Moody's Talks - Inside Economics - Possiblism and Probablism

Episode Date: January 20, 2023

We welcome Jason Furman, Aetna Professor of the Practice of Economic Policy jointly at Harvard Kennedy School to discuss what could potentially be a catastrophic default of the national debt. We'll get into President Biden's economic policies, inflation, and recession over the next 12-18 months. Jason came to play with some humor, positivity, and a great stat.Full episode transcriptTo learn more about Moody's Analytics Summit 2023 & register, click here. Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my trusty co-host, Chris DeRides. Hey, Chris. Hey, Mark. Are you doing? We're missing, Marissa, just as something came up. So, unfortunately, we'll miss her humor. But good to have you. You're not sure about your humor. You're kind of sort of, yes. Yeah. But we'll make do. We'll make do. How was your week? Good. Yeah. Abraviated week here, but it's good.

Abbreviated, why was it abbreviated? Oh, yeah, Martin Luther King Day on Monday. Oh, is that this week? Boy, that seems like a long time ago to me. Yeah. You know, I traveled to New York and D.C. this week. Ah, yeah. It didn't stop by, you know?

Actually, I did. I stopped by my home in Pennsylvania just to make sure everything was nailed down tight. And I did notice all my plants are, you know, distressed. So I've got to do something about it. that. But I did notice that I was down in the financial district at H.Q. Mutey's H.Q. You know, seven world trade. And I will have to say very, very quiet. This was a Tuesday. And not a lot of activity down there. So, and then I went to go to D.C. and I'd have to say it was pretty quiet, at least where I was, you know, run into a lot of the government, you know, buildings.

So I don't know. It just doesn't feel like people are coming back. So marking down your forecast, I take it. No, no, I took that into account. That was already baked, you know, into the forecast. So, no, that's what I totally expected. Although I did hear the mayor of D.C. is now, I think they're going to require federal government employees to come back. Yeah.

It's not full-time, pretty close, because he wants those office buildings filled. Right. Yeah, it's either or. Either go back or give us the space. Yeah. Yeah. That's a lot of space. But anyway, we've got a guest, Jason Furman.

Jason, good to see you. Good to see you. Thank you for joining us. Everyone knows you, but just to introduce you, Jason is a professor at Harvard University, but you've got a long career. Jason, you probably don't remember this, but I think the first time we met was you were working on the John Kerry campaign for president, I believe. Well, I remember then.

I think you were doing some analysis. Was it of our health plan and its economic impact? Yeah. Some of our different plans, yep. Yeah. And I remember it's the first time I met you, and I think it was the first time I met Gene Spurling, too, because you guys were working closely on that campaign. Yep.

Yeah. And you've gone on and done many things in many administrations. You want to just give us a little bit of your personal history, just I think people would find that fascinating. Yeah. So first of all, it's great to be on here. And, you know, I was always really, I loved math and physics, but I also loved the real world and the political debates and the stuff that was happening around me.

So for me, economics was a really good way to combine those two. You could think in a logical, you know, rigorous, numerical way. But you were thinking that's something maybe even more interesting than quarks and leptons, but the incredibly complex thing that is the billions of people interacting to make the global economy and the biggest questions of, you know, poverty, growth, everything else. I thought I was going to be a pure academic. I went straight from college to a PhD program. But then I went just for a year, I thought originally, to work in Washington at the Council

of Economic Advisors under President Clinton. And I discovered I really liked not just the theory, but the practice and the being engaged in things. In some ways, it was almost more challenging because economists can often figure out the right answer, but often the world doesn't want to do the right answer. So then you need to figure out the second best or the third best or how to repackage it or how to persuade people that it's the right answer. And discovered I really liked all of that space. So I end up spending a couple of years in Washington, going back, finishing my PhD.

I won't go through the whole bio. ended up in the Obama administration for eight years. And when that left, came back to Harvard. And I'm just having a great time here at the university, teaching, learning, writing, and talking to you, Mark. Well, it's good to have you. And you're certainly understating all the things you've done in your wonderful career. You ultimately, in the Obama administration, became chair of the Council of Economic Advisors. Is that right?

Yeah. And that's where I had worked in the 90s under President Clinton. Clinton and I went back to head it. And it's just such an amazing, wonderful place because it's a group of economists. They're really thinking about economics, but they're not doing it completely detached from reality. They're sitting basically right in the white house complex and input into every decision. And it was such a honor and privilege to lead that group and sort of take advantage of the fact that every time I was with a group of political people, I knew more economics than any of them. And then I'd go back to our amazing economic team and try to figure out how to sort of

make their work relevant and fit in to what was needed by the political people. Was CC part of the council? She was a member of CEA at the beginning of the Obama administration. So I was at the National Economic Council, which is a little bit more political and strategic. That's right. You were at NEC before you had to see a. So I was at NEC. She was at CEE. And then she was she was there, I think probably about two years and then has made a big return as chair of the council under President Biden.

Sure. Now, do you miss that being in the White House? Do you miss that? I mean, certainly I look at the issue of the debt limit and I don't miss it in the slightest. We'll come back to that. You know, I'm not like, oh, yeah, I'd really love to be solving this completely artificial, you know, man-made problem that has no intellectual content. But no, there are days I miss it a little bit, but I had, first of all, I had a great beginning, middle and end experience there. We came in the door with the financial

crisis. We came out that we left with the economy in much better shape, not perfect shape. And I wish it had grown faster and all of that, but much, much better shape than we came in. And I don't think I could ever reproduce that experience. And also, I continue to be engaged in public policy. I'm not in government, but I speak to people in government. I write things. that hopefully they read. I go on podcasts like this. So I have enough sort of day to day in the flow of things. In fact, I probably have more day to day in the flow of things than I'd like to have. Well, thanks again for coming on. And we've got to, I think of you as someone who has a very large intellectual palate that you, you know, you are able to speak to, provide a lot of insight

and be very thoughtful on lots of different subjects. So I'm going to take advantage of that and try to talk about a lot of different issues that, you know, are bugging, me bugging our listeners and I'm sure policymakers as well. And no particular order of importance here, but you kind of most immediately top of mind, you brought it up, is the debt limit. Oh, and I should say we also play this game, the statistics game. I mentioned that to you. So at some point here in the next hour or so, we'll come back to that game.

I'll explain it and we'll play it. But first up, let's talk about the debt. limit and you know, you kind of told us what you thought of the debt limit. But what do you really think about the debt limit? I mean, and I guess what concerns me a bit here, because I've followed a number of debt limit battles now over the years, now, I guess over the decades. And this one feels different to me somehow in that it just feels like there's a non-zero probability that lawmakers, Congress, and administration can't get it together. in time and there is a breach of the debt limit. So it's not, it's not zero probability,

which is pretty scary. But what is your perspective on the limit and the prospects that, you know, they may actually breach it? Yeah. So as, as most of the listeners know, we've already hit the debt limit, but the government is taking extraordinary measures. They say that will last until June. A lot of uncertainty. I think people think maybe they'd be a month or two more than that, but at some point, those extraordinary measures run out and either the debt limit gets raised or the government defaults. And when I say defaults, it could default on the debt or it could default on all sorts of other obligations and payments it makes, but whatever it is, it's a default and a default would be a terrible thing. You know, arguments in favor of this

is eventually going to get solved. This sort of, you know, number one, a lot of Republicans realize this is not in their interest to cause some sort of crisis, and it's worked out badly for them in the past. Number two, there are 218 votes in the House to raise the debt limit. And there are 50 votes in the Senate to raise the debt limit. That is already there. The big obstacle, though, is those 218 votes in the House are basically 212 Democrats and a handful of Republicans. And they don't get to vote on the debt limit unless Speaker McCarthy says they can vote on the debt limit.

And can he be in a position where he can bring something to the floor? It's mostly Democrats carrying it. Maybe he gets half of his caucus if he's lucky and have his speakership survive. I'm not sure he can. So I'm not entirely sure how they're going to get their act together, the House Republicans, to allow this to move forward. So that was a long version of I'm much more scared than I have been in the past. I think they'll probably get this done. But if my doctor told me I was probably going to live and only a 10 or 15% chance of dying this year, I wouldn't be so thrilled.

Yeah, great point. Great point. Hey, Chris, do you feel the same way about the prospects for a debt limit breach? Yeah. So I think looking back, I feel like we always feel this way. to some extent in the early days, right, back in 2011, too. It's kind of scary that we were also going to cross the line. But, yeah, definitely looks as though the risks are elevated at this point.

Yeah. Hey, so, you know, two things make me particularly nervous. Well, a few things make me particularly nervous. One is just obviously the kind of the chaotic nature of the house process of selecting Kevin McCarthy as speaker. That was pretty chaotic. And as we have learned subsequently, he was able to become speaker because he agreed to basically make a battle out of the debt limit with a number of the Republicans he needed to vote for him. So that's one thing that makes me really nervous. Second thing is that, you know, we've been down this road a number of times.

And markets are, markets, when I say markets, investors, stock investors, bond investors. it feels like they think they know this movie and they know the ending and that they're just not going to react or respond thinking that lawmakers are going to sign on the dotted line in time. And by so doing, markets don't send any signals to lawmakers that, hey, you guys, you've got to pass a piece of legislation to solve this problem before it becomes a problem. And lawmakers take the wrong message from all this. And then the third thing is, just listening to lawmakers, you know, over the years, it just feel like there's more and more lawmakers, mostly on the Republican side, that say, you know, this isn't a big deal. You know, there's ways around it.

We can navigate through it, you know. You don't listen to those guys like, you know, Zandi and Furman and Therini saying it's going to be a disaster if we breach the debt limit. We can prioritize the debt. So just because of these things, it just feels like we have a much greater, a chance of like going over the cliff here. Does that make sense? I mean, is there a way around this? I mean, is, you know, what do you think of prioritization? Maybe you can explain what that means and, you know, what you think of that as a way around this passing a piece of legislation. Yeah. And I, Mark, I really agree with that last point. One thing we had going for us in 2011 is

Senator McConnell, Speaker Boehner. They didn't have a doubt in their mind that this needed to be done. They knew there was no alternative. They knew it needed to be raised. My guess is Speaker McCarthy knows that too, but an awful lot of his people don't. And there's much more talk now than there was at this stage in 2011 of surely there's some way around this. And the leading candidate, the Republicans tend to put forward as prioritization. That's the idea that you would decide what payments to make. And you could pay bondholders, you could pay interest, but maybe you could even pay social security benefits, but you just wouldn't pay schools and hospitals and veterans or something like that.

There's technical questions as to whether the government computer system can even handle and implement privatization. Prioritization has never been done before. They might not actually be able to do it. But even if they did do it, there's both a direct macro effect of a lot of money being, sort of not going into the economy, then there is just chaos in our health system, our education system for our veterans, and markets could very well treat it as a default and melt down. Then there's the preferred solutions that some on the Democratic side, not that many, more

on Twitter than in the U.S. Congress, think you can mint a platinum coin. And you just create a coin, you say it's worth a trillion dollars, you bring it to the Fed, you ask the Fed to give you a trillion dollars. That would just be an unprecedented politicization of the Fed. It would insert them right into the middle of a contentious political debate. The legality is very uncertain. I'm not sure markets would be much more happy with that than they would be with prioritization. So that platinum coin and its other relations, you know, as I said, I think there's a constituency on Twitter and not really outside of it.

that's not an option either. Yeah, it seems on prioritization, the thing I just doesn't make sense to, you make a great point about the fact that it's going to create an economic problem pretty quickly because the government has a deficit. If they can't finance the deficit, that means there's going to be a cut in spending and there's going to be immediate impacts on the economy because things aren't going to happen. Things aren't going to get done. And that'll add up pretty quickly.

And then on the prioritization, the thing I can't get. my mind around is even if you paid the bondholders, the bondholders are going to think, how long is that going to last, right? I'm a Chinese bondholder. I'm a Japanese bondholder. I'm a British bondholder for goodness sake. Are you going to pay me before you pay the military, the Social Security recipient? Even the electric bill. I mean, really? And it's, they're going to, I just don't see them sticking around for very long at all, you know, given the prospects that they, that, the political pressure that they won't get paid. I just don't say it.

Yep. I agree. Okay. Let me throw it, though, another, there's a few other ideas out there around getting around the debt limit, at least for a period of time. You mentioned there's the prioritization, and you mentioned the platinum coin. By the way, the other problem I see with the platinum coin is, doesn't that muck with the kind of the DNA of our political system, the checks and balances?

I mean, that means the next president can come along in the mid-fifference. I have trillion dollar coin and do whatever he or she wants to do and not need Congress to do it. I mean, that doesn't make. Oh, yeah. I think it's disastrous. No one. Clearly, Congress never intended to give the White House the authority to make trillion dollar coins and do what it wanted with it. Yeah.

Exactly. How about this? The 14th Amendment. So in the 14th Amendment to the Constitution, there's a section, I believe it's section four, where if you read the language, it feels like the president could call upon that. to say that I'm going to tell the Treasury to continue to issue debt and pay our bills, and, you know, because not doing so would be unconstitutional. It would, you know, violate the sanctity of U.S. federal debt. Does that sound like a viable option? Right. Look, I mean, the problem is the law is contradictory. Congress passed laws that said, spend this money and collect these

taxes, and then it passed another law that said, don't borrow above this. And those two laws collide against each other and which law is binding is an open question. If you had to do something crazy, I would do the 14th Amendment way before I would mint a coin, write a trillion dollars on it and march over to the Fed. But it still just has just tons and tons of uncertainty about, is it legal? Is it what Congress intended? What will the Supreme Court say? What will bondholders do if the Supreme Court schedules a hearing on it? And so it's, It's just a set of unnecessary damage that we would incur by taking that path as well. So I really think the cleanest, really the only option here is to raise the debt limit.

That was the view of pretty much every Treasury Secretary from at least the 1980s when this first became an issue through today. Yeah. Hey, Chris, are there any other ideas out there that you've heard around that might get us around the debt limit, at least for a period of time? Anything else you've heard? There's talk of the other Fed interventions that could take place. But that, again, I think that would be disastrous. Not only in the short term, but you have to think about the long-term consequences here, right? If we do any of these things, the bond investor is going to put that into their calculus going forward.

And that's, you know, even if it's only a few basis points more on our debt in the future, that all adds up, right? So quickly. And I think that's the irony. Right. Yeah. Is the stated goal of the people using this as a weapon is that they want to bring the debt down, you know, five basis points more on our debt is a lot of new government spending. 50 basis points on our debt would be a new $100 billion a year government program just to sort of

satiate the desire of people for this stunt. So it really could end up counterproductive economically as well as as politically. Yeah. Real dark irony. The same folks that say they want to, you know, they're willing to breach the debt limit to address our fiscal problems by breaching the debt limit will wreck our fiscal situation. I mean, it just doesn't make any sense whatsoever, you know, whatsoever. I wanted to throw out one other idea, and I'm probably going to botch the explanation, but I, this is kind of interesting, one of our financial economists, you know, threw this across the transom. And that is, have the

Treasury issue premium bonds. So, you know, right now they issue bonds at par, issue it at a premium. So let's take a seven-year treasury, you know, I think some, it's got $35 billion coming up here that's due. And they would issue a new set of seven-year treasuries to raise $35 billion at par. The par interest rate is, I don't know what it is, it's 3%, let's say. Let's say, sell, the bond now at 5% or 6% or 7%. So you could actually raise 38, 39, 40 billion and lower the debt that's outstanding by three or four billion dollars. Have you heard that?

Yeah, that's sort of a new idea that's out there. I hadn't heard that back in 2011 when I was working on the debt limit myself. You know, there's some question about how the statute defines the amount of debt and whether it would sort of see through the financial shenanigans that that basically is. There'd be some different tax treatment that you would get if you issued a bond in that manner. And just, you know, we have really smoothly functioning treasury auctions. They work really well. I don't know why we'd want to change them.

To muck up, that's the other thing. All these ideas, ultimately, they don't work. They're not going to work. And they kind of, there's so many, I'm sure, unintended consequences. consequences of all of them that, you know, we can't even contemplate until you're actually, you know, you've committed this, you know, gracious error. So, okay, very good. Just think of all the lawsuits, right? For any of these, I guess, right? Immediately. Yeah. It'll be complete chaos. But here's the other thing that makes me really uncomfortable is

there's no good time for this, but the timing of this couldn't be worse, right? I mean, people expect, there's a widespread expectation of recession this year. And if you ask people, when the recession can occur, it's about the time that we're going to be having, you know, coming down to brass tax here on the debt limit. I mean, it's just really very unfortunate the whole thing. Definitely is. Well, let's move on. I did want to continue to talk about policy a little bit here and talk about the Biden administration's economic policies year to date. So they've, you know, been in office now for two years. And it feels like when it was all sudden, done, it was a pretty productive two years. A lot of economic policy got through the legislative

process, beginning with the American Rescue Plan back in March of 21. Then they got the bipartisan infrastructure legislation through Congress. There was the Chips Act that's to try to incent more chip production here in the United States, given what we learned during the pandemic and our exposure to Taiwanese chip producers. And, of course, goes to the tensions with China. And then finally, the Inflation Reduction Act, which was largely about climate change and climate risk. Can I ask broadly, you know, taking all these things together, you know, what do you think

about the legislative effort here? What does it mean for the economy near and long term? Yeah, so they got more done than I expected. And more of what they got done was bipartisan. than I expected. I think that is, you know, much more good than bad, but I think there's a mixture of, you know, of the two. If I had to say the things that I'm, you know,

most excited about on the legislative side, I think the investments in infrastructure and climate change are really, really good. I think the CHIP's investment, something there is needed, in some sense, it's too soon to tell how good it is because it's not self-executing. It depends on what they do with the money and how effectively they use it. They have a good team.

I have some high hopes for it, but the jury will be out until we see how the money gets used. On the other side of the ledger, I think, and Mark, you and I may differ on this, I think the American Rescue Plan was much larger than it needed to be, given what we knew about the economy at the time, given where it was, and certainly in retrospect, much, much larger than it needed to be. I think that's contributed to the inflation we've had and may have made it harder to come back and get more money for families because they did well on what was originally called the American Jobs Plan,

which was all about infrastructure and climate. They didn't do well on what was originally called the American Families Plan. So things like the Child Tax Credit ended up, bizarrely, less popular after the American Rescue Plan rather than more. Then if you look outside the fiscal area, a renewed emphasis on competition, and you see it in all sorts of things most recently banning non-competes in labor markets, making hearing aids available over the counter, taking a more aggressive posture. I think by and large, that's been a really good thing.

But then on the non-fiscal negative side of the ledger, I think there's been way too much of a continuation and even expansion. of trade wars, of Buy American, and other things that are just going to make it more expensive to meet the goals that they have. I don't think they're going to do very much for jobs and are already leading to retaliation and foreign policy problems. So, you know, all in, it's a good record. I don't think President Obama is perfect. I don't think anyone's perfect. But there's, you know, there's some good, bad and ugly, but more good. Right. Am I wrong, but if you take those four pieces of legislation, obviously the first one, the American Rescue Plan, that was not paid for. That was all deficit finance. And back to your, we'll come back to that in a second in the context of what you said about inflation. The other three pieces of legislation, my memory is getting a little blurred, but they were mostly paid for, weren't they? Or largely? No, infrastructure was much less paid, was mostly not paid for. And some of the pay for us were pretty phony.

I think chips, I don't even think they pretended to pay for chips. I might be wrong. The Inflation Reduction Act, which was for climate, that was completely paid for. And I think, frankly, it's going to reduce the deficit more than it does. Yeah, actually, I think in that case, I mean, if you look at the 10-year budget horizon, it's paid for it. But if you look at it a longer run, assuming the tax increases that were implemented as part of the pay-forers remain in place, you know, under that assumption, which a reasonable assumption. It actually reduces the deficit deficit. Yeah, exactly.

Yeah, and that's a growing amount of deficit reduction. And some people like Larry Summers and Natasha Sarin have argued that the tax enforcement is going to bring in a lot more money, that the scorekeepers were too conservative. And if they're right, then it's even more deficit reduction than CBO thought. Right. Let's go back to the ARP, the American Rescue Plan, because that's obviously been very controversial in all kinds of political circles. and the one thing I found very surprising was that the ARP put a lot of cash into people's pockets, but it resulted in a significant increase in saving. A lot of that ended up in, it still is, in people's checking and deposit accounts.

But the way people have spent that money has been very judicious. And it's actually been interestingly pretty well calibrated. So, you know, with the inflation in reduction in purchasing power, we've seen households draw down those savings in the cash sitting in their deposit accounts to kind of supplement their purchase power to maintain their spending, the overall spending that they're doing. And it's not been, you know, the spending hasn't been with abandoned. It's not the people out there spending with abandon. And it's just kind of sort of enough to keep the economy, you know, out of recession and moving forward.

Were you surprised? Have you been surprised by that the way people have kind of managed their, the cash they received on the ARP? And it's not just the ARP. They received a lot of cash on their cares and the other piece of legislation that were passed during the, during the pandemic. Yeah. I mean, I just didn't, I think we didn't have any idea about what to expect about how people, would spend the money. I think I have a less anodyne view of it than you do, Mark.

If you take the American Rescue Plan plus the earlier legislation, the CARES Act, and then there was legislation in December of 2020, the three of those together were 25% of GDP in fiscal support for the economy.

And that was legislated within a 12-month period of time, and a lot of that money spent out within an 18-month period of time. So 25% of GDP, then the question is, what multiplier do you use? You often have multipliers, I think of like 0.7 to 1.3. Right. Something like that.

The multiplier on this was clearly much lower because of that judiciousness. Let's say the multiplier in the first year was 0.2. That's 5% of GDP. We might have needed that in the first year. But that also meant people had a lot more money. So the multiplier in the second year, 0.2, I don't think that's a crazy high multiplier. 5% of GDP. And the problem is at some point, people are spending money that above and beyond what we could produce. Moreover, a lot of that money got spent on goods, not services.

We always knew that we could not get back to potential instantly, that it would take some time to get the economy back together. So I think we were in a world where people wanted to spend five plus percent more than normal. The economy could not make 5% more than normal. And so that increased spending went more into prices than into output. I think the sort of last dollars, the marginal dollar of that legislation did very little for output and a lot for prices. Now, it continues to go to today. I mean, look at where consumption is right now.

Consumer spending is about two and a half percent above what the CBO forecast it would be in their last forecast before the pandemic. Real disposable income is about a point below. what it was expected to be. So people are still spending way above what you'd think, given their incomes. And so this is casting a long shadow. In some ways, that's good. It means that the Russian invasion and the oil price increase didn't drive us. And the monetary policy hikes didn't drive us into a recession in 2022. But in other respects, it's I think why inflation has been so stubborn. One argument for kind of overdoing it. And I would agree, you know, if you kind of do the arithmetic, go back to March of 2021, that $2 trillion felt like it was overdoing it. And actually we did a lot of analysis around the part of the package that provided money to state and local governments. And it didn't feel like it ended up being $500 billion, I think, of the $2 trillion went to state and local governments, either through public education or, you know,

just grants basically to state and local governments that they're still using. It felt large relative to our estimate of what impact it was going to have on state and local government budgets and to a significant degree. Yeah. And I should say, by the way, in 2020, mid-2020, you had the lowest estimate of the needs of state and local government of pretty much anyone out there. Yeah, that's right. And yours were much more accurate and ahead of the curve, certainly relative to mine.

Now, by March 2021, I had converted to you. I understood their needs were nowhere near that. But it took me about six months more than it took you to figure out. Well, you're kind of giving me credit. And I'm not sure I deserve it. I mean, but I'll take it anyway. It's actually about the team, Dan White and Bernard Jaros, those folks that, you know, they do that careful analysis. But thank you.

But the reason I bring that up is because the argument was, look, in March of 2021, there was still a lot of uncertainty around the pandemic. You know, yeah, we had the vaccines. They were starting to get rolled out, but we had no idea, you know, exactly how this is going to play out. There are a lot of nervousness around this. And kind of policy 101, and maybe I shouldn't say that because you write the book, policy one of you write the books on policy.

But this is kind of the way I frame it. Policy 101 is if there's a lot of uncertainty, you want to, you want to overdo it. Because you don't know, you know, how things are going to play out. particularly in a political context because, you know, you've got political constraints on what you can actually accomplish. And the concern might be that you only have one, you have, as they say, one bite at the apple. And you don't ensure if you could get a second or third bite at the apple if you actually needed it. So given that, does that make it more sensible that they went for a big package? The Biden administration went for a big package on the American Rescue Plan?

Look, first of all, I think the error of too large is better than the error of too small. So I'd rather have made their mistake than the mistake that policymakers made in 2009 and 10, which I think was mostly Congress's fault, not the president's fault, but regardless of whose fault it was, that's where we ended up. So I agree with that. I think you want to err on the side of too much. But, you know, that is not an operationalizable principle. You know, I think we both would agree that $200 trillion would have been too much.

So just because you want some insurance doesn't isn't license for an unlimited amount. You said the state and local wasn't well founded. You know, the $2,000 checks, that wasn't the nerds on the Biden economic team that came up with that idea. That was Donald Trump made that number up on the fly in December. And then for political reasons, Nancy Pelosi and then President-elect Biden converged to it. So the whole thing didn't really come together in an overly. economically informed way. And you know, you could look at the output gap at the time. And it was clearly shrinking. It wasn't much more than, you know, I think 3% of GDP and shrinking. And this was

about 10% of GDP. So I think it was overkill based on what was understood at the time. As I said, you know, political system never gets things perfect. I'd rather have overkill than underkill. but I think we can strive to, you know, Goldilocks next time around. Got it. Hey, Chris, you've heard this conversation. Yeah. You want to weigh in. Who's right?

Well, I'm, that's, I was very nervous about, I'm very nervous about asking him this. Who is right, by the way? And you do, you know, I am your boss. Yeah. Yeah. It's, uh, it is compensation season too. Oh, yeah. That's true.

That's good point. That's a good point. Yeah, right. No, Chris always disagrees with me, constantly disagrees with me, which is great because the mix for- I will agree that at a minimum, I think things could have been structured differently, right? The $2,000 number, right? Where did that come from?

We could certainly have, well, in theory, they could have been structured differently. I think an error or a problem that we still face is, well, you talked about infrastructure, but I think our government infrastructure is still lacking in terms of being able to target these funds more effectively, right? We could have enhanced UI benefits or unemployment insurance benefits, for example, but our systems really don't let us do that in a very efficient manner. So we could have, I agree that the amount was too much for the American Rescue Plan, but even a lower amount could have been targeted much more effectively to, you know, if the ideas we want to support people, there's lots of uncertainty with the pandemic, we could have certainly

structured things to make sure that the money went to best use cases or where it was needed the most. So that I see as a continuing issue that we haven't addressed at all. Right. Yeah, and you're totally right about that. And it's just depressing. I mean, with unemployment insurance in 2020, they wanted to do something where everyone got, say, 95% of what they used to make.

And to do that, you need to program a computer to multiply. What's your salary? multiply it by 0.95, send you a check. The computer couldn't multiply. The computer could add. So they could say, what's your unemployment benefit? Let's add $600 to it. And for some people, that ended up being twice their old salary.

And for some people, it was less than 95%. And, you know, no one wanted to do that, but you had no choice as to how to structure it. And it's not, you know, the next recession we go into, it's not going to be any different. We're just going to be saying the exact same thing. doesn't lend a whole lot of confidence around their idea of prioritization prioritizing that's famous does it right and that's because they're using i think they're using cobalt they're using some decades old computers like there's only a few people left in the country that know how to do same thing with prioritization that operates off a computer system that

there's just not a lot of people i know how to do it now maybe chat gpt could you know figure it out um ask it how to prioritize and send out the checks but you know other than chat gpt yeah i I don't know. Well, I want to move forward. I want to do three things in the time remaining. One, I want to talk about inflation now today. And then second, maybe we do the statistics game. And then third, come back and talk about recession and recession, because that's just top of mind.

You know, everybody's talking about recession. So on the on the inflation front, let me ask it this way. How are you feeling about inflation? How are you feeling about it? I am feeling better than I was, a few months. months ago, I always thought that the inflation rate was going to come down. In fact, at every point in the last two years, I've expected lower inflation. I just haven't expected it to fall as much as other people were expecting it to fall. So it's not shocking that goods inflation is

moderating so much. It's not shocking that housing inflation is likely to moderate pretty soon in what we're seeing in the spot rates. I think some of the services outside housing are probably falling a bit more than I expected them too. And I think that is broadly speaking a good sign. But that being said, you look at wage growth, it's still about two points above what it was prior to the pandemic. I just don't think we're going to be able to get all the way down to 2% inflation, maybe not even below 3% inflation given where we are in the economy right now. So progress, But, you know, still more to do or a difficult choice about whether to accept a higher inflation rate going forward. So the kind of thing that's most still concerning is around wage growth and what that means for prices for various types of services and industries that are very labor intensive.

The other stuff feels like that's coming in reasonably well on the good side and on, I think rent, the recent weakness in rent. suggest that the cost of housing services is going to start to come in here pretty quickly as well. So that's where your concern is most significant. Yeah. Look, I think broadly you can speak about inflation. You can think about inflation bottom up. Let's go through five sectors of the economy. And when you go through that, you feel pretty good about it, especially because a really positive shoe in terms of rent has not dropped yet in terms of the CPI. Now, I don't think goods prices are going to continue to fall at the pace they've fallen either. So some of the good news is transitory, but there's more good news to come. But then,

you do a macro bottom top-down perspective. And there you look at openings that are higher than they've been at any point prior to the pandemic that in the last couple months have stayed very high. You look at workers quitting higher than any time prior to the pandemic. Again, that aspect of the labor market hasn't eased. You look at wage growth and there were some numbers showing some slowing at the end of the year. We'll see what the employment cost index shows at the end of the month. But even with some slowing, you know, I just don't think over a three-year period of time, you can have wages grow at four and a half percent a year and have inflation at two percent a year. Or at least I don't think it's likely. And so that macro perspective is what, you know, keeps me nervous and thinking we're still pretty far from victory.

Let me try something else. Let's try something out on you. in terms of wage growth, because I agree. That feels like the real issue here ultimately to go to the last mile and get inflation back down to the Fed's target. We probably get CPI inflation, you know, 3, 3.5% with everything else. But unless wage growth moderates, we're not getting down to 2.2%, 2%,5%, which would be consistent with the Fed's target on CPI.

So it's really about that's kind of where the concern and the focus is. could it be the case that wage growth jumped, accelerated, in significant part because of a jump in inflation expectations, which occurred, if you look at the data, around the time the Russians invaded Ukraine and oil prices and gasoline prices jumped. The gasoline, particularly, it's kind of central to people's thinking about inflation. that's how they form their expectations. And really, that's what matters most in terms of their thinking about their own finances. And so when gasoline prices took off, in fact, they got as high as $5 a gallon, a record high by June of 2022, that inflation expectations jumped and workers said to their employers, hey, look, you've got to pay me more to compensate. And employers said, fine, you know, they understood.

But now with gas prices back, you know, oil prices have moderated, gas prices. have come back in. We're at $3.25, $3.50, something around that. Inflation expectations feel like they're coming back in. They're already back in for bond investors, but for consumers, if you look at New York Fed or University of Michigan, whatever, they're coming back in. And it does feel like consistent with that wage growth, at least on average hourly earnings, we'll see on the employment cost index, as you say, that's coming in. So it's not really about the slack in the labor market. You know, maybe we're a little bit beyond full employment, but not a whole lot. It's really about these inflation expectations.

and that as they come in, wage growth will moderate, even without a very significant weakening in the labor market and an increase in unemployment. Does that resonate at all with you? I think that may be a piece of it. But I think that also falls under the heading of things that I call possibleism, not probabilism. Everything you can is possibly true. But you don't want to only think of sort of the happy stories that are possible. You want to think about what's most probable. You know, on labor market tightness, 3.5% unemployment, you know, that's what it was before the pandemic. Now, we don't know what was going to happen absent a pandemic in 2020 and 2021. Nominal wage growth was picking up. There's a little bit of inflationary pressure.

Might we have discovered that 3.5% unemployment was, you know, inflationary? We might have. But, you know, I'm not that worried about the unemployment rate. What I am worried about is the ratio of job openings to unemployed and the quits. That to me are better predictors of inflation than unemployment, and they're really off the charts high compared to anything we saw before the pandemic. So I think there is a lot of evidence of tightness. Wages were growing quickly in 2021 also before the Russian invasion. Now, maybe that was a transitory pandemic thing,

and maybe 2022 is a transitory Russian invasion thing. but at some point you sort of want Occam's razor. And if you have four different stories in a row, maybe there's one simple story for all of it, which is a tight labor market. Then in terms of expectations, you do raise a really important and unsettled question. I mean, expectations are like the ether of inflation forecasting.

This thing you can't really, I mean, we have all these measures, but we don't know which of them matters. Is it short run? Is it long run? Is it consumers? Is it businesses? Is it markets? Is it your forecast mark?

You know, what are the expectations that matter. And short run expectations are much higher than long run expectations. I think they probably matter more. You know, when people say expectations are anchored, well, what do you think is going to happen over the next year? What's going to actually affect wages and prices? And the short run have come down as gasoline prices have come down. But there's still, I think there's still two points, point and a half above where they were prior to the pandemic. I mean, if you have the numbers that your fingertips want to correct. One year ahead on New York Fed is four. And that was like two and a half before the pandemic.

Yeah, something like that. Yeah. Anyway, so it's still pretty high. It's coming in pretty fast. It was like at six or something. It's coming in pretty fast. But nonetheless, you're right. It's not in all the way.

Yeah. So I think, you know, maybe this is, you know, this will help us by half a point. It'll help us get towards three. But I don't see how it helps us get to two, two and a half. Got it. Well, hopefully I didn't take someone's statistic when I said the 4% near term inflation expectation. So let's go to the game, the statistics game. Yeah, this is a lot of fun.

I've been up all night studying. So everyone's level sets. The game is we all put forward a statistic. The rest of the gang tries to figure it out through questions and clues, reasoning. The best question is one that's not so easy. We get it immediately and not so hard we never get it. And bonus, if it's relevant to the topic at hand. And of course, we've got a lot of topics on the table here.

So I think we're good. So with that, Chris, I'm going to turn to you first and see what your statistic is. All right. You've complained over the last couple of weeks. My statistics were too easy. Really? Yeah. I'm always complaining.

Minus 179,000. Negative 179,000. Minus 179. Is it a statistic? Animal, vegetable, or mineral? That's a good question. statistic that came out this week? It did.

Is it housing related? It is housing related. Oh, housing, I don't have a chance against Mark. Well, it's not existing home sales that came out this morning, is it? No, that would be. Because I didn't have a chance to get that. Okay, is that the decline in single family housing starts or permits? Oh, both.

Both. I mean, it's related to both single-family housing starts and permits. Oh, but it's not a, the monthly decline. It is the, it's the, I'll give it to you. I'll give you the cowbell. It's the difference between them. The difference between who? Starts and permits.

Or permit, I'm sorry, it's the difference between permits and start. Wow, that's hardcore. Yeah. Permits are below starts. Oh, okay. That is really hardcore. Oh, my gosh. You're saying the actual permits minus the actual starts.

Yes. Okay. Yeah, because if I threw out, you know, seven or 30,000, you'd get it right away. That's a good point. Got to get a mix up there. I like that, though. Very good. It's negative.

It happens time to time, but it does suggest that there is weakness going forward, right? Right. Permits are falling in faster. You're right. That's a great statistic, actually, because usually permits are above starts and signaling We're going to get more starts. You're saying now permits are below starts, right? I see.

The builders are using the permits they already had to put up some additional start. Even starts on an absolute basis are low, but it's still feeding the pipeline. But looking ahead with permits falling faster, it would suggest even more weakness. Right. Right, right. Have you noticed, and this may Jason go to some of your concern about the labor market? There's been no declining construction employment whatsoever. Yeah.

You know, it's like if we're going to see any kind of weakening in the labor market, you would think it would be the most interest rate sensitive sector of the economy. That does make me a little. Well, the output is collapsing there, but. Well, on the single family side. On the residential side, yeah. On the multifamily side is booming, right? So. Oh, but I'm just looking at residential contribution to GDP.

Oh, yeah. It was like minus 1.5. Oh, that's right. It's tracking for Q4. That's as big a decline as we've seen since the financial crisis. Yeah. But even on the single failure, completions are still. Still elevating up because we have so much in the pipeline.

Yeah. That does make me a little nervous. Okay, that's very good. Jason, do you want to go next or you want me to go next? Sure, why not? 1.5%. And if it helps you, decimal places help you, it's 1.49-49%. Oh, really?

That's kind of cool. Rounds to 1.5%. Indeed, it does. It does. It's 1.5% and it's positive, right? It's positive. Yeah, I'm a positive person. Yeah.

Okay. I'm not a negative like you. Yeah. Is it a statistic that is recent, came out recently? Or is it, is it not that kind of a statistic? It's like, uh, you'd have to calculate it. You have to calculate it. Okay.

But you'd have to use recent data among other things. This week or is it, is it related to inflation? I think it's related to everything. Oh, oh, it's like, oh, I see. It's like the meaning of life or something, the 1.5. It is close to the, it is about as close to the meaning of life as you get with economic data. Yeah. Oh, my gosh.

Wow. Oh, this is really intriguing. You want any idea? Oh, it's a, I mean, one and a half percent. I'm just going to throw it just to continue the conversation. That's my sense of underlying productivity growth. Is that? That is productivity growth over the pandemic period.

Oh, my point 49, 49% annual rate. Oh, yes. Wow. That's the meaning of life. That is the meaning of life. It is. I'm just,

I'm going to stop and pause for a moment. I want everyone to soak that in. Did you see how I did that? Chris? That's great. Yeah. Very nice. Very nice.

Hey, did you know, though, Jason, that if you take productivity growth in the three years leading up to the pandemic, it was 1.5%. So yeah. Oh, we are right on track. It is amazing. It's amazing, right? Yeah.

Well, of course, we need, it would be nice to get more than 1.5%. But is there any chance of that? I mean, what do you think? I don't know. Yeah. I mean, well, is there any chance of that? The answer to any question, is there any chance is yes. I'm much of a chance.

Okay. How much of a chance is that? I wouldn't build my plans around that. I build my plans around 1.5. I still think with sort of a certain out of COVID swirling around, a certain amount of hardening against it, I'm sort of pessimistic on work from home, but entirely a bias. You know, a lot of evidence that goes a lot of different ways on that. So, yeah, I think I'd be happy if we had 1.5, more likely to be below than above.

But who knows? Yeah. I'm accounting on chat GPT. I'm just saying, yep. You know, we actually contracted with we, meaning the economics unit at Moody's, with open AI before chat GPT. So we are experimenting with AI a lot of different ways.

So very interesting. So for all of my experience with chat GPT have been to like random things in sonnet form, which have not been productivity enhancing. Right. Well, I'm sure for you, it's creating work, right, because of your students. Oh, yeah.

Oh, I just got the interim report of the committee here for how to change the way we do assignments based on chat. Exactly. Right. Wow. That's going to change education significantly. Yeah. All right. I got one for you.

Sam's coming back. And you ready? Yeah. 926,000. 926,000. Multi-family starts. No. Starts.

No, no, that's 500,000. Housing, labor. It is housing. It is housing related. Oh, no, no. Because we got a lot of housing statistics. It's your favorite. Under construction.

It's under construction. Okay. Yeah. It's a little, that was easy for Chris. This is a really important statistic, Jason. So there are 926,000 multifamily units under construction going to completion. That is a record high by orders of magnitude, orders of magnitude. And it keeps going up.

And, you know, it goes to. just the boom in multifamily related to the very high rents and high prices for multifamily property. And I bring this up because this is critical to inflation, right? Because we're going to get a boatload of supply here. It's already happening. Demand is actually a bit depressed for rental units because of the very high rents because of the surge and rents this time last year coming out of the pandemic lockdowns. And we're going to see vacancies. They're already, vacancy rates are already starting to move higher multifamily and rents.

are going to remain very weak here, which is really important with regard to inflate, particularly CPI inflation, where consumer prices are, you know, the third of that measure is related to housing costs. So I view that as a very important statistic with regard to inflation going forward. Okay. That was great. That was very good. Good because I feel pretty proud of myself. You should. Get the meaning of life. Get the meaning of life. And you're right. That is so, that is the, as close as it gets to the meaning of life in economics. Okay, let's, let's end the conversation with the discussion around recession.

And I know, Jason, you've kind of been, because we, we, you and I have been participating in this poll that Goldman Sachs has been putting together. And I get to see what you think about it. I think it is your cousin putting together. It's my cousin. Yeah, exactly. my cousin putting together. She runs the investment management group at the or the private private wealth management group at Goldman Sachs. And last I looked or last I saw, I think you were around 50-50 for a recession in the next year. Is that about right? I'm at sort of 40, 45.

I think I might have lowered it since I put that down with them. And, you know, I think it's really going to be a battle of, you know, everything the Fed can affect in the economy with housing being chief among it versus consumers. And consumers, I think, still have a lot of potential on them, certainly in the first half of the year. I'm getting more nervous about whether consumers can maintain their spending in the second half of the year. So it's far from inevitable, but, you know, there are just a lot of things swirling around in our economy, plus the tail risk of the debt limit, some escalation in Europe, et cetera. So, you know, if you wanted to talk me a bit lower than that, I don't know that I'd fight you that hard, but it's definitely higher

than the normal baseline, 15%, that you'd have in a normal year. Oh, so, yeah, you know, on average, we have a recession every, what, seven years or so, something like that. So 15% is kind of the number baseline. And you're saying we're at, your sense is 40, 45%. Yeah, that's what I think. But I think it's elevated, but I think it is way far from like inevitable. Right, right. So you're actually well outside the consensus. The consensus would put it closer to two-third probability.

Yeah, I think that's way too pessimistic. I think they're underestimating. I think a decent amount of the monetary impact has actually already been felt. The tightening in financial conditions really happen in the first half of 2022. I think there's lags. but I don't think they're quite as huge as some think. I can consumer balance sheets going into this and are much better shape than they are

at similar cycles elsewhere. We'll get some relief from the rest of the world, China reopening and the like. So all this inevitable recession talk, at least inevitable this year, seems to me overly pessimistic. And I thought it was overly pessimistic when people were saying that last year.

And, you know, we ended the year. It looks like we ended the year on pretty strong growth. We'll find out. And I think if we extend the horizon here another year, say, 2024, your probabilities at that point, they do go about 50%. Well, they definitely go about 50%. First of all, you have more time.

So it would be 30% would be your baseline for two years. But, you know, my belief that there's a decent amount of inertia and inflation is that the Fed may, slow down its hikes. They may pause. But if we don't have a recession this year, then I think almost certainly we're going to have inflation that's above 3%. You're more likely rising than falling. and so there'll be maybe another round of rate increases or whatever else.

So I think we're having a hard time escaping two years with that one. Okay. So just to summarize to make sure I have it clear, you're saying, look, we got enough juice here, momentum consumers to keep the economy moving forward in 2023. But the economy's not going to slow sufficiently enough to get unemployment and labor market conditions to a place where inflation actually comes back into the Fed's target all the way, and the Fed says, oh, my gosh, I've got to raise rates more. So the terminal rate isn't what markets think.

It's not 5%. And actually, markets have rates coming back down later this year. It could be five and a half or six. And ultimately, that pushes. If you told me there's no recession this year. Yeah. Then I would expect the rate would get to 6%. Six percent.

Okay. Now, the market expectation, of course, averages across the probability of a lot of different events, including a recession. But no recession, I think rates go to six. And I think we have a recession the year after. Oh, interesting. And can I just ask just to make a concrete, that probability for 2024 would be 60, 65 percent, something like that? The cumulative over two years.

Yeah, yeah, got it. Yeah, okay. Chris, Chris is the bearer of the group. But although he's gotten a little less bearish recently, he's, what were you, 68% probability? Two-thirds. Oh, your two-thirds probability in 20-23. What are you today? We extended it to early 24.

All right, early 20-24. Okay. So where are you now? I'm sticking with two-thirds. Two-thirds. And what do you think of Jason's scenario where rates have to go higher in the recession actually is not 23, it's in 24? Yeah, I am increasingly pushing out by...

You are. Yeah, I do agree with that. So there is certainly a lot of inertia still, so very hard to get a recession than next quarter or two, right? Things would really, we'd have to be hit with some other shock. But as we get into Q3, Q4 and into Q1 of next year, then I think we have a lot of vulnerability there. Yep.

Hey, can I ask something else that's bothering me on this, related to this issue, going back to the liberal market? Is it possible that? Yes. Yes. I know. How do I say this so that I don't have that problem? Is this highly probable or reasonably probable that we have no significant increase in overall layoffs?

But the labor market weakened sufficiently to get wage growth down just simply because businesses say, I'm not hiring anymore. Like people leave, they quit. I just not going to fill, you know, I'm just not going to, I'm just not going to, I'm just not going to do it. I'm just not going to fill those open positions. I think the best case for that is that job openings just rose so much more than we can quite understand or explain. And so what goes up, maybe comes down. And there was a certain amount of what looks like non-linearity in the inflation and labor market process, where just small changes led to really large changes. Small changes in labor market led to a large change in inflation.

So maybe that can happen in reverse. So I definitely, think, you know, that is the most plausible, more plausible probably marked than your expectation story. I think the most plausible story is that the labor market weakens in the form of openings falling quite a lot while unemployment rises only a little bit. And we haven't really seen that happen before, but we've also never seen things move this rapidly, you know, towards higher openings in the past either. So. Because I'll have to say, I've been just so surprised by the low layoffs. I mean, you saw UI claims this week. There were 190,000 people claim. I mean, that's, you know, a four-week moving average, we're at 200K. That's about as low as it gets.

I mean, typical would be 250. Recession would be 300. It's on labor market is just, it's stunning. Stunning. It's just stunning. And all these tech workers losing their jobs. It feels like they're getting jobs right away. They're all finding jobs again. I mean, I don't know they're all. I don't want to say that. But it seems like a lot of them tech workers layoff or are finding jobs. In fact, it's a great thing for the rest of the business, right? I mean, because people couldn't find tech workers, you know? Every company needs tech workers, right? So here we are.

So pretty amazing. Okay, why, just to round out the conversation, I'm still at 50-50 for 20-23, although I would say 2024 does feel like it might be higher than 50-50 to me for the reasons you articulate. I mean, because. Yeah. And can I ask, because I think we're going to title this. this conversation. What was that phrase you used about? Possibilism and probabilism? Yes,

possibleism. Write that down. Everyone write that down. Possibilism versus probabilism because that definitely is going to be the title of this. Excellent. I guess that's the title of your next paper. You better trademark that because he takes people's. I know. I've been planning to write it up. I've been planning to write it up for the Wall Street Journal. Maybe you've gotten me to.

Yeah, there you go. This might be working through that stuff. Yeah. Hey, Jason, this is a great conversation. Thanks so much for participating. That's a lot of fun. Thank you so much. And I hope I'm right.

That's all I'm saying. So I hope you're right to everything all the time. Anyway, I appreciate that. And dear listener, thank you for tuning in. And I should say, just a reminder, if you have questions that you like us, to address because I think next week we don't have a guest and we'll take some listener questions. So if you have questions you'd like us to address, fire away.

You know how to get to us, Twitter, LinkedIn, our websites, help economy at moody's.com. Anything you want to do, just fire away and we'll answer those questions. So with that, we'll call it a podcast. Take care, everyone.