a core consumer expenditure deflator or just the top line PC? But the top line, but that's, that's where your things going according to script is crucial. Yeah. So that the script there to do that, is oil prices either flatlining or going down and ditto for food prices. Great. If they keep storing, that's not going to happen to headline. Chris, you heard Alan's forecast.

How would you answer that question? When do you think the consumer expenditure deflator will be, inflation be back to something consistent with the Fed target around 2%. So given my recession odds. I probably would agree with him. Oh, there you go. Alan, he thinks we've gone into. Alan, I should have asked you're a, and we have to come back to it,

but you're not saying, that's not based on a recession, right, that forecast. But that's, it's probably based on it. It's basically, you know, recession or weak. Slow, yeah, growth recession. I think the, the odds of a recession are certainly about 50%. Oh, okay. Okay. All right. I want to come back to that in just a minute because we're going to get our recession line.

We're perfectly aligned. Yeah. Finally. Finally. No, no. We'll see if you're perfectly aligned. Okay. Yeah, we'll see.

But before we go there, I want to go back to the Federal Reserve and the op-ed you wrote in the journal. Do you think at this point the Federal Reserve is getting monetary policy right? So they raised interest rates last week, 75 basis points, three quarters of a point. Chair Powell kind of indicated that, you know, maybe we're going to get more rate increases, but the size of those rate increases won't be 75 basis points in all likelihood. So maybe we'll get another 50 basis points. And if you look at market expectations and their interpretation of what Powell said and what the Fed's been saying, we get the funds rate target, which is now at 2.5 percent, the top end of the range.

to something like three and a half percent maybe by early next year. That's kind of where monetary policy is guided things in where we are today. Does that make sense to you? Does that feel appropriate to you in the current context? It does. It does. And by the way, I've been, journalists have been asking me for, I don't know, six months, eight months where I think the Fed is going to top out on this? And I've been saying three and a half percent.

I told you you're a forecaster. you are a natural forecaster you lately i've said three and a half to four so i i think it's a little bit more but that's not a very big difference as as these things go so yeah i think they're this is what i think they're going to do again with a proviso of things go according to script because there's been nothing but surprises for a few years uh i think 50 more basis points in september is very very likely and i think there'll be strong forward guidance on that between then and now. So on the day, everybody will be expecting 50. After that, I think the committee is going to scratch their heads and have a strong debate

over whether they should just hang there for a while or do another 25 at the next meeting and watch developments. So that would put it at three. a quarter and then sort of be you know they're always data dependent but there are times when you're extremely data dependent like this last meeting 75 that was really not data dependent unless something really strange happened right they were doing 75 but there are times when they really are data dependent where the chairman of the Fed comes in for the last few days before the meeting and makes up his mind then and not before

depending on the how the data flow looks. We could be in a position like that at the end of this year. Right, right. And you'd think that's probably that path would be the best path to potentially achieve that soft-ish landing. Yeah, given that they started late. You know, given that they started. Not an accident that they shot in 275s, which by Fed standards is shooting the moon. Yeah.

They were late. They were late. Yeah. Catch up. Okay. So given that, then let's talk about recession odds. And maybe I'll catch it this way because we've been obviously talking about this, on all these podcasts and with everybody.

Everybody wants to know what your probability. of recession is starting sometime in the next year, so between now and mid-next year, and let's say over the next two years. Because interestingly enough, and I'm curious when you're thinking about this, most economists, when they talk about recessions, they're not thinking next quarter, next two quarters, even next year. They're even kind of thinking now two years, and that feels really weird to me, given the current environment. If we're going into recession, It feels like that's at your end early next year or something like that. Yes.

It feels weird to be too, Mark, for that reason. And also because you're in this business, you know that two year ahead forecasts are worthless. Yeah. Nobody can see. You know, you may be able. Except for Chris's, Alan. Except for Chris. In all fairness.

Yeah. You guys are pretty good at looking three, six, nine months ahead. But 18, 24 months ahead. I don't even try. So the answer to the question is I think probably a recession starting in the fourth quarter of this year or the first quarter of next year is the most likely scenario with a lot of variance around that forecast. Really a lot of variance. So a 60% chance of an NBR recession? 60? You said 60?

16. 60. Something like that. Yeah. Chris, where are you now? What's your assessment of the probability of recession over the next year? One year, I'm at 60%. Oh, okay.

Two years, I'm at 65%. 65%. I love him to ignore that other five, Chris. That's just too far ahead. Well, you know, here's why he does that, Alan, because we have this forecast philosophy that we don't make major changes in our forecast. unless we have a high level of confidence in that change, and that subjectively is a probability of over two-thirds.

So he goes, he's going right up to the line. I see, right. See how it's very strategic in his probability assessment. Well, I put them at even odds. I'm a little bit more optimistic than you, you guys. But I'll have to say that varies, you know, day by day, hour by hour. It's, you know, the risks here are, uh, are, I'll tell you what I did that Chris was going over those, uh, second quarter GDP numbers. The one that, oh, this was going to be our, uh, I'm going

to initiate the number guessing game since I was. Okay. Okay. All right. Very good. Okay. So we're playing the game, are we right now? Yes. Yeah. Okay. I was about to blurt it out on this point. Oh, can I just just pause for a second? Hey, guys, listeners, remember the game. I'm sure. sure you do that we each provide a statistic the rest of the group tries to figure out what that is based on questions and clues and deductive reasoning and the best uh uh the best statistic is one that's not so easy we all get it and not so hard that we'll never get it so far away Alan go ahead what's your so mine was which i want to talk about was domestic final sales in the second oh you gave it away we're not even playing the game zero point zero two oh oh i see i see i see you

He's going the other way. You're telling us, this is a great innovation of the game. I have you guys, yes. Yeah, you tell us what it is. I thought I copied negative. I thought I copied down from the B.EA negative point three. Anyway. That's less trade in inventories and government or?

Domestic final sales. Domestic final sales, down point three percent in the board. That was the thing that I found most worried. in that report. So that's all sources of domestic spending, consumption, investment, government. In government. Spending. And, you know, it's not very negative, but it's negative. And in the previous quarter, Chris probably got this in his head. It was well positive. So I just want to go a little geeky just for a second. Get your view on it. But, you know, this goes to the quality of the GDP numbers and they get revised. You mentioned this. They get revised a lot over the years. But yes, but the biggest revisions are not in that hunk.

They're in the inventories and the export, that exports. Okay, good point. Those also get revised. They will get revised. Good point. But here's the thing I wanted to mention, if you look at gross domestic income, which conceptually is the same as gross domestic product, but, you know, added up from the income side of the accounts, people's incomes and corporate profits, that kind of thing. that's been very strong during the past twice as strong i believe as GDP in the pandemic and in q1 it was up meaningfully it was up one point of real gd i gross domestic income was up 1.8 percent do you put any weight on that i do but we don't have the q2 on that no we don't we don't that comes in late yeah well and that's one of the reasons why we don't pay any attention to it because

it's it's like late you know but but we we yeah i was taught by Alan Greenspan in the 90s to watch that one too. Yeah. Let me ask you this. Oh, sorry, Chris. Go ahead. I suppose you average them. That's the,

well, that's what this, the actually is doing that now, right? Publicing the average of the two. Yeah. I think the CEA under Jason Furman, they wrote a nice paper saying,

hey, the best way of looking at this isn't, just a simple average of GDP plus GDI. It gets you to closer to reality. And subsequent revisions, believe in GDP. So, Alan, do you have a go-to indicator or indicators that you have to gauge which path we're going down, the kind of growth recession or the actual outright NBER recession? Yes and no. I'll tell you the two things, this is going to be obvious from what I said before,

the two things that I'm watching like a hawk, so to speak. I don't watch like a hawk. I'm not a day-to-day forecaster. But it's oil prices and food prices. Yeah, yeah, I hear you. I do is where we got hit by a stagflationary shock. Yeah, two-barreled stagflationary shock, as happened in the 70s and 80s. They look like they're dissipating now, and I hope they will. But if they take a turn for the worse, we're in big trouble. Yeah, I hear you. Hey, just to do another one, another stanza of the game. Chris, do you want to give us your statistic? Sure.

Yeah, well, my number was too. The game. I thought I was supposed to come up with something. Oh, no, we all play the game. Actually, Alan, if you get the answer right, we have a cowbell for you. Honorary cowbell. Yeah.

So these are big stakes here. So actually we have listeners sending us cowbells. I'm not kidding, you know. So you don't run out. We don't run out. We got, apparently, cowbells,

you know, you go to Europe, every hill, every hamlet has its own cowbell. I've got one off on a shelf over that. Oh, okay, well,

you'll have to pull that out. From the Jackson Hole conference. There you go. There we have cowbells. So, Chris, what's your statistic? So mine,

so there are lots of numbers that came out this week. So a lot, Lots to choose from. But I think one of the most important is 2.61%. 2.61%. Is it from the GDP report? No.

Is it from the... You already alluded to it earlier. It's not from the employment cost index. No. Two points... The report that just came out today? Nope. It's a statistic that came out this week.

though? Yes, I got I I pulled it last night. Well, okay, that didn't really answer the question. Well, it's daily. It's a daily number. Oh, it's a daily number. So that gives it, that gives you a lot of Oh yeah. Is it security two points is that? It is very good. Yeah. Oh, see, I think that deserves That's a cowbell. No, I mean, thanks. Daily, of course, eliminated all the things I was thinking about. I don't watch daily numbers, but. What's that, the five-year five-year forward?

No, no, no. No, that's the five-year break-evens? Is that five-year break-evens? Okay. Yep. And we already mentioned the importance for Fed policy. Yeah. And as you said, the other thing I would add is that it's down from 3.6 in late March.

So it is moving in the right direction. Right. Well, the five-year break-eaters are the high. It's almost right where the Fed wants it to be. Yeah. If you take 0.4 as the more historical gap between the two price indices, the Fed wants that to be 2.4. Yeah.

Right. Right. Okay. Well, that was a very good one, Chris. And Alan got it. Got it right away. Okay. I got the many hints.

I'll do my. And this might be on the hard side. So yeah, I'm sorry about that. Is it from this week? Yeah. Yeah, it is. It is from this week. It's from two different reports.

Okay. And the statistic is the same. 5.1%. 5.1%. E.C.I. Year over year? Yeah. That's very good.

The employment cost index is up 5.1% year every year. That came out this morning. That's the best measure of, labor compensation wage growth because it controls for the mix of industries and occupations, which can create havoc with the wage statistics. So it feels like underlying wage growth right now is about 5%ish. And Alan, as you pointed out, for that to be where you'd want it, so it's really not adding to inflationary pressures, it's got to be something closer to three and a half.

That's 2% is inflation and throwing some productivity growth than you're around 3.5%. Yeah. Okay. What's the other 5.1? That came out today, too. You should know this. For savings rate. Oh, my gosh. I thought, oh, Chris, way to go, man. I don't have Ryan here today. So yeah. Yeah. Yeah, that's exactly right. The saving rate fell. And this goes to all that excess savings that built up during the pandemic. And before the pandemic, the saving rate was consistently 7%. during the pandemic because we all sheltered in place and there was a lot of government support that obviously shot up shot up and we now have as we estimate the and now we're starting to burn off that excess saving because saving rates have fallen below that 7% threshold for 5-1 but we still have about two by our calculation two and a half trillion dollars of excess saving saving above which would have occurred if not for the pandemic and that's that's a lot of saving I wanted to ask you a question.

I just want to add to that. Yeah. As you're toting up the pluses and minuses, that's one of the reasons not to expect the recession. Yeah. Yeah. And here's let me ask you this question, which is I'm just really curious if you are thinking about it the same way. It feels like consumers are not out spending with abandoned.

You know, they have all this excess saving. It's sitting a lot of it in their deposit. accounts because we can see exactly how much is sitting there in their deposits. So it's cash that they could just use now, no problem. It's not like to sell an asset or go out and borrow any money. So they've got that cash, but they don't seem to be using that to, you know, happy days are here again, obviously, but they're just using it just enough to supplement their purchasing power as it gets hit by the high inflation. Does that, does that characterization of what's going on here sound right to you? That's the way it looks.

not the way I would have guessed the six or nine months ago. Yeah. I would have thought that more of that would be pulled out of the checking account. Yeah. His account and spent. But, you know, if you ask me after the fact, not a forecast, to explain it, it's what you said. I think the incomes have held up quite well. Yeah.

We're not having layoffs and mass unemployment and wages are doing in nominal terms. by doing well in real terms, not so. Yeah. I think that's, you know, to me. So people don't feel they have to go to their savings account and yank out money. Yeah. I mean, at the end of the day, I think the firewall between a growth recession and an outright recession is probably the consumer, right, the American consumer. And this is one reason to suspect that that firewall may actually.

hold and we don't go into recession. Yeah, as I said, that's one of the arguments on the no recession side of today. But let's turn to quickly to fiscal policy. And I should ask, Alan, do you have a hard stop here? Do you have a few more minutes? No, I'm okay. You're okay. We'll probably go on for another five, ten minutes or so.

So we'll be done. But let's turn back to fiscal policy. and it does feel like a flurry of activity here more recently. It feels like we're getting some legislation through. It's not game-changing legislation. You know, we've got the CHIP Act to help fund semiconductor development here in the United States primarily. And it looks like we're going to get a piece of legislation, kind of a slim down, very slim down version of the American Family's Plan, which was part of the build back better agenda.

And more funding for climate-related issues, for Affordable Care Act subsidies, a few other things. But what do you think about the fiscal policy response to now to what's going on? Is there anything you think fiscal policymakers could be, should be doing to help with regard to what's going on with inflation? Or is that really, really up to the Fed at this point? It's mostly up to the Fed. This is what I brought up that 1968 quotation. Yeah. It's basically, there are a few things, if you want to call it fiscal policy,

where the government can nibble around the edges. The most obvious of those is the Strategic Petroleum Reserve. That's a real nibble around the edges. You know, there's the gasoline tax, which is very small at the federal. level, the prescription and the prescription drug, the presumed diminution of prescription drug costs. So there are a whole bunch of things you can nibble around the edges. But the main thing I hope fiscal policy won't do, and I think it won't, is what it did after the last crisis in 2011-1213, which is turned strong.

contractionary and try as hard as it could to kick the economy down the stairs again, leaving the Fed out there alone trying to prevent that from happening. I think that was a huge mistake. And about every third day I worry that we're going to do that again. But I think partisan gridlock is probably going to stop that from happening. Well, that goes back to our paper, right? I mean, we did that paper doing the counterfactual coming out of the financial crisis. You know, what if?

And really, I thought, nicely showed, of course, it was our paper, so it was nicely showed that, you know, that very restrictive fiscal policy was really in the post-crisis period, I went back to this in writing this book that you were asking me about. Oh, is that right? Okay. Yeah, and I talked about that episode. If I remember correctly, now, unfortunately, at my age, I rarely remember correctly. I think it was a fiscal contraction that averaged a percent and a half of GDP for three

consecutive years. Yeah. It sounds right. That's four and a half percent of GDP. Yeah. That with the sign reversed is the same size as the 2009 stimulus. Yeah. And in the context of the household deleveraging that was occurring in that period and the recapitalization of the financial system is the, as the.

And an economy that was still weak and the unemployment rate was still high. It was amazing we grew at all. It is. Yeah, exactly. So as I say, about every third day, I worry we're going to do that again. Yeah. But on the two out of three days, I think now we won't do that. Yeah. If you were king for the day and you didn't need to, you know, send this through the

legislative process, is there something you could do on the fiscal side that could move the dial here more meaningfully on inflation over the next year or two? Not much. Okay. I can't really think of. I say housing policy. What do you think? I mean, clearly that is a much longer run. First of all, most longer run and not mainly federal. You know, all kinds of cities and towns and counties have very restrictive zoning regulations, which as the demand for housing goes up, just comes into price more than into quantity. But almost zero of that is federal. Yeah, I would argue, you know, like a lie tech, low-income housing tax credits.

That really juices up returns to affordable rent. construction. And that's a, you know, a program that's been in place. The infrastructure's there just you just turn a few dials and you juice that up. You can build multifamily a little bit more quickly. You're right. It's not going to solve the problem in the next year, but maybe over the next two, three, four years, it might add more supply, have some impact. Yeah, I mean, all the things that have to do with that sector of the economy are going to be long run. Yeah. Right. Yeah, there's no, there's no, there's no slam dunk kind of, if I do this now, I'm going to, I'm going to, I'm going to get some relief by this time next year on inflation on the fiscal side.

Well, I don't. Yeah. Okay. All right. Just checking. I didn't think so, but I was just checking. We have a way without really ridiculous agricultural subsidies to increase wheat production in the United States quickly.

Now you do have to plant and harvest, you know. This is not going to have to. some rain and not too much rain. Yeah. It's not about to happen the next two months. Yeah. Okay. Hey, I want to end our conversation with discussion around, well, okay, let's suppose

we go into recession. What is, what do you think the nature of that recession is in terms of severity? I mean, are we looking at typical kind of garden variety, something less severe, something more severe? Do you have any sense of that? Yeah, I would think garden variety is the upper limit, so less than a typical recession. And the reasons are several things that we've discussed here already and one that we haven't. One is the large stock of liquid assets that consumers are holding.

So as those income flows stop being so robust, they have someplace else to turn. Secondly, I think it's likely, though not on a large scale, that Congress stops fretting about the deficit and even the Republicans stop just thinking every minute what they can do to make the world worse for Joe Biden. And you get a little fiscal cushion from that. And the thing we haven't talked about is that the current composition of the Federal Reserve doesn't look to me like a bunch of people that want to see the unemployment rate go to 10%. That as things, as and if things start to deteriorate, I think you'll get a rapid monetary

policy reversal if it's needed. Now, you know, on Chris's forecast that may not be needed. That everything is sort of mild and the Fed just needs to flatline, you know, push the Fed funds rate up and then flatline it for a while. But if things look worse than that, I think they'll start cutting it. Right. Very good. So, I think you put it nicely. So at worst, it would be a garden variety. So that would be GDP down 2 and a half 3%. We lose 3, 4 million jobs.

Unemployment goes to maybe high of 6%ish, something like that. That would be kind of garden variety. So nothing worse than that. That's the worst than I'm expecting from the next recession. Yeah. Because if we go into recession, you're thinking is that that would inflation, inflation is coming in anyway if we don't get shocks on further surprises on the supply side of the economy and this would with a recession you get there just a lot faster obvious because you're hurting killing demand

and you get get the inflation right back down quickly yeah okay all right very good um well it was it's been a pleasure i'll have to say again uh i agree with i think everything you said i have enough disagreements We have to talk baseball. Yeah. Well, that's the only source of disagreement here is the Yankees and Phillies. But I have to say, you know, I can see why you like your Yankees. Yeah, real. I get it.

I get it. I understand. And I'm not hostile to the Phillies. They rarely play the Yankees. Yes, I know. You would be hostile if we actually won a few games, I think. But, yeah, just saying, you know. Well, the Yankees play the Phillies.

I'll rule for the Yankees. But it will never be like the Red Sox. Well, you're going to have to come. I'm going to invite you down because you're in Princeton. You live in Princeton? You're sitting in Princeton. Yeah, I'm right now. So you can easily get to a Phillies game.

I'd have to have you come down and have it. I have historically been to Phillies games. They're fun. Since the pandemic, I haven't been to anything. Yeah, that's true. Yeah, very good. Well, thanks so much, Alan, for spending time with us and really enjoyed it. And appreciate the,

time. Thank you. And with that listener, we're going to call this a podcast and we'll talk to you next week. Take care now.