Moody's Talks - Inside Economics - Nerdfest with Bernstein and Parrott

Episode Date: February 20, 2026

Former chairman of the Council of Economic Advisers, Jared Bernstein, and housing maven, Jim Parrott, join Mark and Cris to drink from today’s fire hose of events, including the SCOTUS decision striking down President Trump’s reciprocal tariffs to the 4th quarter GDP numbers. The conversation turns to how well the economy is performing through the prism of AI, housing, and jobs. It’s a veritable econ nerdfest. Guest: Jared Bernstein, Former Chair of the Council of Economic Advisers For more from Jared Bernstein, click here: https://econjared.substack.com/ Guest: Jim Parrott, Nonresident Fellow at the Urban Institute For more from Jim Parrott, click here: https://www.urban.org/author/jim-parrott 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 Analytics Follow Mark Zandi on 'X' and BlueSky @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandi, the chief economist of Moody's Analytics, and I'm joined by my trusty co-host, Chris DeReedies. Hey, Chris. Hey, Mark. How you doing? Good, good, good. And two good friends, a longtime Inside Economic podcasters. Good to have you back. Both Jared Bernstein and Jim Parrott. Hi, guys. Hi, Chris. And I should introduce you. Jared is the former chair of the Council of Economic Advisors. for that, a number of different think tanks around Washington. And today, you're a prolific writer, commentator, economist on Substack.

So if you're not watching Jared on Substack, you should. Is that right, Jared? Does I have that right? Yeah, and it's free. So there you go. It's free. For the time being. You get what you pay for.

And I'm a policy fellow at Stanford Institute for Economic Policy and the Center for American Progress. And you're out in Stanford right now. I am. I'm at Palo Alto, yeah. Yeah, so it's a little early. Thanks for coming on. I know it's a little early for you. I appreciate that. And Jim, Jim is everything housing and housing finance. Jim was a housing advisor to the Obama administration back when GSC reform was at the top of the list of policy items that were under consideration. And now, Jim, you have your own firm consulting. providing advice to a broad array of folks in the housing ecosystem. Do I have that right?

Yeah, that's true. That nebulous title is indeed a good description of my nebulous professional existence. And of course, you and I and Jared have written a lot of, done a lot of work, a lot of research, written a few papers over the years, and it's good to have you back on. A lot going on today, guys. Really? Yeah. I think Jared said it right, drinking from a fire.

hose. Right before we came on, this is now Friday morning, February 20th, the Supreme Court just ruled that the president's tariffs, the reciprocal tariffs that were done under the IEEPA legal justification are not legal. They're not constitutional and struck them down. Maybe, Jared, can I turn to you? You want to fill in the blanks there? How do you feel a sense you feel like this is a good thing? I was about to start applauding. I think this is a good thing. Now, look, we're going to get into the economics of this. And I think sweeping tariffs are terrible economics, especially if you're concerned about affordability and pressure on prices. But obviously, tariffs are a tax on imports. But I got to tell you that my first thought was a rule of law thought. The idea that had the Supreme Court not decided this way, it would have been just a terrible signal for, I think, the rule of law and democracy, because not a lawyer, you know, but it was really clear that the administration had overstepped its bounds with these, quote, reciprocal tariffs. I mean, remember, the word tariff never appears in the IEEPA in the

emergency act that they were using. And yeah, they designated the trade deficit as an emergency. We've had a trade deficit of about the size of it. It is now since the mid-1970s. So it was complete BS. The Supreme Court did the right thing. This isn't over. There's what do we do with the firms who paid all these tariffs? Like, you know, how can they claim restitution?

You know, the administration has other paths that can go down. But yeah, this is a stand-up and applaud moment. So a bunch of stuff comes up. as a result of this. I mean, do you think President Trump will let this stand? You know,

and there's a lot of different ways he can take this. I mean, what's your sense of that, how he's going to respond? I suspect his thumbs are working at about 200 miles per hour right now on,

what is it called, truth social? He'll do his thing. But, you know, maybe I'd be interested in others' view on this. I have not seen, this administration, go to the Supreme Court and say,

screw you, we're going to do whatever we want. That seems to me to be a line they've yet to cross. So we'll see, but I don't think he, you know, starts firing Supreme Court justices, but I'm nervous about it. Well, you know, this is real money, right? I mean, the effective tariff rate by our calculation, and that's the, you know, you take all the tariff revenue that's being generated divided by the value of the imported goods that are subject to tariff

is about 12%. So for context, a year ago before all this started, we were 2%, now we're at 12%. Let's say, round at 10 percentage points. Also our calculation, if because of the Supreme Court decision and the striking down of the reciprocal tariffs, there's other tariffs that are done under other legal justification, the effective tariff rate goes down to 5 or 6%. So effectively cuts the effective tariff rate in half. Amazing. You know, if you don't like tariffs, that's why you're applauding, you know, and why, you know, make...

Well, wait a second. Let me add an addendum. I would not say I don't like tariffs. I use the adjective sweeping for a reason. Sweeping. Okay. Through my long career, I've seen many times when individual tariffs on, you know, rubber tire grade four or chicken part grade three helped to offset, um,

unfair trade practices, particularly dumping by some of our trading partners. But that's very granular and very targeted. What he's done with the much more sweeping approach is quite economically destructive. And I'm sure the four of us could get into some of the numbers on that. Maybe we should. But that's, you know, I'll call today Liberation Day. One thing that's interesting in this, just as a framing matter, To me, what's most, I don't know, problematic maybe politically for him and all this is they've really struck at the heart of his justification for tariffs, right?

So they're now going to shift to all the much more specific targeted ways in which statutes allow you to do tariffs, you know, on a sectoral basis, on a time-limited basis that you've got to provide a bunch of justification for. that's not the way he was justifying his deployment of terrorists before. You know, he would look at a trade surplus or imbalance as he saw it between us and our trading partners, and he would view that as a justification in and of itself for terrorists. And that's exactly what they've just struck down. They basically said categorically, you can't do that. So now he's going to have to shift to a completely different set of justifications that are allowed for in statute, which are not what his justifications have been thus far.

The pivot here, I assume Treasury's been working now for months on shifting to all these more targeted bases because we've sort of seen this coming, at least at a non-DUSTR. Fair enough. The USTR, fair enough. But, I mean, the whole lot of them surely have come up with their alternative, the pivot here. They must have a package ready to go. Completely different away from the grounds on which they've been just trying it all along,

which is kind of interesting. They must have a package that's ready to go. Yeah. Is it possible that the president decides not to respond? I mean, think about affordability. I mean, we all know that tariffs are undermining affordability. It's raising prices for the things that people need, food, apparel, furniture, you know, we import all that stuff. And so he could, couldn't he just say, look, I respect what, well, he won't say to use the word respect, but I'm going to let the Supreme Court stand for the moment.

but I'm cutting back. We're going to do terrorists, but we're not doing them right now. It's a really great point you're raising, Mark. And, you know, if he were smart, that's exactly what he'd do, except he wouldn't say what you said. What he'd say is the trade war is over, we won. Okay. All right.

We won. It's over. I mean, the Supreme Court, you know, those guys are idiots. But, you know, we won. Great. It's over. And, you know, that's that. help him tremendously in the affordability space. But I don't know, what odds would others put on that?

I'd say 15%. So you think he's going to come out and say, these guys, they're wrong, they're idiots. I'm going to impose tariffs, but based on sectoral tariffs, some other legal justification. I think he's going to say, in so many words, we were afraid that these idiots would get it wrong. This day would come. Here's the program we've been working on as a contingency. Got it, got it. So we're not going to get any relief here. Yeah, that's certainly our baseline. That's what we have in our forecast.

Hey, just one sidebar. Did you notice we now have all the trade data in for 2025? The trade deficit in 2025 was no different than it was in 2024. So despite all the tariffs and all the things, this is going to bring in the deficit now. I mean, I think we're within a few billion dollars of, you know, what we had last year. Well, I mean, the one thing I would say. say about that is that the country-by-country composition of the trade deficit is a little different, which is also interesting. So there's less China and there's a lot more Vietnam and Mexico.

Well, let me just say there's less direct China. There's less direct China. Exactly. Well said. Yeah. There's a lot of China through Vietnam and Mexico. But it's right. Right. It's just, you know, it's a whack-a-mole kind of thing, you know, I don't think. But, uh, uh, what? While we're on the topic, have you been following this New York Fed piece that was written about the tariffs in the past through to consumers and businesses? Did that get on your radar screen? Did you see the reaction from Kevin Hassett's, the head of the... I had the Streisand effect.

You know the Streisand effect? Are you familiar with that phrase? I can't remember... Yes. Okay. I can't remember. Chris, do you know how to define it? But what it means is that you say, I can't remember what happened.

I think somebody might have said, like, Barbara Streisand's album is terrible, so everybody went and listened to the Barbara Streisand album. But it's something like that. So the Streisand effect is Kevin Hassett made everybody go read this paper. And, you know, I read it. Yeah, it's very good. I mean, it's very straightforward. It's very mechanical.

These papers all find the same thing. So, yeah. Yeah, just so the listener knows, because I'm sure. certain many people haven't read. Now they'll go out and they'll read it, but it was, and it's not a long piece. It's not that complicated. No. Basically, 90, 95% of the tariffs have been passed through to American business and or consumer. They didn't make a distinction at that, you know, who's paying for this? The business through the lower profit margins or consumers through higher prices, but, you know, the bulk of these tariffs

of almost all of the tariffs have been passed through. And of course, that's not the message that the administration wanted to hear. But, but anyway. So, okay, well, let's move forward. Unless anything else, Chris, did you want to say anything else about the tariffs? I guess in terms of the reaction, I agree that I don't think the administration is just going to let this lie, but maybe they don't go back 100%. Maybe they have the package and they only introduce a few of the tariffs, just to send a signal while still having the affordability play out more favorably.

is that a, I know it's a middle ground, which... Or take time, take their time. Take their time. Take their time. Because I need to, you know, we need to, you know, do all the things that we need to do to get it through the product. Well, some of the tariffs require time anyway, right? If they go with section 201 or three or one, right? Yeah.

Right. Yeah. All right. Well, let's turn to the economic data. And again, going back to drinking from a fire hose, the other thing that happened this morning is we got some, we got a lot of data. GDP data. Chris, did you want to just give us your rundown on that GDP, those GDP numbers? And I said, Jared, I am an avid fan of your substack. I read your piece before we went on. And I just want to say, you have my credit card number. So anytime you want to turn on the spiket, you know, I'm there.

Wow. I love that. Thank you. Hold on. I got to go make it. I got to go press a few buttons. Yeah, that's right. Exactly. Yeah, it's well worth it. But Chris, you want to go down to run over the numbers? Sure. So a main event was perhaps the GDP number that came out today for the fourth quarter of 2025, and it came in lower than expectations, 1.4% on an annualized basis for the quarter. So well below some of the GDP now models or other forecasts that the consensus had. A lot of it is attributable to the government shutdown. So that subtracted about a point, a percentage point from that growth. So if you added that back in or part of that, that back in, you'd have something that's still decent growth. And the growth rate for the year at 2.2% that's Q4 to Q4 also kind of in line, slower than what we've seen in previous in the previous couple of years, but still kind of chugging along at a decent clip. I don't think we would, you know, dispute it or not find it favorable. I don't know if you want to stop there and go to GDP or continue on GDP or do you want to go to PCE or let me, let me just

Let me, let's just stop there. So we got 1.4% analyzed in Q4, well below expectations. I think Atlanta Fed, which they have a tracker, which estimates current quarter GDP based on all the monthly data flow. Last I looked, they were at 3%. We were at 24. And the consensus was, I think, around 24, 25, something like that. And then for the year 2.2, Jared, I saw your substack.

And the word you used was a good economy. two words, good economy. And is that how you feel about the GDP numbers? What I wrote this morning, and I felt it really pretty strongly. There's a ton of data to absorb this morning, and I was doing it very fast, very early. I'm out here on the West Coast with some pretty strong coffee. So maybe I'm a little bit, you know,

I'm feeling a little more inspired than quantitative. So I apologize in advance. I think what we have is a fundamentally good economy that's being incessantly smacked around by horrible policy. And at this point, thus far, the economy's winning the fight. But that could change. Whether it's tariffs, which, you know, very topical, deportations, the government shutdown. I mean, Chris told you that you could be looking at a report that was well north of two. instead of one for, but for the shutdown.

All of these factors, Jim, I'd be interested in your take on some of this, you know, in the housing sector, which has been laid low. All of these factors have been, you know, really quite problematic headwinds, yet the tail win of strong consumer, strong investment, and even maybe faster productivity, has thus far, you know, won that fight.

But we're still, you know, we have a lot more rounds to go. And Jim, we're going to come back to housing in just a second, but just to push back on that. I, you know, I had this increasing problem of when we conflate the words GDP and economy. GDP is one measure of the economy. And I'd say it's, I wouldn't characterize it as good. You know, 2-2-Q-4 to Q4, because I use that because it abstracts from the ups and downs and all around and the quarterly idea, which are being whipped around by the, you know,

the tariffs and the trade flows. Two, two, it's okay. You know, it's maybe economy's potential, maybe at best the economy, maybe a little bit below the economy's potential because unemployment has pushed up over the past year. So I wouldn't characterize that as good. And then I look at the job market,

and I say that's definitely not good. I mean, we're not creating any jobs. We haven't since Liberation Day back, the real Trump's Liberation Day back in April of 2025, you go back and take a look, even with the January increase in employment. we've gone nowhere on jobs, and any jobs we've gotten is in one sector of the economy and healthcare. So that's nothing to me doesn't feel like good at all.

That feels like, you know, vulnerable. And then I look at the inflation numbers. We got that today, too. The PC consumer expenditure inflator came in. Three percent. That's a full percentage point over the Fed's target of two and what we all would consider to be comfortable. And I say that's bad. So, and then I say, okay, we're looking at these aggregate statistics,

lift the hood up and take a look around. The folks that are driving the train or the reason why we're getting that consumer spending is not because of middle-income Americans or low-income Americans. They're barely holding on. It's the high-income guys who are drawing down their saving rate to be able to spend. And by the way, they can't continue to draw down the saving rate. That takes you only so far. And right now the saving rate is 3.6%.

That's about as low as it ever get. So just to push back, Jared, I bristle when I hear the word, good and the economy, this doesn't feel right to me, no? No, I don't think that's right. I think you're way too depressing, which is unusual, because I usually find you pretty upbeat, but you're just bumming me out over here. Look, you make a critically important point, which is the economy. I was talking about the macro economy, and you know, you kind of were too, but then you

took it down sort of to the more micro level, and there I'm with you 100%. I worry about the K-shaped dynamics. I worry that when we're talking about GDP, it means very little to a lot of people who are struggling. And look, I sort of have two lives. One is a macroeconomist looking at the top line macro indicators and trying to understand them. And one, and a more sort of heartfelt one, which is in the affordability space, living standards, trying to help reconnect the growing economy to the livelihoods of middle and lower income people. And I think that disconnection looms very large.

So in that sense, I really agree with you. I think a lot of people are getting left behind. But unemployment is 4.3%. That's on the low side. It is true that the job market's not creating any jobs. It's not laying off people. So I'm glad to see that we're not, you know, I don't see us in anything like a recession right now because you can't have recession

without layoffs. Population growth has been really slow. labor force growth is really slow and that means to get to what you said an important thing you said potential may be even higher than than twoish percent because we've been around to and unemployment's gone up so let's say potential is two and a half or north of that that's got to be almost all productivity growth just based on the arithmetic so it seems like productivity has accelerated i don't think that's AI yet i have some thoughts about what it might be but that's the elixir that's the the the whole grail for economists. If we're actually into some faster productivity growth, that means that at least

the potential for higher living standards is out there, you know, waiting to be much better distributed thanks to good policy versus crap policy, which is what, as I've said, we have. Yeah, on the productivity point, I'm not sure we're there yet. It feels like we're still around two, and we've got some labor force growth. I mean, we have to wait and see. We need that data from... What's your potential growth rate right now? I think it's between two and a quarter and two and a half. I mean, the actual growth rate's a little over two, and we're probably two and a quarter, two and a half. And of that, two percent is, and by the way, two percent, if that's non-farm business productivity,

that's the average rate of productivity growth since World War II. Well, that's, it's about a half. So I was thinking more we were at 1517 before, so that's a meaningful acceleration on productivity. And let me say this. I haven't checked this. So friends sent me a calculation this morning that said, actually GDP growth. Is it Jim? Yeah, it wasn't Jim.

Chris, this is maybe up your alley, so see if these numbers were. He said that take out the government shutdown and that since, you know, since I don't remember the last couple of years, that underlying GDP growth has been around 2.5%, which sounds about right if you take out the shutdown. And, you know, unemployment has ticked up maybe a quarter point. since then. So if you do the Okun Arithmetic, that would tell you that potential is around 3%. I think that's kind of high. But maybe last year and 24, two years ago, that's because you had all that labor force growth, because of all the supply, you know, from immigration coming in. So anyway, I'll tell you know, look, these are fuzzy numbers. So, you know, if it's 2.5 or a little north

of 2.5, who knows. But, but, but I maintain that, you know, especially given the absolute headwinds of absolute horrific policy. I think we're in, you know, a pretty good macro place. But, yeah. Well, you know, the one talking about depressing is housing, Jim. I know you're going to be at the Harvard Joint Center meeting in D.C. early next week. I'm going to be speaking there as well. And I was going over my talk because I'm going to talk about the outlook for the economy

and housing. And I, there's, it's hard to be. upbeat about housing, isn't it? I mean, is there any reason to not be very, continue to be very concerned about the housing market? Yeah. I mean, the, the problems that have been sort of hang over the housing market now for years, mainly a supply shortfall, but also, you know, rates making matters worse as well. There's just a little reason to see. anything meaningful on the rise and changing any of that. I mean, even if rates come down, you're going to see a little bit of the rate lock phenomenon ease up and you'll see, you know,

refi boom and and the parts of the market that are adequately served with supply will begin to open up a little bit. But the parts of the market that we've been most concerned about, you know, the entry level part of the market in particular, is still just dramatically undersupplied, and there's just no policy that I've seen, at least on the horizon, that one should have any hope would unlock that. There's a fair amount of talk on the hill about things that might happen, but even if they did happen, they're pretty modest. We'll talk about that in a bit, and they really wouldn't take effect for a couple of years

anyway in any meaningful way. That is, you know, if you made the policy measures that are being considered, they might affect to the economics of development, you know, that are that are on the table right now, that is considerations of what you might develop and where, which means you might have more supply as a result of this in like two years. So the underlying structure problem we've got, which is a lack of supply in certain market segments, it remains binding and there's very little to see on the horizon that's going to change that. So I worry that even as we see, if we see, rates ease up and the mortgage-related affordability challenges ease up a little bit.

The underlying structural problem that's led to high rents and high home prices hasn't gone anywhere. It's no better now than it was when we all started bitching a moment about this like three or four years ago. It's exactly the same. And so I worry that we'll all get excited about the sugar high of rates coming down. And then we'll wake up from that and realize, oh, shit, none of the structural stuff has been fixed.

So I'm concerned about it for sure. Can I ask Jim a question, Mark? Sure, sure. Far away. So when I listen to you talk about this, which it all resonates, unfortunately, the structural problem, which you're putting at the root of this correctly, I mean, is that kind of near-term unsolvable? Is that like not something you could really do anything about in the near term?

I'm sort of asking, I guess what I'm kind of getting. at is if you could wave a wand and do something that might help people with housing quickly, you know, is there anything you could do? Is that, is that one way? Yeah, I mean, if, if the diagnosis that the structural problem we're talking about is a lack of adequate supply in certain market segments. So if you think that that it's true that the main structural problem is not enough entry-level homes for purchase and not enough workforce rental housing. If like, if that's your view. And when Mark and Chris and I did this paper while back, that's roughly what we found. And just to find workforce housing again, just so. So, you know, rental housing that is one step up from

subsidized housing. So sort of middle class housing that, you know, cops and firefighters and teachers would would likely take advantage of. So we're, we're not, the supply shortfall is not as dramatic at the bottom of the market, but we've already got subsidies employees. There is a shortfall, but it's not as dramatic. There's no shortfall at the top of the rental market. We've had plenty of supply there all along. The shortfall on the rental side is right there in the middle because there's no policy subsidy

and the market can't reach down that far. The math doesn't work for them. And then on the ownership side, it's really the bottom of the ownership market, which is kind of where the middle class enters the market. So it's that part of the market that is undersupplied. And the problem is, even if you were to wave a magic wand today, it means that more stuff likely gets built

over the next several years, which means that that supply constraint gets eased in, say, 18 months. So maybe Mark disagrees, but I don't know of a, I don't know of a magic wand solution that is a within the next six months kind of solution, at least to the supply shortage. You know, everything's an 18 month out kind of solution. Hey, Jim, the one positive thing, though, is there was a piece of legislation that's gotten through the legislative process, right, here on the housing, which is bipartisan. I mean, I don't know if there's any other legislation that's gotten through. So the obviously makers are focused on. It's worth, it's worth talking about that a little bit. So you've got packages on the, in the House

and in the Senate that are, to their credit, very supply side focus. They are the walkiest, least politically, you know, motivating, inspiring packages one could ever imagine, which I'll come back to in a minute. But they are. are they are getting at the minutia in government that is holding back supply, you know, the policies at HUD that have been around forever that cut the wrong way. And they're, they're sort of fiddling with the dials of bureaucracy in a way that will make bureaucracy a bit more of a tailwind to supply rather than a headwind. So it's both, both packages are useful. The Senate's package is a little more aggressive than the house, but either one would be

really helpful to have. So they are, my sense is going to make it through their respective chambers probably in the spring, early spring. And then the question is going to be how did the two sides reconcile inconsistent packages? You know, does the House accept the Senate or vice versa? Answers probably no. So you're going to wind up with the two sides having to come up with some sort of hybrid that can then pass both chambers. And, and, And the upside to that is what's likely to happen is you're going to have a window when the two sides are negotiating where other things can get added to the mix. It's not too late since you're not. These bills, neither one of these bills will be the bill that is ultimately passed by both chambers.

So there still is an opportunity to put other things on the train, as it were. And my guess is the politics in a midterm election year are ruthless enough. on housing affordability that they feel compelled to do something. You know, one question is where Trump weighs in on this. He's been pretty quiet on which package he prefers, but it may be dispositive. You know, if he weighs in heavily on one side or the other, that may make a big difference. So, yeah, there is cause for optimism in Congress that they will do something. But even if those packages get passed, they're pretty incremental. And they would take a long time to make it into the bloodstream of development. Yeah, there's no game changer there. I mean,

They're all, but they're moving directionally. It feels right. And certainly different than what the president himself is offered up, mostly on the demand side of the equation. Yeah. So that's super interesting. So what the president's done is he has. Can I just point out to Chris?

Do you see how Jim says that's very, every time I say something, he says that's interesting? That's so interesting. You see how? Yeah. Maybe I'm being ironic. What he should really say is that's interesting to me. Yeah.

Exactly. So, well, the reason why this particular comment is interesting is the president. To me, to me. The president's positioning on this stuff at one level has been very confusing. So he has said back as early as the early fall, we've got an affordability crisis. He even said he was going to declare a housing affordability state of emergency and, you know, with a big package. that would be adequate to addressing the emergency. And so there was a lot of throat clearing and drumrolling going on with the White House around housing back in the fall. And his team, policy team behind the scenes went and developed a package that they presented to him that was the kind of supply side stuff that you'd want to see.

And Trump being, you know, the political mastermind that he is. So all the stuff on the list and was like, God, nobody's going to care about any of this stuff. And so very quietly, the housing declaration, emergency declaration, sort of went away. It was never declared, so we didn't see a package, you know, rise up to meet it. And it's because Trump realized and its bolsters realized that the sorts of things that you need to do to address the housing affordability crisis aren't all that politically resonant. They just, if you look at polling, it's remarkable, and horribly depressing. A few weeks ago, polling came out that had like nine. 10 likely voters think housing affordability is a pressing concern.

So it's off the charts high. But in that same poll, roughly, only a quarter of those polled think that supply is one of the main drivers of the affordability crisis. Half think that it's all about rates. A third think that it's about greedy investors vacuuming up all the supply. And half of those polls think we don't need more. supply. They don't want more homes on their block. They don't want more density. So if you're the president or his pollsters and you see those numbers and you see, okay, well, we've got to do something because

nine and ten folks think we need to do something. And then you pivot to what your policy people tell. You've got to build more stuff. And you go down further in the pollsters list and you realize that none of the stuff your policy people tell you needs to happen polls very well. Well, it creates a mess. And so Trump has been channeling that mess kind of ever since. He channels the nine and ten numbers. and says, we've got to do something, got to do something, and says, we're going to do something. And then he turns and channels the populist nature of what people want, which is demand side stuff, demand side help, or beating up on private equity firms, not so much building more supply. So you've got this this kabuki dance going on where the administration yells on screens about housing affordability,

as they should. But then when they pivot to solutions, they're trying to channel the polling numbers, and it just doesn't lead you down a very useful path. So as a result, he's really only announced two things on housing affordability, despite all this throat clearing around about the level of gravity of the issue. It's bringing down mortgage rates modestly by buying up NBS, which we can talk about if you want. And it's banning investors of any sort of significant size from buying up single family stock to rent it out. Like those are the only two things he suggested. And not surprisingly, they pull higher than anything else on the list. So that's what he's gone with.

if you did both of them, it would have, you know, a marginal impact. You forgot about the 50-year mortgage. Yeah, but even that lasted 24 hours. Like, he came out with that because he listened to his FHFA director, perhaps, for the last time. And when he realized that that wasn't as wonderful an idea as the FHFA director seemed to suggest, he threw the FHFA director under the bus in like two news cycles. Well, we've talked about the weakest in my. view perspective, the weakest part of the economy housing. Let's talk about the strongest part of the

economy. And Jared, you kind of alluded to it in terms of business investment in AI. It feels like AI is powering a lot of what we're seeing on the investment side of the equation. That's data centers and power and chips and all that kind of stuff. I'd like to get your take on, do you view AI as a friend or a foe, you know, at this point? I mean, friend in the sense that it's driving a lot of investment spending. It is raising, you know, if it hasn't raised productivity growth, it feels like it's on the cusp of doing so. But is it? Yeah. I would call it a dangerous, I feel like it's a dangerous friend. It's like a really, you know, I used to know this guy, I won't name him, but he's renowned, who's like, you know, multi-billionaire and every once a while he would pull me in,

He would, he's a tech dude and he would like, hey, let's go out. And there'd be, you know, he'd have the back room of a fancy restaurant and the bill would be like out, outrageously high. And wine would be flowing. And it was interesting, but it felt sort of like not a great place for me to be. I want to be very clear that this had nothing to do with, you know, this was not an island somewhere. This is just a tech guy who's so you know that and and and and that seems kind of like a relevant connection. You know, AI has real promise just like this guy is blazingly smart and innovative, but there

are excesses and dangers therein. And so I worry that AI is in a financial bubble and I can talk about that. I think it's spinning off some not just investment effects as you mentioned, but we're wealth effects as well. So the idea that, you know, if you have numerous hundreds of billions in terms of appreciated equity from tech stocks and AI, for every dollar that your portfolio goes up, the research suggests you maybe spend two cents more. And so that's helping to power consumer spending. And it's also probably behind some of your case shape results, Mark, where you see the upper end consuming more aggressively than the bottom end. But, you know, that bubbles,

converse than when they do, that can have negative macroeconomic impacts. And then, of course, people, you know, we all worry about the possibility of AI displacing workers versus complementing workers, being a displace, you know, a substitutable factor instead of a complementary one. And there we've seen, you know, not that much yet, but I think we're seeing some outer edges of that. I wonder if the low hiring in particular is employer saying, well, let's just see how many people this this technology can replace and they don't quite know yet so you know nervous but you know as a user of it uh it's it's remarkable and um you know mind blowing on uh you know every every week i i find something you know really to um expand my my thinking around this so so mixed bag yeah so a

dangerous friend i like the way you characterize it chris we're coming by the way we're coming out next week a white paper on AI and look at different scenarios and attach different probabilities to it. And it's been a lot of, it's been a lot of fun, really, really interesting. And I will, just one interesting point, we have these four different scenarios. I won't go through them. We'll take too much time. But we asked, Chris fed the paper to Claude and said, hey, Claude, what do you think the probabilities of these scenarios are, you know, kind of a sang-win baseline, job dystopia, productivity boon, you know, bubble bursts, those kinds of things.

And Chris, who had, who was Claude most consistent with in terms of the probabilities? Well, it was you. Yeah. And I had a very flat distribution, a very flat distribution to the point that saying, basically, I really don't know, therefore the tails are pretty fat here on either. side on the upside or on the downside. But, Chris, what would you say, friend or foe? Is A, in the near term, in 2026, 27, friend or foe? It's a good friend, but not a great friend. So, yeah, I think we're going to fall short of some of the expectations. To Jared's point,

the market is expecting, you know, miraculous growth instantaneously. I just don't see that coming. I think we'll see some shortfalls in terms of earnings reports or expectations. The incremental improvement in the models is getting smaller. There's some marginal impacts here. So I suspect that we'll get some gains, but they won't be quite as lofty as what investors are expecting. And so I expect that we'll see some pullback in terms of the investments and stock prices as well.

So a good friend, it's helpful, but not this great. friend who's going to really power things to a whole other level. Jim, do you have a view on this? I mean, yeah, I mean, it seems like it's going to be lumpy. It seems like what will happen is some sectors will wake up and realize, holy smokes, we've just, we'll be able to jump ahead, you know, 50 years in development because of this. And others will realize that their sector just doesn't lend itself to the kind of advantage that AI has. And the market will sort of pick up on that along with the models. And so we'll see a very lumpy kind of impact on. this I think.

Yeah, yeah. I have a particular, Mark, if I can share a particular concern I have that I think would resonate with the group. This actually comes from the work of Joseph Briggs, who's done very nice work on AI. He worries, or at least I shouldn't say I worry, he says, he's sort of a data guy. So I'm, he's a Goldman Sachs, he's a Goldman Sachs. And he sort of outlines a scenario. He says that history says the following, that recession is a force multiplier for technological displacement.

Recession is a force multiplier, meaning so that, as I said, I think there are a lot of employers who are trying to figure out how many workers can I avoid hiring because of AI and they don't know the answer yet. You go into a downturn, you lay off, you know, 5, 10 percent of your staff or something. now you're asking your question, how many of these folks can I avoid hiring back? And apparently there's an interaction between recession and technological displacement that can be pretty negative. So to me, the stakes of a downturn, which are always high, maybe even higher now because of that interaction. That's it.

I think that's an excellent point. I think that was the history of the Internet boom, right? Because you could go back. the first, that was a decade, 1995 to 2005, the first half of that decade, you saw some productivity gains, but a lot of job growth. In fact, unemployment declined throughout that period. Then you had the bubble burst in 2000, and then 2009-11, of course. You had a recession, and that's when you saw the big productivity games. That's when all the productivity gains occurred. It was in the early 2000s, and I think it is because of that force multiplier effect that you're talking about. A very interesting

point. I'd argue that the productivity gains we're experiencing today, and recently, are from the pandemic, right? There were changes that were adopted during the pandemic. We're working online, remote work, you know. Occupational upgrading. I think that's what, yeah, I think that's what we're experiencing. This is nothing to do with the AI effect just yet. Well, we're going to lose Jared here in a few minutes, and so maybe I thought we'd end the conversation this way.

Can you, we'll go around the group, and can you identify. identify the one thing that makes you, and maybe we've already talked about it, but if, you know, if not, maybe there's other ways of thinking about this. What is the one thing that makes you most nervous about the economic outlook in 2026? Or you want to take the other side of that? No, I'm going to say, I can, are you asking me? Yeah, first you, Jared, yep. So I'll say the one thing, but luckily for me, the one thing implies two things. And that would be, um, Stagflation. So stagflation, which is, you know, pretty good outcomes on the growth, I mean, I mean, sorry, weak outcomes on the growth side, but pressure on the price side, right? And those are supposed to be negatively correlated so that if you have weaker growth, you have less of inflationary concerns. So what I worry about is really in a specific type of stagflation, because I've already been sort of felling to use a Yiddish word, which means, you know, applauded. the pretty good GDP and productivity growth.

I worry about the stagnant job market and pressures on prices. I think I have a lot of faith in the Federal Reserve. I think J-Powell has been a tremendously effective chair, but I feel like they're almost a little under-wired about inflationary pressures. And remember, I, I, I, where the trauma of being in the Biden administration in 21, 22.

So perhaps I'm battle-scarred in a way that has a confirmation bias or something. But I worry that, and you look at it at this morning's inflation numbers, look at the graph I put on my substack. You see real, you know, you see stickiness, you see some acceleration, and not just in goods, but in services, which shouldn't, you know, arguably have that much to do with the tariffs. So I'm worried about inflationary pressures, and I'm worried about that the low hire, low fire in the job market could become low fire higher.

I'm sorry, low higher, high fire. This is going to be the name of the podcast. That's going to be the podcast name. Yeah, right there. Yeah. So, you know, we have low higher, low fire. I worry about low higher, high fire, you know, moving to a layoff scenario with inflation. And that's the stagnation.

Got it. Chris, what's your most pressing concern? I'd point to concentration risks. We talked about spending and the concentration of households, the disparity we see there, and the economy has been carried by that top 20% of households really tied to the stock market. If things turn around and they pull back,

I think that's fodder for recession right there, right? Because the middle and the bottom are not providing a whole lot of support. And then we have concentration in investment as well, as we talked about with AI. We're really placing all our chips on that technology at the expense of other technologies that we could be investing in. Maybe not as dramatic in terms of their impact, but I worry that, again, if AI doesn't pay off as we expect, that could lead to a pretty significant pullback in investment as well. A quick concentration question for Chris. Do you also worry about the fact that so much job growth has been concentrated in a few narrow sectors?

Absolutely, right? It's health care, right? That's really been driven by health care over the last year. And health care is great. Those are good jobs. But, you know, again, a little shaky on the foundation, right? We don't have anything else to fall back on, right? That's really been carrying the water.

So, yeah, absolutely. We're not going to play the stats game because we just don't have time. But I've got one stat. and I want to ask you, you know, who can get this? In the context of this point about health care, which metropolitan area with more than three million in population, there's 25 or 26 metropolitan areas over three million in population of that group, which has had the strongest job growth over the past year, December to December, December 24 to December 25, percentage change.

Which city you're saying? Which metropolitan area? with city yeah think about what we were just talking about health care you got to read my philadelphia inquire op-ed this week or opinion piece this week it's it's philadelphia well philadelphia is the strong in terms of job creation you know December to December of 2024 to 25 that's really is the strongest growing economy in the country you know more than Dallas, more than Atlanta, more than Phoenix. And the reason? Health care. You know, all the, I think the largest employers at the University of Pennsylvania, which is all health care,

Tom Jefferson, Temple, Chop, Children Hospital of Philadelphia. Those are the massive employers in Philly. So, and actually that's why Pennsylvania, the state of Pennsylvania is one of the strongest growing states in the country. Anyway, just a sidebar. So to you, Jim, what would you say? What is the thing that makes me? I mean, I worry more about Trump risk than anything else. It's a nebulous sort of thing, but I mean, we have been, the market's been remarkably, not resistant, but as Jared put it, durable through all this crazy policy and personality risk. But I just worry that at some point it's going to give in some way in the face of some rash move that the bond market doesn't like. I also worry internationally. I mean, so far,

the sheer fear of Trump has kept people from really pushing back in ways that affect us too much economically. There are signs that maybe the fear, that the fever may break and people may begin to call his bluff. And I wonder whether or not they'll do it in a way it will impact the economy. So it's a nebulous bucket and maybe too easy an answer. But I worry that it's a very, some point in the next two years, as Trump gets more isolated in his power, you know, divided Congress internationally, people less deferential, if he gets backed into a corner in a way that ultimately bites us economically or otherwise. I worry about that. I think that's a really powerful risk. As you were saying, literally as you were saying that, Jim, this headline

came over my transom. And, you know, this gets to market. question you know what do you think trump will do with the tariff uh decision breaking news trump says he's considering a limited strike on iran yeah exactly i mean that's been percolating but what do presidents do when they want to you know make you look over here look over they bombs and so yeah i think jim is is right on spot on there yeah well i'm going to answer my own question this way my son sent me this um this ex post uh from uh someone on on x that encapsulates it perfectly for me. And here's the post.

I honestly have no idea if we are close to a crash, a melt-up World War III, an AI Industrial Revolution, a mother-of-all-short squeezes, a depression, a recession, or aliens. That's exactly how I feel. I've been at this for a long time. 35 years I've been a professional economist,

And I'll have to say there have been other times when I've been as uncertain as now, but there are very few of them. You know, there was Y2K, there was 9-11, there's a GFC, the global financial crisis, the pandemic. And I'll have to say now, because the uncertainty created by economic policy is off the charts. And the economic uncertainty created by artificial intelligence is off the charts. I mean, you know, you listen to some of these, Jared, these. You're right, these technologists in that space are just amazingly brilliant people, and you can't dismiss them, but if you listen to them, you come away with, oh, my gosh, there's a tsunami right-headed straight for us, and no one's paying attention to it.

So, you know, that's what makes me most worried is that when I look at the economic outlook and look at the scenarios that can unfold, it's a very flat distribution. It's not this bell-shaped thing where risks on. the tails. It's like these are fat tails. They're all on both sides, on both sides of the distribution. So it just, I'll have to tell you, I feel so uncomfortable with, you know, how things are going. And just because they're just all over the place. Anyway, any, what do you think? Was that, was that one? So I have, wasn't that a great ex post? That is a great tweet. And I'd love you to send me that link, please, because I want to use that. But I do have,

That substack title. Yeah. Well, I do have one question about that, though. So there's a very good and I think kind of well developed and sort of true theory and economics about the option value of waiting, the real option value of waiting. And what it says is that in periods of uncertainty, it makes sense for investors to wait and see where things land before they jump in. And therefore, uncertainty should be correlated with.

with weak investments, slower growth, and less capital deepening. So like for all the uncertainty you just outlined, and it was a perfect thing, it's like, and yet investors are not tapping the option value of waiting. They're jumping in like full board, which is part of your concern. Like, you know, why aren't people kind of standing back? Jim is right about Trump for us. So why wouldn't you be standing back saying, well, let's see where this place. lays out, but there's this kind of weird combination of the flat probability distribution you described

and, you know, aggressive risk-taking. But it seems like there are two possible explanations which scares me to death. One is, and I agree everything you just said, 100% and I find it bewildered. Were you with Jared or with me, Jim? No, Jared, the notion, well, I agree about aliens and all that too. It scares me. I'm equally unnerved and confused by all of it. The Garrett's point about the markets, the disconnection between all of that uncertainty, all of that apparent risk and the market's enthusiasm is just bewildering.

And it seems like they're one or two explanations. One is they are, they view themselves to be insulated from these risks in some way. That is, they're okay with them somehow. In which case, if we have more of them, so what, the markets keep going up. or they're ignorant of them, willfully or otherwise. And if the latter's true, then, you know, when those risks go from being probabilities to be actualities, you're going to have inflection points. You'll have these nonlinear reactions where the market's going to go bananas because they're

going to feel like they got caught off guard by something that's always been a 30% probability that jumps up to common actuality. I worry a little bit that we're kind of in the latter world. And then there's just this willful ignorance of the risks. And when one of them actually comes to bear, people are going to wake up and realize sort of just how risky the environment we're in is. And they're going to head for the hills. Jim, this reminds me of a radio play I've always wanted to do. And this might be a good closeout because it's supposed to be humorous.

And it ties together a lot of what we've been talking about, including aliens. So imagine that, you know, here's a radio scenario I could imagine. You're driving. I hear the radio. Aliens attacked the world today. You know, airplanes were falling out of skies. Buildings were burning. Populations were destroyed.

Markets were upbeat on the news based on... Because the Fed's going to ease policy. Exactly. Right. It means lower rates. That's great. I think we should close out on that. That was really very well put.

So I want to thank you guys. for spending the morning with us. Really appreciate it. Cover a lot of really good ground. And always enjoyed. Hopefully I can get back on at some future date. But thank you so much. Thank you. Great seeing you. To you, dear, dear listener, thank you for your attention. And we'll talk to you next week. Take care now.