Odd Lots - Adam Posen Has a Warning on the Danger of Bidenomics

Episode Date: August 30, 2023

The Biden administration has undertaken an aggressive effort to revitalize domestic manufacturing, particularly in areas like semiconductors and green technology. The reasons are manifold. The pandemic exposed frailties in the supply chain. Climate concerns have accelerated the urgency around the energy transition. And anxiety about growing Chinese dominance in key areas (such as batteries) has heightened geopolitical concerns. So now, day after day, we see spates of announcements of new factories being opened up in these areas. But what are the risks and dangers to this approach? On this episode of the podcast, recorded at the Jackson Hole Economic Symposium, we speak with Adam Posen, a former member of the Bank of England's Monetary Policy Committee who now serves as president of the Peterson Institute for International Economics. He warns that the basic logic for this domestic industrial policy is misguided and based on a faulty understanding of domestic economic dynamics. He also says that we're taking a wrong and dangerous approach to dealing with perceived competitive threats from China.See omnystudio.com/listener for privacy information.

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Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, and wherever you get your podcasts. Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall.

And I'm Tracy Alley. Tracy, you know, we're still here at Jackson Hall. We're hanging on. We're not really in the actual event space. So we're just sort of hanging out in the lobby, looking for people as like, hey, do you want to come on the podcast? And we found a person. We found a person.

We have the perfect guest, actually. But one thing I'm really excited, you know, one of the things we've been talking about already is this idea that, You know, monetary policy, it's always challenging. It's always challenging when you have things like COVID, the war, et cetera. But we're also in a period in which fiscal policies, macro policies, trade policy, industrial policy, these things that we talk about on odd lots all the time, like how do central bankers deal with them? Absolutely. I feel like I've said this a number of times at this point. But one of the themes of this meeting seems to be how do central bankers get a better understanding of. the real economy and then actually respond to it. So things like supply chain issues or booming fiscal spending, how does monetary policy actually react to that? And it is fairly new at a time when the unemployment rate is at multi-decade lows. We have this huge run-up in the deficit.

Right. And we had, you know, people always talk about like the sort of 40-year period. But we really, you know, liberalization, globalization, et cetera. And then in the 2010s, sort of the fiscal activism, really taking a backseat, probably not enough by many people's accounts of like demand management on the fiscal side. And now we're getting the reverse, right, because we had the aggressive expansion. But we're also having these, in the U.S., in particular, these very aggressive domestic investment plans, right, to climate semiconductors, it intersects with trade in a very big way, tensions with China, an attempt to move supply chains, particularly around an advanced tech or clean tech on U.S. shores. And so how that's going to work, how should

economists think about it, how should regulators think about it, how should central bankers think about it is sort of like a huge question that hangs over all this. Absolutely. And you're right. We do have the perfect guess. We do have the perfect guest because he's someone who spans all of these topics. We're going to be speaking with Adam Pozen, president of the Peterson Institute for International Economics. Also a former central banker, a member of the Monetary Policy Committee at the Bank of England and someone who lately has been somewhat critical of the Biden administration and some of the domestic policy and trade choices that the administration has made. So let's have a conversation with Adam. Adam, thank you so much for coming on obloat.

Thank you, Joe, and thank you for the generous introduction. Let's just jump right into it. You had a piece, I think, in March in foreign policy that's gotten a lot of attention. I still see people talking about it. Adam Tooz wrote about it recently in his chart book and said, like this is this sort of, I think in his view, one of the defining critiques. We talk about this all the time. We've had people who run the chips program and the IRA, et cetera. But like big picture, like, what is your concern about some of the domestic policy choices being made right now?

Thank you for referring to my article. And it is a concern that not just the government's getting involved in industrial policy in the U.S. The U.S., as you've talked about previously, I've heard some episodes. At various times since history, there's been public investment by the U.S. in technology. there's been more aggressive, less aggressive efforts. What I'm worried about are potentially four big things. First, so much of this has been cloaked as rescuing the industrial sector and not so subtly buying the votes of angry white industrial workers who feel left behind in Wisconsin

and Pennsylvania and West Virginia. And I understand that to need. I'm not sure it's going to work. I'd like to think there's other ways to win an election. But the good news on that is several of the people who advocate this policy have now admitted, even if it goes well, we're talking affecting a few towns, several hundred thousand people, which matters but isn't going to make a thing. The second thing which I'm much more concerned about is whenever you create a government program

that's about giving money to individual companies, and you combine it with this trade policy, that's very much, as the president keeps saying, American made, American built, American exports. By America? By America. That you end up with creating what we used to complain about a lot in Japan and Korea and China and Europe, these national champions. So, you know, it may be that Intel or Micron just to pick two of the names that are out there. Are great companies with great tech.

But you put them on the government payroll for billions of dollars, and you say that we want to make sure there's an American presence in this industry, American leadership in this industry, and they can end up taking you to town. And frankly, if Trump gets back in, the corruption opportunities are horrible. Third thing is internationally. I'm hopeful that the Biden administration is realizing that they went a little too far on their anti-trade rhetoric. We can debate how much trade has been fair or unfair and how much that matters. But in the context of what you said in the lead-in, and then again, I know you've spoken about this with other people. You know, the U.S. has been basically withdrawing from globalization for 20 plus years.

Everyone thinks, oh, globalization did us in. But we've actually since NAFTA, we've done almost no trade deals. We've cut way back on immigration. We take a lower amount of investment from abroad than we used to. And there's all kinds of blowback from this. There's foreign policy blowback. There's development blowback in the South, the Global South. There's technology races.

And so this ends. up with these things like these subsidies races that we're having with Europe and de facto with China now. The final point, sorry to go on so long, but the biggest thing is where I think the Biden administration is right is the U.S. had to do something constructive on climate. I mean, it's an emergency. We weren't doing anything. Or at least the government wasn't.

And so they were trying to figure out a way. They couldn't do a carbon tax. They couldn't do a lot of things. this package of investments, as they call it, was supposed to get us some climate progress. And it is. My worry is that it's going to end up being a repeat of what happened with COVID vaccines, which is the developing world and even the relatively high-income developing world, places like Brazil or Turkey, are not going to get the access to this technology

or when we have good green technology, it's going to become a political football. Are you loyal to China? are you loyal to the U.S.? And for saving the planet, to put it bluntly, the most important thing is when we get good new green tech, it gets used and adopted as widely as possible. And this is where I've been particularly trying to engage with the Biden administration to the extent they have interest,

is to say if you're doing this whole bundle of industrial policy and trade policy and nationalist policy, how do we make sure that the technology does get down, that it's not like with COVID vaccines, that you hoard it off for yourself, and you make it a political loyalty test, do you buy from us or do you buy from them? So many different directions we could go in already.

And we're sort of talking about multiple different policies at once. So let me step back and ask a big picture question, which is, is there a good model of industrial policy in your mind? Can you sort of distinguish between bad industrial policy that potentially leads to protectionist outcomes and perverse incentives, and good industrial policy that does achieve the outcomes that are intended. It's a very good question, Tracy. And I think the devil's not in the details, but the devil is in some basic design choices. So one aspect is I think it's much better to have the public investment going more into infrastructure, more into public goods.

And some people associate with the Biden administration say, well, that's that old neo-need. liberal thing that didn't work. But actually, those parts did. We just didn't spend enough. So invest in universities, invest in R&D tax credits, invest in skilled immigration, invest in infrastructure of power grid and fiber and EV charging stations if that's how you want to go. The second thing is, and to be fair, the Biden administration and the Congress have done a little bit on this, is to make it so that even if you're trying to get production at home for, say, a good reason, like we need to have some semiconductor capacity in the U.S., manufacturing capacity in U.S., you still leave it open that there's room for competition from abroad. So you're trying to

avoid the whole corruption and international backlash, or at least reduce those aspects, by saying, okay, if it turns out it's a German or a Korean or a Japanese company that has the good tech, you know, we're not going to prevent or discourage our people from buying it or discourage them from selling it here. And again, there are some loopholes like this whole leasing deal they made for electric vehicles in the bill that they can make. There's more things they can do. But so anyway, to me, those two things. A lot more of the public investment goes to general good rather than the specific company capacity, and that you may, you may, make sure that there is competition, including international competition, for the industrial

policy goals you have. I want to go back to something you said, and I think there was a little bit of controversy when you may have said this in another context, but the idea of like manufacturing, the politics of manufacturing, the maybe the nostalgia for manufacturing this side. And, you know, you mentioned, okay, that there are, the China shock really hurt certain areas the Midwest is the point of accelerating domestic manufacturing to maybe placate, you know, several hundred thousand white men in the Midwest by reinvigorating that. But there is another school of thought that I find interesting, which is that, no, actually manufacturing is really

important. Complexity is important, ability to produce advanced goods is an important aspect of being a rich country. Do we just, is that false? Do we just have this sort of like false nostalgia for the benefits of having a manufacturing economy? I think both issues you raised Joe are right. And just to be clear, you know, white males have just as much right to government largest as any other group in society. And anything I've said to indicate otherwise was mistaken. I mean, so it's, but it is this idea that nostalgia is the word I use, thank you,

that there's, Trump had a lot of this, but I think Biden has some of it. that, you know, there was this sort of golden era when a person without a high school diploma could make a really good living in a plant, and that plant would employ lots of people in one place, and they could depend on the job, and so on. And this created a community and all this. And the point of calling it nostalgia is, and meaning that's a bad thing, is threefold. First, that really only apply to a small number of people. I mean, even at its height, you know, manufacturing share of employment in the U.S. I don't think ever got much above 30 percent, and that was in the immediate aftermath of World War II. And obviously, there were people, women, people of color, who didn't have equal opportunity in that space as other people. But anyway, so it's still a lot of people, and even now it's 13 percent of employment. It's still a lot of people. But just to say, it was never, ever, ever going to be the engine for every.

The second thing is to say that there is a bias in that that underplace just how adaptable a lot of Americans, white, black, female, male, everybody has been, you know, moving around the country. Immigrants who come here, but people who moved in the great migrations from the south to the north for manufacturing and then out of the north, back into the south and to the west. But also communities that came back up. We think about, you know, Charlotte, North Carolina is a financial center. Durham is a technology center. This whole area in North Carolina that, you know, several decades ago was tobacco. And Pittsburgh, everybody always cites it because it's amazing. Pittsburgh is now a health center and many other things, and it's not steel anymore. And so there is this sort of bias towards not understanding the change is part of economic life. And it's actually good.

But the third thing, which is where I guess it gets a little more controversial, is for some people, and I think this was much more true of Trump's and some of the people who supported him, there's this sort of idea that macho tasks of large, hot metal or big heavy things you can drop on your foot is just somehow more worthy. The allure of welding. Yeah. Well, and Tracy, as people point out, it's, you don't make fun of people for that. That's fine. For some people, that's a real calling and they really want to do it. But the idea that every son of a welder or daughter of a welder wants to be a welder and should want to be a welder and doesn't want to, like, maybe go into a white collar job or maybe work indoors or outdoors or whatever is just weird. And so sorry, Joe, your big point, which is the more important one, is can we survive if we don't have.

of a vital manufacturing sector. Or at least advanced manufacturing. Right. And I think the answer to that is, well, we do. We just don't have as much manufacturing employment as we used to. So you look at the very basic numbers. The share of the U.S. economy and value added in manufacturing is basically on change or even slightly higher than it was when the manufacturing

employment share was much more, which is another way of saying. Productivity in manufacturing has gone up enormously. We're producing more value of stuff at the higher end, with fewer people. And so in a sense, we can debate that question you raise, but it's also, it's just not even a realistic question. So like, look at the semiconductors. Yes, it's true.

We did not take into account, and I say we, I mean everybody, did not take into account just how dependent certain kinds of semiconductors were on this obviously exposed, very specific set of plants in Taiwan. But the fact is, there's a huge number of, of components of semiconductors, including the ones made by TSM and the ones made by Samsung and Hynex and others, that are dependent on American technology, they're dependent on American design technology, they're dependent on American intellectual property, that dependent on American components. And it's the low-end stuff the U.S. doesn't make anymore. So in theory, it's a

good question, but in practice, it's not one we even have to face. I'm Francie Lacquan, an award-winning journalist, and I've got a new podcast, Leaders with Francine Lacqua from Bloomberg podcasts. I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacois, wherever you get your podcasts.

So you brought up semiconductors, and they are probably the best example of this. But if you take some of these stated goals of this new industrial policy at face value, it feels like a lot of it was sparked by things that happened during the global pandemic when it did become somewhat difficult to get critical components from the east to the west. How do you address that supply chain resiliency concern? Yeah, I think there's no question, Tracy, that the, from some sort of optimal planning perspective, or if you're meaning, you know, if the government tries to take the interests of the whole society or economy rather than an individual company or investor, we were past the point of resilience.

We had too few notes. But it's important to recognize that didn't happen because of somebody making a stupid decision. that didn't happen because of some perverse government incentives. That happened organically. I mean, you would have things where multinational company, the CFO on an earnings call or whatever would say, and we're going to cut costs 15% next year. And somebody working in a plant four levels down says,

oh my God, I got a memo. I got a cut cost 20%. And they figure out, oh, if I order this from Korea or this from Mexico, I can get it. cheaper. And over time, that works. And you realize, oh, there's a whole group of companies down there in Mexico. Maybe I can do some more from them. It just developed organically. And during COVID, we had the Peterson's who tried to look more into this. And we discovered it really was that way. I'm not going to name them, but we would talk to major global manufacturing companies and

say, we just want to do research. We just want to understand what your supply chain is. And the response we kept getting was we don't really know. It just sort of grew up. And we're just, just now figuring out where it all is. So anyway, that doesn't mean it's still valid for, I don't want to do a double negative, it's still valid for the government to say, you know, in certain critical industries, the interests of the society, the economy are not being taken account by all these decentralized decisions. But it's worth remembering that even if that's right, by creating resilience, what you're essentially doing is you're saying, I'm taking out a costly insurance policy. I'm building redundant capacity. I'm buying something that's more

geopolitically safe, but more expensive. Because remember, there was a price reason why it was done the way it was done. There was a reason stuff was being produced in China, not Mexico. So it may be worth it. And this is the thing I tried to argue in the past. It may be worth it to do that from some societal perspective, but we shouldn't pretend that it's going to be short-term beneficial for productivity or profits, because what you're doing, is you're buying insurance, you're spending money against a bad outcome. The other point, just echoing something we were talking about a minute ago, is the international side. As an economist, and when you talk about resilience, the issue is diversification. It's not

necessarily reshoring domestic. I mean, it gets a little confused because if you decide China's a strategic rival or worse, then maybe you don't want China. But, or you may be, you may want to distinguish friends for friend-sharing. But ultimately what you care about is diversification. And so if you have one plant in the U.S., and it's hit by a local flood, or it's taken over by a terrorist group within the U.S., or it's corrupt the same way a corrupt company appears in a different country, and it produces substandard products, and you haven't diversified from that, you're still in trouble. So these are the cautions I would put in. So I'm glad you brought up China because this leads nicely into the other thing I wanted to ask you, but how much of the current industrial policy do you see as a direct response to a potential either economic or geopolitical threat from China?

One thing that's true of big economic policy decisions in Washington anywhere, just as it's true of committee decisions in central banks is your goal is to get the majority of people to say yes. They can each say yes for a completely different reason. You don't need to have a coherent one set of reasons why you say yes. You just want all the people to say yes. And so we had, in a sense, the perfect storm behind this set of policy. So there were people with legitimate concerns about China, and particularly from the point of view of supply chain resilience, but also to national security.

There are people with overhyped crazy concerns about China, fearing Chinese students, I think, to an excessive degree, for example. There are people who were very concerned about resilience coming out of COVID in the way you said. There are people who were very concerned about these left behind post-industrial communities. There were people who were, you know, you go down the list. There were so many reasons for this policy. And so, you know, so for someone like me to be arguing against it, this is in some way sort of silly because it's overdetermined, right?

There's a thousand reasons why they're doing this. When we talk about China specifically, I have a new article out in foreign affairs, and I argue we should be thinking to put a bumper stick on it more in terms of suction than sanctions. That she and the Communist Party have messed up their economy by being interventionist in people's faces, not just politically, in a way they hadn't been for decades. that, I mean, obviously the Communist Party, the leaders ruled China, but there was what I called a no politics, no problem deal that you see in a lot of autocratic societies. Dang Xiaoping and idiot sunflower seeds. Exactly. I was just rereading that. Perfect.

You know the reference. I was just rereading that part of the bio of Deng that Ezra Vogel did a few years ago. And so you see this in a lot of countries, this was true even under Putin in his early days in Russia. Basically, you don't protest in the streets. You don't run for office against me. You do the occasional bribe. I'll leave you alone to pursue your livelihood, to run your small business. But now, zero COVID comes along, and everybody has to study Xi thought and all these other things.

And the average Chinese person is spooked. Anyway, the upshot of this is, I think we need to worry less about containing China in the economic sphere, except for some very specific national security technologies. You can make a case. I think it's more that let Xi put up barriers, put up interventions in his society, let us and the other allies attract capital and people and investment out of China. This worked against the Soviet Union, this worked against the fascists in the 30s. I'm not saying there's going to be wholesale exodus of millions of people, but you want that positive sort of suction pressure on Xi and the regime. And then what usually happens is, as we saw in the Soviet case, and as we saw in various other places, the leader in Latin America, the leader puts up more and more restrictions because he gets worried about the money and the people leaving.

And he worries about the attractiveness of the alternative. And the more he and his party put up restrictions, the more the people want to leave. And I think that's the kind of dynamic we should be leaning into if I can use that phrase. We are definitely going to have to do a history episode just about the story of the idiot sunflower seed company and what that says about the history of the Chinese economic model. But I want to continue along this line because I think, I don't know, maybe like 15 years ago or pre-grade financial crisis. You know, when people talked about Chinese trade, like it was very much focused on like, what is the level of the UN right now? Are they holding it too low and are they boosting? You don't really hear as much about that.

Now the story is much more while they're really doing a great job investing in domestic battery makers and domestic car makers and they have this airline aviation company Comac that's going to might eat into Boeing and Airbus. And it's much less concerned about pure like they're competing us because they're too cheap and more like actually they're really getting good at certain high tech things. Is there concerned that's legitimate like maybe less about the currency level? But is there concern that we should have about? Look, they're investing in their domestic champions. Maybe we need to respond to them. I think you've described accurately the way things have developed, Joe. Colleagues of mine of the Peterson, Peterson, Joe Gagnon, Morris Goldstein, Nicklardy, 10, 15 years ago were really out there screaming with good reason, with good arguments about the Chinese government's undervaluation of the yuan. And a lot of the talk about the China shock and some of this political backlash, frankly, would have been muted if the U.S. government, both Democrat and Republican, Democratic and Republican, had listened to us and others and done something about the Yuan

undervaluation. But to be fair, the Chinese government leadership, basically around the time of the financial crisis 2008-9, stopped undervaluing the yuan. They at least stopped intervening actively to push down the yuan very much. So that is, in a sense, it matters. It matters. but it was competing on cheap is different than competing on quality. You're absolutely right. So now the issue is competing on quality. And there I think it's less about fair, unfair than what are the risks? You know, throughout history, business history, modern business history,

including competition within the U.S., you know, intellectual property theft, reverse engineering, getting around people's trademarks, has always been a factor. and the Chinese corporate sector probably certainly was worse on this in some ways, but I think you put your finger on it, that it's more a question of investment. Now, we in the U.S. have been the envy of the world in commercial terms for decades because our investment system, for all our problems, for all what happened in 2008, in the run-up to 2008, we do a better job of first.

financing tech than anybody else does. And the Chinese have leapfrogged over the Japanese and the Europeans to become our closest rivals in doing this. But we've also seen huge disaster for them, which they've admitted to in their semiconductor industry. They spent billions, in U.S. terms, billions, trying to develop this high-end semiconductor industry for the last several years, even before the most recent conflict, and they ended up admitting it didn't pay off at all. And they jailed a bunch of people for corruption, and we don't know how much what was actual corruption versus just punishing poor performance. You know, so just because they throw money at stuff doesn't mean they're there. So long-winded answer to say, you're right, they've shifted from competing cheap on trying

to devalue their currency to competing strategically in some industries. I still think our allocation of capital is better and higher return than theirs. But there are definitely things we should be doing to invest, going back to some things Tracy and I were saying a minute ago, invest in training, invest in skilled workers, invest in infrastructure, invest in protection of intellectual property, invest in standards that can help us get ahead. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report. delivered right to your podcast feed.

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We're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. Can I ask Joe's question on a slightly wider scale, which is, to what extent is the U.S. now driving de-globalization? versus responding to it. Because we're talking a lot about China, but of course China isn't the only country out there that is trying to boost domestic manufacturing or invest more money in strategically important industries.

It's a very troubling question, Tracy, and it's the right one, and it's what I and my colleagues have spent a lot of our last few years working on because roughly midway through Obama's, second term, the consensus in Congress and in a lot of business as well as the unions already was U.S. had been played for a sucker in international economics and globalization. I think this is just fundamentally false. As I mentioned, the U.S. has actually been withdrawing from globalization rather than grappling with it for many years, arguably 20 or 25 years. And whether or not

the U.S. has been withdrawing. of China, and even if they behaved well, the existence of 1.4 billion people who are capable of participating in the world economy matters. It's not going to disappear, and they have a right to make a living, even if their leadership doesn't have a right to do everything they do. So the danger, which we've seen come true over the last few years, particularly under Trump, but somewhat continued under Biden, is to scapegoat foreigners, scapegoat China, not even clear for what given how well the U.S. economy's been doing in a lot of ways. But to just create this sense of we were cheated, we were played for a sucker,

we should be the bully, to some degree. That's what Trump and Lighthizer and others have said. And I worried that some of the things the Biden administration said and did in the first couple of years, particularly things Ambassador Tye, the U.S. Trade Representative, has done on the trade front, is like that. It echoes, I mean, they independently tie and others believe this. But, you know, neoliberal trade liberalization destroyed our economy. Again, it's not clear that economy's been destroyed.

Some people have suffered, but that happens all the time, and that has to do with the fact that in our society, we have a very miserly welfare state. And if our society would give a better welfare state, fewer people would suffer. But anyway, I am hoping that between the some feeling for reality and the foreign policy realities as well as the economic realities and just some willingness to be open to basic fairness and evidence. The Biden administration

is going to stop going this direction. I don't expect them to tomorrow lift the tariffs and suddenly become free traders. We saw this in Secretary Yellen's speech a couple months ago on to a lesser degree, somewhat grudgingly, but still there in Jake Sullivan's speech. There are two big economic speeches, which I know you've discussed. What are you worried about? And by that I mean, like, right now, you could, like, every day, there's a new factory opening. It looks pretty amazing. There's a new battery factory, and you know, there's a lot of investment. And you look at some of these charts. The lines are still, the lines are going up. Inflation is moderated. We're just talking short-term things.

But, like, what worries you? What's the way this goes bad? Or what are the scenarios? in which, okay, yeah, all this investment does not yield what people hope. And what does that look like to? Well, I think first point is, again, I'm hopeful people are realizing this, but it's not going to create that many jobs. I mean, in the end, we only have a finite number of skilled people for constructing these plants and working in these plants. And unless you get a lot of other policies and a lot of other things going on, you're just going to end up moving some of those people from one job to another. So that's the first disappointment. Is that the end of the world? No. Second, as I've tried to say, and building on what you and Tracy were just talking about, is I think the international

repercussions become real. I think if the Biden administration doesn't say, okay, we've gone far enough in this direction, or the Trump people come back in and go further in this direction, you start getting retaliation. So we're already in a bad situation where there's this subsidies competition between U.S. and Europe and China, and then to some degree some other countries are going to try to play, but they can't compete. And so it ends up like a really bad version of Boeing Airbus, right? So yeah, it's good to have two companies producing planes. It's also not good that they both get enormous amounts of government subsidies in part because the other guy gets, the other company gets good, enormous amounts. It would be better if we basically

did arms control and took it down and equal amounts of reducing the subsidies on both sides and made a deal to keep that from going. And that starts being real big numbers. I mean, that starts being in the tens and hundreds of billions. I mean, that's real money that could be used for other things. Third thing, mentioned what you were saying, since we're at Jackson Hollis in the inflation risk. So, Chair Powell and his speech was perceived as slightly hawkish, more hawkish than expected. I think he was about where I expected him be, but a tiny bit less hawkish than he should have been. That given where our labor markets are, which is wonderful. There is still a risk that we could see a resumption of inflation,

an acceleration of inflation, re-acceleration of inflation. And, you know, there's a lot of chatter right now on Twitter about different charts and things. But the- And we know the chart. But the main point is it's not, what's important to remember is it's not unheard of in U.S. experience, in other high- income economies experience, that you go through a disinflation, you get most of the way there, another shock comes along, and inflation re-accelerates. The bulwept effect in prices. To some degree, but it's also just if you're, and this is that every good deed has its downside,

if your labor market is like it is now, which is wonderful, which is unemployment measured below four percent and labor force participation back up where it was before COVID for prime age workers and your anti-immigration unfortunately, you get another shock and it could just be an everyday shock. You know, gas prices go up or suddenly because these investments in chips production start creating much more demand than we expect. You end up with inflation sooner and sharper. And the chair Powell talked about that. The idea there's this is what he calls a nonlinear Phillips curve, right? that if you're close to a very full employment and there's a recent history of inflation,

inflation may increase faster than you'd like. So that's another risk, and that would not be good going into the election. That would not be good in the past. I was going to say, Tracy, the two big peaks of the grantee towns behind the hotel we're at, I can, every time I look out of them now, I'm like, that looks like the two peaks of inflation in that chart right now. You see inflation risk on the horizon, literally on the horizon. I see on the horizon that peak in the mid-7 days of the late 70s when I look out at the mountains.

Okay, well, I'm glad this was Adam's last sort of risk factor because it segs nicely into the discussion of how monetary policy should respond to the sort of fiscal policy that we're talking about. And I guess I'm trying to think how to ask this question, but you're an inside person at the conference. We are not. We are outside rejects, so we have to rely on you. We have to rely on you to convey. I think the term is hangers on. Oh, there you go. Hang us on. I say lobby people. Okay, we're lobby people. Oh, no. Central bankers don't get lobbied. So what are the discussions around fiscal policy in that room? Because on the one hand, it feels like, you know, the actions of 2020, the unleashing of spending maybe made central bankers lives easier, at least in the short term. But now it's, seems like they're complicating them massively, especially if you don't know what industrial policy is going to look like in the future.

No, it's great that you brought it back. We are here at Jackson Hall, and Joe definitely should become a regular if he looks at the teetods and sees inflation charts. I mean, that's real central banker psyche. Look, I think the starting point has to be it is very awkward, and I've experienced this directly in the room, for central bankers to talk about fiscal policy. because ultimately if you're an independent central bank, which essentially all the free market countries have, the deal is politicians can complain about you, but they don't, or your policies, ideally not about you,

but they don't interfere, in part because you don't go out and lecture them on what's not your responsibility if you're a central banker. So your responsibility is monetary policy and some parts of financial stability. And that's it. You're not supposed to be lecturing on fiscal policy. And in developing countries or countries where governance is not, those are not the same thing, but where governance is not as strong, you sometimes find central bankers feel they have to talk about fiscal policy and budgets and irresponsible policies. And it gets very awkward very quickly.

So you don't want to do that if you don't have to. But as you're saying, there has been a shift towards more activist fiscal policy. And it's one thing during COVID, like you said, in 2020, you don't know what's. going to happen. The world's facing a pandemic. You've seen unemployment spike. You've seen all kinds of things. And I think, frankly, somehow the Congress and the Trump administration and the Biden administration did largely decent policies in the emergency. I mean, maybe Secretary Mnuchin. I don't know who do credit, but they really did do basically good policies for 2020 and early 21. The issue is going forward from here. We're looking at a world. We're looking at a world.

where there's likely to be sustained, increased public spending in all the major economies. So China, G7, including U.S., people are spending on industrial policy in these subsidies wars and investment. People should be spending on direct green investment to try to get some better traction on climate. People, unfortunately, should probably be spending more on defense, given the tensions, given the behavior of Russia and the tensions with China. And you start adding all these up and then all the stuff that are friends of the Peterson Foundation, which is separate, but cousins of ours, so to speak, you know, about demographics and long-term sustainability issues. You know, you're seeing potentially one and a half, two, maybe even three percent average higher public spending over the

next several years of GDP, sorry, 3 percent of GDP. That's a big number. And no prospect that I see that the taxes are going to be raised to cover most of it. So that's a world that's very challenging for central banks. And how do you fit that in? And you say, so what was it like in the room, what was being discussed? Well, it's interesting that last year, actually, there was much more heated discussion and much more about this issue of could the Fed and others have raised sooner, more aggressively given what the fiscal policy was in the first quarter of 2021?

could they have adjusted more, should they have adjusted more? And then if, and Gita Gopeneff from the IMF raised this somewhat in her remarks last year, if there is this green transition, which includes a lot of spending, even to adjust the economies, how should central banks react at it? I'm phrased it all as a question because partly there are no easy answers and partly because there's no anything close to a consensus yet in the central banking community. on this. There's a little bit too much of, well, we can't talk about that. That's not our job. But they're going to have to confront it. What I will say is so far this year, the discussions

that I've heard are mostly about, in a sense, the questions of how this plays out into long-term interest rates and how this plays out into productivity growth. And those are the most important things for a central bank to think about for the long term, but they don't quite capture the political economy of this difficult game. And yeah, I wish I knew how to manage it. Productivity. This investment in domestic manufacturing, domestic technology, things like that. Do you have any hope that maybe productivity statistics, which I think have been pretty mediocre for a while, maybe gone down? Could they reverse? Could a smart public investment, could we see a reverse on that? The slowdown and productivity growth, which started in roughly 2004 and has been evident, basically, for the last 10, 15 years, is very concerning.

Because the slowdown and productivity growth happened pretty simultaneously across all the high-income economies at once, it looks and smells like what we call a technology shock. So it isn't because the U.S. underinvested in this, or Europe, your Germany didn't have enough workers of that, or Japan got older faster. Since we all basically slowed down at about the same time, the same amount, it's probably something to do with what's global, which is technology. And the grim news about that is that put you back in the world

of the famous Robert Solo, the idea of what's called exogenous growth, that we don't really control it. So what I've always said is what you want to be doing is having the government buy really expensive lottery tickets. You're invest in universities, you invest in promising technologies, you invest in infrastructure. There's no guarantee you're going to get the next big thing, as Michael Lewis puts it at the other end, but it increases your chances. And this is like one of those good lotteries where there's only a thousand tickets. They're really expensive, but if you win, you win big. And that's the way to think of it. So then the question is, is the specific kind of spending they're doing on semiconductors and things like that,

the best kind of lottery ticket? I don't think so. It can't hurt, but I'd much rather have them investing in broader technologies than the specific industries. I just have one last question, but I don't want to forget it. You mentioned an unpopular comment, not many people say, maybe we need to invest more in defense. There's that book that came out a few years, trade wars are class wars. Do trade wars lead to hot wars? And do you worry that if we did see spiraling tit for tat, subsidy races, trade, that actually it could become more of a geopolitical story? Short answer, yes. I think the trade wars are class wars concept is actually a particular theory by Pettus and Klein, exactly. And I have some issues with it.

it. We don't need to go into that. We'll do a debate with them in D.C. Yeah, that'd be fun. That'd be good. If you want to make it happen, I'd be lovely. But I think the important thing is some of the Biden people, people like Peders and Klein, have attacked the idea that sort of Tom Friedman worldview, that if we do lots of good globalization in trade, the world will become more peaceful.

As with most things in social science, it's actually the reverse. It's not that if you do good things, good things will result. It's if you do bad things, good things won't result. It's sort of the Obama don't do stupid bleep version of social science. So there's no guarantee that when we did trade liberalization, that China was going to become this wonderful, peaceful, democratic place. There is a very high likelihood that if we have escalating barriers and sanctions and restrictions and hostilities in the economic sphere,

that it will spill over and pump up hostilities in the military sphere. So you can argue quite reasonably, don't oversell the benefits of trade to peace and democracy, but you shouldn't undersell how much active economic conflict can spiral out of control and cause other geopolitical issues. Adam Pozen, that was a real trade. I'm so glad we caught up with you here. That was a fantastic conversation. Really appreciate your perspective.

And thank you for, I can't believe it's taken on this long time. Yeah, it's crazy. I'm grateful. I'm what's the old line, a long-time listener, first-time caller. So thank you for having me on odd lots. We're going to have to have Carmen make a big reel every whole. Important people who say the list. But thank you so much.

And we should make that debate happen. That would be so much fun. And Adam in D.C. And we have a conversation about trade and all this stuff. I love that. Let's do it. Let's do it. Thank you.

Thanks, thanks. Tracy, I really enjoyed that conversation. A different perspective, a sort of robust defense of, trade and openness and some of the, you know, maybe ideas that aren't currently in fashion, but a reminder of why they once were. I think he brings up a lot of valid critiques or potential risks. And I am taking notes for our next interview with a Biden administration official. The other thing I thought was really interesting was when he was describing how policymakers are sort of thinking about fiscal at the moment, this idea that actually it is very awkward because

by design, central banks aren't really supposed to opine on what politicians are doing fiscally. Yeah, I really enjoyed his perspective. It is interesting, too, like comparing 2022 and 23, I really appreciate the sort of glimpse inside the vibe. One thing I appreciate is this sort of pushback against the idea that, like, the U.S. economy has just been getting played for all these years, right? Because that is, that was sort of a key plank of Trump, which is that we're the suckers and the reason that we couldn't be part of the Trans-Pacific Partnership, etc. is like, we just keep getting screwed, right, in these trade deals. And the pushback is like, actually, the economy has been all right. We've had our problems. But the idea that, like, we've been

getting screwed by free trade. Right. But I think it's such, going back to politics, it is such a harder story to tell that actually the U.S. has benefited enormously from this trade system than, oh, we have all these countries taking advantage of us. Well, and this is one of those things. And I think it's like the history of trade is that the benefits are very diffuse. And the people who have lost out are very identifiable. That's exactly it. And this has always been an issue with trade, probably going back hundreds of years in the history of trade. And so I think he sort of identifies that well.

Yeah. We have to do that debate in Washington. That'd be fun. Let's make it happen. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Thoughts podcast.

I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Wisenthall. you can follow me at the stalwart. Follow our guest Adam Posen. He's at Adam Posen. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashel Bennett at Dashbot,

and Sebastian Escobar under the Seabas. Follow all of the Bloomberg podcasts under the handle at podcasts. And for more Oddlots content, go to Bloomberg.com slash oddlots, where we have transcripts, a blog, and a newsletter. And I'm sure this one will be debated. In fact, I know this will be discussed because I first even came across Adam's article. In the Oddlots Discord, Discord.G.g.

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