Moody's Talks - Inside Economics - Unscripted Fed and Unpacking Diversity in Economics

Episode Date: June 17, 2022

Anna Stansbury, assistant professor of work and organization studies at the MIT Sloan School of Management, joins the podcast to discuss the lack of diversity in the economics profession. The outcome of the latest FOMC meeting is debated and the discussion goes off the music sheet!?! (Zandism)Full Episode TranscriptFor more from Anna Stansbury, follow her @annastansbury Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by my two co-host, Ryan Sweet. Ryan, why do I keep messing up your last name? There's something. I know. It's only been 17 years, Mark. I know. Because I'm saying it so fast.

I think that's what it is. But welcome, Director of Real Time Economics and Chris, Chris DeReedy's Deputy Chief Economist. Hi, guys. Mark. Are you excited? About what? 2026? The World Cup

Oh, I saw that. Oh, yeah, yeah. Philadelphia, for sure. Yeah, that is exciting. Now, Philly has never hosted a World Cup game, have they? I don't believe it. No. No, probably not.

That's going to be cool. Very cool. Are you going to go? If I'm still around. Wow. All right. Setting the tone for today. You know, things happen.

Who knows? He's getting nervous because he realized. is probability recession is too low. Now, it's got to be what it is. Yeah, exactly. I was going to say something. What was I going to say? Oh, we, in the first part of this podcast, we're going to talk about the Fed and a lot to talk

about there. But then we're going to pivot in bringing a guest, Anna Stansberry, who's a professor at MIT, has done a lot of great work on the socioeconomic, uh, socioeconomic, uh, composition diversity. Yeah, of the economics profession, which isn't so good, actually. It's like the worst among all PhD programs in the country or PhD disciplines in the country. So we're going to dig into that a little bit more deeply and get her insights. But before we do that, let's talk about this Fed. And of course, this is Friday afternoon, June 17th, in the wake of the Fed. or the FOMC, the Federal Open Market Committee's decision to raise interest rates,

the federal funds rate target, the rate they control by three quarters of a point. Okay, with that preface, let me turn to Ryan, who's a careful observer of what the Fed does. Ryan, just kind of fill us in however you think most appropriate as to what the Fed did this week. We did a lot. I mean, they raised the Fed funds rate. That was the largest increase since 1994. So this is pretty unusual, usually on the way. down, they cut by a large amounts, but on the way up, you usually go by a, you know, a measured

approach. But I think it was the response, you know, rather going 50, which was fully priced in, which everyone expected, except for Chris, who thought 75. 50 basis points being a half a percentage point. That's what the mean. That's what everyone expected this time last week, or not everyone, except maybe Chris, who was intimating at it. But it was, it was widely expected to half a point. And they came back and raised, raised three quarters of a point. Correct. So not only just that, they tweaked the statement. So before, you know, in the post-meeting statement where they explained, you know, what their actions were and why they did it.

Their forward guidance was that, you know, they felt pretty comfortable that they could return inflation to 2% without damaging the labor market. They kind of took out the labor market part. So it's kind of, you know, an indication that maybe they're losing a little bit of confidence that, you know, they're going to engineer a soft landing. A little bit? A little bit confidence? I'm trying to be nice.

Yeah. Okay. All right. I'm not going to be so nice, by the way. So I'm just. All right. Yeah. I'm really confused.

by this whole thing. So I, yeah. And then we also got the summary of economic projections, which includes the Fed's forecast for GDP, inflation, unemployment. It also includes the so-called dot plot where you can see the median projection of all participants and where basically it's, you know, it's not set in stone, but it's kind of a look into where the Fed thinks interest rates are headed. And they really jack that up.

So at the end of this year, they now expect the Fed funds rate to be 3.4%. And then 3.8% at the end of next year. And then in 2024, they're expecting to cut rates back down to 3.4%. So to kind of put that into context, the neutral Fed Fund rate, which is where the Fed Fund rate should be when the economy has no output gap, inflation is at 2%. The labor market is at full employment is 2.5%. So they're really going to be applying breaks. By the way, that's their estimate in the NAR's.

It's the same. We're the same. Correct. 2.5%. Okay. So they're going to be really applying the breaks over the next couple years. Right. Okay, Chris, anything you want to fill in there?

Any color on what they did? Factually, you know, your interpretation of the facts, which I know are often a little skewed, but compare. Well, I think they are, I think the focus is on expectations. And I justify their 75 basis point hike by trying to really slam down on the expectations. I think we did see some result of that in the bond markets. I'm puzzled by that. They're really putting a lot of emphasis in the University of Michigan survey, and that came up a couple of times in Powell's press conference. So after each FMC meeting, chair of the Federal Reserve, Jerome Powell, come out and give an opening remark and answer questions.

And he mentioned University of Michigan survey of consumers' inflation expectations, which is driven by food prices, gasoline prices. And I just don't understand why they're putting so much stock in it. Hey, can I just frame the discussion around what we think about what they did in this way? In my view, my humble opinion, let's put it that way, they have two reasonably possibly possible goals that they can achieve. The first, by raising rates here, in the context of the inflation problem that is obvious. We've got to get inflation down. Everyone's an agreement about that.

First is slowing growth. They have to slow growth in the economy so that the economy doesn't blow past full employment. That unemployment doesn't go into the low threes. Right now it's three six. And that would exacerbate the inflation because it would just get into a kind of a wage price kind of dynamic that would be very counterproductive spiral. The second is keep inflation expectations tethered down. You don't want people, businesses, consumers, investors to think inflation is going to be high in the future because if they do, then we are going to get, end up with the wage price spiral. Inflation is going to be higher in the future.

You know, if consumers think, if workers think that inflation is high in the future, they're going to demand a higher wage and their employer is going to say, fine, no problem because the employer thinks they can pass that along to their customer in the form of a higher price and you get into this very negative dynamic. and inflation becomes more in trend. So those are two reasonable objectives, right? I mean, I don't think the Fed has anything to do with this inflation that we're suffering now. That's the result of the pandemic, supply chain disruptions, labor market issues, Russian war and Ukraine oil prices. That has nothing to do with the Fed. And Fed directly can't affect those things.

But the Fed can make sure that the high inflation as a result of those things don't infect inflation expectations or that the economy bills pass full employment. because then they have a deeper, bigger inflation problem. So do you think that's a reasonable way to think about it? And if that is, do you think a 75 basis point move, a three quarters of point hike in the fund's rate, was that necessary? I mean, could they have accomplished those two goals that I articulated with a half-point increase, which is, again, what markets thought was going to happen a week ago?

So, first of all, they frame it in a way, does that make sense? and then what do you think about what they did? I think you framed it right, but 75 was not necessary. I mean, their 50 basis point rate hikes have been working. You know, they're getting financial market conditions to tighten the stock markets down, long-term interest rates or riders, credit spreads have widened out. They're getting the response that they needed. I don't think they needed to go, you know, a supersized rate hike.

And you can see markets are responding. They were caught a little bit off guard. A little bit. But that's what they wanted, right? They want the markets to tighten up. They're getting too much. Yeah. Absolutely.

They want the stock market to be down 25%, not 15 to 20. They want mortgage rates to go skyrocketing over 6%. They want that to happen, do you think? Well, they wanted everything to be much more gradual, but that hasn't happened, right? Now they're playing catch up, right? They have to, they have to slam on the brink. You think the three quarter point was a good move? I think that was appropriate.

Oh, really? We were even talking 100, right? There was chatter of 100, right? I think that was the panic. In your own mind, maybe, 100. Not a lot. Was there chatter, Ryan? I don't follow the Marcus that carefully.

Were people saying 100 basis points? Yeah, some people were throwing 100. Really? Okay. Yeah. I think that would have been the panic button. But here's, okay, so this has been the crux of the matter. I mean, how do you measure inflation? If your goal is to slow growth, I say check.

That growth is slowing. It was slowing, you know, even before this rate hike, it was clear the economy was going to slow down dramatically. I mean, take a look at GDP growth, if that's your benchmark. We could get two quarters of negative growth, Q1, Q2. Now, that overstates the case, but it makes a case. Job growth is slowing. The housing market is in reverse.

The economy is slowing, no doubt about it. Sure. And second, on inflation expectations, if you looked at bond market measures of inflation expectations, before anyone thought they were going to go three quarters of a point, it was roughly where you'd want it to be, right? I mean, at least by my account, you look, if I looked at one year, five year forwards based on break evens, and I'm not going to go, listener, I'm not going to go into any depth here, just, you know, because that would be three hour lecture, but, you know, you know, breaking

events and inflation swaps, that was down to, 2.4%, 2.5%, which is within, for the CPI, the consumer price index, that's within Target. Well, the five-year break-even wasn't all the way back down, right? It was coming down, but it wasn't back at the level that we'd like, right? Yeah, but it's, I mean, within spitting distance. And in the swaps, inflation swaps were well within Target, at least by my reckoning. So, and then you're, what are you pointing to when you say to Brian's point? you're pointing to the University of Michigan survey expectations that they're too high,

hit me a break. That's just a direct function of oil prices, what I'm paying at the pump. I would so, Ryan, I'd go so far as I say, food prices are a bit player and all that. It's like, what did I pay for gas this time compared to the last time I bought it? And that's what I expect inflation is going to be in the future, according to the 500 people who participate in the University of Michigan survey. Yeah, if you look at it. That's not the only one, right?

Look at you, New York Fed. Yeah. All right. Well, you mentioned one year inflation expectations. I mean, it's the track gasoline prices almost perfectly. Yeah. Okay. All right.

Okay. So, okay, that's a reasonable debate, though. We're debating what are inflation expectations? How do you measure them? What's appropriate? That kind of thing. I feel that's reasonable. I disagree with you.

And, of course, I'm by extension disagreeing with ostensibly, if you believe, what the Fed said, what they're saying. But, okay. But let me ask you this question. Do you think it made sense that you would plant a rumor at the Wall Street Journal two days before the event? Again, most everyone thought a half a point. The Fed decided because of the last week's Friday CPI report and the inflation expectations by the UMIS, again, if you take them at face value, that we go through quarters of point.

And the way they got that into the marketplace before they. the actual meeting was they put a, they planted that in the Wall Street Journal and Wall Street Journal report. Let me ask you that. Does that make any, that isn't that, that's ad-libbing, that's off script, that's, I'm panicked. I panic. That's par for the Fed.

No, that's part of the courts. Not mid-meeting. So they have a blackout period where they can't say anything ahead of the meeting. On Friday, we got the hot May CPI. Yeah. And then UMish came out, you know, an hour and a half later. and big jump in inflation expectations. So now the Fed knows they're going to have to do.

I know why. Yeah, I know that. I know why they did it. Does that make any sense to you that you would go to that length? Because it now smacks of panic, doesn't it? That, to me, that's an ad lib. Let's say, I'm going off the music page and I'm going to make it up as I go here.

That's what that says. No? Write that down. That's a zandism. Music page? Music page. What do you call it? I got it.

I used to play saxophone, by the way. I was. You're in a jazz band. very good. But I wasn't a jazz band. Actually, it was a pretty cool jazz band. We'll talk about that later. So you were always off the music page, right? Jazz is actually, that's very true. It's always improvised, right? And it didn't sound very good. Let me tell you that, which is a metaphor. Oh, yeah. I see you're bringing your baggage into this. Exactly. This is all about me. Well, during the financial court. I agree with you, though. I don't

think that was the right move. I think that does smack of. conspiracy and panic, you know, to some extent, panic. I mean, one of the best tools that the Fed has actually is surprise. And, you know, if the ideas, if you believe that expectations were off course and you really wanted to send a signal, then you would surprise and you would say, oh, you expected 50 here, 75, I'm coming in strong, you know, watch out. I'm, you know, listen to me, right? It was a little surprising how much they... You can disagree with that. premise, but yeah, I would argue that that would be consistent. What were you going to say, Ryan?

I think that with the one surprise was the dot plot. That was really surprising, really. I mean, as you point, a big, big increase in the expectation by the Fed members, FMC members of future rate increases, much, much. It was almost a point higher, wasn't it? Yeah. Because the peak now is 3.8. Yeah, I thought 3.8 or something, right?

Is that right? Yeah. Yeah, here's the other thing that I find, what's the right word, perplexed by, perplexed, on the border of annoyed, but, you know, let's call it perplexed. And that is, it's like they're waving a white flag on the economy. They're saying, oh, you know, very high probability now, almost, yeah, you can count on it. We're going into recession. And that goes back to what you're saying about the statement, right?

Ryan, there was a sentence that, and after the. last OFMC meeting back in, when was that? That was May, wasn't it? Was it May? I believe it was May. Yeah, man. It said basically our policy would be appropriate to get inflation back down to target and to keep the economy at full employment. That's what they said. The same sentence, they took out the part about full employment. This is consistent with getting the inflation rate back down to target. Nothing about the economy, which is a clear signal that, okay, they're going to break inflation and break the economy. Yeah, and break the economy. Really? This is a, but this is whatever it takes moment, right? They're, they're focusing all the attention on inflation, right?

That they've been criticized for, for not doing so, so of course they're going to pivot that. They're saying, yes, they are saying, we are willing to accept higher unemployment in order to bring inflation. We're willing to accept recession is what they're saying, right? I don't know that they go, I don't know that they go that far. Oh. Because in the projections, they don't have a recession. Brian, what do you think? I mean, I think it's all but saying we're going into recession.

I mean, if you listen to Powell's press conference, his tone was, oh, yeah, we could, yeah, still pull it off. Well, it might be able to pull it. Yeah, yeah, you know. So you don't think the dot plots are reflecting their true opinion. Well, I mean, they have. None of them have. Well, that's actually, actually interesting question.

That's a really interesting point. I hadn't thought about it that way. that, you know, if we were going into recession, could the funds rate actually achieve 3.8% by next, by this time next year? No, we're not going to 3.8. That's, you're saying we're going into recession and there's no way the fund rate's getting that high. Correct.

Hmm. Yeah. I mean, it's related, but the Fed, so I think Powell testifies next week before Congress. Yeah. And before his testimony, he put, the Fed puts out, you know, the monetary policy report, which they give to Congress. And in there, it says, the Fed's commitment. It came out today?

It came out today. It comes out Friday. It comes out Friday, so ahead of his testimony. It said the Fed's commitment is unconditional to bringing down inflation. I saw that. Well, there you go. So, Chris, Chris, in my, again, in my humble opinion, the recession is a loss of faith. And consumers lose faith that they're going to be able to hold on to their job.

Businesses lose faith that the consumer is going to be there to buy whatever they produce and they cut back on expansion planes, ultimately without workers in your recession. Yep. And generally, there's some major problem in the economy, economic, fundamental problem in the balance you to the economy, leverage, overbuilding, too much inventory, you know, whatever it is. And, you know, the, you, that loss of faith combined with that imbalance sends you into recession.

Right. Here we are sitting today. The economy fundamentally has no problems, as far as I can tell, no significant problems. It's got high inflation, but that has nothing to do with anything other than the pandemic and the Russian invasion. Nobody's fault, nothing wrong with the ban. So it's all about if you're going to recession, a loss of faith, by saying to the world, I think we're going into recession, that just exacerbate. And you get the market reaction we got.

Stock sold off, 5, 10%, because people are losing faith. It's like we're talking ourselves under recession when we don't really need a recession. Why? Why do we need that? Why do we have to do that? Why wave the white flag? Again, I don't see them as declaring recession. The issue is inflation and loss of faith of the consumer is directly tied to inflation at this point.

Yeah. Right. So, I mean, what they seem to be saying to me is the only way we're going to get inflation down is if I drive this economy into the ditch. and I'm just saying why. Why do you think that? It's a quarter point, first of all, right? More than... I hear you.

I agree with that. I agree with that. And I think it actually, it could actually open the door for a less aggressive hike in September, for example. Right. So instead of... I think they go 25 basis, a quarter point? It's more, it's a possibility now.

Had they gone 50 now, 50 was a guarantee. You think that's basically told us 70-5. Yeah, 50 is the new norm until they get over to or over. Here's the other thing I don't like. And I didn't like this before and I don't like it now. About this, I need to see the whites of the eyes. You know, remember back when they wanted to get inflation up, they said, I'm not going to, I'm not going to tighten monetary policy until I see the whites of the eyes of inflation. Now they basically are saying, I'm not going to ease policy until I see the whites of the eyes of, well, I don't know, you get my drift.

I'm going to fill in the blanks. That doesn't, that doesn't make any sense to me. It didn't work back then. It didn't work back then. It's not going to work now either. Yeah, you're just threatening to go from one side, boom, boom, boom, from one side to the other. I don't know.

I'm, you know, a little perplexed by the whole thing. Unless, you know, it could be, to your point, Chris, they could be playing four-dimensional chess and I'm still stuck in a two-dimensional world. You know, maybe this is strategic, you know. I think so. Yeah, maybe like every CEO on the planet, they want to make sure every CEO, every CF though everybody knows this economy is likely going into a ditch unless inflation comes down. Therefore, you can't count on keep increasing prices like you are.

You can't count on big wage increases. You better scale it back. And by so doing, it makes it less likely you go in the ditch. Is that what you're saying? That's what I think that's the plan. Well, you belong on this Fed. That's all likes. I take it's cop.

I haven't seen Mark this critical of the Fed in a very long time. Never. Never, never. I've been doing this for 30 years. I'm 99.5% there. I just don't get this. I just don't understand this. So, I mean, and you're right.

It's, you know, it's not, it's 70, it's one, one move, right? Let's see what happens here. Yeah. It's a move they should have taken back in whatever, January. The only, the only reason I'm a little more exercised is because it feels like to me, they're going to keep going until we are actually in recession. And I don't believe that's necessary. just don't think that's necessary at this point. Again, if inflation expectations, by the way,

I just, I don't put any weight on the Euro submission survey, zero weight. I don't think it means anything. Zero. I put, you know, and I actually don't put a whole lot of weight on a forecast by economists either, including myself, because, because we don't change, you know, we don't change a forecast until it's patently obvious, you know, that, you know, something has changed. Ryan's not like, that. Chris is not. I'm like that. I'm, you know, a bit slow. So I put all my faith almost, you know, a lot of it on the market, on the bond market. They're putting their money where their mouth is. Yeah, exactly. Right. Ryan and I are sink. Do you see that? Here's a music term for you. There was a little bit of a phase shift there. But otherwise, just to prove, I did play the saxophone when I

was in high school. Mark's just fired up because the Fed's going to kill his low probability. That is actually very true. Yeah. When they release the minute. You're messing with my forecast. Yeah, they're messing with your forecast. You're messing with my forecast. All right.

Okay. What else on the Fed? You know, I kind of drove the train here on the discussion of framing. Maybe there's a different way to think about this. So, fire away. Interesting, they didn't mention quantitative easing at all are the plans for the balance sheet. You mean, I guess it? Yeah, sorry.

Well, the reversal of competition. Did they not? Did they mention that? They mentioned it. Just the standard, you know. That thing's on autopilot. Okay. Yeah.

Reducing the balance. They wanted to be like watching paint dry. They don't want to make any big wiggles. So you don't read anything into that as though. They're not going, again, I see that as not panicking. They're not pulling out all the stops. They went an extra 25. They don't need to because the bond market is selling off rapidly.

They don't need to. QT. I mean, the 10-year yield is back in a little bit, but it's at what, 3.25? That's a pretty big move. And as I said, mortgage rates, 30-year-fixed mortgage rates are over six. I didn't look today, but. So they're getting what they want. You're getting what they want on that end. Yeah. Yeah, the issue is that they might get more than they bargain for. And, you know, this tightening in financial markets is going to really cut into growth in the second half this year. you know yeah hey okay let's let's now do this uh let's what where they headed now so what's what's the forecast uh i i thought i knew the script i thought i you know they were on script and now they're

ad lipping so i'm not sure so what is it uh i guess so the answer that and i know ryan you think recession which is a reasonable forecast but let that can't we're still that's not our baseline for no no no no no no no Okay. We're going to skirt. It's going to be very uncomfortable here. Growth is coming to a standstill. But actually, if that were the case in inflation came in, that would be a pretty good scenario.

Let's assume that's the scenario. What is the fund rate target? You know, at the end of this year and what is its terminal rate? Where is it going to peak? And when is it going to start coming back down towards equilibrium? So, Chris, I'll begin with you. I'll begin with you, Ryan. Where do you think we're going?

based on that baseline forecast for the economy. I think we're all pretty much on the same page. They're going to go 50 basis points at each of the next two meetings and then 25 basis points in December. Right, yeah, 25 basis points after that per meeting until they get to 3.5%. And that would be early next year that they get to 3.5. Right, because they're at 175 now.

Correct. So they do a half point in September. No, wait, they do a half point in July. We do a half point in September. That's $2.75. Then they do... 25 in November. Nothing in November?

Oh, they raise rates 25 in November. 25 in December. So that's now 325. And then January, next January, that's 3.5. And you think that's the peak, the terminal rate. Yeah, and then they'll pause for an extended period of time. Yeah, probably a year. Until they sure inflation is where it's supposed to be.

Or they realize that the economy is, falling apart. And they start cutting. And then you say they go from three and a half down to the equilibrium R star two and a half in 2024. That's when they start. So like a 25 basis point cut at every other meeting. Yeah.

And so by the end of 24 going into 2025, they're back to equilibrium. Correct. Got it. What do you think, Chris? Reasonable for the baseline. I am sympathetic with Ryan's view that something else. could happen before this plan works out. So we may not actually get up to those levels.

We may be cutting before that. Okay. And you would also agree in the, I don't mean to put words in your mouth. Yeah. Just put the straw man out there. You would agree that the most likely baseline scenario still at this point is an economy that skirts recession but doesn't go into a full-blown recession. Yes. Yes, but we're getting awfully close.

Okay, so let's go there. So where, what are your probability, your recession odds? You know, what's the probability of recession in the next 12 months, so by this time next year, and the next 24 months? And Chris, I'll go with you first. What is it? Same. 60, 40, 60. 40%.

Same. That was my, I've been there for a while. I think that's his, that's what he's been, 40s. 60. How did you not change it after that meeting? Oh, why that's what he wanted. Going to script. It was take then. He's a damn good forecast.

I have to say. Yeah, I got to listen to him more. I hinted last week. You did. You did. And I just ignored you. Yeah. Okay. So, Ryan, what were you before?

And now what were you? What was your recession odds? He was coming in. Right. I was coming in, but that's that stopped. Okay, so forget about what it was. What is it now? What's the next 12 and 24 months?

In the next 12 months, I'd say 65%, and then 85% probability in the next two years. Oh, wow. You really did not like this report. No. They messed up. The report or the what the Fed did? The action. Sorry.

The action. Yeah, what the Fed did? It was working. Like 50 pieces of ones were working. There was no need to do so. So, but 65, that's a very strategic number, as we know. It is. Yes.

Because if it's 66, we change our baseline forecast. Yeah. So we're teetering on them. Ooh. We're getting a lot of client questions about, you know, when we would adopt a recession in their baseline. So I tell them our rule of thumb. Yeah, a rule of thumb, if we make a major change in assumptions or our forecast,

and obviously going to a recessionary forecast, we have to be very confident. And what that means is that we have to. believe subjectively, obviously, that there's a two-thirds probability in whatever it is we want to change the forecast to. So two-thirds probability that there's going to be a recession or more than we would change the baseline forecast. And Ryan went right up to the line, 65%. Yeah.

Yield curve is still positive, by the way. Just to, you know, if that changes your opinion at all, Ryan. Say that again? Yeah, yield curve is still past. Okay. I'm going to talk about that because that goes to my forecast. Okay, go ahead. So I, you know, I would previously, I was, I think I was one third probability over the next 12 months in close to even odds, but not over 50% for two years.

Right. I would say I've gone up because of events because of what the Fed did and is doing. I'd say 40% probability in the next 12 months. Good. And I'd say still even odds over the next two years. And here's why. It goes to where people put their money where their mouth is in the bond market. So if I go look at the bond market, inflation expectations are back where they need to be.

Check. So don't lose your mind here. We don't need to go, you know, 75 basis point hikes. We are where we need to be. Financial conditions, in my view, the stock market decline, the rise in long-term rates, mortgage rates. That's all now the strength of the – I don't have you been looking at a dollar recently, with the strength of the dollar. All suggests that mission accomplished.

You did what you needed to do. Let's just let things play out. You don't need to crush the economy. And here's the second thing. The yield curve, my favorite barometer of where the recession, 10-year treasury versus two years is actually still, it's narrow, but it's still positive. Razor thin.

It's razor thin. Yeah, but that's okay. But that's consistent with an economy that comes right up to the line. go into recession. That's consistent with the forecast of no recession, but close to resett. No, what you should do over the weekend? Think about this scenario where we get a recession without an inverted yoker. Well, what does that mean? Yeah, certainly everything is possible, but, you know, why should I think about that exactly? Because it's Ryan's dream. That is his dream state. Then we can retire this whole argument. Yeah, I don't want a recession. But if, you know, we did get a recession and

yoker didn't invert that would be like okay here's one you don't want it but you're saying it's coming 65 85 I'm not I said I said 40 in uh almost even odds you know quite not quite even odds okay I was going to say darn it was a really good thing to cheese what's the timing if it oh that's it that's a timing so uh I'm with you Yeah, you're ready. That's just for the first time of YouTubeing. That was very cool. He was saluting.

We're on the same track. Same track here. Okay. Here's what I don't get. Here's what I don't get. If we're going to suffer a recession, how in, in the world can be more than a year from now, right? I mean, it feels like the economy is like, if it's going to happen, it's got to happen soon, right? because we're slowing very rapidly.

And we make it, again, two quarters of negative GDP growth, which is not necessarily a recession, but people are going to say it's a recession. And then how can the housing market really getting crushed here, you know, with the mortgage rate, with stock market down like it is with every CEO and CFO, every survey, every single CFO in that recent, one of those recent surveys said,

we're going into recession. How's that possible? It's going to take a year to actually go into recession. That I don't get. That's consistent with what you're saying, though, Chris, 40%. Yeah. 60%. So explain.

You're assuming no other shock, right? And I'm assuming that something else is going to come along within the two-year time period. Oh, you're saying, oh, interesting. Our forecast are the same. Our forecast are the same except that you're assuming something else is going to go off the room. Something's going to happen. Oh, that. And you got a hint of what that something could be this week.

I'm not disputing that, right? There could be a Fed mistake. I don't think this was the Fed mistake that you're afraid. But there could be another one. There's another one. What? Oh, another? European Central Bank had an emergency meeting.

Oh, yeah, yeah. Because yields across Europe are just. Oh, your sovereign debt crisis in Europe or somewhere. A lot, 20, was it, 2012? Interesting. because I think Italian 10 years Yeah

Gapped out That's interesting Chris I didn't understand what you were saying But that's very interesting Your forecast My forecast

The recession odds would probably be the same But I'm saying We're going to be a little lucky And you're saying no No chance of that Well 60 is still not

85 Yeah yeah yeah Okay okay I get it All right That's pretty You're coming You're coming

Yeah That's pretty clever. I got you on the 40. I got to work you at 16. That's pretty clever. That's pretty clever. I get you there. Yeah, yeah, yeah.

Very good. So the timing, you know, I think you're right unless, again, something else happens. Yeah. So, Ryan, do you think a recession? You said, what did you say your 12-month probability is? 65. Okay, fine. You're still, you're saying, if it's going to happen, it's going to happen soon.

Yeah, it's going to happen soon. Yeah. And they had a survey of economists and they said, if a recession does happen. Yeah. 70% said it would be in first half of next year. I think it's going to be the second half of this year. I don't see. I don't think we make it to the first half of next year.

Yeah, especially if GDP falls in the second quarter. I mean, just the press coverage of, you know, we're in a recession. That's just going to feed on itself. Yeah, really, we're just talking ourselves into this. What a mess. Anyway. All right. I think you're also angry at the Fed because you're now going to lose a bet with Chris.

The housing starts. I always lose bets with Chris. It's like, you know, I never have won a bet, Chris. I didn't want to bring that up. Well, it's timely. Housing Starts came out this week. Yeah, absolutely.

Chris really thinks about these bets. I got to start thinking more carefully about these bets. The value of a dollar. And you're a good forecast. I admit it. You're a good forecaster. You're a really good forecaster. Yeah.

Ryan. No, actually, Ryan wins awards for his forecast in prowess, actually. Yeah. Okay, I'm going to be excerpting that audio and posting it to my. I wouldn't go that far. Thank you. But no, you guys are really, I mean, in all honestly, you guys are really good. So housing starts to coming in in the next release.

Do we really want to go there? Let's wait until the next podcast because there's a lot of time out there. Fair enough. And we got to keep this a little short because we have a guest in a Stancerry from MIT. He's going to talk to us about a problem in the economics profession. It's certainly in front of top of mind for me because we employ, you know, over 100 economists across the globe. And this is a big, this is important. So we're going to bring Anna in for that conversation around the socioeconomic diversity of the economics profession. Anna,

it's good to have you on Inside Economics. Thanks so much for having me. Great to be here. And you're speaking to us from London. I am, yeah. Yeah. And vacation, business, both. What's going on? Family. One of the good things about the academic schedule. You can work remotely. So I'm working here, seeing parents, sister. Yeah. Very. very good. You grew up in London. I did, yeah, just outside London. A real Londoner wouldn't call it London, but we can for the purposes of the podcast. Oh, very good. And, you know, there's a lot to talk about, you've done a lot of great work on the socioeconomic kind of composition of the economics profession, which a lot of bad news there, I think. But we'll dig into that. Before we do,

can we get just a generous sense of you? I know you teach at M. MIT, the Sloan School, but I'd love to hear a little bit more about your path to where you are today. Yeah, absolutely. So, as you said, I'm at the Sloan School at MIT in the Institute for Work and Employment Research. So I'm a labor economist primarily also do macroeconomics and studying big issues to do with work and employment and labor markets, labor market power, labor market institutions. And before I came to MIT, I got my PhD in economics at Harvard, actually, just last May.

Congratulations. Thank you. And have a master's in public policy also from the Kennedy School at Harvard and did my undergrad in economics in the UK. So I've been weaving my way in and out of economics at different universities for quite a long time now. But always been interested in the subject and the questions and how they relate to policy, really.

I notice you've been publishing with Larry Summers. He's at Harvard. Was he an advisor, a thesis advisor at Harvard? Yeah, exactly. Larry was at one of my dissertation committee, and I worked for him as a research assistant while I was at Harvard. Do you know, he grew up in suburban Philadelphia. That's where I live. His brother, John, is my lawyer.

No way. Yeah, yeah. John's a great guy. I've gotten in trouble. I know, I know this is hard to believe, but I've been sued a few times. So I've won every single time. I want to groundless, groundless, but it always helps have a great lawyer. And John Summers is my lawyer.

Yeah. And they, in fact, both, I think Larry's parents, John's parents were taught at Penn. Yeah. Anita Summers and Robert Summers. And so I've taken courses from both of them. So they're very much a Philadelphia family. Well, I don't know if Larry would embrace that now, but. He's very much of, yeah.

So was he, is he, was he a good professor or, what kind of professor? Yeah. I mean, he was a really fantastic mentor. And I think you speak to anyone who was one of his students, sort of advisees or mentees, and they would say the same. He was incredibly generous with time and intellectual input and mentorship. Actually, he's, he's the reason that I ended up doing a PhD, because I was taking a class at the Kennedy School with him.

And he spoke to a number of the students who, you know, writing interesting essays in the class and asked what you're planning to do next and suggested to me, have you thought about doing a PhD and that planted the seed? So, no, he's been a really great mentor over the years. Yeah, very cool. Yeah, he's a great guy. And obviously, you know, key to a lot of history over the last couple, couple, three decades, maybe four decades.

I'm not sure. But, yeah, obviously very important. And I noticed you wrote a paper with him. for the Brookings Institution, which, by the way, of all, and this is just maybe because of my more practical perspective on economics, I enjoy that more than any other publication. I'd say that's an academic publication. It's just very practical and approachable. And you wrote a paper with them.

A little unfortunate timing, though, right? It was like published like the week the pandemic hit or something. Yeah, it was just the week after everything shut down was the first ever Zoom only Brookings papers conference. Oh, is that right? That's interesting. Yeah, completely on Z. Yeah, exactly.

But we're definitely going to talk about that paper because it's also pretty cool. It talks about worker power and tries to explain a lot about what's been going on in the economy in recent decades from that perspective. but we'll come back to that. But let's talk about the work you've done, trying to understand the socioeconomic kind of composition of the economics profession. Can you just, first of all, can you define terms? What do you mean by socioeconomic? What does that mean exactly? Yeah. So socioeconomic background, I mean, can be, it's sort of meant to be a catch-all, right, to describe what sort of status, resources, access you, your family had as a child,

if it's your socioeconomic background. And so typically people are talking concretely about one of three things when they talk about this. They're talking about family income. They're talking about parental education or they're talking about what occupation your parents had. And so in our paper,

which I co-authored with Robert Shultz, who's a graduate student at Michigan, we defined socioeconomic background as the parents' level of education. And that was not because we thought that was a better definition, but because it's the only one we can get data on. So ideally,

we would be able to supplement it with the others, we can't. So we're just saying, let's look at the population of economists who get PhDs and see whether they came from households where they had no parent with a college degree, at least one parent with a college degree, a parent with a graduate degree, a parent with a PhD. And that's what we're using as our sort of socioeconomic background definition. It's not necessarily race or gender, but it is correlated. No, exactly. It's a different access of privilege, I guess, or dis privilege than race or gender. And it's correlated with race in the sense that in the US and many countries, if you're non-white, you're more likely to be from a less advantaged socioeconomic background as well, for all the many sort of systemic

inequality reasons we could go off and talk about in a separate conversation. But it's not the same thing. You know, there's plenty of white men who come from low socioeconomic resources backgrounds as well. Got it. Okay. And genders, that isn't necessarily correlate. Although I guess there's a gender issue in the economics profession as well, would you say? Yeah, right.

Yeah, so, I mean, gender in the population at large obviously isn't correlated, but in academia, it is going to end up being correlated. We're going to see that the kinds of fields that have a gender problem and have a race problem are also the kinds of fields that have a socioeconomic background problem and that they are really underrepresenting people from these last advanced. groups overall. Right. Right. And socioeconomic, it's not nationality because the economics profession is quite diverse when you look across, at least the folks that get PhDs from American universities are quite diverse. Yeah. So that's another tricky one because exactly,

economics, one of the great things about, I think economics academia in the US is it's very international. So 70% of PhDs in economics in the last decade were to non-American. Americans, only 30% to people born in the US. And so, you know, when you're looking at what does socioeconomic background mean across countries, using parental education means completely different things in different countries, because it means very different things depending on, you know, what that country's overall level of education is and how its education system works. So when, you know, when we were studying this issue, we separated US-born people and foreign-born people to try and proxy for where they got their education so that we could really

get granular about what does socioeconomic background mean when you're talking about parental education. Got it. Got it. And so based on your definition, the education of the parents of the kids that are or the people that are getting their PhDs in economics at American universities, looking at that, the economics profession kind of stands out here, right? They're kind of an outlier. It feels like an outlier.

It is. It is. It's a really quite striking outlier, actually, when you compare economics to other PhD fields in the US. So just as the baseline, if you're looking across all PhD recipients in the last decade in the US, and this is, by the way, you know, always get excited about data, but this is amazing data. This is data that is how excited she is, Chris. She's almost excited as Ryan is, you know, Ryan. She's one of us. She's one of us. And I know, Ryan, have you joined? Are you still He's not joined. He's a picture is on the Zoom, but he's not.

His picture has joined. His picture has joined. Would Ryan also be excited about the data? Oh, my gosh. Yeah, absolutely. We're all data geeks here. We're all day. Yeah.

It's such a nice world, isn't it? When you're all going to get some of it. We're so easily pleased. I mean, you know, just, you know, give us a computer screen. We're good. And in the internet, of course. Yeah. Yeah, good.

Maybe data. Yeah, exactly. All right. No, so this data is, it's, it's, it's, it's, it's, all PhD recipients in the US, everyone, the National Science Foundation makes everyone who gets a PhD fill out this survey. So the response rate is in the high 90%. So we really do know with a great degree of certainty that everything I'm going to tell you is representative because it is basically everyone who's filling it out. So of all the people that got their PhDs in the US in the last

decade, if you split the PhDs into 15 big fields, so you've got humanities, social sciences and pull out economics from the other ones. So the rest of the social You've got physical sciences, biological sciences, math, computer science and so on. Economics has the lowest share of PhDs with no parent with a college degree. So that's sort of first generation college graduates. And it has the highest share along with the humanities with at least one parent with a graduate degree. So a graduate degree would be a PhD, an MBA, an MD, a J.D, an MBA, all those kinds of degrees.

So it's an outlier just at the first pass. And then the even more striking thing is, you know, I mentioned we're splitting it into U.S. born and foreign-born PhDs because parental education means different things in different countries and contexts. If you just look at U.S.-born PhDs, economics is an even more striking outlier. So even if you compare it to other narrow fields, it's the least socioeconomically diverse field, only about one in six economics PhD recipients are first-generation college grads, And that's lower than to take just a couple of fields that people typically think of as very elite, art history or classics, for example. Before we move on, Chris, I just want to give you an opportunity.

Is there anything on that you wanted to ask Anna about in terms of what we mean by socioeconomic? I was just struck by the choice of definition, right? So there's been certainly a lot of talk about gender and race within economic. but even more broadly. So I was wondering if you get, it sounds like you selected this data because it was available, right, this great data set. But even more than that, I do,

I am concerned about the studies around gender and race just for two reasons. One is the definitions themselves are evolving. So if you look at racial identification in the census, right, more and more people are choosing multiple, multiple races, are identifying with multiple races. So it makes it more and more different. for empirical research to really understand who is in which category.

And then there's more, there is a greater non-response rate we see as well with people choosing not to answer certain questions about gender or race or other personal questions. So what I liked about your studies, it seems very concrete, right? Parents education, yes, there may be differences across countries, but still it's something that we can observe and measure. I was wondering if that was part of the motivation here, or are you interested in all the different dimensions? of diversity that we can consider? Yeah, I know. There's a lot to unpack there.

The reason we chose socioeconomic diversity is because actually we were both really interested in gender and race. I think that it matters a lot. And I met my co-author at a summit on diversity and economics in 2018, I think. And all the conversation was about gender and race, which is great and really important.

And I've done a lot of work on those topics in terms of not academic work, but sort of advocacy type work. But both of us were thinking that this socioeconomic background, family financial resources, social class, dimension of things was missing. And that's why we ended up writing this. So writing this to sort of plug a gap that we thought people weren't talking about enough in conjunction with gender and race, which people are talking about more.

I mean, it has the advantage that parental education can be easily measured. But I do think what we can't do is we can't get more granular because, for example, example, it's very different in terms of your financial resources if you came from a pretty financially well-off middle-class household where maybe neither of your parents went to college, but they were earning a good living in the building trades, for example, versus you came from a family that was in poverty. And we can't distinguish between those two things. Everyone who's got no parent with a college degree is going to be lumped into those groups. And so that's one of the shortcomings of our very clean, clean categories.

So now that we've established that, I guess the next question that comes to mind is, why? You know, why do we see such a disparity here? I'm sure that's pretty tough to nail down, but I'm sure you have some thoughts about that. Can you give us a sense of that? Yeah. So I think we can broadly separate. into three buckets where it's coming from. And we can't in our study identify everything,

but hopefully we can start this conversation at least with some ideas and directions. So one bucket is obviously PhD academia is much less socioeconomically diverse than the general population. I know you both know that, but it's important to emphasize that a big part of the difference

when we say only one in six economics PhDs in the US from a US-born family has got no parent with a college degree, that's five times lower than the rate in the general population of similar-aged people. But most of that gap is coming from academia rather than economics. But within academia, obviously, we just established that economics is even more of an outlier. So why is that?

Part of it seems to be coming from something to do with the quantitative disciplines. So economics, math, and computer science, very specifically, diverged from the rest of the PhD fields, starting in about the 80s, in their share that was coming from, you know, first-generation college student background in their share that had at least one parent with a graduate degree. They were becoming much less socioeconomically diverse relative to the other academic disciplines. So there's something about the quantitative disciplines, their pipelines, maybe the preparation people are getting in college.

But then economics diverged even from math and computer science, starting in about 2000. And so then we have to think about the economic-specific factors, what's happening with economics. So the undergrad level and what's happening with economics at the kind of pipeline from undergrad to PhD are people falling off there. So I have thoughts on all of those three buckets, but those are really the kind of big picture how we think about the problem. When you peel that onion back a little bit more for us, which I'm going to ask you to do, whether my one explanation might not be like education in high school, you know, pre-college. Like when I went to school, I don't know if it's still the same case, the same way. obviously I've been at high school for a long time. But I, you know, I got home, I had home economics.

Home economics meant how do you make an omelet? You know, by the way, I can make a pretty good omelet. I can't make much of anything, you know, but I can make, I can watch berries. I can get my coffee from Wawa and I can make an omelet. But economics. Pardon me? So a button. Not what I can do it, not well.

Let me put it that way. Not well. Not well. Can you? So a button? Oh, yeah. Oh, yeah. Okay. That's about it. But, you know, there was no such thing as even like basic household finance, right? Like, what is a mortgage? When I got out of high school, I didn't know what a mortgage. I had no idea what a mortgage was. So I would think economics coming out of high school for many is just very daunting, right? Because they haven't very little to know experience with it. Is that? Did you find that? Am I going down the wrong path here? Or is that on a partial explanation of what's going on?

Yeah, I know. I think that must be a factor. When I was saying undergrad, I was sort of bucketing in everything that happens up until you choose your major, basically. And so I'm sure that's a factor in that people don't know what economics involves. And so we haven't, I haven't seen any studies specifically on this as it relates to socioeconomic background, but there have been some of the investigations into why undergrad economics is not very diverse in the U.S.,

the undergrad major, researchers have surveyed incoming freshmen and asked them what they think about economics. And the perception is, to the extent they know anything, that economics is finance and economics is people that want to go work in banks. And obviously, a lot of economics is finance, but a lot of it isn't. And I think the lack of understanding of what economics is is probably meaning that a lot of people who might be interested don't even think about it. So we're losing people even before, even before we get in the first hurdle. And there's other studies in the UK which have asked high school students to draw, I should have high school or what level of school,

but school students to draw pictures of what they think an economist looks like and it's sort of a person in a suit with a top hat and lots of money. So there's definitely perceptions of economics that are not helping in terms of getting a diverse group of people into the discipline.

So I'm sure that's a part of the problem. Just the image of the perception. Okay, so as you peel that onion back a little further, Okay, so it's highly quantitative and all disciplines that are highly quantitative, math, obviously, computer science, are suffering to some degree this issue. But economics even stands out from those. So what other factors could be explaining that? What could be driving that? So one of the things we try and look at to see what might be driving it is we can try and break down mechanically where this difference is coming from relative to other PhDs.

And one of the things we can do to break that down is to look at what undergrad schools people came from. So this is saying take economics PhDs and we can see in the data every person who got them, what undergrad they went to if they did undergrad in the US. And then we can do that for the other PhD subjects. And one of the things we find is that economics PhDs are coming from a disproportionately socioeconomically advantaged pool of undergrad schools. So we don't know, obviously, whether that's happening because of application. or because of selection on application, right? We don't know where that is coming from, but that's a really important piece of the puzzle.

And when we break it down further, we actually see that economics, again, comparing it to these other big categories of subject, math, computer science, humanities, economics is pulling the largest share of its US-educated PhDs from private universities and not public, and is also pulling the largest share of its US-educated PhDs is also pulling the largest share from Ivy Plus universities.

So we define that as, you know, following other researchers as the eight Ivy League plus four more, who's is escaping me right now, but 12 elite undergrad schools, the sort of Ivy Plus category. So economics is really pulling people from the kinds of schools where such a large share of the population is so socioeconomically advantaged that it would almost be, you know, very, very fluky to actually get a very diverse population of students if you're just drawn from the population. their schools. So that's one of the factors. Sorry, carry on. No, I was just going to say. So, yeah, I have my PhD from Penn, University of Pennsylvania. My dad was a professor, right? So, you know, of engineering. Chris, you got your PhD from Hopkins, right? From Hopkins. And was your,

what about your parents? Were they, how educated? My parents, can I ask? Sure, they are high school. Oh, so you're socioeconomically diverse. I didn't know that. Yeah. Well, that's what I found interesting as well. From this study of this perspective, right? I fall in a category of diversity along this. But hardly would consider myself disadvantaged. Now my whole view has changed here.

Yeah. And Anna, you're obviously Harvard. Okay. So were your parents highly educated as well? Yeah, my parents both lawyers by training. Both lawyers. Definitely. You know, they both, in the UK, in the US data that would count as a graduate degree.

In the UK, it's not a graduate subject. So we count as an undergraduate degree, but like in practice, they're lawyers. So definitely came from a background where I was advantaged. And I mean, I think it manifests not, it manifests polyponentially, but also just manifests in like parents being able to help you navigate university and graduate school and that kind of thing. Well, it feels like you have to keep pulling this onion back because that doesn't feel quite satisfying to say that right so can can you pull it back another later okay oh good i knew you could

okay great yeah yeah we've got so many layers in this one it's it's a it's a big onion so um part of it is coming from the pool of schools and as i said we don't know why this is drawing from this advantage pool of schools part of it is coming from the pool of undergrad majors and so this is just kicking the onion down the road for one of a mixed metaphor um which is e-conycones undergrad also seems to be pretty non- socioeconomically diverse. That's not explaining everything. Part of it is an undergrad to PhD problem, but the Econ undergrad major is already less socioeconomically diverse than math or than the other social sciences, which is sort of the direct comparators if you think about Econ being a mathematical social science in some sense.

So something's going on at the undergrad major level. Part of this seems to be that, you know, It intersects with the school in that at private schools, Econ is a bigger and more popular major than at public schools. So you've already got some kind of selection there. And then part of it is at a lot of big public schools, there's a GPA cutoff so that if you are below a certain GPA when you're choosing your majors, you actually can't get into a major like economics. It's very competitive. It's very popular.

And there's been research by Zach Blema, who's an economist, at Yale showing that this GPA cutoff is disproportionately keeping lower income students out of economics because when they come into undergrad, they're probably less prepared. They've come from maybe less good high schools. And so that's also a source of the problem. That's interesting. Hey, before I let you pull the onion back even further, if you want to do that, Chris, do you have a theory as to what's going on? I mean, when you were reading in his work, you know, I'm sitting there thinking, you know, what could be explaining this?

Did you have any come up with any theories as to what was going on? Do you want to test out on now? Sure, sure. And certainly the paper resonates with me, certainly, in terms of the parents' education. I think the profession itself, economics, does a disservice in terms of present as not a particularly practical major, if you will. So if I reflect on my own background, right? my parents didn't go to college, but they certainly were encouraging practical majors, mathematics. If it was business, it's accounting, finance, so something very bright.

Economics was not really on that list in terms of a practical major, something that could lead to employability or high propensity to get employed. Also, I feel as though the profession also shies away from some of the key questions that people personal finance right typically we as if you ask an economist for any personal finance advice or stock market investment advice suddenly the arms go up right oh no no no i i don't do that i i don't study finance you really want to talk to a stock broker or someone and i i think economists have a lot to say actually on those fronts but we kind of take this uh hands off approach that oh no no we study models we are looking for behavioral changes incentives so my sense is that that might actually

be dissuading quite a few potential prospects from even considering this as a field to go into and i think you touched on that in your in your research so that would be my leading leading uh theory for the case but uh wonder what do you think about that is there yeah yeah i think that sounds very plausible. And that's something that we can't speak to directly with our data, but I certainly think seems very likely to be the case and it's something I hear a lot in these kinds of conversations, which is, yeah, majors that seem like they are practical and that they are going to lead to a good career that will provide a return on this big investment in college that a lot of people are making are often going to be encouraged, particularly by families, first generation

college families. And that's, economics doesn't necessarily sound like that, even though it is in practice, one of the highest paying majors, but it's not necessarily, and it's to this awareness point, it's not necessarily clear that it is going to be. And I do think, I do think that's compounded by the way often intra-economics is taught, or economics as a whole, but particularly the introductory courses. And I think part of it is this feeling of it being very divorced from the kinds of really very central real-world questions that we're studying as economists. And, you know, if you're studying indifference curves and thinking about Robinson Crusoe sitting on an island trading off leisure and labor or you're thinking about guns and butter and a production function,

which is both of the ways I might. It just feels so far away from the questions that we are caring about right now, you know, what's going on outside with the financial crisis or inflation or unemployment and we'll get there. But it takes so long that I think you lose a lot of people on the way. I also worry, and I'd be interested in both of your thoughts, that the way we teach you, intro econ and the way we kind of the way that some econ uses language can be quite exclusionary in a way that I think might might well put a lot of people off in general but might disproportionately put people off for whom this language is speaking about them and people they love which is

you know we use this this language low ability low type unskilled is often used to describe people without a college degree which is not only offensive but just very clearly inaccurate it. And I think that must play a role as well. That's an interesting point. I hadn't thought of that, but that makes a lot of sense. It certainly does. Yeah, it is kind of offensive to say unskilled. Or low-skilled, yeah. Yeah, that's just not right. Yeah, that's a good point. Oh, sorry, go ahead, Anna. No, I was just going to say, I think it's not right. And I also think it's just not precise or correct. Not precise. Not exactly. We just said what we meant, you know. College, no college, whatever it is.

Yeah. Any other layers to the onion that you'd want to peel back? There's a couple of others that relate to, because a lot of what we've been talking about is kind of when you're at high school, when you're in undergrad, what are people choosing, where are they going? A couple of layers that I think are relevant in the undergrad to grad school bit of the equation is that economics, I think, is relatively unusual. and having a path to grad school

where it's probably not best if you just do well in the Econ major. Because it's such a mathematical subject and because the undergrad major is usually not taught very heavy on math or doesn't have to be, you're advised if you want to go to grad school that you need to have a lot of good grades

and a lot of very advanced math courses or ideally you want to have a minor in math or maybe even a major or maybe even a math only undergrad degree with a little bit of economics. And if you're, if you're not very aware in your second year of a four-year college degree that that's what you want to do is go on and get a PhD, if you realize in your fourth year or even your third year that

you're really enjoying this and you want to take it further, you might not be prepared. You might not have the courses ready under your belt. And so I think there's just such a, there's such a winding path to the PhD in economics that is not very obvious or transparent. I think that's got to play a role. And that seems like something that will be much easier to fix with more direct and conscious outreach, I think. Yeah, good point. Well, I guess the next question is, okay, the profession is not socioeconomically diverse. So what? You know, big deal. Why should we be concerned about this? Right. Where have we been talking about it this whole time? Yeah. Yeah. What's the deal? I mean,

Why should we, why should we? That should have been the first question. I guess that should have been the first question. That would have felt a little rude, I think. Why are you on this podcast again? Exactly. So I think there are three reasons you should care about this. The first reason is as good economists, we should think there's an efficiency case for caring about this.

And I think this is the case with almost any kind of diversity argument, which is if you believe that underlying talent across different fields is equally distributed across the population, which I do, then if it's disproportionately difficult for people from some groups to get into that profession, you're excluding talent that would actually be really good at doing economics. And so we're just losing a whole bunch of people. That would be very good economists. And therefore, we are missing out on good research. So there's an efficiency case that on the face of it, I think, is actually compelling enough.

But there's also two other cases that I think are important. One is obviously the equity case. I think we should care that if this situation is arising from a lack of information or from barriers to access or from exclusionary behavior, if it's arising not as a result of perfectly informed, free and optimized choice, then that's an equity issue. We should want there not to be barriers to access to our profession and we should want everyone to have the ability to get in.

But I think the one that's very specific to economics, because those two can apply to any discipline, right? They can apply to any profession. The one is specific to economics is we're a social science and we are studying the way humans act basically in different situations. And the way humans act is crucial to understanding basically everything that we care about, you know, thinking about inflation. Like how are people choosing to set prices? How are workers responding to wages? Are people perceiving nominal or real wage increases? What are they expecting going to happen with inflation?

if we're thinking about unemployment, if we're thinking about how people make decisions about access to education or how people decide when and whether to move for jobs. Almost all economic questions, I think all, not even almost, all economics questions require this. And I think it's pretty clear that

to understand these kinds of questions well and fully, you want to have the full context of how people are making those decisions. And it's very hard to get the full context of how people are making decisions if you're parachuted in with no awareness of how that context operates. It's doable. I think people can research contexts that they're not from.

But I think as a profession, the more people we have that are used to and know very intimately all these different contexts, the more we'll be able to gather all that information and do better research about inflation and unemployment and access to education and health care and welfare and poverty and all of these topics. Yeah, I mean, so I also think it affects the things that we think about, right? I mean, income and wealth inequality. It's come onto the radar screen in recent years,

just because it's been so long in the making and such a problem. But it took us a long time to really start thinking about it as an economics profession. And maybe that's in part because, well, it wasn't affecting us. We didn't see it in our everyday lives because we weren't socioeconomically diverse. Absolutely. I think that must be a factor. And you see that with the history of gender in economics, for example, that some of the pioneering women economists at the time when there were very, very few women economists

were studying topics that were just not thought about before very much to do with how women, you know, participate in the workforce and combinations of work and family. And so I'm sure you see that again as you get more socioeconomic diversity. I think it also affects just how, you know, what we think about as the most salient issues when we research specific topics. So I have an example that has relevant in my research is I've done some work on the minimum wage and noncompliance with the minimum wage in the US and the UK. And it's my sense that often when we're talking about the minimum wage, whether it's in econ research or in policy in the media, noncompliance is not really thought of as a big issue. But when you dig in, I didn't know that. It's a problem.

Exactly. Exactly. It's a huge issue. I know. And when you look at the estimates that other researchers have made, actually, there's very, very large shares of people that should be being paid the minimum wage that aren't. And it's because minimum wage noncompliance is actually really hard. It's very easy to detect if literally it says on your pay slip that the pay is below the minimum wage, but a lot of minimum wage violations are hard to detect for workers and for, you know, society at large. And so can be very big. It's things like you're paid a peace rate, for example, to clean a hotel room and the peace rate is supposed to make up on average the minimum wage, but it doesn't. Or you're required to clean up after.

you've clocked out, and that is adding time every day that is not being paid, all these different kinds of things that add up. And I think would be much more aware of these things as a profession, if there were more people who had worked minimum wage jobs or had family that had worked minimum wage jobs, who could say, this is how it works in practice. This is what we're not seeing when we're gathering the aggregate data. Yeah, great point. Great point. I do want to move on to your other research, but before I do that to kind of close the conversation around this, It doesn't feel like given the discussion that there's a slam dunk solution here, right? There's like no smoking gun.

If I do this, I'm going to solve this problem. Is that your sense of it? Yeah, I don't think there's a smoking gun. But I do think that there are some obvious paths that will make things better, even if it won't solve it. So I think if part of the, so one of the questions we didn't talk about is whether this is a, just a good choice people are making that if they, if they've taken an undergrad degree that they may be better served by going and getting a good

well-paid private sector job at PhD, right? So if that's what's going on and econ undergrads are just actually, you know, optimizing for income, then there may not be a problem to solve from the perspective of the individual. It may still be a problem from the perspective of the profession. But if there really are barriers, we can do a lot more to bring them down, right? So we can, as a profession, do a lot more to mentor more proactively. And that's happening a lot more with race and gender now, and I think incorporating socioeconomic background into mentorship schemes and expanding them would make a huge difference, seeking people out for those mentorship schemes early in undergrad, increasing awareness of what econ is in undergrad and high school. There's

some interesting studies, I think a study by economists at Swarthmore and some other schools as well, where they've looked at just really expanding information, sending undergrads when they enter the school, information about what econ is and the diversity of topics. By the way, Swarthmore is a Philly suburb. We live, we live, both of us live very close to Swapmore. There's a lot of Philly pride on this school. Apparently, apparently. A lot of Philly pride.

Yeah. Yeah. They did this great intervention where you inform people about Econ and the diversity of topics and the diversity of people studying it. And, you know, a lot of these kinds of really easy information interventions already see big increases in the number of women, racial, ethnic minorities, and first generation college students. choosing econ subjects or even econ majors.

And so there's a lot of very kind of low, lift, obvious, easy things I think we can do as a profession. And once we've done all those and we still have a problem, then we can start thinking about whether there's something more complicated. So I think expanding access, expanding information and doing something about those issues we talked about regarding how econ is taught. There's a lot of movements like with the core econ movement as one example to really reshape how introecon is taught to be more.

focus directly on the real world problems and then bringing in the theory. So it's very clear how the theory tackles those problems. I think those three things could do a lot. Right. On that question of optimal choice of the undergraduate of HR, do you see a larger share of e-com PhDs going on to academia than other subjects? Is that just the path to academia? You will have to ask this again after I finish the next paper in this series,

which is looking at, We just matched, I'm working with two others, Anna Giftya Pocajerman and Kira Rodriguez, and we are matching the census of PhDs to their career paths. So we will be able to know soon, but don't know yet. Fantastic. Chris, any other, I do want to respect Anna's time, and I do want to talk about her work on worker power, but any other, did we miss anything here that you wanted to highlight or bring up?

No, I think you. Okay. I think we hit it. It's a complex. problem. It's not going to be solved easily, but well, and I say, you know, we're a large employer, right? We have a, we have a hundred economists or so across the globe. So, uh, we're hiring, uh, lots of folks. And this isn't

something on our radar screen. You know, it's not like we look to see what your socioeconomic background is, right? That's not a question we ask or even would think about that, you know, there's no way to get that information. I mean, we see what your gender is, we see what, you know, obviously your ethnicity is your race, but socioeconomics is not, you know, on the radar screen. So I'm not sure what we, you know, if that matters or should matter. I would encourage, I think, I think I would encourage employers to think of this as part of their diversity and inclusion. Is that right? Okay. Yeah. And so there's a number of employers, I'm not following these efforts closely. So I don't have huge amount of details,

but there's a number of employers in the UK that are actually making a move to include this as one of the kind of, you know, how you ask in your intake. Often you'll ask in an intake screen, you know, race and gender for diversity monitoring. And that you can ask a question that is, you know, the exact question depends on the context. In the UK, one of the questions that often asked is, did you come from a family that was eligible for meals? Because free school meals is a kind of government defined income cutoff that everyone knows and everyone knows whether they were or went eligible for it. And I do. I do. think that gathering the data is the first step to knowing if and where a problem exists. So I think it could be a good thing to do. Yeah, that's a good point. Although one interesting thing about our hiring, and we do hire a lot of folks from very elite schools, but we also hire a lot of folks from public schools because I find public universities, right? Yeah. Like we hire from Penn, but we also hire from Penn State, you know, because in a private public, because I find the kids that come from the public schools to be much more practical, you know,

much more thinking about real world problems as opposed to, you know, thinking about game theory or, you know, whatever it is. But, and for the work that we do at Moody's Analytics, because it's very empirically based, data-driven,

you know, model-based, that's really important. And, of course, we're very focused on the, what's going on in the world right now, you know, because that's what our clients are most focused on. Yeah.

Well, that's good to get. As programmers, sir. Yeah, absolutely. Yeah. Hey, but while we have you, though, you wrote this great paper with Larry Summers back prior of the pandemic on Worker Power. Could you, it's a very interesting paper with an interesting result. Maybe can you start by just summarizing that work?

And then I would like to talk about, well, what do you think about what you wrote, you know, a little over two years ago now in the context of the post, or I should say we're in the middle a pandemic still during the pandemic. Right. During the pandemic. During the pandemic. Will there ever be? Yeah. So that paper was basically looking at big macro trends in the US over the last 40 years.

And those big trends are the decline in the labor share of income, the rise in corporate profitability and equity valuations, measures like Tobin's Q, and the decline in before the pandemic, this is, of course, the decline in average unemployment without generating an increase in inflation. So these are sort of the decline in the narrow, if you want to call it that, the non-accelerating inflation rate of unemployment. Full employment and unemployment rate. Yeah. Exactly. The full employment unemployment rate. So those three big trends are arguably some of the kind of most defining macroeconomic trends of the last 40 years. And we argue that the decline in worker power in the US was one of the biggest forces explaining those trends.

and that it was as important, if not more important, we argue probably more important than a rise in monopoly power than globalization or then technological change in driving, particularly the decline in the labor share of income. Yeah. And I think you had a list of measures of worker power. Unionization was like first on the list, I think. Yeah. In fact, it's interesting you say that because all the modeling we've done of the income

and wealth, the skewing of the income and wealth distribution over the last 33, five years. years, the one variable that always works in every single model very strongly is unionization. That is like really important in explaining what's going on. That's really interesting to hear. Yeah, we found that it had a big effect. And we were thinking of it in two ways. One is the kind of direct way that you think about it, which is the unionization rate in the private sector in the U.S. is now 6%.

And at its peak, one in three in the 50s, one in three. private sector workers were union members. So there's just been this, you know, massive, massive decline in the share of people that are covered by a union agreement in the private sector. But the other is, so that's a direct effect, but there's also this indirect effect, which is that if you are in a plant and the plant down the road is unionized, your employers are going to have an incentive to pay you better or give you better benefits or give you better work conditions in order to avoid your plant from unionizing too, which is often called the union threat effect. So we think that the combination of that direct effect plus this indirect union threat effect, you know, were very, very big factors in explaining this decline in worker power.

Not necessarily the whole thing, but a very, very big component. Yeah. Now, fast forward to the current point in time, my read of the data, if I look at things like labor share of ink, national income or other measures of the share of the economic pie going to labor versus. versus businesses. That feels like it's stabilized over the last decade or so. You know, it had this, the labor share declined very dramatically. It felt like in the beginning of the 80s and 90s and 2000s, but, you know, since the financial crisis,

really before the financial crisis, it feels like it has leveled off. And then more recently, and now because of the pandemic, it feels like things are shifting here. that, you know, it used to be workers were on their back feet vis-à-vis their employers, but that doesn't feel like that's the case now and may not be the case going forward given demographic trends and, you know, what that means for labor supply, that kind of thing. But what's your view of all that? Did I characterize the data correctly?

And what is your view of all that? Yeah, no, I think you did. I think identifying trends in the labor share is a fraught topic and very, very debated because it depends exactly what measure you want to use and as to what you capture, you know, should housing be included in capital income and what do you do about self-employed people and all these are the questions and measurement questions. But broadly speaking, yeah, the big declines in the corporate sector labour share were at the beginning of the 80s and then the beginning of the 2000s. And it's a very cyclical measure. So it's hard to know if what we saw in the last 10 years was to what extent that was a result of cyclical patents because, you know, we had the

Great Recession and then we had this incredibly tight labour market before the pandemic and to what extent it's a secular flattening. But now it's an interesting time. I think we are seeing, we're seeing two sets of trends that are related in terms of worker power or power shifting in labour markets. And one is that there does seem to be a big uptick in union organizing effort and success. If you see the Staten Island Amazon warehouse that successfully unionized earlier this year, which was the first ever Amazon union to form, if you see the Staten Island. Starbucks unionizing effort, which really took off from, you know, nothing to many, many stores now, having unionized or about to vote for union. So there's this big upsurge and union organizing.

And there's also, of course, this very tight labor market in terms of low unemployment and wage growth and hires and all these other things that I know you've talked about a lot on this podcast. And that, even if there's no formal bargaining power in the form of a union, gives workers bargaining power. because if there are lots of employers competing for an individual worker, that worker has more power to get better pay, get better benefits, say no to bad working conditions. So in that sense, yeah, I think we're saying a shift. The big question for me is to what extent this shift is going to be long-lasting

because this tight labour market, depending on how monetary policy responds and how it can respond seems unlikely to last forever. It may last a while longer. It's hard to know what the response is going to be to interest rate hikes and how that's going to pan out over the next couple of years. But almost certainly, you're not going to have a tight labor market forever. And then in terms of the union side of things, I think we have to remember that we're at a unionization rate of 6% in the private sector.

So you have to do a lot of unionizing. to get up to where we were in the early 80s, which was 20, 25%. The new union organizing activity that would have to happen to get there is so vast. And in a context where unionization has declined consistently every single year, you know, over the last decades, it just seems, it seems, I think, a little premature to know whether we're at a really true inflection point or whether all of the structural forces that have been combining to cause the decline of unionization, which are big. They're, you know, policy hostility in a very, very difficult organizing environment where

violations by firms are not penalized legally. They can't be. There's no, the NLRA doesn't provide for penalties to firms for violating the law. And you've also got difficulties organizing in service sector where, you know, organizing a big, several hundred person plant is very different than organizing several small 15 person and establishments. So all of these big structural factors are still there. And I think the question of how much union organizing effort can, the kind of, the upswell of organizing can outweigh those big structural factors and move us from a place which is already so low in terms of unionizing.

That's one thing where I think, I'm not sure how much change we're going to see in a big, meaningful sense. Yeah. It's a key question, you know, whether what we're observing a cyclical, I mean, there's definitely a cyclical component to it, obviously, because the pandemic is still disrupting labor supply and, you know, that's going to take a while to iron out. But how much of it is, there's kind of an underlying trend here. I was actually at a function or a function might be too strong a word, a kind of an event where that might be destroying a word too. I don't know what the word is, but, you know, you're convening.

Convening is the right word. David Otter was there. David, David is at MIT, isn't he? He is, yeah. Yeah, so he's a colleague of yours. And he presented some really cool research on wage growth by different parts of the income distribution. And nicely showed that even pre-pandemic, wage growth for low-wage workers had caught up to wage growth for highway workers. Now, obviously, during the pandemic, low-wage workers have done well because that's where the labor shortages have been most severe because that's where the pandemic has been most of a problem.

Labor, leisure, hospitality, retail, that kind of thing. But he was making the point that, in fact, it looks like there was something going on even before, you know, the pandemic had. And that would suggest that this is not just cyclical or some secular, you know, developments here that might be helpful. That's interesting. And that wasn't explained fully by their tight labor market pre-pandemic, you know, because we were at very low unemployment rates. Yeah, it started. Yeah, it started even, well, you know, it was 2015, 16, 17, you know, before, before, 8. 18 and 19. So we would definitely, you wouldn't say we're at full employment.

It was like in the week, you know, expansion period after the financial crisis. You know, you know, if you go back prior to that, you know, the low wage workers were getting, you could see it. The wage growth was well below, you know, middle tier or high wage workers, but it had converged by the 15. I'm making this up. So I don't have it quite right, but 15, 16, 17, but that was a point he was making. Yeah, very interesting. Yeah. And then, of course, there's a lot of discussion around, you know, immigration policy, how that's changed, the trade wars and, you know, what implications that has for low wage workers, you know, that kind of thing. So I thought it was very interesting. But it's going to be a very key question.

And I'm sure the fodder for many papers for years to come for you, Anna. Yeah. I think so. That's going to be a fountain for your intellect, for all the work that you do going forward. Well, it was really a really a pleasure and honor to have you on. and learned a lot and hope to have you on in the future. So thank you very much for joining us. Thank you so much. It was a really great conversation that enjoyed it.