Moody's Talks - Inside Economics - Crazy But Correct

Episode Date: November 22, 2024

Joe Hazell, Assistant Professor of Economics at the London School of Economics, joins the podcast to discuss inflation. Joe breaks down the reasons for the lack of inflation in the pre-pandemic period and the primary causes of inflation over the past four years. The team discusses why the average American is much more sensitive to inflation than unemployment and whether the Fed should rethink how it balances the two when considering monetary policy. Finally, the discussion turns to the incoming Trump administration’s policies and their potential effect on inflation over the next few years.  Guest: Jonathon Hazell - Assistant Professor of Economics at the London School of EconomicsPapers mentioned in this episode: Why Do Workers Dislike Inflation? Wage Erosion and Conflict Costs and The Dominant Role of Expectations and Broad-Based Supply Shocks in Driving Inflation Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-host, Marissa Dina Talley and Chris Dutis. Hi, guys. Hey, Mark. Good morning, Mark. How's it going? Good.

Great. Good, good. So I joined Blue Sky. You know, Blue Sky, the new social media platform? Oh, you did? I've heard about it, but I don't know much about it. Yeah. I just posted my first post this morning.

I have 115 followers. I don't know how that happened, but I'll take it. Are you off of X? Are they all bots? Yeah, right. I think on Blue Sky, they're legitimate, I think. Okay. For now.

For now, yeah. Am I off X? Not yet. You know, should I be off X? What do you think? I'm not on it. So I, you're not on it. Right.

If you want to come over to LinkedIn, you know. Should I? Should I do that? Yeah, I don't know. I don't know. But anyway, we'll see how this goes. Good to have an alternative out there. And I saw Paul Krugman is on there and Jason Furman.

I haven't looked really a lot, but just very curious, you know, what you thought. So what else? Anything else going on before we kind of dive into things? Any other news? I see it snowing here in the suburban Philly. That's the big news, yeah. That's the big news. Local news.

All right. Okay. No big news. Well, we have a guest. Joe, you know, Joe, is it Hazel? Hazel, that's right. Oh, I'm so sorry. I just call you Joe.

I don't know. I never told you by your last name, Joe Hazel. So it's good to have you on. That's great to be here. Thanks for having me, Mark, Chris, Marissa. Really excited to get into it, get into some economics. So are you a Twitter, I was thinking about this.

So I'm actually, I'm using both right now. So I think it's good to sort of keep the platforms competitive, you know, exert some, exert some market pressure. I use them both. I'm more of a consumer than producer. And at this stage, you kind of notice that different subgroups have segmented into different platforms. So the people who are active on LinkedIn, X or Twitter and Blue Sky, just different people.

So academics are all on Blue Sky. I think media is still mostly on X slash Twitter. businesses on LinkedIn and I want all of it. So I kind of try and, you know, I'm in my spare time. I'm a big runner as a hobby and they're all on Instagram. So why don't use them all? And then the hope is that you keep these giant corporations a little bit competitive because they've got the pressure that you're able to switch really.

Right. I should have known that, but I never, that makes perfect sense. You know, academic business and media. I didn't dawn on me, but that makes a lot of sense. But doesn't it take a lot of energy? to be on all those platforms? I'm a dreadful procrastinator, so I have the time pre-ed-

my embarrassing secrets. The way that I get stuff done is I like to spend every half an hour I like to take like two or three minutes to kind of procrastinate to recharge my energy. It's actually it's sort of perfect to spend just a couple of minutes meandering around social media

during that short interval. So that's a kind of dirty secret. I was going to say, I mean, you seem so productive The procrastination doesn't seem like that would be in your M.O. I like to think it's part of the process, but who knows. Part of the process. After them leaving all this money on the table, we'll see.

Well, I think everyone can hear that accent. So that's a British accent. British accent, exactly. And you're teaching at LSC. Correct. And my wife, I told my wife, I'm going to be talking with you today. And she said, oh, tell him that I went to LSC. Oh, fantastic.

So she went to LSC for a year. It's a wonderful place. I'm really lucky. It's like you can see, you can feel the history in the hallways. You know, we've had these amazing economists. Hayek went there. John Hicks. You know, Sir Arthur Lewis, the first development economist.

William Beveridge of the beverage curve, your wife. I mean, all of these. I mean, all of these. This podcast, yes. So, it's an amazing place. It was a pretty tough year. She said you guys were pretty. hard over that. No, it is tough. And I should say one more, which is Arthur, is that Arthur?

Arthur Phillips, the inventor of the... Oh, is that right? Also went to LSC. So, you know, we have this amazing pedigree, and you can really... So Arthur Phillips actually invented the first computer for macroeconomics. So in 19, I guess, in the early 1950s, he invented this computer, which was actually based on water. The idea was you would see how the economy would flow around. And so we would have this system where the water would flow around the economy, using various sort of pipes and so on and plugs a bit like some very complicated water wheels slash bathtub, and he would use it to try and forecast the economy. So we have a somewhere in LSE, though I haven't seen it yet, is the original macroeconomic computer model. So it's an amazing place.

Oh, that, that sounds fascinating. And he actually tried to use this to. He did. Wow. Methods have come on since then. Yeah. Yeah, that's pretty amazing. So how long have you been at the LSE? I've been there for three years now. So this is just the start of my fourth year. I'm sabbatical right now in California. But no, I've been there for three years and it's an amazing place to be. It's an amazing environment. Well, how does that happen? You get sabbatical after three years? What the heck's that all about? Well, it's academic sabbatical just means you work, you have equally terrible work-life balance in another place that isn't your home institution. So it isn't, it's not, it's not the holiday

that you might have. Is there still such a thing as sabbatical where you actually get time off to go think? I think I always say to people that the challenge of academia is that it's like you're on a holiday all the time and never because, you know, in some ways, the mechanism, if I, in the next year, if I did, if I took all of my time off, there would actually be, other than showing up to each of few classes, that would, they would actually be within the realms of the contract that, that I have and so on. But instead, I spend all my time researching. So, you know, if for sabbaticals, you can do whatever you want with them, but most academics use it to research. To work.

To work. Yeah. Yeah. The way we got to know each other was you kind of knocked on my door and you said, hey, I'm doing this research on inflation, you know, the causes of inflation. Right. And I'm very interested in kind of the work that you did around the Senate races back in Georgia because that was a key point, kind of crossing point with regard to what fiscal policy in the future would be like and ultimately what that might mean for inflation.

And you produced a study. Can I ask, though, before we kind of hand it over you and maybe you can describe this in more detail, is inflation and inflation dynamics kind of where you're most focused in your research or is it broader than that? So inflation is the core. I'm something I've always been fascinated with ever since I started thinking about economics. You know, it's just one of those fundamental deep questions. So even before, and of course the best thing about it is it's always interesting. So before this kind of post-pandemic inflation, there was a long period when inflation didn't move very much. And that was also a great time to write papers about inflation because you have the sort of the puzzle of what people call the flat Phillips curve before 2020.

And now inflation's high. So that's interesting to write about too. So I think it's a it's a sort of perennally interesting topic because there's always something happening or failing to happen. And that's, yeah, that's my main focus for now, at least. Okay. So that's interesting. So before, because I was going to say, that must have been pretty boring kind of place to focus before the inflation actually took off. But you make a great point. Inflation was very low and suboptimal for a long time. So that's also an interesting. Absolutely. Yeah. So, you know, before 2020, people used to kind of talk about the last 40 years

of US macro history in this interesting way that raised puzzles. In particular, during the 1980s, there was a very strong co-movement between unemployment and inflation. And then over time, ever since it fell and fell and fell. So during the 1990s, during the 2010s, unemployment was very low, but inflation wasn't very high. And so people kind of called this the missing disinflation or the missing reinflation, which was that in the decades before the pandemic, inflation and unemployment didn't move very much relative to the 1980s. And one thing that I was trying to do before the pandemic happened was similar. simultaneously think about why it is that inflation was so sensitive to unemployment back

during the Volker times and yet less sensitive since. And of course, every new data point creates a new puzzle for us, which is after the pandemic, maybe we're back in this world of a strong commitment between unemployment and inflation, although it's not so clear. So before we move on to the work you did a study around the pandemic and inflation, and obviously this very, very critical kind of conversation around what caused the high inflation of 20, 21, 22 going into 23, because that goes to what the appropriate conduct of policy is and what that might mean for future policymakers and how they think about these things.

So it's really an important debate. But before we get there, how do you, what's your thinking around why inflation was so suboptimal between the financial crisis and the pandemic? It was consistently below the Federal Reserve's target. What was going on there? Absolutely. So the way that I've thought about, I have with amazing culters, I mean Akamara and John Steinson at Berkeley and Juan Reno at UC San Diego, we wrote a paper arguing that one can explain both the missing disinflation and the missing reinflation of the 1990s onwards and the high inflation and volatile inflation of earlier periods with two ingredients, which I will call maybe the flat Phillips curve and the gradual anchoring of inflation expectations over time.

Okay. So let me give you just the kind of quick one minute summary of this. Economist organizing framework for thinking about inflation is what we call the Phillips curve, which relates inflation today to inflation expectations and current unemployment. It's very intuitive. The idea is, look, if unemployment is very low, inflation, all else equal should rise. And if inflation expectations are high, people are going to kind of realize this and raise in inflation today. And these are, you know, these are these are core ideas, very intuitive, very at the heart of economics. Our simple explanation for why you could have very volatile unemployment in the 1970s and 80s,

but relatively not volatile unemployment since is what originally Ben Ben Bernanke put forward, which was called the Angkornexpectations hypothesis. This was the idea that during the 70s and 80s, inflation expectations were very volatile. Why? Because monetary policy was very volatile. It was very unclear what the Fed was going to do, what their inflation target is, what they were planning to do in the near future. You know, you hear all these stories about Nixon pressuring the Fed in the earlier part of

period and then Volker sort of resolutely saying we're going to bring down inflation no matter what. If you look in the data, inflation expectations are all over the place in this period. So that can really explain why inflation was so volatile in that earlier period. After about 1985 in the United States, you see inflation expectations are really flat, really anchored. At that point, inflation itself stops moving. So we sort of think that really what's going on with this period of volatile inflation before 1985, but relatively quiescent inflation after 1985, is the gradual increasing credibility of the Fed that kept inflation expectations more anchored over time. Leaving that one side, we were also saying that conditional holding fixed inflation expectations,

unemployment itself wasn't having very big effects in inflation, which is to say even when unemployment became very low, it was unlikely that inflation would rise very much. And so that was the paper, and we kind of had some new arguments based on regional data that we think kind of sort of fleshed out that idea a little bit better than people have been doing previously. Like most things, there's more than one explanation. kind of in my narrative around that period of time in inflation was also the fact that China was really coming on in a big way.

And that created a significant amount of actually deflation on the good side of the economy. Yeah, yeah, yeah. Absolutely. So I don't think this is the only story. The fact that we brought to the table that sort of supported our story a little bit was to go to regional data. We constructed some regional data. So we actually made state level price inflation index.

State level price inflation indices for the United States, quarter by quarter from 1978 onwards. These didn't exist before, which is a little bit surprising. And with that regional data, we sort of study the co-movement within regions between inflation and unemployment from 1978 onwards. Now, what we found is that in regional data, the co-movement between unemployment and inflation was actually very, very stable over time. Why was that interesting? Because regional data in some sense, when you're comparing two regions and how their inflation and unemployment is moving in one region relative to another, what you're doing is you're holding fixed what's going on of the aggregate.

And one of the things you're holding fixed at the aggregate is federal reserve policy, federal reserves of inflation target of the Federal Reserve and so on. And the thing that was pretty interesting was that a lot of stories for why over time the relationship between unemployment and inflation might be declining would sort of show up to some extent in the regional data. Like if you thought that there was more trade openness over time, even within regions, unemployment should respond less to inflation. And that's not really what we saw.

For sure, I would say it's part of the story. But what we really liked was that by looking at regional data, we kind of hold fixed issues like the Federal Reserve Inflation Target that could be really important for thinking about inflation. Yeah, very cool. We actually construct state SPI measures. Do you update yours still? It's a great question.

So in the next few weeks, we're planning to do a new release. Oh, really? Okay. Yes. Yes. Yes. I'll let you know. All over that.

Yes. We do that as well. Oh, excellent. Maybe I can ask afterwards, Harassi for a link to your thing. Yeah, absolutely. Yeah. Yeah. You know, one of our colleagues, Adam Kamens, spends a lot of time, has spent a lot of time on this. So, and I know he updates it every month. So, yeah, absolutely. Well, it's okay. So let's move forward to the study you did on the inflation around the pandemic. And you're really focused on this. And I'm going to frame it. And you just tell me if I got the frame right. But, you know, basically the argument or debate has

been raging around what caused the acceleration and high inflation that began, kind of in the second half of 2021, throughout 2022 coming into 2023, demand and supply. And I think everyone would agree that's both demand and supply. But where you land on that in terms of whether it's more demand or more supply has big implications for policy and what the appropriate conduct of policy is. So is that a reasonably good frame? That's exactly the frame. So, you know, exactly like you're saying, Mark, but I think is the key question of the last four years, which is, the way I would put it is that around the world, deficits were high, inflation was high, and there's a question about whether or not the two are related.

And it's related to this classic question of whether or not deficits cause inflation. But of course, like you're saying, it's very hard to know because we have a single data point, a single time series. We have lots of shocks going on at the same time. We have this deficit shock from the Biden administration in 2021, but then we also have supply shocks like oil shocks, supply bottlenecks, the lingering effects of the pandemic itself. So there's lots of stuff going on that could have caused the inflation. What we were trying to do was trying to tease out the effect of deficits separate from these other inflation shocks.

And of course, that's hard. It's the classic emitted variables problem, but it's particularly severe here because you've just got one period of time and you have loads of different shocks. So disentangling one of them is different. What we tried to do is we tried to introduce what we call a high-frequency narrative approach. The idea here was using the historical narrative to find a specific event that released a great degree of news about inflation, and then look at the high-frequency response of asset prices,

of inflation expectations from swaps to see what the effects may have been on inflation. And the appeal of this is that if news about deficits during this window is released sort of separate from any of the other shocks that drive inflation, then maybe one can get a handle on the contribution of deficits. I'll say more about that, as I say, how we did it. So the event that we focused on was the 2021 Georgia Senate election runoffs. So you probably remember exactly what happened, but for your listeners, in 2021, at the start of 2021, President Biden had just won his presidency and had 48 senators,

but there were two Senate seats that were too close to call in Georgia. If Democrats were to win both of these Senate seats, seats, they'd be able to pass their fiscal stimulus. But if they didn't win both Senate seats or they lost even one of them, Republican would have a Senate majority and Democrats wouldn't be able to pass fiscal stimulus. So these Georgia Senate elections, they were pivotal for the chance that Biden would be able to pass his stimulus. And that's the key context.

And what we're going to do is we're going to study what happens to inflation expectations around that one event. Now, what you need is you need a measure, basically, of how much news was released to markets about the size of deficits when we go from a, 50% chance of Democrats winning just before this Georgia runoff in January 2021, to an 100% chance of Democrats winning after they've won. We're releasing a bunch of news about the likelihood of deficits when we go from a partial chance of Democrat victory to a full chance of Democrat victory.

So how do we measure how much news? Well, that's when I came to you, Mark, because I said, look, places like Moody's on the eve of the election just after the election are going to say things like, well, we think that if Republicans win this election, then there's going to be a certain amount of deficit spending. And if Democrats win, there's going to be a certain other amount of deficit spending. And, you know, the consensus reading your reports, as you remember at the time, was to say, look, if Democrats win, there's going to be a bunch more spending, something like a trillion dollars.

And if Republicans win, there probably isn't going to be. And that's based on my pigeon understanding of U.S. politics, that when one side has the presidency and the other side has the Senate, nothing gets done. And so my sense is that where you were coming from as well. And so the second part of this narrative piece is to say, well, reading careful, the reports, like the reports that you generously shared with me, when Democrats win in Georgia, that releases to news to markets that probably were going from a 50% chance of a trillion stimulus. That is to say a 50% chance that Democrats win and enact a trillion dollar stimulus

to win a 100% chance of a trillion dollar stimulus, because once Democrats have won, they're definitely going to pass it. So that was the narrative part. So trying to carefully measure around the Senate election exactly how much news about deficits was released. And you got a number of different investment banks, other forecasters to participate, right? I think it was about 20 or so. That's correct, exactly. That must not have been easy to do. No, it wasn't.

So the first one we started with was actually you guys and you were most comfortable. Oh, is that right? Well, what we wanted to do, so we started by reaching out to you because we wanted to have some sense of, is this going to work? Right. Really got into details and read everything. And then once we had a sense of, you know, this is the kind of thing that people commit to paper, then we wanted to sort of see as many as we could to have the maximum sense of this is what the market's thinking.

But there's a fair consensus at that time that Democrats were likely to spend about a trillion dollars if they want. And that Republicans were likely to enforce no more spending if Democrats lost in Georgia. Of course they went on and spent $2 trillion, right? Yeah, exactly. So this is one of the interesting things. So what you guys said at the time,

and this was kind of the consensus, was that, well, Democrats are unlikely to spend more than a trillion because the margin of Democrat Senate is relatively conservative. And then over February and March, a bunch of negotiations take place so that in March 2021, when the deficit packages eventually passed, it turns out to be quite a big, quite a lot bigger, quite a lot more permissive. Because the marginal Democrat, Joe Manchin of West Virginia turned out to be more favorably inclined to stimulus than anyone thought in January. But in January, people thought it was going to be a trillion dollars. And so that's sort of a number. So that's the narrative piece.

how much markets expected would happen to deficits as a result of the Georgia election. The high frequency piece said, okay, so what happened to inflation expectations? How much did markets expect inflation was going to rise as a result of this news about deficit spending? And the answer is it seems to be quite a bit. So inflation expectations jump up around the news about the stimulus.

So over the next two years, markets expect 40 basis points more of inflation. And it's expected to be quite persistent. And this is what you glean from swaps, inflation. Exactly. Right. It's extremely simple. You just, you pop the swap and you see that the swap price just jumps around the news of

Democrat victory. It's that simple. Then the final part is to say, well, look, what we've got here from this window is we've got a measure of for a given extra deficit dollar by how much do inflation expectations rise. And what you can do is you can take that sort of increase in inflation expectations per dollar of deficit spending. And you can scale up the total deficits over this period by that sort of inflation per deficit dollar amount to figure out the total effect of deficits on inflation.

You just sort of extrapolate from this narrow window how much deficits were expected to increase inflation to figure out how much total deficits caused inflation. And the number that we get, which I sort of, I guess, agree with my prize, but it's kind of useful to have better evidence on this. that deficits probably caused the deficit stimulus probably caused something like between a third and a half of the inflation over 2021 and 2022.

My takeaway from that is that deficits were probably barely important for inflation, but other shocks were probably equally, if not more important. And there's no shortage of other shocks over this period. Supply shocks, bottlenecks, that kind of thing. And so I suspect it was a mix. I suspect there was a bit of a perfect storm of perhaps a little bit too much demand stimulus,

although not, I think, crazily ex-ante-excessive amounts combined with some difficult supply shocks at the same time, like the Russia-Ukraine war and so on that also pushed up inflation. You came up with a kind of a cool rule of thumb. You called it an inflation multiplier where I think it was point, memory serves 0.18. So for every percentage point increase in the deficit to GDP, that would add 0.1, ultimately over, I think, a couple of year period, 0.18% to inflation.

Exactly. And take that number and multiply it by the total amount of deficits. Right. And then you get some kind of back of the envelope of how much deficits led to inflation. Well, and you came up with two to two and a half percentage points. And inflation kind of was closer to six, six, and six, seven percent. So therefore, that's how you got to the third kind of. Exactly.

That's exactly right. Right, right. Well, it's very intuitive. The one in some of the email conversations we had that followed, the one thing that I questioned or was just curious, about was whether that inflation multiplier is a constant, you know, whether it is a function of the, you know, the state in which you're in. Because if you look at traditional multipliers, you know, output multiple, and for the listener out there, you're just looking at what is the impact on GDP or the impact on jobs from an increase in fiscal policy, government spending or tax

policy, that is, those multipliers aren't thought, they're thought to be, they change, their function of what's going on. If you're in a weak economy, the multiplier is larger. If you're in a full employment economy, the multipliers are smaller. Is that the same, does that work here as well? Absolutely. So my mental model is that monetary policy is very important for the size of either the classic multiplier linking government spending to output or what I'm,

calling the inflation multiplier which links government spending to inflation. And, you know, as a thought experiment, imagine the following two things. First, there's a government spending shock of some kind. And the Fed hikes interest rates enormously and immediately. Then the effect on inflation could be zero or even negative. And if the Fed does nothing or cuts interest rates immediately, then the effect on inflation could be very, very big. And so, of course, a range of things are possible, and this multiplier that we were talking about is a sort of multiplier conditional on the stance of monetary policy. One of the other things that we're able to do is just look at the stance of monetary policy

and how do we do that? Around this shock, you can see markets' expectations of all sorts of interest rates, the short-term bond rate, the future guesses of what the federal funds rate and so on will be. And the striking thing here is that markets believe that monetary policy will be relatively loose in response to the fiscal shock, which is, you know, which is, you know, and the federal which is to say that in the short run, markets believe that nominal interest rates aren't going to change at all after this fiscal shock from Georgia, meaning that in real terms, short run rates are falling by quite a bit in response to the fiscal shock. This is just that loose monetary policy is part of why deficits have this reasonably large effect in inflation.

Now, you know, I don't want to, I always caveat here that I don't want to sort of engage in, I guess what, you Americans would call Monday morning courtebacking. Because I think the Fed had a very different, I mean, I think the Fed would. No, go ahead, Joe, please feel free. I think ex post the Fed was probably, there was probably a little bit too much demand stimulus by the Biden administration and a little bit too monetary accommodation by the Fed. But on the other hand, at the time, it was a little bit difficult to know that. And the flip side, the byproduct or the benefit of this higher inflation was an extraordinarily good GDP growth performance. And I always try to emphasize this. So this is another thing that we can see in the data, which is that if you look at proxies for GDP growth,

from investment bank forecasts from asset prices, markets price in response to this fiscal shock, really tremendously good GDP growth performance. And that's one of the real benefits that accompany this higher inflation. And it kind of accords with our traditional view that when you have a big demand stimulus, output goes up and inflation goes up. So I think it's important to stress

that it's not clear to me this was bad policy because one had a little bit higher inflation, but at the benefit of the very strong real side, a very strong output performance. And, you know, I look to Europe, look to my native UK, which over the same period as America, from sort of the end of 2020 to 2022, saw stagnational decline. And I think perhaps American policymakers are it a very good job because the American recovery, the American GDP performance of the last four years is really extraordinary and remarkably good

compared to anything in Europe. And in some ways, you know, America has had high inflation, but everywhere has had high inflation and yet American prosperity and American recovery is sort of the envy of the world. I do want to kind of stress a balanced view that I think perhaps ex post there were some mistakes made, but it's not clear. And these mistakes had at the least benefits accompanying them that were quite evident too. You know, one other consideration is at that time, this is my recollection of the period when we're talking about early 2021 now with the American Rescue Plan, that's the $2 trillion package that we're focused on here, that that was deemed to be. let me call it good inflation, that, you know, as we were talking earlier, inflation had been suboptimal. I mean, below the Fed's 2% target, really since the Fed started targeting inflation

in 2012, officially started the 2% target in 2012 through up and through that period, inflation had been consistently below target. So in 2020, the Fed changed its policy framework and said, hey, look, if you're in a, if you've experienced a period of suboptimal inflation, now I want a period of inflation above target to make the price level more consistent with, you know, what it would have been otherwise. I mean, here we were, uh, inflation in 2021 picked up as, you know, as we've been discussing, but that was, that was not a problem. That was, that was good inflation. Here we were. The Fed got exactly what it's, what it wanted. The, the, the, the inflation became a problem later in 2022 when we got another supply shock.

You know, the Russia, this is on the supply side, the Russian invasion of Ukraine. So it's almost like you got exactly what you wanted. You got inflation, you know, back to the Fed's target. And you got an economy that's performing much better. And as you pointed out, better than anywhere else on the planet, the U.S. economy is now leading the way across the globe. So for my perspective, it's almost like that's the exact policy you want it.

I'm, I'm very sympathetic to this. You are. I'm, I was hoping you wouldn't be because we could fight over this. Let me give you my sympathy and then my caveats. Yeah. Oh, okay, there you go. He's very smooth.

I agree with you. He got so much. I think, no, I think this is basically right. I don't fully agree, but I mostly agree. So the sense,

I certainly think X and D, this was a very sensible decision, even if X post they've been surprised. So let me say where I think this, this makes a lot of sense. Okay. Imagine the following scenario. Imagine that the US had done this stimulus and then there had been none of these adverse supply shocks. Taking the numbers from my paper seriously, which I think in a ballpark sense are pretty reasonable. Inflation might have overshot to maybe 5% for one year, two years and then gone back down to 2%. And I think that basically

would have been fine alongside an excellent GDP recovery. The Fed are heroes, the Biden administration of heroes, everyone sets off into the sunset. The problems of the pre-2020 economy, you know, the overhang of the Great Recession, excessively low interest rates are in the rearview mirror. You have a great output performance, moderately high inflation, and everyone's happy. I think that's a very plausible scenario. And instead, the Biden administration were unlucky with some adverse inflationary supply shocks that affected many countries. So I think that's probably true. I think that's a big part of it. So that's definitely my point of agreement. My caveat is that Relative to what I believe in 2020, I and I think many people, including maybe yourselves,

have revised up how much people dislike inflation relative to unemployment. Oh, yeah. And so I think, you know, from the standpoint of 2020, a tradeoff that says inflation going to 5% for one to two years with an excellent GDP growth performance and unemployment falling very rapidly feels like a very favorable tradeoff. from the standpoint of 2024, that seems like, well, if we think that actually people dislike inflation more than unemployment, relative to what we previously believed, perhaps that kind of menu of policies is a bit less attractive than we thought. And here I'm thinking about this idea, which sometimes people call this quote unquote vibe session, which is that, you know, consumers right now seem more

pessimistic about the economy than they were at any time during the long, slow recovery. from the Great Recession. So unemployment was very high at the time. Everyone rightly thought this was a very bad situation. People were very upset. But they seem more upset now with what I view as a relatively modest inflation. But it's not my position to say what people should think is modest or not. It's clear that people just really hate inflation. Perhaps more than they have unemployment. And perhaps that's because, you know, inflation affects everyone and unemployment only affects the select few who are unfortunate not to be unemployed. But that's something that policy has to take into account. So, So that's my caveat. I agree with you that there was good inflation plus good inflation plus bad luck. On the other hand, even good inflation seems a bit more disliked than I would have guessed. Okay, you make a great point. That's a great point. So what you're saying is, look, the Fed's waiting inflation. The Fed says I want inflation above target so I can make it all iron out. But maybe that's not the right strategy in the context of the fact that people really hate inflation. much more than they hate unemployment.

Exactly. And that's just not what I expected. And I think, you know, people, sort of two generations older than me who lived through the 1970s was sagely saying this to me. And I was saying, you don't know anything. Times have changed. But maybe times didn't change. And I mean, I was very surprised by this.

You know, I wrote a paper trying to reevaluate why people dislike inflation so much. And it's definitely, that's probably the biggest lesson that I learned from this period, because I think, you know, our basic mental model describing the world of, well, what's going to happen to inflation after a bunch of supply and demand shocks worked fairly well, I think, which is that the US is a big demand shock and a big supply shock. So output does pretty well, but inflation goes up by a lot. I think that model basically worked okay. But our, even as our descriptive model of the world worked pretty well, I think our sort of model of how people feel what economists sometimes call our model of welfare. or a normative model of the world. I think that worked pretty badly in that people seem really, really upset about this in a way that I wouldn't have guessed. That's a really interesting.

And Chris, you've made this point to me as well in the context of the Fed's reaction function, right? Because, you know, you got unemployment, you got inflation, and they seemingly equally weight the two. And the reaction function is, I look at inflation, I look at unemployment, I look at financial conditions, I look at stuff. And then I say, what's the appropriate federal funds rate target? and they tend to equally weight the unemployment objective and the inflation objective.

And Chris, you were arguing, well, maybe they shouldn't be doing that given exactly what you said, Joe, that people really hate inflation. Did I have that right, Chris? Yeah, that's the conjecture. Yeah, it's really interesting. The Fed is also learning this over time. I mean, I think the Fed basically, you know, I'm pretty confident that I'm summarizing the conventional wisdom of 2020 that the Fed believed. And I think the Fed has probably realized that. I mean, you know, one thing that is.

that's remarkable about the Fed. It's very impressive relative to other central banks. I think over this period, you know, they were a little bit slow of the mark, but I think they were relatively quick updating their framework and their view of the world as new information came in. And I think I think that's really commendable. I think the ECB, the Bank of England, obviously took a lot longer to kind of react the changing circumstances. And I think probably within the Fed, what I'm saying is kind of uncontroversial, which is that in 2020, we thought one thing about the kind of social welfare function of the relative cost. of inflation and unemployment, and we realize that's wrong, and it's a lesson we'll learn going

forward. That's my guess. I mean, I don't speak to the Fed. But maybe you do. I mean, maybe that's right. No, no, no, no. I think that's exactly right. I mean, although we, like everything in macro, we got macroeconomics, we got just one more data point. So it's hard to draw a lot of strong conclusion, you know, because there's a lot going on here. And this gets to your, your most recent paper you dissent to us, which is actually very interesting around this topic. Yeah. trying to explain why people hate inflation. Did you want to talk about that?

Absolutely. Yeah. So I always like to, when I try and explain this paper to people, I always like to start with an anecdote of when I first had this discussion with my mother many years ago. And so we were talking about why people, my mother is not an economist, but she's a woman of great common sense. And so we were. Like my wife.

I'm just saying. Yeah, exactly. Exactly. Well, no, but your wife famously is an economist. My mother is a doctor. And so. So I said. to her, why do you think people dislike inflation?

Hold it. Wait a second. Wait a second, Joe. Are you making this up? You actually had a conversation about why people hate inflation? Yeah, absolutely. Because, because, I mean, and precisely to this point, I think inflation is something that people out there in the real world, not just nerdy economists like us, do have very strong opinions about. Yeah, right. So she may have initiated the conversation, this, but I don't remember. But she said, I don't like inflation because wages don't keep up with prices. You know, everything, I've still got the same amount of money, but everything's becoming more expensive. And I think if you speak to anyone out there on the, on the street, economists, anybody, I think this is normally the first thing that comes up. And there are

influential surveys, a classic one by Robert Schiller, the Nobel Prize winning economist, and a more recent one by Stephanie Stancheva, who's a Harvard professor, that finds that this is kind of universally why people dislike inflation. However, traditionally economists have dismissed this reason for why people dislike inflation, for one good reason and one bad reason. So the bad reason is that economists say, as I said to my mother at the time, they say, no, no, no. That cannot be the cost of inflation because when prices go up, wages should rise to. And if wages and prices both go up, then everything's fine. Your wages have not risen more than prices because wages should rise with prices.

And this is a sort of theoretical argument motivated on the idea that the kind of invisible hand of the market will make sure that when prices, rise wages rise to and that no one's worse off. And so this sort of seems like it relies on on this strange worked out logic that only an economist could dream up. But this is what Mancu says in this tech. He said this is not a cost of inflation because because you know wages should rise to when inflation goes up so wages can't be outstretched by prices. A slightly more reasonable version of this is economists point out that if you look at time series data, often during periods of inflation, prices do keep up with wages. So during periods of high inflation, often the labor share of income doesn't fall.

Often real wage growth is fairly strong. Over this recent period, the statistics are pretty contested and a little bit messy, but what is clear is that at least for low wage workers, real wages did perform fairly well over this episode. Yeah, low wage workers still seem very upset about inflation. So that's the kind of the, that's the scene setting, which is that people have this strong view that one of the challenges is wages don't catch prices, but economists say maybe the data doesn't fully support that.

There's a lag, right? I mean, prices go and then wages don't go for a year or two, maybe. And the lag is going to be core to what I'm about to say. I think the lag's really part of it. Our perspective is just to say, well, perhaps when there's inflation, workers need to take costly actions in order to have wages keep up with prices. They need to fight with their employers. perhaps they need to take industrial action, go on strike.

Perhaps they need to search for another job. Perhaps they need to have a tough conversation with their employer. All of these are very costly actions that workers need to take to have wages to catch up with the prices. Take the example of me. I'm an assistant professor at the London School of Economics, as you know. And over the spirit of high inflation, LSC gave me a nominal raise of approximately 0%. And so I have to contemplate why will I go on the job market? for another job, just to get my wages back.

And that's obviously very costly. And perhaps eventually at some point I will have to do this. So notice then that real wages no longer summarized the costs of inflation. Real wages could not change at all during a period of high inflation, yet there could be these enormous costs going on in the background, which is that real wages are staying level precisely because workers are exerting all these costs in the background in order to have wages catch up with prices. So that's the kind of key observation.

I think it kind of reconcile. It can reconcile my starting, my starting kind of tension between the people and the economists. Because my sense is that what's going on a lot of the time, and there's some survey evidence in support of this, including survey evidence that we provide in our paper, is that people say, well, you know,

I really don't like this feeling that wages aren't catching up with prices. So what I'm going to have to do is I'm going to have to take all these costly actions to rectify the situation by getting my wages to increase. But that stuff's pretty painful because that means, You know, in my case, that might mean some extremely difficult and challenging costly negotiation process. One sort of other fact in support of this is that over the recent episode and more generally, periods of high inflation are also periods when there's lots of industrial action. So periods when workers and firms seem to be conflicting a lot because workers sort of feel they need to fight with their employers to get pay raises.

And then the final anecdote are offering supporters. I shared this paper idea with an Argentine colleague of mine. He immediately said, he immediately said, this is exactly right. That in Argentina during the period of high inflation, everyone's just fighting all the time. And I think there's some truth to that. I think that when inflation... Of course, the Argentines have to have, they've been fighting since the beginning of time. Well, that's what I said.

So I did just... Oh, you did. Okay. So I said, well, when inflation was low when I was living in Argentina, I think, but yes, the main point, I don't want to do any slurs against Argentina with this podcast. But I think, I think, you know, I, we haven't seen this exact observation anywhere before, but I think it the one sort of caveat in my mind is during this period, people avoided conflict by quitting and going to get other jobs. I mean, this was the, what was the phrase, quit session or quit?

Great resignation. Great resignation. Great resignation. Right. So it's like they could have, they could get their pay increase. and they actually did. If you look at the wages of people who switch jobs, they got pretty sizable wage increases.

Absolutely. They got better jobs. They were more suited to their skills and education and talents and interests. So it's almost like they were able to avoid the recession, but still they were angry. Well, so we think of this as potentially one of the costs, which is that, so exactly.

So for low wage workers, I think the sort of the fact is that low wage workers saw strong real wage growth, realized entirely through job switching. So the low wage workers who didn't switch jobs had big real wage falls and the workers who did switch jobs have big wage increases. And so that,

you know, in some ways that seems like a very good thing for exactly the reasons you're saying, Mark. It seems like you get some reallocation. That seems very good. People going towards better jobs that are better suited to them. Real wages are very high now for low wage workers at the US. That seems great. You know, what we want to do is say, well, the flip side of that

that one should acknowledge is that the process of searching for a new job is probably one of the more, in any given year or any given five year period. is probably one of the most costly things that a person can do outside professionally is one of the most costly things that a person can do. And so that great resignation could have been playing out alongside substantial costs of various kinds.

The discussion so far has really been about the past, you know, coming to here. I want to talk a little bit about the future. But before I do that first, we're going to play this. Are you going to play the stats game, Joe? I'd love to play the stats game. I'm breath. Okay, fantastic. But before we do that, let me do this. I have kind of cut off Marissa and Chris here. Anything that you guys want to bring up in the conversation about the conversation so far before we move on to the stats game. Marissa, I'll turn to you. Oh, I have so much. I can talk to. So much. I know.

Two hours about them. I mean, I'll just say, I think, the comment about people's perception that their wages haven't kept up with inflation really resonates because every single time. I talk to someone, that's the first thing that they say. Right. And then as an labor economist, I say to them, well, no, actually, in fact, they have. As of the third quarter, the ECI shows that wages are up 22 percent, just like inflation is since the end of 2019. But then they always say, well, not mine. You know, I don't know who's that is, but it's not mine. The point about the lag is really important because even though that is, I can technically say that's true, wages have kept up. It really just happened. Like in the third quarter, that convergence just happened, right? So while inflation's gone like this, wages have had to come up. And some of that is just

inflation slowing down. So wages could catch up recently. Here's my question. Please. When you, when you, this tradeoff that you're talking about, people are more sensitive to inflation than they are to unemployment. If you look back at periods where you have very high unemployment or you have unemployment rise and you have maybe moderate or low inflation, what is the dynamic that you see there in terms of people's perception of the economy or, you know, this sort of, yeah, I guess this perception of the economy. How different is it? I mean, like I have trouble remembering, right, what that looked like because we've been in this inflationary environment. for the past four years. But is it really true that people dislike inflation more than they dislike the potential of losing their job? That's a great question. So before I answer, I think just to pick up

on some you said Marissa, which I totally agree with, I think one of the reasons that I like this paper is it's sort of a little bit born out of talking to real people and not just sort of looking only at aggregate statistics and models because I'm guessing I've had the same experience you have where you sort of, you the well-informed economist, you charge and you say, well, actually, you're incorrect. And wages are doing great.

And it's not a great way to make friends, I guess. Because people say, this is not my experience at all. And so somehow I felt that one of the things I liked about this paper was to try and sort of leave the ivory tower and look carefully at what people say and try and model that. And often economists sort of try not to do this and say, let's not look at what people say and just look at what they do, but sometimes I really miss things out.

Do you answer your question specifically about, people disliking inflation versus unemployment. A lot of work remains to be done there. I think, I suspect economists and also political scientists will spend a lot of time over the next few years thinking about exactly this question. The fact that I know that it's interesting on this is that consumer sentiment as measured by the Michigan Consumer Sentiment Index seems to correlate much more strongly over the last few decades in the time series with inflation than unemployment. This is very surprising. It's not what I would have expected, but it is the, it's the fact, as I understand it. Larry Summers has a paper which shows that if you kind of adjust inflation, so you add in housing costs in, I think, a more plausible way than it's done in the basic inflation measurement, this correlation is even more sort of in favor of inflation than unemployment, which is to say a measure of inflation that includes proper measures of housing costs like mortgage rates and so on, which the baseline inflation measure doesn't. That measure of inflation. seems to predict consumers self-assessed well-being much better than unemployment.

But this is, you know, it's a time series. If you try the conference board survey, have you tried that? So I, so this is based on me just eyeballing. Oh, okay, because I bet you get a different result. Okay, that's interesting. So like I said, I mean, I'm saying this. Yeah, yeah. I did want to say a caveat to the people disliking inflation more than unemployment,

which is that it, the losses from unemployment are very concentrated, but the losses of inflation are quite diffuse. So you might think that for the 5% of people who get unemployed, their losses from unemployment are sort of plausibly far, far bigger than the losses that everyone suffers from inflation. But in a survey like the conference board or the Michigan Consumer Sentiment survey, everyone has sort of one vote, as it were. And so there's no way to say, well, look, the 5% whose lives are ruined by unemployment

should be weighted X times more than, the 95% who dislike inflation. And so that's my my fear is that maybe there is something about the difference between sort of aggregating person by person versus waiting by how bad the experience is. Yeah, that makes total sense, right? Because everyone's facing, everyone's buying eggs, but not everyone gets unemployed. Exactly. But, you know, more expensive eggs is less bad than being laid off as well.

Right, right. Yeah. Yeah. Well, let's move on because I do want to get to the future. But before that, let's play the game, the stats game. We each put forward a stat. The rest of the group tries to figure that out with clues, questions, deductive reasoning. The best stat is one that's not so easy.

We get it immediately, one that's not so hard, but we never get it. And if it's apropos to the topic at hand, inflation, all the better. But it doesn't have to be. And Joe, just to just we always go with Marissa first. It's tradition. So we'll let her go first. Marissa, you're up. My stat is 89.2.

Index. It is an index. Yep. Did it come out this week? Yep. Is it from the University of Michigan survey? Yep. Is it present conditions?

No. 89.2, because it's low. It was a low, it came in another low. Republicans. Oh, Republicans. Oh, yes. Is that it? Is that it?

It is Republicans' expectations index, which rose 27.8% between before the election and after the election. Joe, I'm just telling you, that University of Michigan survey, I don't know. I'm just, Mark, like, I think this goes to exactly what we're talking about. If we had listened to the University of Michigan survey, we would have correctly predicted the election. Yeah, yeah, yeah, yeah, exactly. I mean, I'm not saying it's not crazy, but it could be both crazy and correct. Yeah, I mean, I think this gets right about the election.

That's a title for the, right? this podcast. Sure. Crazy and correct. Crazy incorrect. No, it's a fascinating. Write that down somebody. And Marissa, the decline in Democrats is, it's small of a very important.

Democrats declined 17.7 points. And there was a paper. I think it was by Paul Krugman. He did a few, more than a few months ago at this point. But he was talking about Michigan and he was talking about how there's this asymmetry between the way. Republicans view a Democratic president in the White House versus the other way around, right? Republicans punish a Democratic president more than Democrats punish a Republican president

in this survey in terms of their perceptions of the economy. And this is exactly how you see it. So now the Republican expectations for the future are the highest that they've been since October of 2020. And this is like the biggest jump that I can find in this data series. And this is just the election, right? But Joe, that doesn't bring up an interesting point, though. I mean, this whole pain around inflation could be just simply politics.

I mean, this is how I view things based on my political prism. It has nothing to do with anything else. No, I, that's absolutely possible. I mean, I think it's a fascinating stat. There are a few actually using the 2016 and 2020 versions of this. There are a few academic papers that were documents, documenting that, I believe in 2016, my co-author Art of Myanmar, he shows that the Republican Democrats split was a very strong predictor of subsequent consumption.

So people really, really kind of live these expectations. So it's not just sort of partisan cheerleading. Maybe that's part of it. But it's also the case that after 2016, Republican and Democrats spending patterns, investment patterns, mutual fund investments, all diverged dramatically too, which is fascinating. So people really believe this. Social media platforms. Social media platforms, exactly.

You know, Jonathan Parker at MIT Sloan shows that using, I believe, Vanguard data that the portfolio reallocations for Democrats versus Republicans were very significant, which is crazy. They were really changing their stock market allocations in 2016 because of a stat like this. Wow. Crazy but correct. Okay. We're going to remember that.

Joe, you're up. What's your stat? Okay. So my stat is 6.4%. 6.4% inflation related sort of labor market related

not really not really not really okay as a percent of GDP let me say that oh 6.4% deficit oh is that the deficit oh there you go the full year deficit of 2024 as a percent of GDPs that's 1.83 trillion dollars

and I wrote it here as a staff because I wanted to ask you this. It's a bit of a mystery to me why deficits were so high last year, because the major stimulus of the Biden administration was the American Rescue Plan, whose effect should long since have been passed and the Inflation Reduction Act, which was, at least as scored in 2022, approximately deficit neutral. So what I'm just totally confused about is why deficits remain very high, potentially on an ongoing basis. And this is not something I've been able to find out much about. So I'm not sure if this is something that any of you know about, but it's a mystery to me anyway.

Well, spending levels are elevated, right? I mean, despite all the efforts to kind of rein it in around that debt limit battle in 2023, that didn't happen. So we've seen as a share of GDP expenditures remain, you know, very elevated. And tax revenue has not increased, you know, despite the strong economy, it's not increased. And that goes to the tax cuts, right? I see. So it's a combination of entitlement spending growth and the TCGA's long shadow? It's not less than entitlement.

Some of that, obviously, you know, Medicare or Medicaid costs of health care. But it's also just discretionary spending is up, you know, pretty much across the board. Defense, non-defense, you know, everything is up. Right. Pretty interesting. Oh, and now that's the other thing. Yeah. So the primary deficit is what?

I don't even know. That's probably closer to three and a half to four percent. something like that. But still, that's large in a full important economy. It is a little worrying. It's very high. A little whirring. I say, you know, I'd say a lot at worrying. Yeah. Yeah, going forward. Oh, that was a good one. Chris, good job. Yeah. Chris is so understated. If I had gotten that, I'd have been jumping up and down saying how great I was, you know. Not Chris, not Chris. Yeah, yeah. Oh, Chris, you're up. We'll do one more. I'm up. Okay. I'm going to give you a lighthearted statistic to take off some of this

tension here. Fifty-eight dollars and eight cents. That's the cost of a Thanksgiving dinner. It is how much. Okay, Joe, Joe, I'm just now now I'm going to. It was so quick. It was like a, it was like a gunslinger. What was the increase over last year? Oh, oh, that's interesting question. Is it down? Is it down from last year? Well, you tell me. I believe it was that your guess. That's what I seem to remember. I think it might be down. Doesn't that affect turkeys, A. B and flu? I would think. Yeah, probably. So?

I'd say it's up, up 5%. Marissa's right. It's down 5%. Oh, wow. Why? And it's down 9% from 2022. So why is it down? Turkeys.

Turkey prices are down. Oh, despite avian flu, they're down. Okay. I think the turkeys have been scared. They don't have the last year or so. And then this year the turkeys. Oh, I see. I see.

Interesting. But what I read was both supply and demand for turkeys is down. Both supply and the demand was more. Okay. There's also a shift. I'm not. I'm not doing turkey this year. You're not.

What are you doing? Me neither. Seafood stew. I didn't get an invitation to your Thanksgiving dinner. Yeah. Could I get one? Really untraditional. Yeah.

In my limited understanding of Americans, this is this is far out on the, on the It is far out. Well, yeah, Mercer's a little weird. I'm just saying. Yeah, we all know that. It's a little weird. Well, I'm having Iranian, Persian. Nice.

Yeah. And Chris, you're having Italian? I am. Well, that's some pasta. See, not, no one's having turkey on this. No one's having turkey. Joe's having. I'm just, I'm just going to go to the office and work.

Joe's going to cook. It's British. I, uh, Probably going to have a sandwich. They get a turkey sandwich. Yeah, yeah, maybe, maybe. There's two things forward-looking I want to talk about. One is President Trump in his policies and what that might mean.

But before we get there, one of the key kind of increasing, I don't want to say concerns, but kind of things that are back of people's minds is inflation doesn't feel like it's all the way back into the bottle that, you know, if you look at core inflation as much, as measured by the consumer expenditure for later, I think we're two and a half percent-ish, and we need to be closer to two. Is that a concern for you? Is that a big deal? Is this so-called last mile going to be traversed here? Or how are you thinking about that? I think two and a half percent inflation doesn't seem like a big deal. You know, it's a problem we would have killed for really at any point in the last 25 years. So two and a half percent

doesn't worry me. My lingering concern is exactly what we were speaking. you about before, which is that if you have a persistent or permanent deficit that is sort of in like a 5 to 6% range, that's very, very high. So if that's going to last forever, perhaps that's leading to 2.5 to 3% inflation forever. And that does seem a little concerning. So, you know, a couple of years above target inflation, it doesn't seem like a problem. But if you just have permanently high deficits and that's leading to permanently high inflation, if we think there's a deficit to inflation link, which I've sort of persuaded myself of, I would be worried about. So, yeah, So like I said, I worry about just sort of the persistence of this all.

If there's just persistent deficits and persistent inflation as a result. Joe, that brings up an interesting question. I just didn't dawn on me. I mean, I always kind of thought of your work as the change in the deficit affects inflation. Absolutely. The change in inflation. Is that right? No, that's exactly right.

The levels don't matter, really, or they might matter, but. I think it's complex. I don't know, I mean. Complex. Yeah. So the way I would think about it is, you know, somehow. Starting from a baseline when deficits are normal, so like 2 or 3%, and perhaps that seemed consistent with 2% inflation, starting from that baseline,

the change, the shock is like a world where now deficits are always double that. And I would think that would have some effect on inflation. Now, it's going to be very sensitive to exactly what your favorite model of the world is, but just intuitively, if the federal government is always running quite big deficits, you would expect that to show up in inflation. Yeah, I guess that means, it goes back to your point about, monetary policy depends. Yeah, oh, for sure.

Yeah, right. Because the fake could, it's going to get 2% if it wants 2%, even if you got a 6%. Yeah, exactly. So then the concern, right, is that if the, if the federal government is permanently running these big deficits, what does it mean for monetary policy? In the context of interest rate costs and debt, is there potentially a risk about the erosion of monetary policy independence? This seems very concerning.

You know, one thing that I feel pretty confident in is that having monetary policy making independent of government is good. and 6% deficits, sort of lots of a constant injection of demand into the economy, a constant risk of fiscal dominating monetary, that seems, that seems worrying. So I think I'm not worried about sort of slightly high inflation per se. I'm a little worried about what it could signify for the future. Yeah, one other perspective on that, and I just want to get your reaction, is that the principal reason why inflation is above target, say we're at two and a half now,

and Target is two, is the cost of home ownership, the so-called owner's equivalent rent. That still remains elevated. It's moderating, but very slowly for lots of different reasons. And if I exclude OER, owners equivalent, I'm there and then some. The, you know, inflation is below target. So does that, does that resonate with you? Or does that make a less worrisome that that's the case? You know, I'm yes and no.

The stylized fact from the last, all the U.S. business cycles is that rent is the main cyclical component of the inflation index. That's basically, I mean, there's some services too, but that's the main finding. And so it depends whether or not I'm comforted by the fact that it's all in rent depends on why you think rent is the most sickerical component. One reason could be that rent's kind of easier to measure than other components of inflation and you think there's some underlying cyclicality and rent's a good way to measure it

because the way that the Bureau of Labor Statistics measures healthcare inflation is pretty hard, pretty unclear what it's doing, whereas the way it measures rent inflation, I think is very clear and easy to understand and like it to be correct. So there's this question about whether or not you think that rent is just a good proxy

for the cyclical component of inflation or you think that there are rent-specific issues that we shouldn't worry about too much. And I would say the jury's still out on that. I haven't seen a really sharp analysis that says that the rent stuff is all just housing factors only. Okay, okay. Very good.

Let's move on and we'll end with President Trump and his policies. And, you know, of course, there's a lot of uncertainty here, a lot of script to be written. But, you know, if you look at or listen to what he said on the campaign trail, and I think we need to take him roughly at his word, at least directionally. He's not going to impose the kind of tariffs or deportations. he's talked about on the campaign trail, but he's going in that direction. So we get tariffs that are, you know, meaningful China in particular, but, you know, I was in the Europe last week and the EU is quite nervous. UK less so, EU much more so about tariffs, particularly Germany and

on vehicles. We're talking about some deportation. We're talking about tax cuts, talking about deficits in debt that probably will add to deficit in debt despite increased tariff revenue. And you mentioned Fed independence. That does feel like that might be on. under some pressure here as well, given what President Trump has said on the campaign trail. You kind of add all that up. I come to a place where it just feels like, you know, all else being equal, that's inflationary, some combination of inflation and the higher interest rates and diminished growth. So with that, as a preface, let me just throw it back in your court and get your reaction to all that.

So let me first say before I dive into this, that now I'm sort of going a little bit off piece. So this is absolutely not my excommunities. You're going off what? Off-piece. So skiing, it's a skiing metaphor. So you know, when you're skiing, maybe this is only a European thing specifically. So when you're skiing on the slopes, right, you might be on the groomed, on the groomed pieces. Oh, see.

I go off into the woods. And when you go off into the woods, it's a little bit more uncertain. So this is. Would you call it peace? Off-pitched. So maybe this is a European. So we call the pieced, the groomed slope. Oh.

And then the off-piece is the is the bit that's not groomed where everything. Did you guys know that? Did you know that? Chris, Chris, Chris knows that. Chris knows most of this stuff. You knew that, right, Chris? Of course. Of course.

Let me say, maybe off the beaten track. Okay, okay. Now I'm with you. Yeah, yeah, now I'm with you. For my American cousins, I'll say, oh, yes, I'm with you now. And so I'll caveat that these are now just my conjectures, but something I have thought about a bit. So, okay, so before I get into what I think of them, I think there were four planks to

to Trump economic policy. The first is likely some kind of. of large tax cut, either sort of renewal of the TCJA or perhaps even bigger corporation tax cuts. The second is tariffs. The third is a risk of loss of independence of the Federal Reserve. And the fourth, which is sort of related to the first three, but maybe I think useful to be conceptually distinguished, is permanently higher deficits. And you didn't say you're not going to bring in deportations, immigration policy.

And deportations is the debt. Okay, you are. Okay. Excellent. No, no, no, I should, I should mention that too. So let me go through all of them one by one because I think, actually, I think each of them is, is usefully different. So firstly, on the tax cuts, this is something that I, other than its effects on permanent deficits, which I'll get to, I think I'm not worried about the inflationary effects of corporation tax cuts. My reading, the academic literature, the TCJA, a bit of introspection, suggests to me that corporation tax cuts are to some extent working on supply as well as demand. So they're unlikely to be that inflationary, which feels like an obvious point, but not a point that I hear raised that often. So now there's excellent micro evidence about the effects of the TCJA. Can I just say this for their listener? That's the Tax Cut and Jobs Act. That's what's passed under Trump, just so they know. Just so they know. No, no, no. I should always know. No, no, you're totally right. So actually, I'm a stickler for not using acronyms, which I've, unfortunately, I've violated that rule here.

No, never use that. So the tax cuts and job ad act, which is also easier to say of 2016, a big corporation tax cut. There's now great microevidence by a couple of people. So this guy, Pat Kennedy at UCLA and a team based at Harvard and Chicago booth. And they independently find that it had quite big effects on investment, which is what you would expect, because it's a big subsidy to investment. Now, whether or not you think this is a good policy, it's going to boost the supply side of the economy. That's what investment does. And there could be some inflationary effects, but you wouldn't expect them to be that big,

relative to maybe a classic demand stimulus, something like giving people stimulus checks. There's a long time series literature in economics that also looks at the effects of corporation tax cuts in the economy. And again, they don't seem to have big effects in inflation. So Plank 1 is renewed or even greater corporation tax cuts for inflation. I'm not that worried about that. The second is tariffs. And again, this is slightly out of consensus. But I'm also not that worried about the effects of tariffs and inflation.

And I would cite two pieces of evidence. The first, just looking back at some fairly sizable tariffs in pre-2020, inflation didn't change very much. It's also the case that I think the best evidence on Brexit, so from my home country, suggests that for all the problems that may have arised you to Brexit, it wasn't a big contributor to inflation. So food and grocery prices seem to have risen a little bit, but, you know, they're a relatively small part of the overall consumption basket.

So overall consumer prices didn't rise that much after a very big tariff and non-tariff barrier shock in the UK from Brexit. So I've sort of updated towards thinking tariffs are probably a bad policy for other reasons, but probably not very inflationary. Then the three things that I am worried about. Well, first, Fed independence. I think, you know, I just have a sort of a strong prior, and I think quite a lot of historical evidence is that monetary independence is just an excellent thing for keeping inflation

at bay, and it seems likely this could come under threat. So I think this is very bad. I think basically all economists think this. I think that sometimes economists overstate what we do or don't know about the world, but I actually think just our evidence, less from theories, but just a careful read of all of the history suggests that central bank independence is really good. So that I am worried about. Fourth is sort of maybe permanently higher deficits.

We've discussed this already. Doesn't seem like a good idea. It seems like it potentially relates to the third thing, because as Chris was saying, well, if you have permanently higher deficits, that maybe is going to raise interest rate costs on debt by a lot. And that's the point at which maybe the government leans on the central bank to keep interest rates low to prevent sort of a spiriting deficit. And that's the kind of thing we might think would lead to inflation.

And then finally, the fifth thing is deportations. And here I think it's complicated. And in my mind, I'm still a little bit confused. And the reason I'm confused is I think it depends a lot on the time path of how these deportations would work out. How big they are, but also how long it takes. The massive increase in immigration in the U.S. from 2022 onwards, it's big, but I haven't seen yet credible estimates that suggest that it was a big contributor to inflation. because, you know, it's big, but it's a relatively slow-moving effect. And at least for now, the academic consensus is that immigration doesn't tend to have very big effects on wages.

You know, that is a whole debate that's rife with debates. But for now, academics seem to think that immigration doesn't have big effects on wages. And if immigration doesn't have big effects on wages, then you wouldn't expect to have big effects on inflation. Now, I think maybe that evidence could be revisited at some point. But most of the papers that I've read say, look, immigration is unlikely to have big effects on wages. And so, you know, in the flip side, deportations would be unlike their big effects on wages, too. But we'll see. You know, there, I think the micro-level evidence about immigration and wages, I think it has

lots of problems, potentially lots of publication bias issues. And so the jury's out on that last one. So to sum up, I'm definitely worried, not really about corporation tax cuts and tariffs, but Fed independence and permanent deficits do seem to me to be big concerns. So if you look at the bond market, you take a look at five. year break-even. So that's, I look at the yield on the five-year treasury bond, and I compare that to the yield on a five-year treasury inflation-protected security, so compensated for inflation risk. You can, that break-eaves, so-called difference or break-even is a window into what investors,

people who put money where their mouth is, on inflation over the next five years. And if you go back a couple months ago, can I say mid-September, when, hey, Harris was winning in the polls and the betting markets and compare that till now, you know, obviously she lost and Trump won, those break-evens are up almost 50 basis points, 0.5 percentage points. So the markets seem to be saying, and of course, there's a lot of moving parts here and I'm maybe reading too much. And there are other things maybe going on here, but it feels like a pretty clean read that

it's about half a point. Does that sound about right to you? Yeah, I mean, so bear in mind That's that's half a point every year for five years Yeah, that's a lot That's a lot You know, it's a lot I guess my sort of out of consensus

Would be less worried about inflation Less worried about that, okay But this is something where you know I would actually want to look carefully At the whole range of data So one thing that I've learned Is there's lots of different data sources And inflation expectation

And one wants to care about it So first, sometimes, Probably not for something good this, but sometimes the difference between breakheavans and swaps inflation can be very big. That'll be the first thing. The second thing is my colleague Ricardo Rice has this wonderful work looking at the whole sort of distribution of markets expectations about inflation. Not just the mean outcome, but is the tail risk of a big inflationary or disinflationary event rising.

And to me, I imagine a lot of it would show up maybe as tail risk that there's a meaningful chance of some kind of unanchoring event. So I would want to look at that too. my sense would be that the mean expectation is less bad than the market fears, but there is some tail risk of something really bad happening. That would be my slightly out of consensus relative to the market take. Right. Great. Well, this was a fantastic conversation.

I really enjoyed it and learned a lot from it. So I really appreciate that. And thank you for all the really good work. And thank you for including us in your work. That was very kind of you. I mean, I thank you. I mean, it was a lovely, it was a really nice chat, lovely to chat to the three of you. And I'm so grateful because, you know, I have a paper now.

And hopefully one day it will get published somewhere. And it was possible because I was able to look at this great data from Moody's. So, you know, in the notes to the podcast, if you're interested, we'll definitely link to all the numbers that you find both the papers that you gave to us and any others that you think are appropriate. That's really, really kind. It's great to have a platform to speak about research. Thank you.

And I had thought you were in the UK and this was late on a Friday. but thank you for doing this Friday afternoon. Oh, actually Friday morning where you are. No, no, no. It's for me, it's a pleasant mid-morning. It's here in Palo Alto, it's all good. Seriously, a real pleasure. So thanks to the three of you.

Anything else, guys, before we call this a podcast, Chris, anything? Thank you, Joe. Thank you, Joe. Dear listener, thanks for listening. I hope you enjoyed the conversation, and we'll talk to you next week. Take care now.