Moody's Talks - Inside Economics - Probability of Recession and Puppies for Everyone

Episode Date: October 29, 2021

Kevin Hassett, Vice President and Managing Director of the Lindsey Group and former Chair of the Council of Economics under President Trump, joins Mark, Ryan, and Cris to discuss the risk of a recession, inflation, and tax proposals in President Biden's Build Back Better legislation. Full episode transcript. 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. I'm the chief economist of Moody's Analytics, and I'm joined as per usual by Ryan Sweet, Director of Real Time Economics. Hi, Ryan. How are you? I'm doing well. How's your week, Mark? It went fast, Ryan. I was in Milwaukee for a couple days for a board meeting. Made it there and back. Pretty quiet in Milwaukee, too, I'd have to say. But that was a good week. Where's the cowbells, Ryan? They're right over there. Can you see them? No, you need to pull those out.

Give me a second. I can see a cowbell. Do you see the cowbells? I did, yes. So if you get, by the way, listener, Kevin's jumping the gun here, but we got Kevin Hassett here today as a guest. We're going to introduce him formally in just a minute, but we're really honored to have him with us. So welcome, Kevin, and I'm going to grill you in just a minute, so hang on. But these cowbells are key, Kevin, because we play this game here on Inside Economic.

with the statistics, and if only if Mark gets it right, do we ring the cowbells? Okay. If Ryan gets it right, I mean, what's the big deal? He knows all the statistics. He's supposed to know this stuff. He's supposed to know this stuff, exactly. I didn't know you're going to be in the office. I would have dropped them off.

Yeah, and I came in because I wanted to be with Chris, Chris, you're not, where are you? You're back at home? Is that where you are? Yeah. The fourth floor is actually closed in the office today. It is. I didn't know that. They're doing some repair work.

Oh, okay. Well, I had to come in because we're doing major surgery on my electrical system in my house. So I have no power in the house, no internet or nothing. So I made it way my way to the office. And that's Chris Duretis. You heard Chris's voice. He's the deputy chief economist. And looks like you're in fine form.

Chris, I'm the one who's wearing the geeky shirt today. Chris is in looks like James Bond. A little roll reversal today. Yeah, little roll reversal. Yeah, well, good. Well, welcome, Chris. And Kevin, Kevin, so good to have you here. Thanks for joining us.

Great. I think you and I almost have the same geeky shirt on, actually. I know. We're two geeky guys on this. Well, you know, I am a geeky guy, so there's no way around it. So that's true. That's what it is. And where are you joining us from, Kevin?

Are you in D.C.? Oh, I'm just in my kitchen. You see my wife has a, our kitchen filled with her chicken and rooster collection. So given the supply chain disruption, we might end up having to eat that guy back there. So when you're on TV. But yeah, I'm in my kitchen in D.C. When you're on TV, do you do it from that venue or do you go somewhere else?

You know, lately they've been sending trucks to the house. Like you could be a little far away from the city. But here in D.C., like if you see me on TV in the last month, I would have been in a van. But I have different parts of the house that are set up better for a shot. in the kitchen. But the kitchen is where all the work gets done right now. It is actually a supply chain story, too, because we did a little renovation because we're an empty nest now. And I bought some new office furniture like last February, and it's still not here. Oh, is that right? Last everywhere. Yeah. And so I literally like working at the kitchen table most of the time because I don't have a desk.

Oh, my goodness. That is a supply chain problem. I wonder what part of the world that's coming from. Yeah. New York State. There you go. They can't get the trucker. Yeah. Yeah. Are you familiar with Room Raider? You know, have you seen this? Oh, yeah. I don't think I've been embarrassed by not rated. Yeah. Yeah. Yeah. I, they like, I have a home and Vera, and I did some interviews down there that I love that venue. They hate my home. And I wonder what they would rate this. This is my office. By the way, that's my mom's for all the YouTubers out there. My mom did the big wreath back there. The wreath?

Yeah, she's a little bit of an artist. So it's your mom made the wreath. The wreath isn't your mom. That's, I would permit it. He said, that's my mom. Yeah, that would be scary. That would be scary. Right.

Well, Kevin, so good to have you. We've been friends for a long time. I can't even remember, you know, when we first met. It would have been the late 90s. Yeah. And, you know, you've had such a great career. still doing lots of different things. You were at AEI for a while.

You were a director of economic research and studies there, and you'd have this great meeting every year where you'd get... Oh, sure, Dad, first at Beaver Creek and then at Sea Island. Yeah, you'd get some Ds, some R's, a lot of Republicans in the Senate and the House. and it was great several days of policy and politics and just a really fun time. And you invited me to a number of those functions. And I really appreciate that.

Oh, I appreciate that. Yeah. Yeah. I did my best to, you know, kind of take it right up to the line, but not go too far, you know, with the D stuff. So it was, I thought it was pretty good. And then you were on the Council of Economic Advisors. you, the chair of the Council of Economic Advisors under President Trump. Tell us a little bit about that.

Can you or how was that? Sure. Well, it's actually kind of interesting, like, how I got drawn into that. One of the things, because you and I actually worked on the McCain campaign together long, long ago. Oh, that's where we really got to know each other, right. Yeah. I think we had met before that. But basically, one of the things that really bugged me about economic policymaking in the U.S. is that there are a few plays with these sort of black box scoring models. So I know you guys actually are one of those places now. But that if you don't have a black box, then developing policy,

you're really at an extreme disadvantage. And back when you were helping us with the McCain campaign, you know, like the Bush guys had hired every single person that would model anything, right, in 2000. I don't know if you helped us in 2000. It might be you came for 08. I don't know if you were there in 2000. It was 08, not 2000.

But, you know, if the candidate wants to propose, something that, you know, the numbers kind of got to add up. But if you don't have a big model, then how are you going to make a proposal where the numbers add up? And then when the numbers don't add up, then the media just beats the crap out of you. So anyway, so what I did is I reversed engineer. Do you know about this? I reverse engineered the Joint Tax Committee and CBO creating this website called the Open Source Policy Center. And the basic idea was to make it so that anybody, you know, anyone listening right now, you know, could come up with their own tax plan and then get like the distribution tables and the revenue costs and what, and you can dynamic score

if you want. There are a lot of different models merge to it and so on. And so the idea was to democratize policy debate and make it so Democrats, Republicans, independents, anybody who wants to could formulate a plan and sort of know what the official score would look like, you know, really almost instantly. And so I built that website and pretty much every presidential campaign in the last cycle was using it to some extent. And also we could sort of see that a lot of people in government are using it.

Even a lot of people at Joint Tax Committee use that our software now because it's easier to use their software. You know, Kevin Brady at Ways and Beads started, you know, he had all of his staff trained up on scoring things with the Open Source Policy Center. And then when joint tax disagreed with the score, then he would ask them to explain why. And so it kind of opened up the black box a little bit over time. But what happened was that you might recall that in the campaign, the Trump administration had some proposals where the numbers were just. like totally out of line. And they had like the classic, you know, it's happened to lots of campaigns, a lot of news stories about how they don't have a clue about what they're doing, you know, that kind of stuff. And so just a friend of Jared Kushners, who knows me, said,

oh, well, you should get someone connected to the Open Source Policy Center and use that thing, and then your numbers will be fine. And so they called me up. And then I actually knew a guy. turns out the joint economic committee had just changed sheriffs and a bunch of the career staffers at the joint economic committee got let go, including a guy named Jeff Schlagetoff. You probably know Jeff. You know, he's right at the middle of, you know, they're like the economic think tank for Congress. And so I told the Trump campaign, hire Schlagadav. You know us how to run OSPC and your numbers will be fine. And so then from then on, you know, basically they didn't, you know, they certainly got in a lot of trouble for a lot of things.

but, you know, if they said something was three, if they said something was three, it was three. And so then after the president won, he's kind of like, oh, that guy that fixed our numbers, he should be CEH here. That is great. But I didn't even work for the campaign or anything.

I literally was just run to this website for all the campaigns. But then I might even talk to you about it, that I thought that at some point, you know, sort of in your country, it's a real honor. Absolutely. Yeah, I probably wouldn't get another opportunity to. And so I decided, even though I didn't come in as,

You know, like, you might recall that when they nominated me, I was being attacked at Breitbart. And Lou Dobbs said that, you know, Trump has double-crossed his voters by picking acid. I didn't catch that, though. Yeah, well, anyway, so I, you know, I wasn't necessarily a natural fit, but I loved it. Ended up being close friends with the president. And, you know, I hope you get to serve in the White House someday. Oh, you're very kind. Well, thank goodness that you did.

I mean, really with all your talent and skill, the nation really needed your help. And it's just good of you to serve. So thank you for all that. And then you left and then you came back and you were a special, I think the right. Senior advisor. It's actually about the highest title you can have in the White House. And the interesting thing is because like the Council of Economic Advisors is spelled

with an E, advisors. But if you're a senior advisor, that it's an OR at the end. And so I think I might be the only. person in U.S. history to have both been an advisor and an advisor in the loiter house. It's probably true, right? Probably, yeah. A very unique status. But seriously, early in January already, it was like clear to me that the COVID thing was going to be a big deal.

You would have seen me on CNN talking about how bad the pandemic was going to be and how GDP, already in January, my GDP estimate, for second quarter was minus 30-something percent. You know, I could run you through the math that got us there. I probably, you know, I probably even talked about it at the time. But, you know, I think that when it became clear that that was true, and then the president sort of knew me well and trusted me, you know, the task force had basically no data operation. And so, like, the first time I went to a task force meeting, you know, Dr. Berks,

who's a wonderful person, I love her. And I think that she kind of got, you know, some bad things. I got the short trip at the end of that. I think she was a really American hero, but she was literally making charts with a pencil. You know, and then, so my main job was one to help design the stimulus stuff,

but two, to help, like, create a data operation for the task force so that they could actually keep track of things. And so as an example, while I was there, our team, all of a sudden,

I'm sitting in my office and somebody says, oh, Cuomo, is on the line and you know at that point New York was really really in bad shape and and he said that he needs us to send him 40,000 ventilators and we only had 10,000 ventilators in in the stockpile and so like how am I going to send them 40,000 ventilators and so then I got the idea that the Medicare billing data because I'm in the White House I can sort of get access to just about every data you need with us in stroke in the presidential ped I got the Medicare billing data

which is for every hospital in the country three times a day. They actually pay them three times a day. And it says basically, so the first thing I did is I looked at like, what's the maximum number of ventilators ever billed a day? And then I looked, well, how many did they bill yesterday? And so then I could find, like, the empty ventilators. And so then we could actually call up hospitals and send FEMA people, like to move ventilators from places that had low capacity to places.

And ventilators are basically what you need to have at ICU bed. But then when we called the hospitals, they would sort of say, hey, well, yeah, but maybe we're going to need that ventilator three weeks from now. This is a pandemic. So why should I lend it to New York? And so actually, Everett Eisenstadt worked with me at the National Economic Council and was the head of the DC office for General Motors. As I called up Everett, and I said, you know, air filters, ventilators, you know, maybe you guys could make ventilators, right? And so he talked to the General Motors people, and they actually really quickly started making ventilators.

Like, they're an incredible industrial company. And that made the whole thing work because then you could sort of call up a hospital down the road and say, hey, lend some ventilators to New York. And by the time you might need yours back, if we don't give it to you back, we'll get one from GM and give it to you. And so, like, in the middle of a crisis, there were just a million things like that that really required data analysis and economics and so on. And, yeah, that was what I did when I went back into my second, my second, trip to the White House. But it was pretty, it was pretty weird because, you know, I was on TV a lot. And as you know, like I always just answer questions truthfully. Like this White House is pretty disciplined

with their talking points. Like everybody goes on TV says it's a pandemic of the unvaccinated, which is completely not true. Just look at what's going on in the UK right now. But everybody says those talking points. But I was out there basically just answering questions truthfully throughout the COVID crisis. It is amazing, you know, sort of how treacherous the press could be when you're doing that. You know, one time there was an outbreak in the White House and, you know, a number of people got COVID really early on. Remember that. And, you know, we're basically, the West Wing is pretty fortified.

You can't open the windows, right? There's no ventilation. And you're basically working in close quarters doing things like getting ventilators to be. so they don't die. And like all around me, there are people getting COVID. And as you know, I've had like heart troubles and stuff like that. And so I'm probably like the guy who if he died of COVID, then everybody would say, well, of course he died. He's one of those preexisting condition guys. But yeah, I'm going into the West Wing every day anyway because we got to serve our country. And at one point when I was out of the CNN, somebody said, well, what's it like to be in the

White House right now? And then I just sort of said, well, yeah, it is scary. There are people getting COVID, but you go to work every day because you got to serve your country. There are a lot of people in the armed services that take much bigger risks than being around COVID. But then all of a sudden, everywhere, especially the liberal media, is like, hapsets, it's afraid to go to the White House. I remember that. I do remember that. But it was a very weird time. Like everybody decided to fight about COVID instead of work together. Well, I know I've told you this before.

I'll say it again. You really ought to write a book on your experience. I mean, you mean, these stories are invalid. and, you know, highly interesting, but I think, you know, very informative for folks in the future. I think if I did do that, we would, it would have to have a sufficient amount of time. That it's just one of those things. There's all, it's so political still. Yeah, true.

Good point. And, you know, like, was it the Wuhan lab? Was it not the Wuhan lab? You know, what was Fauci saying about masks? Did Fauci lie to Congress? You know, I was definitely in the Oval when Fauci said 100 percent. It came from a pangolin to the president. I was in the Oval with Fauci and the president, when Fauci told the president, for the love of God, don't tell people to wear masks.

That's almost a direct quote because, and then he actually said, if people put a mask on, then they're going to be fiddling with the masks. And then they'll be touching their face. And that'll probably make them more likely to get the fight. He says, supposedly the president will sit and he had the resolute desk when Fauci said that to him. But then the president goes out and says that. And then a week later, everybody's criticism. It's an important. I mean, it's a big mistake.

You might recall, I was always waving a mask when I was on TV back then, too. And mask is sort of an obvious thing. Final thought of that is the economics has a lot to offer of this space because there are a lot of things like a mask. The cost of wearing a mask is pretty low, right? The mask itself doesn't cost much. If you got a mask on, you know, like we're all a little bit worse off because we don't get to see the hands of Mark Zandi. But other than that, right? The mask isn't really got much social costs, but it might have a benefit.

Right. And so why not? Why not? So you should really, you should really know that there's no benefit at all, like with a high degree of certainty if you're going to not wear a mask at a circumstance like that. And it just doesn't feel like the sort of cost-benefit analysis was something that the health people are trained to do and to think about things too. Like there are all these supplements that maybe help and maybe don't. But since it's just a supplement, like why not take some zinc now and then. That's my life's attitude.

Yeah. Yeah. Well, my, I didn't shave this morning, and I thought I'd shave when I got to the office, but my razor disappeared from my office. So my, my, interesting. My, uh, ugly mug is even uglier this morning. I can't tell, actually. You can't? Okay.

Very good. Good. Well, good. Well, it's a really a pleasure to have you. And thanks for joining us. And I will be the first in line to buy your book when you write it, but maybe a little bit of perspective. And we should dive right in. We got a lot of statistics to talk about.

It was a big week for statistics. Is the cowbell ready? I see it there on Ryan's desk over there, so we'll see how it goes. So Ryan, I always begin with Ryan, Kevin, because Ryan is the maven of these statistics. And right, Chris? Absolutely. Undisputed champion. Yeah, undisputed.

So, Ryan, why don't you go first? Let me just say, this better be about the GDP report. That's all I'm saying. All right, then you might want to start with Chris. Okay, no, go ahead. Go ahead. Fire away. Do you want something related to GDP?

Well, no, I don't mean to mess with your, you know, your number. So you go ahead. I actually have some pretty good GDP numbers. Do you want me to go first? Yeah, you go first. Let me go first. I have a good one for you guys. Okay, go, Kevin.

I'm going to give you three numbers. Okay. 14, 14%, 14%, 15.3% and 12.4%. What are those three numbers? Are they annualized? And yeah. Okay. And they all, they came out this week.

So they're the way you would see it at the release. They came out this week, yeah. One of them's intellectual property investment. Nope. No. Okay, so they came out this week. These are percentages. 14, 15.3 and 12.4.

Hmm. That's interesting. Do they all come from the same release, Kevin, or are they different releases? They come for the same release, but since you guys are floundering, I'll say that it's the last three, the current quarter and then the two quarters before the number in the release. Oh, okay. So what was 14.5? No, 14, 50. So the latest release, it was 14.

Okay. So it must be GDP, right? It's got to be GDP. Something in the GDP report, 14%. Yeah, it is something in the GDP report. Yeah. So it's not an intellectual property because that does feel. That was really strong.

Yeah, that was very strong. Yeah, it was around 12. Yeah, 11ish, I think, is what I remember. And these are all positive numbers, no negative numbers. Yeah, it's really quite a run, right? Like, you don't usually see the GDP release numbers like that one after the other. It wasn't services spending. No, it wasn't that strong.

Maybe, no. Is something to do with imports, perhaps? Nope. Not, not at, well, no. No. Okay. All right, fair enough. I don't know.

I'm stymied. Do you guys have any clues, any ideas? You want to ask, you want to give us one more clue without giving it away, Kevin, or is impossible to do it? Um, yeah, like, like, uh, how about this? Has anyone, uh, gone to Home Depot lately? Oh, it's, uh, it's, uh, is it really consumption on, uh, I don't, do they, oh, it's a home, it's a home, it's a home remodeling and renovation.

Well, it's, it's the deflator, the, the, the, the inflation rate for residential construction. Oh, oh, oh, oh, oh, oh. That's a good one, though. Those three quarters, though, right? Yeah. We all love to dig through the numbers, but look at that. Yeah, and so real residential investment was down 7%. But it was because of this deflator.

That is interesting. So this is the measure of inflation in the home building. Yeah, so all the building materials. Yeah. Exactly. Right. That's a really good one. That is a good one. That is a very good one.

And this highlights the impact that supply chain issues are having on pricing. And I guess strong demand as well, as you point out, we're all been going to Home Depot and Lowe's a lot. It was actually, like, there's been a lot of interesting stuff in the space that shows how economics works. Like, you know, so fencing is a lot more expensive. But one of the ways you can make fencing, less expensive is if you have wider boards so that it takes fewer boards

because each time you nail a board there's like labor costs for doing that and so if you go look they've actually the fence boards are wider no really yeah yeah yeah really yeah and it's because it like so it helps reduce the costs for the so the soaring

materials costs or can be offset by lower labor costs if you make the thing easier to put up makes sense and there's a lot of that going on if you go look. But, yeah, it's a, it's my whole life I've never seen it like this with lumber and although interesting enough. Lumber has come in quite a bit.

It peaked in May. Sure. I think it was at $1,600 per thousand board feet and I think we're down to like $5,600, still high compared to a pre-pendemic. So despite that, you're still seeing these big increases in building material costs. Yeah, interesting. Yeah. Have you heard about blue paint? I have not.

But is it blue paint? There's the blue paint crisis, apparently. The paint manufacturers are indicating that the chemicals they need for blue paint are in short supply. They can't find them. So they're just not going to produce blue paint apparently for a while. Wow. You know, when I was at the Fed, paint was actually like a really interesting thing for,

like it's like total esoterica, but that's why we're going to talk to Moody's right now, right? But paint is one of those things that's like really costly to ship. but the raw materials, I guess, are not so hard to ship. And so the paint manufacturing is really diffused all over the place. It's kind of like the paint, if you live in Massachusetts, that the paint you're going to put on your walls is probably made in Massachusetts. And so the paint manufacturers are pretty close to where they use the paint. And so paint is one of those things that's sort of regionally interesting because it's spread out everywhere.

And there's sort of paint manufacturing kind of everywhere. And so if you like follow the, you know, paint manufacturers, their earnings reports and things like that, it's a kind of nice indicator that that's not dependent on local conditions very much because it's everywhere. Well, it used to be the case, and this many years ago, maybe two, three decades ago, the chief of climateist of DuPont that told me that the most reliable indicator of the business cycle was this chemical that went into making white paint. because white paint was used for, you know, appliances and cars and, you know, off. Probably titanium dioxide. Oh, that was it. It was titanium dioxide. Exactly.

Hey, Ryan, where's your bell? That is bellworthy. Don't you think? There you go. You're not going to ring it. Yeah. That's amazing. That's awesome.

You're going to best Ryan, Kevin, at this pace. Yeah. Titanium. It is the price of titanium dioxide. I kind of lost track of that. I haven't been following that since for a number of years. Okay, I'm going to go next then. And this goes to the GDP report, and it's three numbers.

You ready? 2%, 2 percentage points, and 2 percentage points. A lot of 2. So one of them is the drag, is one negative? No. One is like obvious. One is like the obvious.

The top line number is 2%. GDP was up 2% in the four ventories. Inventories were 2.1. They added 2.1. It was 2.07. I'm rounding down to 2. Okay. Okay, that was good though.

Just so catch the listener up because they're not following this at all. So there was the first two is GDP, you know, bottom line, up 2% annualized rate in Q3 of 2021. Obviously, a very soft number. We'll come back and talk about that for a second. The second to percentage points is the boost to GDP from inventory. So inventories in Q2 were drawn down. We added to inventories in Q3, so that swing added two percentage points.

So which means without that swing, we would have... actually a slight negative number, right? Slight negative number. Yeah, squat. Okay, now here, this is where you get the cowbell, if you get this one, right. And I think Ryan should get this. It's to drag for me, autos.

Oh, you're right. Ring the bell. Ring the bell, Ryan. There you go. That's pathetic, that bell. Come on. I'm not swinging it. I'm not, because I'm, oh, you're listening.

You don't want to get it. Yeah, you're at home. Okay. baby sleeping upstairs okay so so fair enough all right i know i can't can't do can't sacrifice the baby to inside economics okay fair enough uh we've got to work on that we got to you got to get your priorities straight over there right yeah so the second two percent the third uh statistic uh statistics of the two percentage of the two percentage points is the drag on GDP from the collapse in a vehicle production motor vehicle production and obviously that was

pretty significant. Again, going back to global supply chains, it's not because there's no demand for vehicles. There's a lot of demand. It's that vehicle producers just couldn't get the chips and other stuff they need to build the car. So you can't buy something you can't get. Yeah, can't buy something you can't get. Okay. All right, very good. So GDP was soft in the quarter, and we're going to come back to that and talk a little bit about what we think that implies about the economy going forward. But before we do that, Ryan, you want to go?

What's your statistic? All right, 47.6%. 47. Has nothing to do with GDP. 0.6. Is it something to do with confidence? You're getting there. Okay.

Oh, I think I know. Is it the labor market differential in the conference board survey? Good guess. It was really strong. It was 45. 45. So that is the difference between the percent of people say that jobs are easy to get less percent

to say they're hard to get, which I think 45, isn't that like the highest in history or pretty close? Pretty close. Pretty close. So that goes to what's going on in the living market. But so, okay, it's in the, it's in the survey. Right. And I picked confidence because last week we talked about some economists are worried that, you know,

you've got confidence driving. This is a sign recession. but this number within conference board which is pushes back against that. Right. Well, the top line conference board survey was like 113, so that's not it. So it's got to be something in the bowels

of the conference board survey. It's really in the bowels. Okay. I'm going to take a wild guess. It's the sentiment measure for people in the lowest part of the income distribution? Chris, you got to guess? I don't.

I don't. All right. I won't let you guys suffer. It's the percent of, respondents planning to take a vacation. Oh, okay. Give us context. Give us context. It's back to where it was pre-pandemic.

All right. But if you look within the percent that are, their travels domestic to the U.S., is already back up to where it was pre-pandemic, and that was really, really strong. So if people are really worried about a recession or their jobs, they're not planning vacations. Yeah, good point. Good point.

And what was the, what was the low, if you go back into the teeth of the, pandemic. Do you recall? Low 30s. 30%. Low 30s? Is that bad as low as it gets? Low 30s?

Yeah. Probably. Okay. All right. Well, that's a good one. Yeah, you're right, because there was a lot of voices or at least a few voices, or maybe just one voice that I heard a lot saying recession. And that was because they were pointing to the collapse and confidence in the, in both

the University of Michigan and the conference board survey. But that was all Delta related. The sentiment, decline in sentiment. Yeah. Yeah. Yeah. Yeah, that was that Blanche Flower paper. Blanche Flower, yeah.

Yeah. Yeah, I got a call from a New York Post reporter, and she brought that up, and my immediate reaction was no way. And that's, of course, the quote she put into the paper, and then Blanche Flower started tweeting, you know, things that I won't repeat. This is why you shouldn't be on Twitter. I know, but I find it so intoxicating. Yeah, it's a very intoxicating thing. That's the trap going down, rabbit holes. So at one point, I set up a Twitter account, but I've never.

tweeted once in my life. But for some reason, I have, like, I haven't even checked, but the last I checked, I had a few hundred followers. And I just love those people. Like, I picture them every morning, you know, it's today to day. It's today. Well, Kevin, I started, I did the same thing as you. 10 years ago, I got my handle, and I hadn't used it for 10 years. And then two weeks ago, I said, okay, I'm going to give this a shot. And I've been doing it for two weeks now. And I find it, I find it interesting. I mean, you have to manage, I think, Oh, excuse me. I apologize for that. You have to manage time wisely because you can get really sucked down into it. But I find it quite interesting. Chris, are you on Twitter?

I am on Twitter, yeah. Oh, Chris. Wait a second. Before Chris says that, this is a good time for me to advertise. At Mark Zandi. There you go. That's my Twitter handle. Go ahead, Chris. Are you on Twitter? I do have a handle, but I never use it. You're a LinkedIn guy. You're all over LinkedIn. I'm all over LinkedIn. Yeah, I'm not on LinkedIn.

Yeah. We've got to choose one. Kevin, are you on LinkedIn? No, no. No, yeah. No, okay. Yeah. All right, Chris, you're up.

Oh, sorry. On the number thing, I have another one that I think is really like the most, if we're about to segue into talk about the economy, it's like the most interesting number to be out there is 62% right now. 62%. And it's like a, it's pretty wild that it's 62%. Really? I don't know.

Just because we're going slow, I'll just tell you. So it's in the NFIB survey. Oh, is that the net percent having difficulty hiring a position? Yeah, it's people who say that they can't find anyone or having difficulty. Yeah. And it's about half and half. But it's amazing how hard it is for people to find labor right now. Oh, yeah. Yeah. Chris, did you want to, did you have a statistic you want to do quickly?

Sure. I have a quick one. 0.8%. It's not housing related. It's not housing related. Oh, for one. Oh, yeah. Did it come out today? It did not come out today. It came out this week. It's the latest price for titanium dioxide. I think that's up 300%. increase the million income.

I don't know, Chris, far away. What is it? All right. So it was a little bit of a trick question. There were actually 2.8% that came out this week. But the one I was focused on is core capital goods. Oh, that's a good one. Yeah.

So non-defense. Oh, it's a good one when Chris suggested. It's a terrible one to use. You know, there's some truth to that. I apologize, Ryan. You're right. You're right. I criticized you for using that.

He's grading on a scale. You know, I got a lower bar at Ryan. So tell us about that statistic, the point eight. Yeah, so the point eight is up, it indicates strength, and businesses shows that businesses are investing in equipment, and this should pay off in terms of additional productivity later on. And I also think it demonstrates that businesses are not just sitting on their hands with the supply chain issues they're investing.

They're going to figure this thing out, and therefore the inflationary pressure should subside. over the next few quarters. So I viewed it as an optimistic statistic. It's, you know, at an all-time high, yours. Yeah, investment remains very strong, quite strong, yeah. Hey, Kevin, you said to me, I think it was in an email earlier this week, that if GDP in Q3 came in negative, you thought there's a high probability we'd go into recession.

It wasn't quite negative, although, you know, pretty... There's all inventories. Yeah, because, yeah, GDP now is down to 0.2% right before. for the release, and that's pretty uncomfortably close to negative. And, of course, the way the media covers recessions is two negative quarters, right? So you can talk about all the indicators that BER has. But I'm pretty wary about the fourth quarter because of the supply chain issues. You know, there are a lot of seasonals that are expecting big moves that aren't going to happen.

And so I think it's kind of unlikely that Q4 is going to be above Q3. and now given the big inventory build, you know, that's probably going to be a reverse, right? Probably inventory is usually, it's negatively correlated, so maybe it takes half a percent or a percent off the fourth quarter. So you're probably looking at a negative fourth quarter is more likely than it was the day before the GDP release. And if it had been negative, I think you'd have had the two negative quarters. And so the NBR may or may not have decided that that was a recession if you had two tiny little negative quarters after like, you know, those huge six percent quarters. but the media would have said recession for sure, right, once they saw the second negative quarter. Ryan, do you have any views on the seasonals?

Do you think they are going to play a role here in Q4? Yeah, and the seasonals for business investment and inventories aren't very favorable, but, you know, consumer spending is going to be pretty strong in the fourth quarter. Yeah. Particularly since we're going to pull forward some of the holiday shopping into October, November, December is going to be a dud, but that alone should keep us north of zero. I mean, you got personal consumption spending today, and it was pretty strong, and that was on top of a very strong number for August.

In October looks really strong. In October looks, so, Kevin, you're coming into the quarter with a lot of consumer spending, so it could be offset by inventory and maybe in trade. I'm not sure you're going to see the same kind of drag. That was a pretty big drag from trade. related to the inventories, right? You import all this stuff. Sure.

And, you know, if you're going to see some unwinding of inventory, you might see some unwinding of the trade deficit. So I think it's going to be pretty tough to get a weaker number in Q4. The thing is, too, that we have to see what happens to prices. And the price, the link between, like, nominal and real is really uncertain now in a way. It hasn't been, you know, since you and I were kids practically right. And so when you see, like, a really strong M3 durable goods number, you know, it may or may not be as strong as you think because the prices are like again like what we said about

the price of residential construction uh you know that little pockets like that are going to take things you thought like and you see that with disposable personal income right i mean real disposable personal income took a pretty big fall and that of course transfer that was a lot of that reflected the loss of the supplemental ui in september so you saw this big drive hey the one thing i did see that i was encouraged by, and I'm just asking if I should be, the core consumer expenditure deflator, that's the key indicator that the Fed uses for kind of gauging inflation. That was only up two-tenths of a percent in the month, so you annualize that, and that's, you know, 2.4 percent, roughly, so kind of where the Fed would want it. Is that, was there something going on there

that's one off, or does that reflect a moderation in inflationary pressures? That's at face value, that's what it's saying. Is that... It's temporary. If you look at use car prices, in the next couple months are going to be nasty. So you think we're going to get a...

This is going to come right back up. Yeah, the house prices are starting to bleed in the core CPI. The house prices are going to be the whole thing, Ryan's exactly right, because those haven't budged yet, but like if you look at Kay Schiller and everything and the residential construction costs,

you know, house prices should be going up, you know, five, six percent annual rate. But they've been two. and the GDP release. The one interesting thing there is, though, in the PCE, the rent is just as much smaller percentage of the total index. I mean, that's going to matter for CPI, for sure, but much less so for PCE. But nonetheless, yeah, okay.

So I shouldn't read too much into the pretty sanguine inflation number that we got for the month. It must indicate that things are, I mean, if you go back and look at the monthly increase in core consumer expenditure inflator peak back. the summer, like April, May, June, in that period. And it must be, it is moderating, but you're saying it's not, you're right. Yeah, okay. Yeah, we're not going to get, you know, usually you could forecast the core PC deflator in normal times of a ruler.

It's going to be 0.2, 0.2. But that's not going to last, you know, in the next few months. We'll get, we won't get back to what we just saw earlier this year, but we'll get an acceleration. Okay, let's, let's end this part of the conversation with just, and you don't have to play if you don't want to. What probability do you put on a negative GDP print in the fourth quarter, Ryan? 10%. 10. Chris? Chris, oh, no. Chris, oh, no, that was my number 50. Yeah, right. Kevin, what do you say? Oh, yeah, 60%. Really, 60%. Wow. Isn't that interesting. I mean, look at the, Look at the evolution of the GDP now for Q3, right?

I mean, so everybody started the quarter thinking it was a 7% quarter. Right? And by the end, it was down to point two just because of the successive revisions and the inflation. So I think that nominal GDP, you and I probably will all, like, we'll probably all agree nominal GDP, but I think that there's going to be so much in prices that you could have. The Atlanta Fed measure is a, they do a very good job, but they also include some survey-based measures of economic activity. That doesn't necessarily feed into GDP, and I think that's one reason they had a pretty big miss, you know, compared to what GDP actually did.

Just for the listener, the Atlanta Fed puts out a tracker based on the data that's coming out every day and translating that into GDP for the quarter. We do the same thing, but that's what Ryan means by the Atlanta Fed. So 60 percent, interesting. I'm going to really blow your mind. Here we go. Zero probability. It's not happening. you're going to go 50.

Not happening. It's not happening. Unless the virus comes back, but I don't think that's going to happen. That's the key. That's the key. But it's not going to happen that fast underneath. But also, even with the virus, right, because vaccinations have spread so much, I know there's still more people who should get vaccinated. It's different now, right?

Like the case fatality rate has gone way, way down. And so I think that even if the virus, like there's this new AY4.2 variant that people are concerned about, that if that did take off, I still think that as long as the case fatality rate stayed low, that people continue to go to work and stuff, right? And it's not going to be a shutdown. They didn't do it with Delta, though. Delta did have an impact. Yeah, if you look at these.

Yeah. But yeah, that's right. The first time through, but the percentage of people vaccinated is way higher now than it was like in June. Yeah, I agree with you. I think each successive wave, unless the virus really goes off the rails here, is going to be less disruptive than the previous one. So it should be less disruptive. There was a really interesting Lancet article, by the way, on that, which is just that if the people who had COVID and have been vaccinated have a kind of superimmunity. I've heard that.

Yeah. Yeah. Yeah. So I think that they're, yeah. Yeah. Yeah. Hey, let's. One last thing for Q4 GDP, why it's unlikely going to decline, is that the inventories in Q3 still fell.

They just fell less than they did in the prior quarter. And just the way they calculate GDP is the change and the change. Exactly. So even if we get flat inventories, we have to get a build at some point, that's going to really juice GDP. Because the stock is so low. It's the stock of inventory is so low. Inventory action.

That makes sense in the context of the supply chain issues. Yeah. I agree with you. Okay. Let's turn to the topic at hand with top of mind. And that's the, seems like this has been a topic for quite some time. The build back better agenda, the proposal that President Biden put forward a few months ago, kind of making its way through Congress now, feels.

like it's coming pretty close to the finish line, meaning getting passed into law, although that's still not a done deal we'll have to see. Right now, the legislation is, the proposal is sitting around $1.75 trillion over 10 years in spending on various types of social programs, health care, housing, child care, climate change, just a range of things. And there are pay-forers in the proposal that at least the White House is scoring at something closer to 1.9 trillion. That's, I think, the biggest pay for is more enforcement by the IRS to raise more revenue. There's some tax law changes on taxing foreign income for corporations, minimum global minimum tax. I also noticed, and I'm really curious, Kevin in your view on this, on the stock repurchases,

there's a tax on repurchase of stock now. That's the first time I've seen that kind of snake in. And all that's over a 10-year period. So a lot to digest there. But Kevin, really interested in your broad sense of this. And I guess if I had asked you a very specific question, because I know where you're coming from, let me begin by saying, what, is there anything in this that you like if you were king for the day that you would, you know, say, okay, I think that's okay. And then maybe to bookend it, what is it you really don't like in the proposal? But it kind of open-ended. I let you go anywhere you want to go. Yeah, thanks, Mark. You know, I think that this is, I'll have to, you know, like two things after I say the next thing. But one of the things I like is that the sort of

huge increases in marginal tax rates across the board on corporations and individuals that were like originally contemplated by President Biden have pretty much the probabilities of those going through have gone to zero because, you know, cinema and mansions say they won't vote for tax increases like that. And I think that like the original corporate proposal, it's something that a lot of people didn't really understand. But like in the Tax Cuts and Jobs Act, You know, our corporate side costs almost nothing. You know, I'm not saying cost nothing in a Gensaki kind of way. I'm saying cost nothing in a joint tax committee kind of way.

The international tax, like this guilty and beat stuff that we added so that there's more tax on your foreign earnings, that just about offset the lower rate. And so that the JCT score for the corporate side of our proposal was just $300 billion in loss if it combined the international and the tax rate effect. And so the original proposal was raising, you know, like what, 1.9 billion just on corporates. I mean, trillion on corporates over 10. And so what that means is that relative to President Obama's corporate tax code, you know, what President Biden was proposing was keeping all the base broadens that we put in and then jacking the rate back up. Right. Which is why the reasons why Milton Friedman was kind of opposed to tax reform in the way, by the way.

He said, oh, you're going to get a broad base and then they're going to lift the rate back up in the future. So it's exactly what they were doing. And so relative to Obama's code, it was a huge tax increase, corporate tax increase, would have made us, like, by far the least competitive place. So I really like the fact that, like, people sort of came to their senses about that one because I think that would have really done quite a bit of harm. You know, I think that in the spending, you know, I guess the subsidy, for green things. I've written a lot. Mick Haff and I have a number of papers on how subsidies for green things, you know,

tend to work. And if you're an economist, then you think that if, you know, you believe in Pagovian taxation, what we call it, right? Like, so if there's something that's cleaner than something else, then subsidizing that isn't bad economics at all. And so, yeah, I guess that if I had to pick something that at least has some economic,

makes some economic sense, it would be that. The thing that sort of disturbs me is that there are a lot of really cockamamie, ideas floating around or things that I view as potentially like really long run harmful because of the precedents they set. And you mentioned a few. So the Kakamami idea, number one, is they have an alternative minimum tax on book income. And no kidding, Mark, in the 80s, I wrote a paper about this with Trevor Harris and accounting

professor at Clubby University. But the basic idea is that, you know, tax books and accounting books are designed for different purposes. Tax books are designed for enforcement, accounting books for information revelation. And then if you combine the two, if you make the tax connected to things in the accounting statement, then you get all sorts of weird, strange behaviors in the paper that I wrote back of the day because they were using the accounting books for tax purposes in some countries. we found things like corporations were inflating their earnings by not claiming investment tax credits. So you just create like this.

And so Europeans used to do something like this alternative book tax and they all stopped it because it created such weird incentives. So that's like a cocky-baby idea. I think the excise tax on stock buybacks, right now, like the dividend tax is high. It'll be certainly if proposals go through potentially higher still. But what people do is they repurchase shares instead of paying dividends in order to take advantage of the lower capital gauge rate. And if you want to level the playing field, you know, maybe you could argue that the excise tax on stocks buybacks is making it so that there's not like a favor treatment of one type of given cash to shareholders over another. it's probably not like the end of the world, a 2% excise tax on stock five-ax. It's not something I proposed.

But what companies would just do is they would retain their earnings until a Republican comes in and takes it away, right? And then they would start buying back shares again. There is a little bit of evidence, but it's pretty old, but like Fazzari, Hubbard, and Peterson have a famous paper that when firms retain more earnings, that they invest more. and I think that that's kind of like the motivation that people have. But our back at I have a paper in the journal with public economics that I think shows that that doesn't really work.

Like the firms that would be repurchasing shares, their investment isn't going to. Think about it like Apple. Apple's investment in the U.S. isn't going to be affected if we penalize the purchases. Right. And so the market tax on billionaires, it's about 107 pages, the proposal. And I actually read the whole thing. because I'm a tax deke, you know, it's what taxis. You mean the widen proposal that they were debating?

The wide proposal. Yeah. And the thing is that that one is the thing that's disturbing about it to me is that, so first what they're doing is they're basically saying when you have a capital gain, then you should call that income. And, you know, in Hague, Simon Sons, you know, we all learned in graduate school, but it is kind of income, you're changing wealth, right? And so it's income in the year that you earn it.

say you have to pay tax on it. So like if the SEP 500 goes up 10% this year, then you owe tax on that. If it goes down 10%, then you can refund previous taxes and so on. And so that kind of taxing on accrual, our back has a famous AER American Economic View Paper on that, how to do it so that it's, you know, it's basically you tax at the end retrospectively, but you sort of level the playing field between accruals and other types of income. And so the accrual part, is something that exists in the literature. But the thing that's really, I think, positively creepy about the proposal is that the first year you qualify, which could happen, and you might even qualify, as successful as you guys are. But if you have three years in a row of $100 million.

I should say, Kevin, Chris is the crypto king. So if anyone's going to qualify, it would be Chris. So if you have three years in a row of $100 million in pre-tax income, then you're a billionaire. given that 50% of it's taken by the government, it really means that if you're after tax income is $150 million in three years, then they're calling you a billionaire, right? But the point is that when that happens, do you know what they do? They tax all your previous gains at the capital gains rate.

And so the sort of a cruel taxation that happens rolling forward is after basically a 28% wealth tax, which would be the highest wealth tax in the history of the world. And I think that that's one reason why, you know, moderate Democrats have sort of decided they're not interested in. Yeah, I think. Why this proposal? But because Cinnamon Mansion have decided that they won't endorse like actual sort of statutory rate increases, then they're feeling around for weird tricks to raise revenue.

And that kind of stuff doesn't usually end well. And final thought is this, you know, paying lots of auditors and everything to close the tax gap. The tax gap is, you know, something that every presidential campaign that I've ever seen, like, going all the way back to 2000, Democrat or Republican, they always, like, pay for what they're doing by closing the tax gap. Because the tax gap is basically, like, there's probably, like right now, I don't know what the current estimate is maybe you do, Mark, but it's probably there's about a trillion or two in taxes that are owed by people that aren't paid. And there's an estimate of that that's put out, I guess, by joint tax every year. And so the tax gap is out there. It's like, say, let's just say it's a trillion. And every campaign says, well, I'm going to increase enforcement and close the tax gap by $500 billion.

And then I'm going to spend the $500 billion on, like, you know, getting a dog for everybody because dogs are so wonderful. It's so the point is just that the tax gap is kind of like the rogue's way to pay for things because it never gets closed. and this idea that if we take this thing that's impossible to close and then stick a bunch of, you know, low-skill, low-paid IRS employees on the problem. Like, they're not going to close it. You're not going to get that revenue, whatever the joint tax committee says. The tax gap. I guess, I guess it depends on CB or against the Joint Committee on Tax scores it at, I guess. Right.

I mean. Well, I think in the end, though, it depends on what happens. So maybe it'll help them pass it because the JCP says, so it's going to be effective. Yeah. Yeah, interesting. So it sounds like just listening to that, that on the tax side of this, you're least concerned about the stock repurchase, the tax on stock repurchases are buybacks. Right.

And I didn't get to the thing that I didn't get to the thing I'm most disturbed about, which I think is really going to happen, which is the surtax on high incomes. You don't like that? Yeah, because, you know, so it's a. 5% surtax on modified adjusted gross income above 10 million, 8% surtax on modified gross income over 25 million. And so, you know, that brings the top order to 8% in 2020, 52, 51.4% in 2025 when the 37% rate expires. It makes the U.S. have the highest marginal tax rate of any OECD country.

And, you know, sure, maybe you don't care if, you know, Michael Jordan or LeBron James is paying him, you know, martial tax rate like that. Yeah, I know. Larry Byrd. I'd go to Michael Jordan, too, by the way. Yeah, yeah. But Michael Jordan still probably make $10 million to euros, all I'm saying. But the point is just that there are a lot of small businesses in that category that employ a lot of people.

And so it's a very big tax increase on businesses at the, you know, It's probably about half the people in that category or businesses, I would say. So, you know, past therities. So, I mean, is there any tax that you would be in favor of to generate revenue to pay for expanded government services or even just to close deficits in debt for that matter? Yeah, sure. I, you know, I was a big proponent of the border-adjusted business cash flow tax. You know, it's basically that plus a payroll tax. is sort of like a value-added tax, which is a super-efficient way to raise revenue.

It's pretty much what everybody else does. So if you look at tax history around the world, countries all around the world have started to take inefficient income taxes and replace them with super-efficient consumption taxes. They don't even have to be, as David Bradford taught us, they don't even have to be regressive because you can combine another transfers with consumption taxes so that, you know, it works out for low-income people or low-consumption people. And so I think that if we took the corporate tax and basically modified it so that it was, you know, border-adjusted business cash flow tax as, you know, we proposed or that before I went into the White House, as was proposed by Kevin Brady, then you've basically taken the corporate tax and turned it into a value-added tax. And then at that point, the distortion from it is much different from the current structure.

So, in fact, absolutely had to have revenue. That's how I do it. Just one other tax I wanted to ask about is the carbon tax. Well, how do you feel about that carbon taxation? Yeah, carbon taxation, you know, I've written a lot about this, that if you take the carbon tax revenue, the carbon tax is kind of like a value added tax. And it's sort of hitting a little bit of everything because there's embodied energy and just about everything. And so if you took the carbon tax and then used that revenue to revert tax. reduce more distortive marginal tax rates, then if you look at the academic literature,

there are people who show that you can actually make GDP go up, you know, irrespective of any climate benefit, right? Because the carbon tax is relatively efficient. And so if you take the inefficient taxes and reduce them with the carbon tax revenue, then you can come up with a trade that makes sense. And I think it's sort of a metric of how broken politics is that, um, that hasn't happened. Right. So let's just say that the Democratic Party is super concerned about climate change. And the Republican Party is less concerned.

I don't think that that's a terrible characterization. It's probably pretty close. But if you really believe Greta and you think that it's like an existential threat to the world and we got to do something about it, then if you're a Democrat, you basically say, okay, you know, $60 a ton carbon tax, you know, go to Mitch McConnell. You let me have the carbon tax. I'll let you have the revenue. You cut whatever taxes you want. And if they did that, then GDP would go up and be good for the economy.

It'd be good for the climate. But the fact that we can't make that trade so that when Democrats are proposing policy in the space, they always want to take the money and spend it on their pet projects, right? So they're not ever like dickering with Republicans over it. And I think that if I thought that there was an asteroid coming to hit the planet and you thought that there isn't, but I was really sure the asteroid is going to hit the planet. then I'd give you whatever you want for me to like send Bruce Willis up there to blow up the asteroid, right?

And the fact that they're not doing that on climate change suggests to me that the Democrats aren't serious about it. Or they're trying everything they can, given the politics of the carbon tax, right? I mean, I think that's where we actually think that's where we ultimately land. I mean, yeah, because it's a big tax increase on coal as an example. Exactly, exactly. Exactly. Give MacCath and I in the early 90s did some input output analysis. So probably somebody else was updated. But a $25 a ton carbon tax just increased the price of gasoline and home eating oil by about 11%. But it increased the price of coal by 85%.

Yeah. So basically, your carbon tax is a tax on coal. Yeah. It goes away, actually. I mean, pretty quickly. Yeah, coal. It's a huge tax on coal. Yeah. It makes it very different. Of course, that's where all the CO2, a lot of the CO2 is coming from. There's one thing I wanted to ask you on tax policy. I've been dying to ask you because you were instrumental.

You were, I don't know if this is an exaggeration, but you were the architect or an architect of the Trump tax cuts. And, you know, there's a lot of debate, at least in the circles that I'm in and the research that I'm reading, about whether those tax cuts. X-cuts had any kind of benefit, except for the near-term kind of demand side, you know, cut a check to corporations, they, you know, spend some of it with some juice. Is there any long-term benefit? And you saw the IMF paper, Brookings came out with some work, kind of saying, no, we can't see it. There's no benefit.

How do you respond to that? There's some pretty tendentious stuff that's not very academically sensible. I don't know if I've read the IMF thing. They're usually pretty good. they have a good tax team. But you might recall that Glenn Hubbard and Jason Cummins and I had a paper that looked at the 86 Tax Act that was published in Brookings and has probably been cited a thousand times as, you know, one of the early papers that used a natural experiment to identify the impact of tax policy on, you know, capital investment. And what Glenn and I have

done with, you know, my person who worked with the at CEA, Tyler Goodspeed, is we've basically taken everything that we did for the 86 Tax Act and applied it to the Tax Cuts and Jobs Act. And we're just finishing that paper up right now. But we're finding actually pretty much similar estimates to what we got with the 86 Tax Act. So there was a big positive effect on capital spending that was, again, the identification strategy that we used back then, which we haven't changed at all. So you couldn't argue that we're data-lining it anyway. We're just using it. Just for the listener, the identification strategy, meaning there's all these moving parts and you're trying to tease out the tax effect.

Yeah. Right. And so what we did back then is, so the problem with finding tax policy effects is that Congress tends to like have an investment tax credit in a recession and then take it off when you're out of a recession. And so if you're looking over time, then it looks like investment tax credits make investment go down because investment tax credits tend to happen when investment's low. because the policy is endogenous. And so making it so that you can control for that is the whole challenge. And I think the first paper in the literature that did that effectively and solved the problem, our back and I actually wrote it.

And then a year or two later, Glenn Hubbard and I did a follow on to that paper. But it was basically had a simple identifying thought, which is that Congress is, let's just say, too stupid to, like, because there are lots of different types of assets. There's cars, there's computers, there's trucks. There's blast vertices, so stuff like that. And Congress is too stupid to jigger the cross-section variation of the tax rate on computers versus cars when they have a big tax reform or investment tax credit. But depending on the asset life, if you have something it appreciates quickly or over a long,

long time, then a tax change will have different effects on the incentive to buy a computer or a car or anything like that. And so taking the broad, the B.A has really, really broad asset detail. It's now up to like almost 200 assets. And then estimating the change in tax policies likely affect on that asset, that you end up with like a prediction of what happens to like 200 different assets, like whether they went up by a lot or a little after the Tax Cuts of Jobs Act and you could estimate the tax policy effect, looking at how all all those things vary. And when you do that, you know, we're getting, you know, really big effects

to the Tax cuts of Jobs Act. Yeah, you can see. It's really obviously the data, just like it was in the Brookings paper that we wrote a while ago. The people who are saying that the Tax Cuts and Jobs Act had no effect, there are a lot of people who have said it that are partisans, not like smart economists like you guys, but there's a common mistake that I see people make. And it's basically that first of all, the Tax Poster Jobs Act was passed

in December, right? And then it was effective, or maybe it was even early January, is effective in January. But what it was being debated, the expense... 2018, right? It was January. Yeah, 2018. 2017, or January 2018 or

December 2017. Yeah, right. So this is actually something that that I insisted on while we were doing it. But if you, basically say we're going to have expensing, which means that if you buy a machine that's got really favorable tax treatment, then the whole time that you're debating that, then if people wonder whether that's going to happen, suppose they really think in September that by next January

there's going to be expensive. Well, then what you might do is not buy any capital in the fourth quarter because the tax treatment is so wonderful if you can make it to the first quarter. And you don't want to create a crater as you're having a tax policy debate. And so what we did is that when we started the tax policy debate, we said that expensing will be retroactive to today, like the day we're starting the debate, like September or something like that. So that we'll give you that favorable treatment if we pass it. And so that way you don't get, you know, the crater. But in this case, the tax rate went from 35% to 21%. And so as it became obvious, that the tax change was going to happen, then firms saw that if they timed the investment into the

fourth quarter of 2017, then they would subtract a dollar and then get a 35 cent benefit because they'd save a 35% tax rate, whereas if they in January subtracted the dollar, they'd get a 21 cent tax benefit. And so they piled up the investment in the fourth quarter as much as they could. So you got this really, really big spike in investment in the fourth quarter. And what a lot of people do, who say that, oh, we didn't get the spike that they expected is that they don't attribute the fourth quarter increase to the tax expense, but they should. And the other thing is that the investment, what attacks, the other conceptual people make is that what a tax policy does is it sets the level of investment. And so if you're in an equilibrium, say, then people are investing just enough to

replace depreciation, just say. And then all of a sudden you have a tax cut, and so that people want to invest 10% more. So when they invest 10% more, the level of investment goes up by 10%. Now, investment is more than depreciation. So the capital stock is growing, the economy's growing. And if investment stays at that higher level, then you're going to continue to grow until the capital stock is so much bigger that depreciation and investment are equal again. And so the idea is that once the investment level jumps, then in the models that we use to model what happens after the tax cuts, that it doesn't jump again. You're not looking for accelerating investment growth. Once you get the investment level high relative to depreciation, then you get the capital stock growth you need to drive wages and economic growth.

And so, you know, the investment to capital ratio jumped, jumped a lot and then stayed there. But like in the second year after the tax cuts, investment growth was kind of squat, right? But it was at a high level. And so the capital stock growth was actually there. And so, yeah, I think the tax cuts worked. And as you recall that the, you know, we said like $4,000 was going to be like the wage increase for the typical family. And it ended up being about $6,000, you know, after having like eight years under President Obama, of not really growing at all.

And so I think that the stuff that we said was going to happen up until like January before COVID happened just about the way that I expected. And again, maybe I'll come back on the podcast a few months from now, but Glenn and I are about to publish that paper. That would be very interesting to see. Yeah, we're about done with all the tables. So it'd be out now if I wasn't basically behind and, you know, making my co-authors angry at me. As you come back on the advanced estimate of Q4 GDP. Oh, okay. That's a good one. Yeah, we'll have you if you're a game. That'd be great. Hey, I know we've taken a lot of your time and thank you for that. Just one last topic to hit on is deficits in debt. You know, there's obviously been a lot of debate around how big a deal it is that we are running deficits and debt, higher debt loads. How big a deal is it in your mind? I mean, can we run these larger deficits? And what are the constraints on that?

What are you looking for to say, hey, this is becoming a real problem? Yeah, I think that, you know, first of all, the deficits have skyrocketed because of COVID. And that, you know, it happened. So, I mean, some people are saying, oh, it's all President Biden's fault. So as you know, like he added maybe 25% at the end, right, compared to all the stuff that came in during COVID. And so that, you know, we are looking at really high levels that, you know, are a problem. And the bottom line is that if you spend a dollar, then eventually you have to, somebody has to be taxed to pay it. Right.

And even if you don't pay it back, then you at least have to pay the interest on the dollar. And so in present value, you've got to tax the guy to pay the interest out of the dollar. It's sort of the same whether you pay it back or not, right? Like somebody's got to pay the tax if you spend a dollar. And the literature is clear that the marginal cost of a dollar of tax revenue is about $1.50. We had a big report on this in the economic report of the president when I was CEA chair. And so all that extra spending, the trillions and trillions of extra spending has accumulated debt that's got to be paid back with taxes. And the cost of that is about 50% of the increase in spending in dead weight loss that we'll have from the higher taxation of the future.

And so, yeah, there's going to be a big price. to pay. But I think that if we hadn't done PPP and all the other things that we did, I, for one, was very much in favor of the expanded UI benefit because for most of the COVID year 2020, you know, people weren't allowed to go to work, right? Yeah. I mean, so like, how is that going to affect, you know, so I think by the end, maybe the benefits are happy effect on the unemployment rate. But I think that getting people money to bridge them to the other side of the, you know, worst pandemic recession in U.S. history made sense. But the cost of it is going to be severe.

there's going to be, you know, trillions and trillions and deadweight laws from the higher taxes that we're going to have to pay in future years to pay for it. I guess the issue is as long as interest rates remain as low as they are, it's pretty hard to connect the dots in the minds of people that deficit in debt really matter, right? So, you know, what do you, what do you show to the, to the electorate that this is why we need to do this? So, well, you know, I think that it's not just the interest rate, but it's just actual the money that you owe, right? But the debt service is so low. Like right now the debt service is one one and a half percent of GDP. So if you could issue a console at a zero percent interest rate, then you wouldn't have to worry about it, right? But that's like I have a hard time thinking that that's going to be a market equilibrium.

In the end. So what you're saying is rates will rise at some point. And at that point, that'll be. Yeah. And with inflation of the sort of five percent range, the natural time. the cycle and that would happen would be right about now. Although, you know, market expectations are for inflation to be very low, right? Well, they're going up to the expectations, right?

They've been ratcheting up. No, I don't know. Ryan, are they, have they been? No, they've risen recently along with oil prices, but the five-year, five-year forwards are just around their historic. Around two and a half, I think. Yep. And when you adjust that for the CPI, it's, you know, it runs a little bit ahead of the PCD

deflator. expectations are right where the Fed would want them to be. But anyway, I guess that's what's going to take is for inflation, interest rates are really rise in a sustained way for. Right. But there's this other thing, which you might recall, like some debates I had, like around 2000 with Peter Orszag and Bill Gale. But there was like a consensus amongst a Democrat or left-leading economists that deficits

had a huge effect on interest rates. And so therefore, like the Bush tax cuts were going to kill the economy because of the interest rate response. You might remember that. And I did a bunch of work with Charlie Calamaris on that topic and very much convinced myself back at 2000. The link between deficits and interest rates is almost not there. And part of the reason is that the interest rate that the U.S. pays is set in a global market.

and at the margin a little bit of deficit that we have more or less this year is going to be low relative to the global stock of debt right it's sort of like the impact of u.s oil production on the price and global price of oil it's going to be hard to get it to be a really big number right because we have a relatively small share of global oil production well the same is true for debt yeah we have a probably a bigger now share of global debt it's a little bigger now yeah yeah but 28 trillion i think got a Well, whatever. The global market is the point.

But in the end, it's the fact that you have to pay it back. Well, speaking of debates, we had a great debate, I thought, and thank you for inviting me. We went down in Dallas. I think it was a couple months ago now, and we debated ESG. And if folks are interested, you should Google that. Yeah, the debate is online. Yeah, it's a great debate. Hassett, Zand.

Well, I enjoyed it tremendously. I had a lot of fun. It's about ESG investing. And I think the premise or the proposition, I should say, was ESG investing will, was it undermined the American economy or something along that? And you were defending the proposition. And of course, I was taking the other side of the proposition that it wouldn't. And I had a very friendly audience because we were in Texas, right? And so there was nobody in the audience.

Friendly. Yeah, there's nobody in the audience of ex ante. Yeah, there's nobody in the audience. You've probably changed the minds. Although they were so gracious. They were an unfriendly crowd. They were so gracious, though. I mean, I really, really enjoyed it, and I want to thank you for inviting me.

But that's a topic we should tackle it inside economics is ESG investing, because, you know, obviously Moody's is very, as you know, as you know, that's why you've probably invited me. He's very involved in ESG investment, so a very important thing. But I do want to thank you, Kevin, really for coming on and really appreciate your perspective and the time you spent with us. And just to remind everyone, please, if we're looking for future topics that you're interested in, so go to economy.com. There's a button there for Inside Economics and let us know what topic you're interested in, and of course, we'll listen to that. And Ryan, Chris, anything else you want to say?

Did I miss anything? Should I be telling the listener, oh, we want you to go rate us, you know, Apple or Spotify, let us know, give us a rating. We appreciate that. Anything else, guys? No? I like to endorse the HACID dog for everyone proposal. I second. I second it. I have to read. Do you get to choose the dog you, or is it determined for you? Okay. You should probably let me choose for you. Like, I'm a big government guy. Got to pass the bill first, Mark.

Let's pass the bill first. Okay. Well, thanks, everyone. Until next week. Take care now.