Moody's Talks - Inside Economics - Perfect PCE, Problematic Politics

Episode Date: July 28, 2023

Mark, Cris and Marisa (yes, she is back) welcome Matt Robison of the Beyond Politics podcast to talk policy and politics. The discussion ranges from the risk of a government shutdown and Bidenomics to a consideration of whether the nation’s politics are as fractured as they seem and who is going to be the next President.  It goes without saying there was also a fulsome conversation about this past week’s economic data - could the numbers have been any better? Even “supercore” inflation was up just 0.2% month over month and 4.2% year over year in June.For more from Matt Robison, click hereFor the full transcript, click hereFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and Marissa, you're back. I am. I'm back. You look very rested. Thank you. And more tan than when I left. Yeah, you were in Kauai? I was, yeah, 10 days in Kauai. Ooh, that sounds cool. I've never been there. It's so beautiful. Recommend? Yeah. Oh, yeah. It's, it's absolutely gorgeous. Have you been to Maui? No, I have not. I've only been to Kauai and the big island. Oh, two years ago.

Yeah, I'd like to visit. Yeah, Chris, have you ever been? Of course, we got Marissa D. Natali and Chris DeReedy's. I should have introduced you, but everyone knows that. So, Chris, have you been to Hawaii? I have not. Yeah. Merce, let me ask you this.

You live in California, so it's only like a five-hour flight. Yeah. If you're out in the wet on the East Coast, is it worth, do you think, taking the 10, what is it, 10, 12-hour flight to get out to Hawaii? Or would you just go to the Caribbean? I would go to Hawaii. Yeah. You would. You know what's interesting is because obviously I'm from the East Coast grew up there. I've only been in California for eight years. But I was shocked when I moved here, how everybody in Southern California goes to Hawaii regularly. Like it is such a strong linkage between, yeah. I mean, I know people that have houses there that go there every year. And it's

just so strange coming from the East Coast because like I didn't know any growing up I didn't know anyone that ever went to Hawaii right people would look at me like I had three heads because I'd never been to Hawaii yeah it's such a long trip from the East Coast you usually have to lay over in L.A. or San Francisco spend a night and then go but from here it's five hours so yeah yeah but I would it's definitely different from the Caribbean so yeah yeah interesting yeah very good well it's good have you back and good to have Chris back. He was off in the hills of Italy. Yeah, the other direction. Yeah, the other direction. And we got a great podcast. We're going to turn to Matt Robeson of Beyond Politics here in a few minutes. Before we do, I want to talk about this week's economic data and the Fed meeting and a lot to talk about there, a lot to digest.

So, and I'm not sure what you guys are focused on, but maybe, Marissa, I'll start with you. of all the things that happened this past week on the economic front, you know, what would you call out? Well, there's a lot of data to talk about. I don't want to steal anybody's statistic, but, I mean, we got readings on, two readings on consumer confidence, wages, the housing market. We got a lot of data. And nearly all of it good, like quite good, I think. Maybe too good? Perhaps isn't.

Too good. Well, we'll have to come back to that. I don't want to know what that means. GDP, right? GDP growing 2.4%. So all good data, the Fed had a meeting. They did what we expected them to do, raise rates by a quarter point. The communication, I think, was not surprising around that.

They certainly left it open to more rate hikes. They're looking at the data. They're focused on inflation. And, you know, they kept hammering. One thing in the Fed statement, I was. noting was how many times they said 2% inflation target. Because one thing people are asking me a lot when I go out is, do you think they really stick to 2%?

You know, would they be happy with something like 2.5%, 3%. But I think in the first two paragraphs of that statement, they mentioned the 2% target like three or four times. So yeah. Trying to hammer the point that we're focused on too. Sure. and brought up inflation expectations specifically as one that they're watching. All right, let me ask it this way.

Of all the data that came out this week, and you mentioned it, GDP, the employment cost index, which measure of wages, we got data on consumer spending, income, and of course, inflation, the consumer expenditure deflator, that's the measure of inflation. The Fed is targeting the core X food and energy PC deflator. You got housing statistics. our own Moody's analytics, repeat sales, house price index came out this week. I mean, a gazillion things. Anything that wasn't good from a perspective of I want inflation to come in so that stops

the Fed from raising rates and the economy is continuing to grow and avoiding recession. Any statistic that we got durable goods, we got trade, we got like a lot kinds of stuff, Anything in there that? And the answer could be no. I'm just asking. I think if you dig into some of the detail of some of these things, you could point. Like, for example, in the GDP report, corporate profits fell again in the latest quarter. There's been three or four quarters of declines in corporate profits.

No, no, wait. They didn't release corporate profits for Q2. No, no. They revised Q1. They revised, yes, yes. Because the profits come out next month is lagged one month. Yeah, yeah. So there's been three quarters, I think.

You're right. It wasn't for the current quarter. So you're really digging. Yeah. Jobless claims are falling back from where they were to. Jobbless claims being a window on layoffs and they're back down again. Yeah. Okay.

All right. Chris can name five things that are bad. that too good? Like the jobless claims, is that too good? Right? Is the Fed going to look at that and say, well, this is not a cooling economy. There's still risk here. I don't know because, you know, wage growth is clearly coming in from the ETI report. Is it good enough though, right? So we had the employment cost index. That's the one I would pick out, right? Four and a half percent year over year. Yeah, it's coming in. Is it coming in fast enough, strong enough to sway their opinion? I don't know. I mean, it's consistent with a PC deflators coming down. Like all pretty much every measure of inflation is heading in the correct direction.

Well, Chris, let me ask you. Yeah. Give me your, you know, the, all this data. What's your interpretation of, of what it said and what it means? So all good numbers, right? I think it's hard to say that anything is going off the rails here by any means. Again, I come to this question, I think that the Fed is going to try to address, which is, is it good enough? Is it fast enough? Right. Yeah, sure, it's going in the right direction. You know that the first part of getting inflation down was going to be relatively easy. Now we're going to start to go into that, I guess, seventh inning where it becomes much more difficult. You see oil prices, you know, stabilizing actually coming up a little bit. So risks of another shock are still out there. And you can't fall back on some of the other. deflationary forces that we had in play, like the supply chains getting worked out. That's done, right? So now we're going to... Not really. I push back on that. I mean, still, we got vehicle prices that are going to decline. That's supply chain related, right? We got, you know, a lot of many multifamily homes coming to completion that they got all bottled up because of supply chain issues. So I'm not, I'm not sure. But the house prices to your point are, you know, they back up

again, right? So, right. I was sorry, I shouldn't have stopped you. No, no, no. Yeah. So I think he's I think it's too early to unfurl the mission accomplished banner, right? Oh, of course. Of course. That's my point. Well, yeah, no. You look at this data, sure. Yeah. But, okay, let me ask you this. Of all the statistics, which, which one would you point to as being the most worrisome for you? I think employment costs. I think it's the right now it's wages that we're going to be laser focused on. Right. Yeah.

Right. All right. I can't take it anymore. It's unambiguously good data. Come on. It's unambiguously good. Yeah. Is it where you want it to,

you know, be to, is it right on target? No, but it's screaming. Everything is heading back to the Fed's target in a, the reasonably graceful way, right? I mean, the employment cost index is, you know, year over year 4.5 down from 5.5 to 6. It's clearly decelerating and you need to get it back to 3 and a half.

And if we get that in the next year, is that what's wrong with that? That feels pretty good to me. inflation is coming in. The core consumer expenditure deflator is coming in. It's 4.1 now year over year. And I'm not going to go into too many more statistics because we're going to play the statistics game at a second. But it's clearly, you know, coming in. You know, got consumer confidence has improved. So that suggests consumers are going to hang tough.

The consumer spending data that came out, that looked really good. It's, you know, the saving rate is stable, you know, we still. Not a little bit. Was it down a little bit? 4.3, 4.3. Oh, I don't want to take too many statistics. Oh, no. But that feels like it's in a four to four and a half percent range.

It was bouncing around somewhere in there. You know, the GDP number is like, okay, you know, it's right with the economy's potential year over year. It's a little bit below the economy's potential. gosh, it just everything, everything was durable goods. I mean, businesses are investing. They're not pulling back and we want them to invest, right? Because that goes to long productivity growth. The trade numbers look pretty good.

I mean, it looks like the trade balances stabilize. Inventories no longer adding to growth or subtracting growth. It feels like inventories are back to where they need to be. I mean, that's that week of data that we got, it was like, oh, could you have asked, literally asked for a better set of data. I don't, you know, given the, you know, the environment that we're in, it's very hard to do that, in my view, it felt, you know, very good, felt pretty good. You want to push back on anything I just said?

Except that description is still being written. I agree. Yeah, exactly. Current situation. Yeah. Backward looking data. Right. Right.

Okay. There's still. I hope I'm, you know, you pay me as the bear, but I don't want to be there. Yeah, yeah. I'm just saying that the risks are out there. And, you know, yeah, 4.1% core PC, great, but still very far from two, right? So. Okay.

Okay. All right, fair enough. On the Fed, we have no more rate increases in our forecast and our baseline forecast in the middle of the distribution of possible outcomes. That this last rate hike is the end of the story, the so-called terminal rate, the highest rate, five and a quarter to five and a half percent. We don't have rates coming in until this time next year, really, because I don't think the bar is pretty high for them to actually cut rates. I think they need to get inflation all the way back into their target before they do that.

And by our forecast, it takes about a year to get there. And I think our forecast now is consistent with market expectations. That's a question, if you guys know the answer to it. And the other question is, is that sound right to you? I mean, do you think that outlook for the Fed make, is that consistent with your own expectations for, you know, monetary policy? And, Marissa, I'll turn to you first. I think we could get another rate hike later on this year. I think it really just depends on which way the data go.

Inflation is coming in, but I don't expect that it's going to be completely linear, right? I think we are going to have some months where inflation accelerates here. And if that's, particularly if that's core and it looks like it's coming from the service sector. And if the job market stays the way it is, I think we could get another quarter point rate hike later this year. Chris, what do you think? Oh, first of all, do you know what the market is saying? I think the market is consistent with what I just said. Pretty much.

Roughly so. Yeah, I think right now it looks like for September, it's 80% chance we stay. a firm 20% chance of a hike quarter. Oh, is that right? Only 20%. Yeah, so pretty low. At the September meeting? Okay.

Yeah, November, I think is pretty similar to that, maybe a little bit higher, just given some of the uncertainty. Right. I think, I think Marissa nailed the point that there's likely to be some noise in the data here at minimum, and we could see inflation pick up, take up a little bit before it comes back down. And I'm increasingly of the opinion that the Fed will hike one more time, sometime. in the fall. As I think about the political cycle, and I think that's trying for just to get it

out of the way before you get into the presidential election. Yeah. The last thing they'd want is to pause now. And then let's say in the spring, we get to a 4-4% unemployment, 4% inflation economy. Well, then they have to start hiking again. That's tough. difficult. So I think the bias could be to let's hike one more time, even at the cost of, you know, increasing recession risk just to ensure that inflation stays the course here. But let's see. I mean, Mercer's right about the data. Yeah, on that point, I basically said the same thing on CNBC that, you know, they don't want to decide the next election. They prefer or at least not be perceived as deciding who wins the next election.

And the host fired back, well, the standard, the Fed's not political. And I said, well, there may not be political, but they don't want to be politicized. That's how I kind of sort of, I think that's how I responded. Do you think that's a fair response? I think so, but I reject the notion. Everything is political. Everything is political. You reject that notion out of hand.

At a hand. Any policy you make has some type of theory. or underlying bent to it. Yeah, okay. It might not be overtly political. Yeah, but there's some political consideration at a minimum. I guess the concern would be that they're not making a decision that's appropriate for the economy, for full employment and inflation at target because of politics.

You think? Yeah, yeah. I think that's the case. And I think, again, one. reason why they would prefer to hike earlier rather than later, I think, is to just get that out of the way. Yeah, just not even create the doubt that they might be politically driven. Mercer, what, do you think I answered that reasonably well on CMPC? Because I was worried that, you know, maybe wouldn't come across well.

I mean, what do you think? I mean, it is what it is. Everything that happens is politicized now, right? Everything, even though the Fed is not a political body. everything they do is politicized. So to do anything during an election year will be hyper politicized. So I, yeah, I think that that's the correct response. Yeah. Okay. And let me ask you one more thing about the Fed. Going back to your point about the 2% target and the Fed obviously working really hard to convince people that they mean 2%. What do you think? Do you think they are steadfast at 2? Or, you know,

would they be okay with three headed to two? Or how do you think about that? I think that I don't think they're going to keep doing policy action until they get to two because they clearly understand from the statement that this takes time to work through and it works through with a lag. They also mentioned QE or, you know, easing, right, letting the balance sheet continue to run down. So I think that as long as they, I think he said, like we quantitative tightening now.

Right, right. Let the assets on the balance sheet wind down even if they're not raising rates or did they take even if they're cutting rates. Is that, I can't recall. Yeah. Yeah. Okay. So I think, I don't think that means they're going to continue to hike rates until they get to two. I think they may stop, you know, well before then as long as they're confident that the policy action.

they've taken are putting the economy on the trajectory to get there. What do you think, Chris, on that point around how relaxed are they going to be to actually get to the 2% inflation target on core consumer expenditure inflation? I think that still remains the mandate, but I think that if it's too-ish, right, then they're not quite as aggressive. Obviously it depends on the trends, right? If it's gradually moving down closer and closer to two, then they let the economy play out. If it stalls out, if it actually starts to take up meaningfully, then I think they,

I don't think they accept even two and three quarter, right? Or two and a half. I think it'll continue to drive down if that's the case. Particularly the job market is really strong too. If what? Particularly if the job market in that scenario. It continues to be really strong. Yeah.

Right. Right. But if the kind of, if the inflation rate's 3%, and it feels like it's headed into the twos, and the job market's not getting stronger, it feels like it's holding its owner, maybe, you know, slowly easing up, you think that would be, they'd say, fine, I'm not going to raise rates because, you know, in that kind of environment, or would they still view that they need to raise rates to get that inflation back to. too faster. I think, well, the timing of that could be interesting, right? Going back to the presential election. Yeah, right. I don't think they want to raise rates in 2024. So I think that maybe they do if this is the scenario we're in at the end of this year.

Right. Okay. Okay. Chris, any? Yeah, I'd concur there. Concur. Yeah. Okay.

Okay. Let's play the statistics game. The game is we all put forward to forward to statistics. The rest of the group tries to figure it out. By the way, Merseye, I schooled him last week when you were away. I did listen to the podcast that I missed. That was a long podcast. Did you notice, man? We were, Chris is so chatty. It's like a long comment. We didn't get through all our questions. No, we didn't. Yeah. But the game is we put it forward to statistics. The rest of the group tried to figure that out through

cues and deductive reasoning and clues. And the best, A statistic is one where it's not so easy. We get it immediately one that's not so hard that we never get it. And if it's apropos to the topic at hand, which I'm not sure what that topic is exactly, but there's a lot of statistics. Maybe politics. That's a good one. Okay. Oh, that's a hint right there, I think.

It's a little Easter egg for you. It's correct. Okay. Let's begin in tradition is we begin with Ms. D. Natali. Okay. 4.67%. That's ECI year over year. No?

Percent change year ago in the employment cost index for... It is. Civilian workers? No. Wages and salaries? Compensation? Yeah, but it's something more... Oh, I know.

I know. It's... All right. Chris is going to let me say it. Year over your growth in the employment cost index. Yes. private industry wage and salary X incentive pay no you're really you're really close oh geez but really good okay no Chris you want I was going to go with a non-union workers

non-union oh okay so that's not right so it's not wait is it is it wages and salaries it is wages and it is year-over-year growth and wages and salaries X incentive pay no Oh, it's not. A particular segment. Oh, it's a particular segment. Okay. It's not, it's not total. It's not the whole shoot. No. It's not private industry. It's not civilian. It's something more specific. One of the industries? I think it is non-unit, but it could be. It could be. But, but. Okay, go ahead. What is it? It is year-over-year growth in wages and salaries and the second. order for service sector workers. Oh, service sector. Yeah. Okay. That's a good one.

Very relevant. I actually think 4.7 does apply to a lot of different. Yeah. Yeah. Yeah. It will make. Everything was 1% on a month over a month. Yeah.

Did you notice that? Which by this, by the way, by the way, Chris, analyze that for me, please. 1% in a quarter is. Oh, well, you know. You're forecasting with the ruler here. That's 4%. And what's the boge? 3.5.

3.5. Okay. And that's, there's like a band of uncertainty around that. That's pretty wide, I would think, right? On both sides. Exactly. Exactly. Yeah.

All right. Okay. So, Marissa, why did you pick that? I picked it because of inflation, right? That at this point, inflation in service sector wages is something that is, really as we get past energy and food and supply chains and all these other things that have brought inflation down quickly over the past year, this is one of the sticking points is service sector wages. So there's progress here as well. 4.67% is high relative to where it was during

the pandemic, which was around 3% in the quarters before the pandemic. But it's been coming down pretty steadily for the past year. year-ish. Yeah, actually year. It peaked at 5.3% back in the second quarter a year ago. So it's been coming in as well. And it's the slowest rate of year-on-year growth since the end of 2021. So it's encouraging that here we're making progress as well, although it's slow, but it's there. Yeah. Yeah. And just to make sure everyone understands out there that the ECI, the employment, cost index, what you're putting forward here is what we consider to be the gold standard for measuring wages and labor compensation because it controls for the mix of occupations and industries and the other measures we have don't do that. So the problem is it's lagged and we only got Q2 data. But nonetheless, this gold standard is saying wage growth is still high compared to what you

think it should be if you have a 2% inflation target. but and by the way, not if you have a 3% inflation target. If it's a 3% inflation target, you're right on. Job done. Job done. Mission accomplished. Mission accomplished. Yeah, mission accomplished.

But okay, that's what the ECI is. Okay, good statistic. Chris, what's your statistic? All right. Got two here. 92.4 and 50.9. Okay. Are those from, are they,

Are they indexes? Are they from a consumer confidence survey? They are indeed from a consumer confidence survey. Is one from the conference board and the other one from the UMISH? Are they both from the University of Michigan? Yes. Oh, see, I didn't look at that really. When did that come out?

That came out this morning. This morning. I haven't had a chance to look at that. And it was, what, 92? 92.4 and 50.9. I'll give you a hint because he didn't look at it. The overall index was 71.6. Okay. So one is current conditions. One is expectations? No. No. Okay. I'm relating it to the topic of politics. Oh, is one the perception of Democrats and one the perception of politicians? You got it. You got it. That's a good one. Yeah. That's a good one. Okay. Yeah. Explain. So Democrats at 92. So the overall was 71.6, right? Across the entire population.

92.4 for Democrats is quite high. It's actually on par with what it was back in February of 2021. And I think we've talked in the past that these sentiment measures are very sensitive to political party and who is in control of the White House. So February 21, President Biden takes office and suddenly the Democrats are all optimistic. The 50.9 is Republicans, which is quite low, certainly much lower than the average, as I mentioned. It's off of the bottom, which was 33 last year, but still relative to the cycle. That Republicans still view this as a very negative economy, right? Just slightly better than what it was at the depths of the pandemic, not close to where we were prior to the pandemic yet. So just to color the sentiment.

Yeah. Because we are going to turn to Matt Robeson soon and talk about the policy and politics. And that's a really good one because we're going to talk about the fracturing of our politics in that conversation. So the overall UMIS, University of Michigan survey, it was 72, what was it? 71.6, which was up a lot. Up a lot. 64.4, so up seven points, which is a big deal. Big jump.

Yeah, big deal. Still low by historical standards, but moving. And, of course, the Conference Board Survey of Confidence, another measure, that's also jumped in the month of July. And that is actually quite high by sort. It's not high, really high, but it's above average. Right. That was 117, I think. Yeah, something like that.

Okay. Okay. Okay, very good. Okay, you ready for my statistic? Ready. Let's hear it. Very easy. straightforward, down the strike zone, 2%.

That's target for inflation. Well, yes. Okay. That's, yes. I knew you were going to say that. It's not because that. Is it, is it the, the PCE over the past six months? No.

Is it on the right track? It's, is it the PC deflator? Well, it's from that. It's from that release. Yeah, it's not the, it's not the PCE later. It's from that release. It's from that release. What's the most significant, most important inflation statistic for setting monetary policy? Core. Is it core PCE? Core PCE in the quarter annualized. Annualized. Mark loves to annualize everything. Wait a second. Wait a second. Wait a second. Wait for it. Let me repeat that. The core PCE deflator grew 2% in the month of June, in the month of June. Okay.

So that's done. Yeah. That's what you're saying. I'm just saying. In fact, you know, we said mission accomplished a number of times here. I can feel that that's going to be part of the title of this podcast. That will jinx you. Oh, that'll jinx it.

Yeah, you're right. The last time someone said that it didn't go well. Yeah. Oh, that's right. Are you referring to President Bush? I am. Yeah. Oh, you are.

Yeah, I forgot about all. Maybe we'll skip that. Yeah, we'll skip that. But I thought that's pretty cool, huh? Right? It is. Because, you know, you got to get some month to month quarter to annualized numbers at your target before you actually get to target.

Absolutely. This is, you know, a long. the way. So it felt pretty good. Hey, one question I don't know the answer to him. I don't know if you guys do either, but I'm going to ask it, super core inflation. That's, you know, the PCE deflator for services, X housing, X energy services. This is what, you know, Chair Powell, Fed Chair Powell is focused on is saying, well, this is the thing the Fed can control.

Do you guys know what that number was? I didn't. I didn't look at it. Okay. All right. No, no worry. No, I didn't look. Maybe you can find out.

We'll put that into the blurb. So people will have that because they're going to be awfully frustrated if we don't, we don't give them that statistic. Okay, very good. So before we move on, probability of recession just very quickly. What is the probability the economy enters into a National Bureau of Economic Research defined recession between now and July of next year? Marissa? Oh, she's. I feel a cut coming.

It better not be an increase. It's not. But now I'm a little worried about a government shutdown more so than I was. She's presaging the next conversation. I am, yeah. I can't help it. Sorry. I mean, I think it's like a third.

A third. Okay. And you were at 40%. Like 40%. So your highest probability was 45 or 50%? You were 50. My highest ever? Yeah.

You were even higher. I think I was near like 60. Oh, yeah, you were. You were at that point. Yeah, that's right. Okay. One third. Okay.

Chris, I'm sticking with 50-50. Oh, damn. I can't wait. As soon as he cuts it below 50-50, we're going to have to do something. Yeah, I'm at one-third as well. I agree with you. One-third. Oh, so you didn't move.

You didn't move down. No. No, no, no. despite all this great data. No, because it's consistent with my forecast, Chris. Sticking the script. Stick in the script, baby. And you're right, you can't declare mission accomplished.

And you're right, Mr. there's a lot of potential threats out there. You mentioned the government shut down. The stresses on the financial system, something could break. We've got student loan payment moratorium coming to an end. You know, and those are the things that we know. It's the unknown unknowns that, you know, probably will come in bite us if something's going to bite us.

But anything else before we move on, guys? I don't think so. Very good. We're going to bring Matt into the conversation and looking forward to that. And let me bring in Matt Robeson into the conversation. Hey, Matt, how are you? Hey, Mark. I'm good.

How are you? I am okay. I had to say I had a tough travel day yesterday. I was in Milwaukee. and for a board meeting. And just as I'm leaving for the airport, it was canceled. And they moved it to today 24 hours later. So then I scrambled, got a card to take me to Chicago,

Herr, and got on a 9 o'clock flight last night, got in around midnight. So I'm a little discombobulated. But I'm here. I'm here. I made it. Have you been lucky enough to avoid those kind of travel problems? I have ever since I took my consulting life down to a bare minimum.

I travel a lot less, a lot less time on airlines. And I'm not sorry about it. Yeah, you're a lucky man. You're lucky man. So Matt, you have this great podcast that you were so kind to have me on, I think a couple times I've been on Beyond Politics. And maybe you can take a minute and just kind of describe the podcast and sort of how you found that long, windy road to be, you know, running that.

that show. I'd be a little bit more about your background. Well, sure. The podcast is called Beyond Politics. I host it with my former boss in Congress, former Congressman Paul Hodes of New Hampshire. He was the 2008 national co-chair for Barack Obama, a two-term member of Congress. I spent about a decade working in Congress. Before that, my background was in economics. I was an economics major at Swarthmore College, where my advisor was Fred Pryor for economic historians. Can anyone place that name? Fred Pryor.

Swapmore is a great school. Great school. Of course, we're just down the road here. I'm in Malvern and Westchester, so we're right down the road from Swapleman. Fred Pryor, no, I can't. Can you guys? No, but we remember, we've had so many Swakmore alums.

Oh, yeah. Yeah, we're few but mighty. So Fred Pryor, if you've seen the, Steven Spielberg movie, Bridge of Spies, was the other guy in the exchange for the U2 down spy plane pilot, Gary Powers. He was an economist studying Eastern European economies. He was part of that swap, and he settled at Swarthmore College. Fun fact for you, Mark, that's only one of the amazing footnotes in his economic career. He also, and this story is so good that I hope it's true. I've never tried to interrogate it because I like it. He also is the reason that you constantly have

traffic on the blue route. If anyone's traveled around Pennsylvania, you'll note that the blue route, which is a big highway in Pennsylvania, shrinks from three lanes to two. And it's right around Swarthmore College. Why is that? It's because Fred Pryor knew enough about manipulating the federal government, which is also my stock in trade, to file environmental impact statement after environmental impact statement to try and stop the highway. He forced it to narrow to two lanes, which is why there's always a bottleneck there, just because he didn't want it to make so much noise around his house. Damn. That's why. Fred Friar is an amazing historic figure, and he was my first economics advisor. That's a cool story. When I was a kid, the Blue Root had been built,

because of all these lawsuits, it had not been open. So it was like this highway with nobody on it. We would take our bikes, and we would ride along the Blue Root. for really hours. And you're saying that's because of Fred Pryor. Fred Pryor caused a lot of traffic congestion in the greater Philadelphia area. He was part of an historic spy exchange. His father tried to wall off his small town from the Great Depression by printing his own money. Turns out the Secret Service in the Treasury Department do not like that.

So he has hundreds of thousands of dollars of fake currency in his addict. He died a few years ago. So I digress. But the point is I come from a background in economics. and a friend of mine at Swarthmore said to me, why are you going to major in political science, major in economics? You learn all the same stuff, but better.

She was right. I went into economics, but then I found my way back into government and politics. And now I host this podcast. Well, it's great to have you on, and there's a lot to cover both in terms of policy and politics. Maybe we can start the policy first and then turn to the politics. Both are pretty fascinating at this point in time,

but, you know, maybe we should do the, eat our vegetables first and then turn to the dessert. So, you know, one of the things that kind of increasingly top of mind for us, because, you know, obviously we're looking at this through the prism of what it means for the economy and, you know, the economy is vulnerable to anything that can go wrong because it's pretty weak here is. And right now the thing that's kind of come to the fore is the potential for a government shutdown. How, how, in just a little bit of context, the lawmakers, Congress, have to come forward with a budget by the end of the fiscal year, which is the end of September. The new fiscal year starts on October 1. And if they don't pass funding legislation to fund the government, it will shut down.

And there's, you know, a lot of talk now that maybe that might not happen. what's your sense of things there is government shut down your you know realistic possibility here let me give you the bottom line up front 90% oh 90% likelihood goodness and i know i know chris is usually the bear here so yeah i'm just trying to be more negative than than he usually is um so look in 1976 we reformed the way that we do the budgeting in congress since that time This is what you might call an unsuccessful reform. Since that time, there have been 22 funding gaps in the federal budget, four of which have led to significant, lengthy government shutdowns, 10 of which have led to some number of federal employees being furloughed. The conditions under which you might expect this to happen are not always the same.

It tends to be more likely when you have a president and at least one chamber of Congress of opposing parties, which is the situation. we have right here. But my real concern is around incentives. I mean, Mark, when you were on beyond politics, we were talking about the debt ceiling and the likelihood of going over the cliff. And my concern at the time was, hey, you know what economics teaches us? People respond to incentives. And political memories are really short, especially about economics. And so there was an incentive in my mind for Republicans to want to go over the cliff because by the time the dust settled, All voters would remember is, hey, this cratering depression of an economy we're living through. I don't care whose fault it was.

I just don't like it. I'm going to vote against the incumbent advantage Republicans. Didn't turn out that way. Kevin McCarthy probably thought that it was too much of a gamble and also probably had some major donors in his ear saying, please do not do this, Kevin. I think the incentives are very different when it comes to a garden variety government shutdown. there's already an inbuilt incentive in that debt ceiling deal where if they don't pass all of the individual funding bills that fund the government, there are 12 of them. If they don't pass all of them, then there's an automatic 1% cut to most government spending.

This is something that Republicans want. And in fact, all of their political incentives, I'm not trying to be negative about them, but all I'm a Democrat, but all of their political incentives line up to not want to vote for. spending bills. Spending is bad in the Republican Party. It's not, it's not a political advantage for you. So I think they have every reason to hold firm. We're not going to pass the spending bills on time, 90%. So I was under this kind of economist naive perspective that that 1% sequestration that you mentioned. So as part of the debt limit deal, they said, okay, you know, if you don't, get this done by, I think it's January 1 of 2024, there'll be this across the board 1% cut in discretionary spending, non-defense and defense. And of course, Democrats don't want

the non-defense or many don't want the defense either, but, you know, they certainly don't want the non-defense. And the Republicans, they may want the non-defense cuts, but they don't want the defense cuts. So at the end of the day, they'll come to terms before January 1. So is that, are you saying that that's not likely or well the last time we had one of these sequestration and by the way no one likes jargon except economists as much as politicians um the last time we had one of these sequestration uh in built deals um we we triggered it you know like i don't think that that's a strong enough stick in this carrot stick approach and again i i just think that the politics of this lineup in in a very bad way

And we have to remember that there's a substantial amount of leverage in a closely divided House of Representatives for small cohesive groups like the Freedom Caucus. Their perception was that Kevin McCarthy cut a bad deal on the debt ceiling. They thought they got played. They thought they got had. They thought they got rolled. They're not entirely wrong about any of this. And they would love nothing better than to extract the pound of flesh. Most of these members of Congress, again, they're responding to their own personal political incentives.

In their districts, the only threat to them politically is someone beating them in a primary, calling them a rhino, a Republican and name only, outflanking them to the right. And, you know, voting against everything and causing a shutdown and fighting spending and being a burr and Joe Biden saddle, it's not a bad thing for them. Okay, so we come up to the end of September, October 1, you're saying there's no deal, there's no budget, the government shuts down, and it's going to stay shut down until the Democrats relent. Or no, it goes all the way up to January 1, and then we get to sequestration and we go forward. Is that kind of sort of what you're saying? Well, what usually happens in Washington is, like I said, and I don't want to get into weeds. Although your listeners, they're listening to an economics podcast. They're probably comfortable with weeds.

Oh, they're deep down. They're about as nerdy as they get. So feel free. Right. It's like the 76ers GM likes to say it's like you're comfortable being uncomfortable. So I mean, basically we split up the discretionary spending of the federal government in Congress into 12 bills. Used to be 13. Then we merge some.

Whatever. 12 bills. Okay. It's like the 12 days of Christmas, except the boring version. And you got to pass them all. And it's impossible because no one wants to be on the record voting for these things. We used to have earmarks with little goodies tucked for each, like a present under their Christmas tree, tucked into each of these bills, little bits of spending in each individual member district.

And that kind of greased the skids. You know, we have them back. We didn't have them for a while. But even with that, it doesn't unstick things. So what Congress has done is they've crammed. everything in together into an omnibus let's do all 12 of these at once or or what you can do is called a CR a continuing resolution where you just say remember what we did last time let's just re up I'll just do everything same same or you can combine

those things into a cromnibus which sounds like a cruller but it's a lot less delicious so could that happen I mean the way this usually goes is as the deadline approaches yeah pressure mounts and People start to knuckle under and eventually after a short shutdown, you get there. So I'd say the most likely scenario, if I were forecasting, if I were being forward-looking here, is we end up with a short, short enough shutdown till people start to feel the pain and then they'll work something out that looks mostly like a CR and a little bit like an omnibus and is a lot less delicious.

Okay. And then do we still get that 1% cut at the end of the day? Yes, I would say, if I were a betting man, I would say, yes. We loved a bet around here. Yeah. Ooh. Yeah. I'd say yes.

So it does feel like, oh, so. Strong opinion lightly held. Yeah, I got it. Got it. Okay. So that's some pretty significant fiscal restraint then. So. Well, can I ask you an economics question?

Yeah, far away. I've just given you this input. You guys are the modeling. and prediction experts. How are you factoring, as you make economic predictions for 2024, how are you factoring the likelihood of government shutdown and sort of the potential macroeconomic shock into your predictions? Well, it's not dissimilar to, we have to make an assumption along how this is all going to play out similar to what, you know, you just articulate it. And in the kind of our baseline view right now, we have a shortcut.

government shutdown, pressure mounts politically, they come to terms pass the CR and then ultimately come to a deal before we get the sequestration and this 1% cut across the board. If that's the deal, if that is what plays out here, and it's, you know, couple three, four, five, six week kind of shutdown, MHA, you know, maybe a couple three-tenths of a percent off of GDP growth in Q4, which isn't great because Q4 is probably going to be weak anyway because He's got student loan payments kicking back in and got a lot of other stuff happening. So it's not the greatest thing in the world, but it's not, you know, something that pushes in a recession.

But if he's thrown in the mix, what you just said, and you get this 1% cut and it kicks in, you know, the beginning of next year, you know, that makes me a little more nervous about, you know, what the world looks like in Q1, particularly Q1 in next year, because that's pretty significant fiscal headwind, you know, that we're going to, fiscal policy goes from being effectively, neutral with respect to the economy to kind of a head went to the economy again at kind of the wrong time. Chris, did I, is that roughly right? Is that? Yeah, I think I just heard you revising up your recession odds. Oh, no, no. No, no, but that I have to buy into Matt's angst to do that. I haven't done that yet. Okay, okay. Fair enough. All right. Just laying the ground. But I hear, I hear you. That's definitely a risk. So, Matt, you're, As a betting person, you would say, if you were in our shoes and you had to put pen to paper to produce a forecast, you'd say, assume that 1% cut at the beginning of the year. Yeah, I'd say 90% some type of funding gap of some kind. And then maybe 50-50 on triggering the 1%.

So I would do a probability weighted, you know, like whatever you're better. Yeah, some kind of like, yeah, econometric. something or other. Got it. Got it. Okay. Okay. Well, let's move on to another policy question that's kind of top of mind.

And that is this so-called term Bidenomics. Curious what you think about that term. Not sure it's going to win any marketing words. But binomics is basically Biden's economic policy. And there's actually a lot to chew on there because a lot of things got done. in the first two years of his term. But what do you think of binomics, both in terms of policy and just maybe we can delve into the politics a little bit?

And, you know, what do you think about the politics of binomics? I think that you summed it up perfectly. It is, and look, I have great respect for Mike Donnellin and Anita done the communications gurus in the White House who are shopping this term. I'm sure I've had the pollsters who worked for this. White House who work on these terms on my show. And I'm sure they've worked with some of the smartest people in the business like them to come up with this term. I question it. I am not running out. I'm not going to put it on any t-shirts, baby. I'm just, I'm not, I'm not buying it.

That said, I mean, the proof of the pudding is in the eating. And darn, I mean, it's hard to argue with the proposition that maybe there's some luck here. Maybe there's some business sites. here, maybe there's some good Fed policy here. It's hard to argue with the proposition that things are fundamentally working. I mean, let's not forget that Donald Trump was the first president since Herbert Hoover in the Depression to actually lose jobs. His net total on the day he left office was a loss of 2.9 million jobs. Yes, a lot of that was because of the pandemic, but our handling of the pandemic is also on his tally. So yeah, I chalked that up to Donald Trump. We were essentially from an economic standpoint in a car on fire care careering over a cliff.

over the last two years, among all the leading economies of the world, the G7 economies, the U.S. has had the highest level of economic growth, and over the last year, we've achieved the fastest decline in inflation and now have the lowest absolute level of inflation. Our bank accounts are between 10 and 15 percent higher on average. Wages have finally gotten out ahead of prices again, which means where our real pay is going up. That's especially true for people at the non-manager level, people lower in the income distribution. And look, I know there's been a lot of interrogation of the figure, the fastest one-year job creation tally in American history. There's some question about that.

But again, it's hard to argue with the fact that we've added 13 million jobs, almost 800,000 manufacturing jobs, strongest manufacturing job performance in 30 years. I could go on and on about this. I mean, the record is incredibly strong. I would love to run on this record. But I don't get he's not getting he's not getting any credit right well and I think that's because I think that's because first of all I'm a fan of the movie snakes on a plane from a marketing standpoint I've never seen it but I can tell you what it's about you know what it's about that snakes on a freaking plane good point you know and so like I you here's another movie for you remember the movie Roxanne with Steve Martin and he's in the bar and someone calls him hey big nose and he's like oh yeah yeah yeah yeah I can come up with something better. I come up with 20 something's better. Do you think that the group of us like, you know, Marissa, Mark and Chris, we could come up with 20 something's better?

The Biden jobs plan. The Biden economy rescue. Oh, you think it's all marketing. You think that's why he's not getting better. You're saying I hate Bidenomics. That's where did he come up? Well, that's, of course, a play on Reaganomics, but Biden. Well, okay.

Well, since you invoked Reagan, I think we're all at an age, maybe not Marissa. I'm not sure where we can remember more. Definitely not Marissa. Yeah. You're so youthful at it looking. Come on. So you guys remember, your younger listeners will not remember this. You remember I'm Borning in America? Yeah. Marketing. Marketing. What did Mel Brooks call it? Merchandizing. Morning in America was, I'm not going to curse on your show. It was BS. It was complete and utter hooey. The morning in America ad, the most made me feel good, though. I'll have to tell you, that's to your point. To your point. Yeah. Of course it made you feel good. it in vote like don't you feel better than you felt and everyone thought oh yeah i was feeling terrible you know why people were feeling terrible it was because they were remembering not the way things were in 1980 when ronald reagan won office they were remembering the 1981 1982 recession in fact in 1984 when they ran that ad unemployment was higher and inflation at absolute price

levels were higher than they were when ronald ragan took office marketing people marketing. Interesting. So you don't think it's, you don't think it's the high inflation rate. Inflation's coming in, no doubt about it. It takes a little bit of time for people to figure that out. And also, even if inflation is coming back in, prices are a lot higher, right? I mean, people are paying a lot more for rent, for food, for everything, pretty much everything today than they were two years ago. So you don't think there's a more fundamental reason for, you know, why people saying, I'm not so sure about this thing called Bidenomics. One of the most well-known consultants in Democratic politics is a colorful guy named Mudcat Saunders says people don't think in terms of rates. They think in terms of bills. And economists and politicians like to talk in terms of rates.

The rates of inflation are going down. I don't know what that means. I know what my bills are, right? I know what the price of eggs is. And so I think you're right that it's going to be a hard sell. And I unfortunately was in the midst of helping to run a Senate campaign in 2010, the worst possible year to be a Democrat. And we were in the position the economy was doing much better. But people didn't feel it. And so we were in the unenviable position of saying to voters, who are you going to believe me or your lion eyes? I think that Biden is currently in that position. But I think that there is a marketing way to at least do better than Bidenomics. Yeah.

Okay. Can I ask, do you have, if you were king of for the marketing day, would you have a better term for? What would you have said to them? I'm workshopping it. Your workshop in it. I'm workshopping it. Mercer, do you have one? Do you have one?

No, but I agree. He was critical of binomics as he is. I don't have one, but I agree with economics. What does that even mean, right? I mean, is that good? Is that bad? It's, I agree that it's terrible. Right, right.

Interesting. Yeah. All right. Well, let me ask you one more policy question before we move on to the kind of the politics. And that is kind of a longer term. You know, if you look at the nation's fiscal outlook, it looks pretty dim, I'll have to say, right? I mean, you go congressional budget office, CBO. They're the non-partisan budgeteers, and they do these long-term projections.

Under current policy, assuming no change in policy, which, by the way, the Trump tax cuts for individuals, high income in the households and wealthy households, that will expire in 2025. So that by itself, all else being equal will help the budget outlook. But even assuming that, the outlook looks pretty bad, right? I mean, the nation's debt-to-GDP ratio is close to 100% already. 10 years from now, it's going to be 120% close to. And then we're off to the races. And, you know, the debt-to-GDP ratio looks unsustainable. Any prospect at all that we're going to, you know, address that,

it feels like we got to at some point, but any prospect that we're going to do this in a reasonably graceful way or not, not, not, it's going to take some kind of crisis for us to do this. Oh, you had me on the first part of that sentence up until you said reasonably graceful way. Reasonably grace. Yeah. No, no, there's no prospect. No prospect. I'm going to argue to that that's a good thing.

I mean, look, you can barely agree to deals like the debt ceiling, right? And we face something. We all know in this group that the real problem here is the so-called entitlement programs. I know that's not a politically palatable term. But, you know, we're talking basically social security. Medicare to some extent, Medicaid obligations. Very little of this comes from discretionary spending, especially non-defense discretionary spending. When it comes to Medicare and Social Security, we face something on the order of $104 trillion 30-year shortfall, okay? About 70% of that is on the

Medicare side. And look what happened when Florida Senator Rick Scott proposed, hey, let's just sunset said everything after five years. Well, the Democrats took about 0.2 seconds, you know, so like, you know, I'm like the, the complete reformed part of a congressional and political staffer. The larval form of me took about 0.2 seconds to look at that and say, great, you want to cut Medicare and you're from Florida. Great genius. Thanks. And they jumped all over that.

And, you know, and he had to walk that back pretty darn. The politics of this are brutal. And I think what it comes down to is the. The BS asymmetry principle, which is known online as Brandelini's law, which is the amount of effort and energy expended to dispense BS is far less than the amount of energy and effort expended to try to rein it in. It's just so easy. It's called what law? Brandelini's law. I don't know who Brandenie.

Brandelini. Oh, does everyone know this? I never heard this before. Randolini's law. This is a fun Google. Yeah. Okay. It sounds like a chat GPT to me.

I mean, in economics terms, I'll probably screw this up because it's been 30 years since I was an econ major. But like the marginal cost of spreading demagoguery. Yeah, sure. Right. The marginal cost is zero. And it's what the legal scholar Rick Hasson, another guest on my show like you, calls cheap speech. He wrote. So the BS, the attacks are cheap speech.

The explanations and the defense of a solution are very expensive speech. And that's that's the basic problem. By the way, this is the basic problem of my party, the Democratic Party. Everything we say takes a lot of words, a lot of explanation. And we're always doing things like trying to explain quintile disparity. And like Republicans just to get to say things like four legs good, two legs bad in the economy. like it's it's really not that hard um they just they just have this inherent asymmetric advantage built in uh and i like to rib them about this it's just it's an easier move them so the the the shorter

answer to that is look the the o as i trust fund you can pay full benefits until 233 and medicare's hospital insurance trust fund if i remember correctly can pay 100 percent of benefits until 2031 so I would expect some action on this circa 2030. Got it. All things being equal. So we got to be right up against the cliff. And that's right. You've got to be able to run ads showing Sandra, a senior citizen who's about to lose her social security and say, unless Senator Zandi and Senator Dinaali do something about this, then Sandra.

loses her social security. You have to have something that you can fight political fire with fire with. So I think there's just there's no way until the crisis is on our doorstep. Yeah, I'm very sympathetic to that. I'm even wondering if that's the real crisis, though, because at the end of the day, the government, federal government, those trust funds are kind of foe cliffs, right? I mean, the federal government can redirect funds from anywhere and make sure that people get paid their Social Security and their Medicare and their Medicaid.

It's almost like you've got to come to a point where, you know, interest rates are rising rapidly. Those bond market vigilantes, you know, back in the day in the 90s, with the last time we did something significant in terms of our fiscal, long-term fiscal situation was under Clinton, Rubin, and Gingrich, I think. And that's because the bond market vigilantes were out. Every time it looked like the fiscal situation was going off the rails, long-term interest rates rose.

And Rubin could say, hey, look, Mr. President, if we don't do something, you know, people can't afford mortgages. They can't afford a car loan. I can connect the dots politically. And then they came up with, you know, an agreement on, you know, welfare reform at the time. And the fiscal situation looked a lot better after that. I mean, there were a lot of reason for that. But I think that deal was a very positive deal. And I almost feel like we had to come back to that before we, you know, you know,

interest rates are rising. The economy looks like it's going to crack. Before that hat, before we actually cut a deal. Well, first of all, I think the four of us should form a rock band called bond market vigilantes. I think we would sell. I think it would be great. There you go. Good marketing. We have a very narrow, very narrow listenership. Yeah. You know, it's interesting that you that you invoke that because there was in Democratic Party circles a real debate between the Bob Rubin's school, which was the bond market vigilantes. and the Bob Reich school. It was the Battle of the Bobbs, which was much more, let's invest in the durable infrastructure, which is sort of what we leave to the next generation that creates long-term economic growth. And you were talking about binomics before. And one of the aspects of binomics that I'm curious for y'all's perspective on is it seems to be a little bit more of a throwback to the Bob Reich school of, I mean, look at what he's done. It's investment in infrastructure.

It's sort of a semi-industrial policy comeback with the chips bill and, you know, some of the targeted inflation reduction act investments in high tech and manufacturing. And it seems to be his working thesis that that kind of approach is the better one. It seems like the Reich School is ascendant. Is that how you guys see it from an economics perspective? And do you think that that approach actually holds water? Well, I'll take a crack at that and let Marissa and Chris weigh in. I think it's kind of splitting the difference between the Bob Reich and the Bob Rubin.

I mean, it feels Bob Reich-ish in that, you know, these are pretty big pieces of legislation with lots of moving parts, you know, the infrastructure, the Chips Act, the, the Inflation Reduction Act, a lot going on. But, you know, roughly speaking, they're paid for, right? I mean, you look at the, you know, here's the money that we're going to use to pay for these things. And there's a lot of debate as to whether they're actually raising as much money as they think they're raising, you know, with the funding the IRS, for example, to make sure that people pay their taxes. Or, you know, what's the take up on the tax subsidies and incentives in the IRA? It feels like that might be a lot larger than they thought it, CBO thought it was when they scored the bill. But, you know, abstracting from those issues, I think the objective. of the administration was we're going to we're going to pay for these things roughly speaking

and the other kind of nuance years maybe it doesn't exactly happen in the next 10 years but if you go over the next 20 years these are these are paid for these are going to be paid for so it's not exactly it's kind of split in the difference so that that's kind of how I think you know I think about it Chris Marissa any other perspectives on that Chris no no yeah I think that's a all right. I guess my question would be what benefit did they actually get in terms of credit with the voters, right? I think we've been talking along those lines. These are very long-term plans. I don't know that the average voter really sees a whole lot of benefit when they're looking at these infrastructure bills and seeing what it means to them. Right, right, right. Well, I mean, that's a tough one because these things play out over a long period of time. But I think on the infrastructure. structure that there they you know the politics can play pretty well right i mean the administration kind of using that as a hammer right because every senator or congressman who voted against the infrastructure law who's now out saying oh you know i'm in favor of that particular project that's

helping my state or my district you know the administration's all is already is kind of pounding the pavement saying hey look look look this was pretty disingenuous but yeah but but but i i i i man i'm i'm i i'm I agree with you. I think it's going to take pressure, you know, some kind of crisis before we actually kind of hold hands and decide to rein in spending and raise taxes at the same time. Let's turn to the politics, which are obviously pretty interesting. Let me ask you a kind of a broader political question around kind of our fractured politics. I mean, you know, it just is pretty obvious that, you know, we've got tribes here, Republicans, Democratic. and I want to come back to no labels too and talk a little bit about that. There might be a new tribe. And I guess the question I have is, is this as bad as it feels or, you know, the other way of thinking about this is this nation, our country has been kind of in this pitch battle since the beginning of time.

You know, you go back to Tom Jefferson and Alexander Hamilton. Those guys, if you go back, read Chernow's book on Hamilton, the amazing. thing is these guys were going at it, you know, really going at it, you know, back then in the way, using the media at the time. So is this really different now or, or is this just kind of standard of fair for, you know, what we've been through historically? If you take the historical comparison that you were just making, you know, Lincoln's team of rival, Hamilton, Burr, in kind, it is not different. It's the same set of themes. But it's a little bit like the difference between if your kids ever get into a fist fight and it's like, you know, no real

damage is done here. And then if they grow up and like Mike Tyson is going at a Vander Holyfield, a lot of damage can be done here. I think the tools that are at the parties and the faction's disposal have just become that much more powerful. And that's why we're seeing the fracturing. And there are data-driven signs that the fracture is very real and it's very wide. We have 3,143 counties in this country. And we can measure the number of counties in which a presidential candidate wins by a super landslide. That's at least 80% of the vote. That proportion has jumped from 6% in 2004 to 22% in 2020, almost a quarter of... Say that again?

22%. It's almost fourfold increase. 6% of counties, just a very, very small percent. One in 20 counties in the U.S. were super landslide. They were totally red or totally blue. Now it's almost a quarter of the counties in the U.S. are totally red or totally blue. Another way to say this, this is one of my favorite statistics, is that...

But in 2020, Joe Biden won 85% of the counties that had a whole foods and only 32% of the counties with a cracker barrel. They'll put that in your econometric model. Yeah. That's pretty cool. You know, and you can see it in congressional districts as well. You know, you have these split districts where they vote for a congressional member of one party and a presidential candidate of the other party. It was 86 districts in the year 2004, and by 2022 is down to 23 districts. So, you know, I can throw numbers at you.

It's real. It's very, very real that we're this fractured, we're this far apart. But what's interesting is I had the Princeton political scientist, Francis Lee, on my show, a little ways back. And she made a really compelling case that in terms of the functioning of our institutions, like Congress, we're still kind of getting stuff done. We're still holding it together. And look, the first two years of Biden's presidency, we had, in my view, the most successful and productive Congress in 100 years, almost 100 years. Maybe the Great Society Congress, the mid-60s,

maybe that would rival it. So, you know, I think we're fractured, but we're still functional. And look at the end of the day, despite your skepticism and my skepticism, Kevin McCarthy brokered the debt ceiling deal. Like, we're holding it together. Yeah, yeah, good point. Fundamentally, what do you think is behind this increased fracturing that you've observed? Is there one or two things you can put your finger on? There are three things, and I will tell you in a nutshell, my pet theory about this, which I intend to turn into a book.

And so I'm glad I'm saying it out last. out on your show now. Get it out there. Yeah, right. Yeah. Copy right. No one's going to want to steal this. This is like really weedy.

Look, in the 1980s, there was this concept of the iron triangle, which was a set of forces that locked out the people that were sort of a self-reinforcing set of power structures, you know, among defense and members of Congress. And I think there's a new iron triangle that has evolved in America. of three forces that I call dark media, dark money, and dark psychology. And in a nutshell, and they're all mutually reinforcing. And in a nutshell, what we've seen is a massive influx of dark money, of money from sources that we can't track that are not aligned with the views of the majority of Americans. Think about Harlan Crow giving millions of dollars to Clarence Thomas. Think about all of the dark money ads that we see.

There's dark media, which is media that, you know, unlike kind of the media that most of us grew up with, you know, three channels. Their incentive structure is built entirely around catering to a small sliver of America. And then there is dark psychology. This is a change that I saw in the midst of my own politics career. When I started in politics, if I was in a meeting, let's say, the group of us were political operatives and marissa said hey we need to beat chris our rival chris he's a bear we're against him we need to take him down i said all right let's run an evil ad where we say you know evil chrysterytus some kind of a deep voiced ad he i don't i didn't want to say out loud what the

charge would be he stole gummy bears from a candy store whatever it is that sounds like Chris, by the way. Right, sure. Whatever it is. Well, Marissa would come in and say, no, Matt, you can't do that because there will be a backlash. The voters don't like that kind of thing. It'll actually hurt us. And I've been in consultant meetings where I was the one saying like, oh, let's say something terrible. And the consultants were like, no, no, Matt, you idiot, don't do that. That's very bad. No one says that anymore. There is no floor that you can sink below. And so I think that that's really what's going on. is that we have these mutually reinforcing forces that are pushing us toward the fracture. Right. Yeah, that's a great book. That's going to be a great book. Yes. Do you have a title for the book?

We can, let's critique it. Oh, crap. Wait, I do. I have a word of new title. I haven't pitched the book yet. Yeah. I haven't pitched the book. Hold on.

Yeah. Oh, here it is. The New Iron Triangle, how three startling forces are crushing. American politics. I think that's great. I love that. Yeah. I'll definitely buy it. Yeah. I'm just, I'm just getting my laying down my marker for this possibly used to. I didn't say how much I'd pay for it. I definitely, no. It's a free e-book. Self-published. I'm lying. I'm kidding. You can buy, I've written a couple of books. They're a nickel on eBay. So, you know, so. But let's let's, let's now, let's, you're with the conversations that got going,

in lots of different directions that are really great. But I want to end with this election that's coming up because this one feels, and I say this with every election it seems like, but this one really feels like a big deal, you know, because things can go in two different, very different directions, depending on how this plays out. And I want to get your sense of broadly speaking, you know, the contours of this. I mean, is it going to be Biden v. Trump?

But do you think that's what's going to play out here? Could that be different? Could there be different people running for the presidency? And if you have a sense of, you know, who's going to be the victor at the end, I love to hear that too. But anything you can, any color you can provide, that would be very valuable. If I didn't have children, I would find this to be a deliciously enticing modeling exercise in like a stochastic problem.

Yes. Right. You know, because the problem is that the bad outcomes are genuinely bad. And I don't want to offend any Republican listeners. You're, I'm sure, wonderful Americans. I just happen to think that if Donald Trump is the next president, he will be the last president, that that's an extinction level event for America. That's my own personal political view.

Certainly, though, I will credit the other side, which is they probably feel the same way about Joe Biden. So the stakes are pretty darn high here. And there are a lot of factors. So your first question, is it going to be Biden versus Trump that's overwhelmingly likely at this point? There is not a realistic prospect of Joe Biden failing to emerge as the Democratic nominee. Cornell West is going to be a little bit of a problem. And, you know, there's, I mean, it's, but there's no realistic prospect there. Donald Trump, he is lapping the field. Rhonda Santis is on a steady downward trajectory since his formal announcement on May 24th. His polling numbers have gone steadily down and in inverse proportion, probably totally

inversely correlated. Donald Trump's numbers have gone up. And I don't see at this point an exogenous event that would change that. That said, I would. not have foreseen COVID. So, you know, things can change. Also, the demographically, these two gentlemen are not the springiest of chickens. So, you know, they're kind of realities to deal with there. In terms of what's going to happen, that's, I will say this, Democrats are the masters of the circular firing squad. We love to get down on ourselves. We are inherently

bearish on everything. Chris, we will outdo you at every turn. And so we don't like to take good news for an answer. But the best polling that's available right now has Biden out ahead by about seven points in a head-to-head match up with Donald Trump. And he won by seven million votes last time. And there is nothing that Trump has done that shows me where he's. he's going to make up those votes. So that's the good news proposition. The bad news proposition is that in 2020, the difference in the election was 44,000 total votes in Georgia, Arizona, and Wisconsin, margins of 0.3%, 0.4%, and 0.6% in those three states, respectively. Those margins are far less than what Gary Johnson got in 2016 the last time to historically unpopular nominees were facing off for the presidency.

He got 3.1 percent. Jill Stein got about one percentage point. So there are factors. No labels could be a factor. Exogenous events could be a factor. A recession could be a factor. A shutdown leading to a recession could be a factor. So, you know, I would not feel any confidence in an outcome prediction at this point. But, you know, if I had to play with a, you know, if we were in a poker hand and I had to choose a hand to play, I'd rather be playing Joe Biden's hand as of today. Got it. You mentioned no labels just very quickly. That's a, I think they don't call themselves a party, but it's kind of a movement. that's the Joe Manchin, Joe Lieberman, there's Republicans and Democrats, more centrist,

or at least that's kind of the way they try to position themselves. How big a deal of movement is that? Is that a big deal or something we should be watching carefully? Potentially, as the president would say, a BFD because of the factors of those margins. I mean, remember, American elections are one in the states. They are not a national polling outcome. And so, boy, talk about stochastic outcomes. You know, you've got these, you've got these 50 little modeling propositions to deal with,

with very slim margins. And look, part of the reason that we have Donald Trump as president today is Jill Stein. Jill Stein's margin of victory was the reason that Hillary Clinton didn't win Wisconsin. or it was maybe about half of Michigan, not as clear in Pennsylvania, but there is a very good case to be made that without the third party candidates, garring such a strong support in 2016, we would have had a president Hillary Clinton. And so, yes, they are potentially a huge factor here. That said, it could be the kind of thing that doesn't work against President Biden. There could be candidates that would that would hurt Trump more. But as of today, right now, Democrats are the group that is more worried about a no-labels factor, and they should be. Well, you should know we have an presidential election model at the electoral college.

We do model it. You do. We do. We do, actually. We've been running it for, I don't know how many elections. We usually get it right. We got the Clinton Trump one wrong. Oh, yeah, that we missed.

And the last election, the Biden, Trump, we got, felt pretty good about that. In terms of we picked states. And we, I don't think we got Georgia, but we got Arizona. I can't quite remember. But, you know, as you can imagine, we're economists and everything, thing feels like the economy to us. So it's based on economic factor. So at the end of the day, you know, I do think how the economy performs over the next six, nine. obviously 12 months is going to be pretty important to how this all plays out.

So, Matt, I really want to thank you for taking the time with us. And, you know, there's a lot of time between now and the next election. A lot of things are going to happen. Can we have you back on? I'd be delighted to come back on, especially if I managed to roll out a book. Oh, absolutely. Talk about predictions. Let's put that at under 25%.

I'm pretty gummed up with doing podcast. I'm all in on that book. That sounds like it'll be a fantastic. I love it. Yeah. Pre-endorsement. You know what? I'm going to have you write the blurb. Would you write the blurb? Absolutely. You count me in. Yes. All right. You know me in. I love, I'll be very happy to do that. So thanks, Matt. And we'll catch up with you soon down the road here. Take care now.