Moody's Talks - Inside Economics - Bonus Episode: Heather Boushey on Climate and the Economy

Episode Date: April 11, 2023

Heather Boushey, a member of the White House Council of Economic Advisors, joins the podcast. She gives us a rundown on the economy, including her thoughts on the job market and inflation, and the hard work of incorporating climate risk into the outlook for the economy and federal budget.For more information on Heather Boushey’s work with the Council of Economic Advisers click here or follow her on Twitter at @HBoushey46. Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn 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 this is a special bonus podcast. And I'm special on a lot of levels because we have some great guests. I want to introduce my colleague, Chris Lafacchis. Chris, this is not your first rodeo, is it on Inside Economics? You've been on before. I've been on for oil and for climate. So I think this is my third appearance. Perfect. You're the right guy for this podcast. So it's good to have you back. And Chris, we've been working together a long time. I can't at least a decade, probably longer than that, right? Yeah, I joined in August of 06. So I guess this August it'll be 17 years. Okay. What was the unemployment rate in August of 06? Come on. I'm going to guess 4.9%. Let me think about this for a second. And Franco, you need to look this up. Okay. He said 4.6. August of 2006, you know, before, you know, before. before we were still in the middle of the housing boom, house prices hadn't rolled over yet. They're about ready to. I, four, six sounds pretty good to me, but I'll say four eight, four eight. So, Franco, you're going to look that up, okay? It can do, or Sarah, you can look it up.

Fred, don't go to Fred. Go to our data buffet and look up the unemployment rate for August of 2006. But it's good to have you, Chris, and welcome back. And we have Heather Boucher. Hey, Heather, it's good to have you on. Heather is on the Council of Economic Advisors. And just a real honor to have you on. Thank you, Heather, for joining us.

Oh, it's my pleasure. Really great to be here today. I love your background. I've had a couple of Zooms with you. And I've always, I don't know if I've told you this, but I love that background. Is it real? Is it a real background? That is, this is my bookshop.

Yep, this is my house. So cool. Yeah. What was the last time? you actually read a book from that bookshelf. Oh, I feel like it was a long time ago, but I did actually just put my copy of the economic report of the president into the bookshelf. So that I was like, you know, putting that there.

This was the one that the president himself signed. So that's pretty exciting. That's pretty cool. That's a really people don't like generally people know that that is a real, really significant body of work every year that the council puts together, right? Oh, it's, yes. I mean, I think this year it was 512. pages. And we covered everything from a chapter on climate, adaptation issues, labor supply,

the macro economy, a chapter on the care economy, one on crypto with a nice little box about a crypto mining tax and how important that is, which made it into the budget. And a whole bunch of other things. So, no, it's a, it's a big lift. But what it does is it helps that helps the president understand where economics is and where we can be pushing the ball forward in terms of economic policy. Yeah, it's a very, and I know that CEA, CAs every year spend a lot of energy on that, going all the way back in time. So it's actually a wealth of information, you know, if people are interested.

I mean, just it really gives you a lot of insight as to what are topics that are top of mind and then really going into depth and really doing important work. there. So really important. So before we dive in, and we've got a lot to talk about, I want to talk about the economy, of course, but yeah, I know you've been doing a lot of work at CEA with regard to climate and the cost of climate change and trying to bring that into the budget process. And Chris, I know you've been following that very carefully and doing a lot of work in that area yourself. But before we go down that path, Heather, can you just give us a sense of your long and windy road to being on the CEA,

because you've been a fixture in D.C. for at least from the beginning of time in my memory. That sounds bad somehow, but you know what I mean. Yeah. I feel like, sometimes I feel like that as well. I've now actually lived in D.C. longer than I lived in, I grew up in the suburbs of Seattle. And so I've lived here longer than anywhere else. So this is certainly my home. I wrote in my graduate school application essays that I wanted to grow up and work at think tanks and advise policymakers on how to think about economic policy.

So I have definitely been living the dream for many years. I've worked in a number of think tanks in town. I was able to spend a little bit over a year on the Hill at the Joint Economic Committee during actually the beginnings of the financial crisis. I was there in 2008, so a front row seat to the crisis there. And I know you came and testified a lot. I saw you a lot that year and the years after. And then with John Podesta, I co-founded an organization in 2013 called the Washington Center for Equitable Growth,

where we investigated whether and how economic inequality in all its forms affected economic growth and stability. And that, I feel like in many ways, was sort of the platform to the winding path that got me here. But when I started advising the then-Vice president, candidate Biden on the campaign trail, you know, we were really focused on, you know, how we could understand not just the moment in front of us with the pandemic, but as he kept talking about, you know, that sort of morphed into the buildback better refrain, you know,

what were some of the longer term challenges facing the economy? And of course, at that point, you know, it's been almost a half century of rising economic inequality that forms the backdrop in which our economy is functioning now. What does that mean? How does that mean? How do we think about that? How do we address the economic insecurity that that has created? How do we reverse those trends? And of course, the president has made that a priority as well as addressing racial inequality. But I think about climate change is connected to that in many ways.

That just like the issues around inequality, there are serious inequality issues in climate change. But it also really does change the landscape in which the economy. economy is functioning. The rules are go-to common sense notions are shifting as we work our way through this energy transition. And as we rethink what our data and models can tell us about the world around us as the natural environment is shifting. So that's a little bit of how I got here and what I've been thinking about. But yeah, I'm just, I couldn't be more honored to be a part of this administration. It's really the highlight of my career. Well, it's a great CEA. And I know, I guess Jared Bernstein is up for leading the way here.

I guess he has to go through the nomination process, but I'm sure he'll be approved here. Fingers crossed. Fingers crossed. Yeah, he's such a good guy. In Washington growth, that does such great work. And who's leading the way there now? I've kind of lost track.

Yeah, so, Shana Strong is the new executive director. And no, it was a real challenge. So many really terrific organizations, a lot of leaders like myself went into the administration. And so it was this time of change, which can be both revitalizing, but also kind of hard on staff. So I know that I've been really impressed watching her take the helm. Well, great. And I should say before we move on, because the listeners may be wondering, what happened to Chris Duretis and Marissa Dina Talley, our host, or a traditional co-host? They're sick. I don't know if you were listening to the podcast on Friday, but they were ill, but they kind of powered through. Turns out both of them have COVID. So they're both out today. So we're diminished as a result, but we'll plow ahead here going forward. But that I found that can you believe that? I thought, I thought it was over. I've been looking at these numbers and it, you know, they keep getting smaller and smaller. So I'm sorry to hear that. But hopefully they got the milder version.

and all the things. But a holiday weekends for so many, too, that must be rough on their families. Yeah, yeah. I think it's a mild version. I think they're okay. But anyway, so let's dive in the economy, and you got some, well, we all got some pretty good news,

I think, last Friday, the jobs numbers for the month of March. And they felt pretty good to me in terms of still solid job growth, but moderating, consistent with the need to quell wage. and price pressures, and it felt like wage growth is kind of moderating into the sweet spot consistent with the Fed's target. A lot of other details in there, but if you kind of add it all up, it felt pretty good to me. What about you from your perspective? What did you think of the report and what it means about for the economy here going forward?

Yeah, so I was, the first, you know, as we got the numbers and started looking into it, the word Goldilocks just kept coming to mind, that really hitting that sweet spot, not too hot, too cold, you know, still generating strong job growth and yet not that overheating or not that blockbuster pace that we needed to pull out of the pandemic recovery. I think this is one of the things that has been, is I've been watching the news coverage over the past couple of years really interesting, right? Of course, during the pandemic, so many people lost their jobs, so many people went home for the health of us all, you know, with COVID and everything. And to pull out of that, we really needed this really fast job gains, which of course we saw. But those numbers couldn't go on forever.

And so finding that slowdown back to a sustainable pace, a stable kind of pace has been a real challenge, especially alongside all of the mismatches between supply and demand that had been leading to price shocks on the other side, the inflation that we've been seeing. But this kind of jobs report really is, I think, that sweet spot. it was the last three months we created about 345,000 jobs, which is down over 200,000 from the pace that we're creating over the three months a year ago in this time frame. So that's good. That's an average monthly job growth. So the average monthly job growth was, you said in the past three months, 347,000 on average.

Yeah, 345. Something like that. Yeah, 345. Yeah. Down from 550 something. a year ago over the three months moving average. A slowing of wage growth, again, you're kind of seeing it come back down, but you still do see nominal wage gains.

And we had been seeing, of course, we'll get new inflation numbers in a couple of days, so we don't know what those are in terms of real wages, but up until February, you had seen real wage gains going back since the summer. So that was at least slowing growth, but still seeing that little bit of an uptick. One of the things that, of course, really popped from this month's report was that the black unemployment hit an all-time low. We've only been disaggregating the unemployment data by race since 1972, which I guess is a really long time ago. It doesn't seem so long ago to me, but whatever. Me neither.

It's like when I was yesterday. But at any rate. Okay. What was the unemployment rate in 1972? Oh, that's a good question. I'm going to say, and Sarah, you've got to look this up. up too, but I'm going to say six something. Yeah, probably because, you know, the structural unemployment rate was a lot higher back then, right? Because yeah, you had a lot of boomers entering

in a lot of female participants, big increase in female participation. I'd say six and a half. And that probably wasn't, that was right. Oh, it was right before the recession. So probably say six two. I'd say six. Yeah. It's, I mean, that's pre-oil oil crisis, right? So it's like 16. But yeah. Chris, can you look that up? Can you when you, when you, we're chatting. Also go back and look up the other one. Yeah, it was 4-7. In 1972? No, no, no, no, 4-7 for August 06.

What did we say? Yeah. We said 4-8. I think I said 4-9, I think. I think you got me by like a 10. Price is right rules. What about 72, 1972? What was that?

All right. I think we said 6-2. Yeah, six-something, yeah. What month do you want? No, the average for the year. Oh, okay. Yeah. The recession probably began in 73, didn't it?

Yeah, because the oil crisis hadn't happened yet. You're too slow, Chris. You're too slow. Yeah. Come on. Sorry. For a day, you're under pressure. You're nervous.

Five, six? Yeah, it's around five, six. Oh, five. Okay. You're not too bad. Yeah, we're going to, okay. Anyway. Yeah, so now, yeah, so now black unemployment is five percent.

So, you know, the lowest it's been since, since that era, super important. But, you know, I mean, Mark, you've been around this, you know, watching recessions for a long time. One of the things that we say time and time again is that when you get the unemployment really low, then lots more folks can come in. It pulls people in who don't normally get opportunity. And so you see that in people with less education, being able to get jobs. you see that, you know, that gap between black and white unemployment getting smaller, and that's exactly what we see here. And so that really does speak to the strength of the labor market right now, and that's good news.

I think we're all hoping that we can sustain this level or a level of continued job gains without, you know, things turning too far south. So I think, you know, what we saw last month really good means that we're that we are still continue to add jobs, but of course we will see as we get the data in the months to come. Yeah, I guess we're in a critical juncture here for the economy, right? Because the growth is slowing by design, the Federal Reserve's raising rates to slow growth to demand.

In fact, last month, by my calculation, it was the first month since the pandemic shutdowns that labor supply was greater on a year-over-year basis than labor demand. So that means that unemployment is going to start ticking up. here. And when unemployment starts to notch higher, even from very low levels, obviously, that's when you're kind of, the economy is very vulnerable to anything that can go on. So it feels like we all knew this is going to happen. You know, it's not a surprise, but here we are. And it feels like the next six, 12 months are going to be, going to be tricky. It's going to be tricky to to kind of navigate through. Would you concur with that? I would concur. And I mean, honestly,

that's one of the reasons why dealing with the debt limit is so important because you think about this economy, this recovery has been able to handle so many things that have been thrown at it, right? You know, there were a series of emergency measures to deal with the COVID pandemic and what that did to the economy, a little bit of insurance built in there to make sure we had some bandwidth if things, you know, didn't get better as quickly as we hoped. a couple of different variants of the virus that got thrown at the economy, but still able to keep on truck end, still able to keep adding jobs. The energy shock caused by Putin's unperforked war in the Ukraine that upended global energy prices, you know, challenged everything, the supply chain shocks. And yet at this moment, as you just said, where we're trying to get back to that steady job growth, again, not too hot, not too cold, something like the debt limit.

really could be the straw that the thing that really does cause the chaos that causes the challenges. So it feels a little bit more vulnerable now. And so it's just something that is just weighs on the back of my mind every day. Yeah, I totally agree. We've done a lot of work on trying to understand the debt limit and its impacts if we breach it under different scenarios. And we're calculating, still a lot of uncertainty, but we're calculating the X date, the date when the Treasury runs out of the cash, out of cash necessary to pay everyone on time, pay all the bills on time, mid-August, to be precise August 18th.

So it feels, you know, so far there's not really been a lot of angst in markets. They're focused on different things, obviously. But my guess is we come back after July 4th break and it becomes clear that there's only a few more weeks left for Congress to do something. And that's when tensions will start to rise. And you're right. I mean, that's the same point in time. when the economy is going to be dealing with slower growth, perhaps some increase in unemployment,

and it's going to be incredibly vulnerable to any kind of disruption to markets as related to the debt limit. So it feels like that's a really big deal. I mean, especially you combine that with challenges that we've seen in the financial market and the fact that we know it takes some months of lag for federal reserve policy to work its way through credit markets. It does seem like the summer is a really important time and not a great moment to do. be upending the full faith and credit of the United States. I think we're very worried about the chaos that that could cause and that it could upend this so far really excellent recovery, which as we noted is having these implications for equity, is bringing people into the labor

forest, helping them get jobs, creating that economic security, which is exactly what we want to see across the economy. Yeah, are you surprised that we haven't seen any kind of reaction so far in markets or is just this is too early for markets to kind of focus on what's going on. Specifically around the debt limit. Are you, have you, had you expected more by now or is this way too early? You know, I lived through other debt limit debacles. You know, the, so it does, it does seem like there's still time. And so I think there is hope that Congress will avoid the brinkmanship. I think there's hope that all sides can come together and do something. You know, we do know, of course, that the current speaker, Speaker McCarthy, voted three

times under the last president for a clean debt limit increase. So it does seem that there's some possibility. So maybe markets are kind of, you know, you know, crossing their fingers, whistling past the graveyard or whatever, hoping that that'll be the case. So I haven't been too surprised because it's kind of the way Washington works, but I agree with you that once we get to the summer, if we haven't already addressed it, things could get a little bit unsettled. Yeah, I know the last time, it feels, I mean, I've seen a lot of debt limit battles, and some are more contentious than others. The one that kind of stands out is the 2011 debate debacle when S&P downgraded U.S. Treasury

debt. And this feels more like this period is going to be more like that than the other debates. So, and that's unfortunate in the context of an economy that's vulnerable for sure. 100%. So, okay, what's the average on, Chris, you ready? What's the average unemployment rate in 2011? 2011. Do you want to take a crack at that, Heather?

Of course, coming out of the financial crisis. Oh, man. 10% on the nose, I believe, in, in, later 9 or 2010. It had fallen pretty far by then. I'd say, I'd say eight. Would you say eight? Yeah, I'd say, I'd say seven and a half. Yeah.

Yeah. What is it, Chris? It's 8.9%. Ooh, on average in 2011. I was closer with eight. Wow. It's like you just block these things out because you can't imagine how awful it was. Well, and that was a recovery.

I mean, here's one thing I will say about this recovery, just because you opened the door for me to talk about my favorite chart from the Biden administration so far, which is that we have created more. That's because it's your chart, Heather. It's a great chart. Yeah, but we've created the president, under this president, faster pace of job growth of any recovery during my, since I became an economist and going back to the, you know, for decades and certainly more than the Great Recession where it was so slow.

And we forget just how slow that was and how lackluster that recovery was. and the challenges that it left in its wake, relative to this recovery where job gains were really fast, which it should have been because it was a COVID, it was a pandemic-induced recession. So we should have been able to recover really quickly, and we did. But it does bring up a series of questions that I'm sure we'll get to, which is, you know, you were left with a situation after the Great Recession where, you know, wages were low. the weight share of national income was relatively low. You had this prolonged period of unemployment that left a lot of structural issues in its wake. So it's good to see that we've had this very sharp recovery in this, in this sharp jobs recovery in this recovery. Yeah.

So I guess no debate about the job performance and unemployment. And, you know, I think you're right about black unemployment to 5%. that is a, that's a clear victory. Obviously, the problem that we're struggling with is inflation. And that's particularly hard. It's a hard on all Americans, obviously, but, you know, particularly low or income Americans because they don't have any savings and cash cushion. And, of course, they, you know, they're focused on paying for their gasoline and their food and rent.

There's just no, no give there. what's your sense of inflation? I mean, just for context, CPI, consumer price inflation peaked at close to 9% back last June. We're now at 6th. As of February, as you pointed out, we're going to get another data point for March here in a couple days. Does it feel like to you, we're headed in the right direction here that we're going to get this down, you know, something close to something we all feel comfortable with if they feel comfortable with in a reasonable amount of time, given what we know about the economy? I mean, I remain optimistic. I mean, first of all, there's a lot of, there's been slowing of the pace of inflation,

which does not mean that inflation has come down. I want to be really clear about that, but that the pace has slowed, as you said. It was over 9%. In the summer, it's come down to, you know, by a third, which is certainly good news. You know, we've also seen the abatement of gas prices around the country. So gas prices are down by $1.40, $1.50 relative to their peaks last summer. So that is certainly good news for families around the country, at least ones that drive gasoline-fueled cars and where that is an issue, but also for transportation and all the

things. At the same time, we've seen some of the structural issues that led to the inflation abate. You know, the biggest challenge, of course, was that we and the rest of the world was recovering from this global pandemic where we all learned that the shutting down of a factory in Malaysia could have implications for whether or not you could get the car parts and make new cars and what prices would be here in the United States. And those supply chain challenges really did upend our economy. And on top of the fact that people were at home, they weren't buying services. People wanted stuff. They wanted, you know, home offices. They wanted, you know, new things,

this new furniture, all the things as people were stuck at home. So all of that has really reverted. And so we've seen a lot of progress. Supply chains are up and running really well. You're not seeing the lines of the ports that you had. We're making these historic investments in semiconductor production in order to forestall those kinds of challenges in the future. We're making these historic investments in clean energy in order to address some of the challenges we've seen in energy, again, that's over the long term, but all these things are going to make us more resilient, some in the short term, but certainly in the medium to long term as well. And then you combine that with the fact that the labor market is coming back down.

It's a little bit slower. And I don't think we're seeing pressure from the job market on prices in the way that a lot of people really concerned that we would. We're not seeing a wage price spiral. So all of that gives me hope and optimism that we will. see inflation continue to come, the pace of it continue to slow. And then the Fed has taken a lot of actions already. So we need to let those work their way through the economy.

I think also the banking crisis has been happening is also going to slow down credit. So are there indications that it will? So all of that, I think, points to the fact that we're moving in the right direction. Let me add one more thing, which is that, you know, dealing with inflation, is really the Federal Reserve's job. And yet at the same time, especially given what we have seen in this economy, there were a lot of things that the administration could and did do to address higher prices, everything from all the work the president did on supply chains to the fact that focused a lot on lowering

healthcare prices for families, lowering the cost of prescription drugs, lowering the price of insulin, you know, really focusing on the specific costs that government could do something about. And so I think that, too, will help reduce the, you know, the president likes to talk about give families a little bit of breathing room, but reduce those cost pressures facing families at the same time as well. Well, one more set of questions on inflation. I want to get to the climate work that you've been doing. The pushback on inflation is that it's not, there's long list of reasons.

while inflation is high. Supply demand, you know, they're all in the mix. And you led with the supply side kind of supply chains and pandemic. You mentioned the Russian invasion. Others would argue it's the demand side, you know, that it's all the fiscal support that was provided during the pandemic, including up and through the American Rescue Plan in 2021. And also energy policy. You hear that often, too because, you know, the difficulty putting rigs in the ground and producing energy and therefore higher energy prices adding to inflation. How do you respond to those critics, those criticisms? And I take those are criticisms, right? That's policy, right? Yeah. So, I mean, on energy, you know, the president has made clear time and time again that, you know, that there has not

been as much use of the tools that energy companies and fossil fuels have available to them. So there's drilling permits they haven't used. There's been a lot of wiggle room for them to be expanding production. But at the same time, you know, we've also seen that especially over the summer, there was a lot of profitability in that sector that we saw that where any, where even when prices started to come down in global oil prices, those were not being passed on to consumers. So I think one of the responses to the energy conversation is, well, we need to actually look at what's been happening in the fossil fuel sectors. There are indications that, you know, in the literature, they call this rockets and feathers. When energy prices, they go up like a rocket, but they take a long time to come down like a feather.

And we certainly saw that. But that means they're getting a lot of the profits, a lot of the rents to use the economic terms. and so adding to price increases. So there was a lot of that that we also need to focus on, and then not doing their part in terms of ramping up refining and using all the tools they had available to increase supply. But then on the household side, you know, I think that's a really important question.

I think economists are going to be digging into this for a long time. You know, was the policy response to this pandemic recession, the right one, where did it over or undershoot? And, you know, here's the thing. When the president came into office looking at an economy that was creating, I remember that January, the three months before inauguration, average job creation was about $60,000 per month on average. Certainly, nowhere near what we needed to pull the economy out of the pandemic recession. We needed that to be increased by a factor of 10, right? We needed to see more like $600,000 a month, about 60.

And there was this real concern that family. were being because schools weren't up and running, businesses weren't running, the vaccine wasn't out, needed to make sure that families, communities, businesses could be made whole so that we could weather this challenge and get back up and running. And that's exactly what we've seen. You know, the United States has seen one of the strongest recoveries relative to our economic competitors. They did not do the same kind of fiscal support we did. And yet, we were stronger and everybody else also had inflation. So there's a little bit of, what is it that, you know, what's the goal here? I think from the president's perspective,

the goal was to make sure that America got through this challenge, got through it together with the least amount of long-term damage. And we've been able to pivot, you know, again, we started this conversation, talking about the fact that we still are seeing these good, solid, strong job numbers. I think that is because of the decisive and bold action. And maybe it overshot a little bit. But the reality is that we didn't know exactly how many variants, of the virus it would be how quickly we could get that vaccine out to people. And this gave us a little bit of bandwidth to make sure that communities had the resources they needed to cope.

So I think that looked at in the larger context and the larger economic outcomes, I think this was an enormous success. And given the fact that other countries are also struggling with inflation, I think that really does point to this being a mismatch of supply and demand, is consumers shifted to goods, away from services, as we learned about the fragility of our global supply chains and just in time production, there's a lot of learning there. And I think that that's, again, I look forward to the ASSA meetings next January when we can all debate this. Well, yeah, I think you make a good point. I mean, it's hard to remember back to January,

February, March of 2021 when that American Rescue Plan was being put together. But in that time, it was still a lot of uncertainty in regard to the pandemic, how that was going to play out the vaccines, the rollout, the efficacy of the vaccines. There's still a lot of concern and fear. And I think policy 101 says if I was writing policy 101, I would say, you know, if you're in a period of high uncertainty, better to err on the side of overaccommodating than not accommodating enough because that would be very, very disastrous, not only for the American people, but also from a budgetary perspective, because your economy evaporates and it takes revenues and spending and causes even more fiscal problems and costs to you would be even greater. So I think that's key

to remember here. And I'll say one more thing. You know, the president, the leads on his economic team, Janet Yellen, Cecilia Rouse, Jared Bernstein, myself, all labor economists in some way or another, people who've spent a lot of time thinking about labor. And, you know, Secretary Yellen spent a lot of time, especially early on, talking about the long-term effects of scarring from high unemployment that lasts. I mean, we saw that over the past, you know, after the Great Recession. And we are not seeing that now. And so the productivity-enhancing effects of taking that decisive action. Again, time will tell, but I think we are continuing to see the benefits of that. And certainly American families are benefiting from it. Yeah, good point.

Hey, let's talk about climate and all the work you're doing there. Maybe you can bring everyone up to speed with regard to what work you're doing. I know it all goes back to an executive order the president put out pretty early on in the administration. Did he not? Yeah, executive order on I'm so bad at remembering these really long numbers, but it was put out in May of 2021, so early on, and it was on climate-related. I bet Chris has this memorized. I bet he does. I think it's 11-4-0. Is that it?

Okay. I think so. I think it does start with 1-1. Mark, it really put me on the spot today. No, it's good. You can Google that. But it's on climate-related financial risk, and it focuses a whole-of-government approach on how we can account for the physical and the transition risk of climate change in our economic tools

and in how we think about risk across the economy. So a lot of work, you know, focusing on the various regulatory agencies, how they are defining risk and thinking about it, asking OMB, the Office of Management and Budget to look at how those risks affect the budget making of the U.S. government. And then my little corner of the world and where I've certainly talked a lot to economic forecasters like yourselves is, you know, how do we think about methodologies to incorporate the physical and the transition risk of climate change into our economic forecasts? And what does that mean? And why do we need to do this? And so that's been two years of work now. We've released two white papers.

We've incorporated this into the long-term budget outlook, both in the fiscal year 23 budget and then the fiscal year 24-1 that was just released. And we've learned a lot. And let me just give you some top lines here. When you talk about the physical damages from climate change, you know, you're thinking about the fact that there's destruction of physical capital. There's this destruction of a bridge because of the increased prevalence of hurricanes or something like that or the destruction of a levy or flooding or whatnot. The increased fires that destroy homes across the West. You have those kinds of things. You also have the increased uncertainty.

We haven't lived through a period of climate change like we're living through now. So any data set that we have is always based on past data. We don't have data that shows us exactly where we're going to go, exactly what this is going to look like. So there's a lot more uncertainty about what the weather patterns will be, what the damage could be from changes in temperature. And that uncertainty certainly also adds to the risk in the economy. It adds to the risk of investment. So this is another way we think about the physical damages, migration, a whole bunch of other things. And that's something that is both in the here and now.

I mean, we're already seeing these every, you know, year after year, these record-breaking amounts of physical damages from climate change, climate-related weather disasters and the like. But we know that these are going to grow over time, even if we were to stop increasing emissions now because there's so much carbon in the atmosphere, we have these damages we'll have to account for. So that's a big budget question.

It's a big economic question. How are we going to pay for that? Who pays for it and all that things? Second, though, is this question about the transit? And the exciting thing, of course, is that the president got over the finish line, this huge legislation, the Inflation Reduction Act, and also the bipartisan infrastructure law that have these major game-changing investments in transitioning us to clean energy. And that's very exciting. And the engineers have done all these models that tell us, okay, if we make this investment in hydrogen

or if we make these investments in electric vehicles, this is how much we can reduce emissions, and this is going to be great. There will also be. be economic implications of this. And the faster we make that energy transition, the more challenging, perhaps those, you know, really trying to understand those macroeconomic and microeconomic implications will be. So what is this transition going to do to labor demand? How is it going to affect changes in labor demand across place? I was reading the paper this weekend, as one does on a weekend. And there are multiple articles. Wait, this is news. Did you actually? I, you know, I mean, this is just a little bit of a tangent, but yes, we do read the actual paper at my house, but we, no, but we realized

how, how misinformed we are then, because I was really excited about this article about electric vehicles and this story about Ohio and this factory closing, and it was just a really important article. I wanted to send it to a colleague. I couldn't find it because it had been released online weeks ago, but only showed up on the cover of the business section on Sunday, And I thought it was news. It wasn't, it was old news. At any rate, but so a lot of things that, you know, tell this story of what's happening, you know, in the automobile sector, you know, where plants are going up, you know,

that's creating all this opportunity, but also where, you know, workers are struggling because their factory was making gas power vehicles. And now those are being, you know, they're not going to be made anymore. So there's effects on labor demand, effects on investment. You know, we know that there's this significant uptick in investment in clean energy. So there's both questions, what are we not investing in and how might that affect productivity and growth moving forward? But also, how does this shift the macroeconomic climate, productivity implications, price implications. So all of these are questions that we need to think about in our macroeconomic models and forecasting.

And part of the reason they're so important to think about is, is that whether we believe that price changes today or investment changes today are about the much-needed transition to clean energy to avoid these physical damages of climate change, or we think they're about something else could affect how we react to them, how the Federal Reserve reacts, how the Federal Government reacts, how Congress acts, how states react. So I think really wrapping our head around why we're seeing shifts in the economy, how much of this is related to either the physical or transition risks will be a really important challenge over the coming years. So that's what we've been focusing on. Yeah, no, a lot of good work there. So just so I understand, in your baseline economic forecast, it is the basis for your budget forecast because it's driven off how well the economy is going to do or not do. in that baseline, do you now have explicit assumptions around climate, both in terms of the temperature rise, the impact on physical risk, both acute and chronic, and any assumptions around transition costs related to things that you've done or will do? Are they now embedded in the baseline?

Not quite yet. So what we released this year just a few weeks ago was a plan to do that. I mean, and here's the thing. It's a really hard thing for the federal government to do. Yeah. Because we need to make sure that we are using the best available methods that are, you know, that are road tested, tires kicked. Everybody, everybody understands. And to your question, we do need to change. We do need to think about how all of these new things affect the baseline, but we need to integrate them. And so what we laid out in this white paper that was released a couple of weeks ago is our plan. plan to do that, how we're going to think about reconfiguring our models. We're open to input. We'd love to hear from anybody that wants to read the paper.

It's long. It's very good. Chris has read it. Right, Chris, am I wrong? Yeah, no, I read it. Yeah, I'm sure multiple times. Yeah. It just came out, so I've only had time to read it once.

Well, you cite a couple, you cite a paper that are, you were, you wrote, Chris, along with Juan, LaCari, a couple of other colleagues, right, around. macro forecast. And I saw that in the in the in the paper that was linked to. So we're, uh, you should be proud of that. So yeah. And, um, there's some other, uh, IMF and the ECB have also read our climate research as well. So I'm glad that it's, you know, going somewhere and it's not being just shot on it either. Can I ask, so to Chris. So it, well, I think one of the problems you have, Heather, obviously is the horizon, right? Because climate risk affects the economy over long periods of time, decades.

And the budget horizon, the traditional budget horizon is 10 years. So, you know, in the next 10 years, how big an impact will climate risk actually have on things like GDP and income and prices and the things that jobs, unemployment, the things that matter in terms of the budget for the forecast? So, Chris, if I turn to you based on the work we've done and you've done, what can you give me a order of magnitude? Like if I look out 10 years from now, under our baseline assumptions around climate, what's the impact of climate on economic growth? I mean, how much lower or higher is GDP as a result of however you want to frame it? Right. So with 10 years, the effects are going to be less than half a percent of GDP. But I think what's really important, especially from the context of like forecasting for the long term.

and that's what kind of like Heather and other federal government agencies have to do, is to understand kind of the cumulative impacts that are going to reverberate back on the economy, and especially because federal lawmakers are subsidizing a lot of the cost of living in very vulnerable areas right now. And that's through a couple different mechanisms. The National Flood Insurance Program is a huge one. And then also the disaster relief that federal lawmakers provide. If you go back to Hurricane Hugo, and that was, you know, a long, long time ago, and you measure the cost of the economic cost of all the natural disasters that have occurred since Hugo to now.

and you look at the amount of federal aid that lawmakers have appropriated, they've appropriated 47% of the cost of those natural disasters. And so if we're always spending money from the federal coffers to rebuild communities and we're subsidizing through NFIP, then no one really feels the effect of climate change. We're just dampening the impact. But it is a real macroeconomic cost because it crowds out private. private sector investment. It raises interest rates. It affects borrowing, consumer borrowing. It has a whole range of economic consequences. So I'm very appreciative for Heather's efforts to

quantify and incorporate climate risk into the federal government forecasting framework. Well, I mean, I'll just do another one out. I mean, you said just a number of really great things, Chris. You know, the federal government secures 65% of outstanding mortgage debt. And when you think about the fires that happen out West and, you know, what that does to homeowners and what risk then the federal government has to assume, then what that does to the cost of future mortgages for other people, all of that, just one other fact to add to that. But then what that also means is that are we truly valuing in the right way the expenditures that we need to, to make today to foster the transition to clean energy.

Right. So if you think about the money that we are investing as a part of the inflation reduction act to give subsidies to people to buy heat pumps or to buy electric vehicles or production tax credits to transition to electric vehicles or clean hydrogen or all the different things, we're just, we're accounting for that in sort of the normal way. We think about budget deficits and fiscal expenditures. And yet those expenses have the capacity to really lower future costs and to make sure that we aren't taking on these risks in the future. And we don't really have a way to think about that in the budget. It's not the way that we've had to think about things before.

So I think a lot of our work is starting from this question, well, how do we measure it so that how can we help policymakers make good decisions about what investments are going to be the most cost effective, not just. in this year, but over the next 20 to 50 years and to make sure that we are encouraging investment to go into the things that are going to be most productive for the longer term health and well-being of the planet and the economy. Yeah, one of the, not only is the budget horizon make this analysis difficult, but the other complicating factor is we live on a planet and what other countries are doing may matter even more than what we do here. So to take that into consideration as well in your assessment of the impact of climate change on the economy and the budget, that gets really complicated pretty quickly.

Well, let me add two things on that. So first off, the models that we use for our forecasting are a single region model of the U.S. economy. So it's not a global model. So right there, we have to, okay, wow, we've got to rethink that. So that's in the paper we talked about that. The other thing is that so many of the models that we mostly rely on to think about the effects of climate damages were mostly developed to help people understand what climate damages could look like and what they could cost. And so they're not actually designed to help us understand some of these questions we're talking about here in the macroeconomic context. One of the things many of them do is as they are trying to model what it would look like.

to move to clean energy, is that they assume today we're using fossil fuels tomorrow, someday in the future, we move to clean energy. And there's a transition that happens in between, but that's not really a part of the model. It just goes from one to the other, and they assume a carbon tax. And then private actors will all just see that higher price on things that emit carbon, and they will just very easily transition to different activities. And I think as economists, we know that in the short to medium,

term, that may not look quite as smooth as it does in those beautiful models. And so that's the other challenge is how do we actually, how do we think about modeling that transition in a way that is more true to what we actually think the experience might be over the next few years? So you're right about the timeframes. The damages are way off in the future, but the transition is here and now. And while, you know, we've had energy in our macro models for a long time, everybody knows that energy prices are really important because, you know, energies in almost everything. We're using energy to do this web, you know, this web interview, right?

But we haven't thought about how you transition everything in an economy from one form of energy to another and how you think about the cost and benefits of that over time. Yeah, I mean, it's a really complicated issue. We've been doing a lot of macro modeling trying to bring climate into our global. We have a global model and trying to incorporate it because we do a lot of work with global financial institutions that are now being required in many are not here in the U.S., but in many other parts of the world, these so-called climate stress tests where the banks

need to assess the impact on their balance sheet and income statements of different climate risk scenarios, mostly so-called NGFS scenario-based kind of work. So we're doing a lot of work in the area. We know how difficult this is and how complicated it is. So with that as a kind of preface, if you could have one thing or maybe two or maybe even three that would help you in your work trying to translate all of this into what it means for the economy and the budget, what would that one thing be? What would you want?

The thing I want the most is I want the brilliant modelers that are, you know, that are doing all that work. That rules me out right away. All over the world who have developed these models. I want them to model what it looks like to use policy tools that are not a carbon tax. So how does it look like if we use subsidies, if we use different tax incentives, if we use regulations, like how do we model that? I mean, that is really thorny. It's complicated. There's actually a new project started up by the OECD, the Organization for Economic Cooperation Development on Inclusive Carbon Mitigation Approaches, where they are trying to help different countries all over the world understand what kinds of policies can lower emissions and what that looks like so they can compare regimes across countries.

And here too, all these countries are like, well, I don't know. How does this policy reduce emissions? and you look at the models and we don't, that isn't, that isn't what people have been focused on. So I think there is just a really exciting opportunity for modelers to get out there and grab this by the horn and do it as quickly as possible. So if I could wave my magic wand, I would, you know, have a lot of people focused on that right now. That's good. That's good to hear. Yeah. In Europe, the Europeans are further down the path here than we are in terms of trying to figure out how to mitigate climate risk. and a lot of different kinds of policies have been put in place. So we are actually doing a lot of modeling in Europe to try to capture, you know,

these different policy approaches to addressing climate risk. Well, this, I think, is really critical kind of tying this back to your work on income, wealth, and inequality. This is really critical, right? Because if you, we've done some work where we've looked at geographies, look at the climate risk of those geographies, down to like a zip code or, you know, block level. And what you find, and we create scores of climate risk for these different geographies,

so based on, you know, how prone these areas are to hurricanes or flooding or sea level rise or whatever it may be. And if you look at those scores and then you look at the income distribution, the median incomes in those in those geographies block groups, you quickly see that the areas that are most at risk from climate change are the most vulnerable communities in our country, the lowest income communities across the country. So this is really critical,

not only to broader economic growth, but very, very important to addressing this pernicious problem we have with income and wealth inequality. Well, there's that on the physical damages, 100%, and then on the transition side, you know, a lot of what we need to do is to change the things that we use, the way we power our homes, the way we power transportation. And there's some ways that this can be very distributionally neutral, like if, you know, local communities are investing in electric school buses or something, that can have a really

positive effect on distribution. It can, you know, one of the best things about electric vehicles is that they don't smell and they're not noisy. It's going to be a really positive effect. incredible world in the next few years when we, you know, get these stinky, noisy vehicles off the street. It's going to be fantastic. I mean, it's actually a little unnerving. The first time you go into one, you go, is it on? Yeah, is it on? Well, and you realize that the pedestrians, yeah, you have to, you know, but that means less, it's good, there's going to be less asthma for kids that live near highways, right? That school bus won't be, you know, spewing out toxic diesel fumes at little kids. So there'll be some distributional effects

there. But on the other hand, you know, if you think about the ability of higher income families to afford solar panels on their roofs or to afford to buy, you know, who buys new cars, higher income families, those families are going to be able to adopt these new technologies faster. And that'll create some distributional questions. It's also the case that the more you get higher income families adopting these solar panels, they're going to be using less grid, less energy from the grid. And so then there's real questions. We need to rethink. about how we calculate the pay-for us for electricity. Who pays for the grid if a lot of wealthier people are getting the net meeting, that they're metering.

They're getting these benefits back from power that they're giving. So there's a lot of real thorny sort of microeconomic questions that'll come out on the transition as well that have significant distributional implications. Absolutely. Well, we're at time, and I know you've got a lot going on, so I don't want to abuse. use this opportunity. So I want to thank you for participating. I was trying to think of one more unemployment rate question to ask you. The real question I want to ask you, and you have to be right here, is what is the unemployment rate going to be a year from now? That's the key question. That's hard. That's hard. Yeah, I wish I could. You know, C.C. Rouse just, you know,

C.C. Rouse just, you know, step down from being chair. And the team gave her a clouded, a cloudy crystal ball on her way out because we all walked around saying, our crystal balls are cloudy. But here's what I hope for the American people. I hope that we can maintain this recovery. I hope that we don't do anything foolhardy that causes chaos and catastrophe across the economy, like allowing the nation to move past this debt ceiling and default on the debts that we owe. So I think hoping the Republicans can come to the table and really find a path through that. Those are going to be the key, the key elements to keeping that unemployment right down. Excellent.

On that note, no catastrophes. I'm all for it. Help me. Thank you so much, Heather. It was really a pleasure, honor for you joining us on the podcast. And to the dear listener, I hope you enjoyed this. And we'll be back on Friday. I don't know if Chris or Marissa will be here, but I will be.

Come hell or high water. I don't think I've missed. Chris, I've not missed a podcast in two years. and I don't plan to miss one for the next two. So with that, thank you. Thank you so much. Take care now.