Odd Lots - Did We Just Experience a Break in the Neoliberal Consensus?

Episode Date: March 15, 2021

For decades, the dominant economic philosophy of the United States has been that fiscal policy should be relatively inert, and that the Fed should be the primary driver of macroeconomic stabilization. But that may be changing. As evidenced by the stimulus deal, the political willingness to use fiscal stimulus in a responsive way appears to be growing. Moreover, the importance and power of fiscal firepower has been accepted by a range of actors, from Senator Bernie Sanders to the U.S. Chamber of Commerce. So are we at the start of a trend break in the neoliberal consensus (whatever that means)? We debated this question with Skanda Amarnath, the head of research at Employ America and Mike Konczal, Director at the Roosevelt Institute and the author of the new book "Freedom from the Market America’s Fight to Liberate Itself from the Grip of the Invisible Hand."See omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, OddLots on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a very big line. It's a lot. It's a firm. a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com

slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing Corporation Distributor. Hello and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy, you know, one of the big things, big themes I think that has, especially in the last year pervaded our episodes, is really just this idea of like the 40-year trend, more or less starting in the early Volcker years, years of declining rates, monetary policy dominant. And the question now is, are we at some sort of turn? in the direction of the economy, some meaningful sustained change in how we approach economic policy. Yeah, I guess the low rates aspect of it is still up for debate.

But certainly we have seen this talk of a handoff from monetary policy to fiscal policy. There seems to be a lot more room in certainly the U.S. political landscape to actually talk about things that the government could do on this front in a way that got stamped out much, much. more quickly in earlier years, I think. Yeah, I think that's exactly right. I mean, like, we look back at this period and think so many of these discussions, they really do come back to politics, political choices, and whether something is in the air, something of the water, or something fundamental shifting such that we can sort of break out of the old expectations about what government can and can't do, how much it can really spend, and

whether that will really produce a policy shift that would meaningfully change things. Maybe it would meaningfully result in higher rates, maybe result in higher inflation, maybe result in higher sustained wages, fuller employment, so far and so forth. All kinds of questions like that. And so we seem to be at a moment where a lot of these questions, a lot of stuff that seemed impossible suddenly seemed possible. Yeah, there's also an aspect of this that I think often gets missed, which is, you know, people talk about the possibility of the government doing more or being more involved in economic policy and things like that. And they always frame it like before the

government wasn't involved at all. But of course, the current system, even, you know, even if you categorize it as liberal or light touch or however you want to put it, what devised by the government. Like the actual economic system that we have in place was made through political choices. And so there's a possibility that political choices can change and we can get something different. Yeah. I think that's that's basically 100% right. Like people have this idea, okay, there's some sort of state of economic neutrality where the government is hands off. And now the government will intervene in some way. But of course, that set up that we had then or the setup that we have right now is also just the result of perhaps a different set of policy choices.

And those political choices are, of course, subject to change. And I think it's potentially happening right now. I should note it's very important. We're recording this March 9th around 6 p.m. There is scheduled to be a vote tomorrow. And hopefully that happens only so that we don't have to re-record this intro. But, you know, the House is scheduled to pass this $1.9 trillion stimulus that the Senate passed just this weekend, which really does open up this question of, are we going to do fiscal policy in a way, the likes of which we haven't seen? Yeah, I think that's fair. Yeah.

So the question really is, are we at a turn here? We have two great guests that I'm very excited to speak to, and they'll help us think through the current policy stance and the history and so forth. going to be speaking with Skanda Amernath. He's the research director at Employ America, as well as Mike Conkso. He's the director at the Roosevelt Institute. And he is the author of a new book, Freedom from the Market, America's fight to liberate itself from the grip of the invisible hand. So very excited to get his perspective. And I thought about this discussion and that we should have this discussion, actually back in January, because there was a tweet from Scanda. And he asked this question, which is essentially, are we at some structural break from neoliberalism in some way? Are we at this trend break? And that really is the key question. Did something just turn?

So let's just start with that. We'll try to answer that right off the bat. Are we at the structural break? So Mike and Skanda, thank you so much for joining us. I really want to start with that term, that word neoliberalism, because, I mean, it's kind of a joke. I would say like on Twitter, people always use that word, neoliberal, neoliberalism, the neoliberal consensus without any sort of idea of what we're actually talking about, what that means. So I'd love to get your perspective. I'll start with you, Skonda, both of you, come in if you like, what are we actually talking about when we throw that term the neoliberal consensus around?

So thanks for having me. I think I agree that it has been overused as a word. to just describe things people don't like, particularly from those on the left. But at the same time, I do think it also has some substantive meaning and does capture a certain arc that you were referring to earlier. So if we go back to some of the people who have defined themselves as neoliberals from people like Milton Friedman, he had a 1951 essay about neoliberalism to Charles Peters. He added a sort of Washington Post op-ed on neoliberalism in 1982.

if you kind of try to find the common threads and where this all fits, it's to start rooted in a skepticism of democratic and political power in terms of organizing society. If I were to really try to break this down into some sort of crude shorthand, it would be de-emphasizing the democratic forms of power and trying to rely more on markets. And if you're coming maybe a little bit more from the left, it's probably a reliance on technocratic governance

and maybe reliance on academia to really solve some of these problems. If we think about the Fed and sort of its arc in terms of dominating macroeconomic policymaking, the Fed's independence is sort of this mix of markets and academics, in the sense that the Fed is trusted because they are the macroeconomic experts. And at the same time, they're also kind of relying on the banking system to respond in a certain way to their policies, and that is the way in which you will get full employment and stable macroeconomic policy. So it's really delegating out functions that were maybe thought of as traditionally in the domain of Congress and the president and really trying to rely more on technocracy and markets to really organize that sort of part of society.

Some will disagree with this definition for sure. So Mike, I want to ask you about something that Skanda just said, which is this idea of, you know, a sort of market-based structure or markets dictating the ultimate outcome. Is there a good historical example of that actually working well? Because I think nowadays we're so used to talking about market-based systems not really doing what people would like them to do or not providing certain social needs in the way that some people might have expected or at least what would aim for. Is there an example in history where a market-based system worked and it was sort of the pinnacle of neoliberal. economic policy. Yeah, sure. So just to go back to what Scanda said, one reason the term's a little weird is because the term liberal is a little weird in U.S. context because some people use it to mean the New Deal and big activist government and the great society. Other people tend to want it to

mean a more traditional what we might often call libertarian idea. And what people often emphasize is new about this classical liberalism is the affirmative role of the state. Yeah. That The neoliberal's understood themselves. And if you actually read Hayek and Friedman, you'll see this pretty clearly. They understand it is an affirmative state building project. And the goal of that project is to subordinate democracy to the market and put in what the historian Quina Slobidian describes as encasement around the market to prevent it from Democratic challenges. So that's why sometimes the question about, like, what's an example of, like, a neoliberal solution that worked is often a little weird because it's often in the context of devolving,

privatizing, voucherizing, or otherwise removing the publicness of public institutions and public programs. You know, there's a lot of things that involve markets that work all the time. Single payer health care involves a lot of markets on the side of hiring doctors and buying bandages. What is unique about it is that it is removed from market dependency. It's the big thing I try to go into my book. The market is how individuals intersect with health care under single payer,

though obviously, you know, even in the UK, doctors are employed. They're employed by the state in that case. There's still markets and price mechanisms and feedback and incentives. But your ability to access isn't dependent on a logic of ability to pay and profit-seeking activity. So that's why, you know, there's a lot of solutions that involve markets and some things in which markets, which have existed before capitalism and it will exist after can play a very important part of solutions, but it's the supremacy, it's the dominance of the market dependency and the market logic. I think that catches people off guard in this era.

Did something happen, you know, in the intro, I was like, okay, 40 years, 40 years, Volker, 1980. Is that actually a meaningful turning point in your book, Mike? Or, you know, when you look at the history of economic thought and economic policy, Is that a real moment or is that kind of an arbitrary thing that we identify because the 30-year yield peaked and then it started going down after his tenure? You know, there's a real emphasis to run the clock back earlier. A lot of deregulatory moves done under President Carter. A lot of choices made about the nature of corporate structure in the 60s and early 70s. I think the shock of Volker was enough of a massive change.

under which on the flip side of which, and it ran concurrently with lowering a top-end marginal tax rates, a very increase in the decrease of unionization, the doubling of the rise of the share of finance in the economy. So I think it does mark a break, though, as is in the nature of scholarship. You know, the more you look, the more you see things, you see connections running earlier. But I do think, in particularly in what we're talking about here in monetary policy, macroeconomics, there's definitely a shift where the Fed is viewed in a much different way, and the role of economic theory and macroeconomics also changes pretty profoundly.

Sorry, can you elaborate on that point a little bit more? What do you mean when you say the Fed is viewed very differently now it is? Sure. So, you know, I can kick it to Scandotia too if you want to jump in. I don't want to dominate the conversation. Both of you. Sure. So I think the Fed itself, if you think about the 50s, 60s, 70s, 80s, 80s,

what really changed about the institutional centers of power on macroeconomic policy. In the 50s and 60s, the Council of Economic Advisors is one of the sort of key institutions for thinking about what to do with macroeconomic policy. That's who Kennedy is leaning on for sort of passing tax cuts. You see little things that sort of sound like, okay, tax cuts in sort of the Kennedy years, you start to see some similar measures sort of past future decades. but really it's fiscal policy that's sort of at the center of it. Monetary policy is still doing some things around recessions and maybe in some cases pretty critical, but like Volker

sort of crystallizes the sort of role of the Fed in this process. The Fed is going to be willing to hike rates to the point of putting people out of work and causing a recession. I think there are different parts of the policy apparatus, so if we step away from Macer from a sec. Those breaks can happen at different times. I do think in the case of when Reagan was elected and when Carter was elected, they had certain ideas that were different from their predecessors. So Carter more so than Lyndon B. Johnson, Reagan more so than Nixon. So there were some shifts in terms of the philosophy around how much do we trust democratic forms of governance to really work? And look, for a lot of people who are already skeptical of the state during the New Deal,

It was sort of natural to sort of go along these lines for a lot of people who may have been more optimistic about what democratic governance can achieve. You can look at, well, the Vietnam War was going on. There's a lot of stuff that the government's doing that sort of breeds mistrust for rational reasons, for justifiable reasons. And that also helps to sort of catalyze, well, maybe government really shouldn't be doing this, or if we're going to be doing this, we should be doing it in a way that's really deferring to the market and leaning on the market to find a solution.

and again, it starts to really warp the set of default rules around how we really structure all of these things. The default rule is, let's first try to do this through the market. Let's try to cut rates and hope that banks and financial intermediaries lend more money, and then if they lend more money, that will also help to sort of get the economy on right footing. Milton Friedman was the one who said, I want to make the Fed into a computer. I want to turn all this stuff into something automatic that we really can't lean on sort of a lot of these self-dealing politicians to solve. And so that, I think, we're kind of at a sort of wits end on some of this stuff now, because if you're leaning on interest rate policy to do the work of macroeconomic stabilization,

it's necessary, but it's not sufficient. I guess that's the way I put it. Yeah, I'd also just throw in that, you know, it's easy to characterize economists' views in this time period. I don't want to do this, but I think there's a genuine belief that the Federal Reserve had solved the problem of the business cycle by solely intervening in short-term interest rates and communicating their path through inflation targeting or some sort of medium-term target. You know, the era of the great moderation, I think, gave intellectual bolsterness to that, or like help bolster that as a concept.

But evaporated in that is the notion of what the Fed is doing vis-to-vis the financial sector. The way the Fed is really controlling the long-term yields, you know, the long-term interest rate, the end rate at which individuals use interest rates and access credit and the way the fiscal situation evolves, the interconnectedness of monetary policy with all other facets of the economy, which was a very strong part of how World War II was executed in its aftermath and was kind of living memory in that mid-century period, had evaporated into this much more ethereal, like, computerized mathematical sense of that, you know, with this small intervention, like the smallest intervention, the smallest cut you could make, you could dictate the macro economy.

And that's what failed in the Great Recession, though we spent a decade trying to figure out what to make of that. So that seems like a good sort of turning point to the sort of like the question or the, the Skonda's tweet about, is this the trend break now? And it feels like that sort of like great moderation triumphalism we figured out really came to a crashing halt with the financial crisis. 2008, 2009. And then we had this like decade of still mostly leaning on the Fed and the central bank, even though I guess by that point on some level, the idea that we could control the economy through overnight short-term interest rates kind of discredited. Now we come to the sort of the post virus period and this question of like, is this, is, are we on the new thing? Is, are we finally ready to have a macro policy that is truly like, sort of like post-fed in some sense?

So, Scanda, like, start off, like, you pose that thought on Twitter. Is this the trend break? What are the sort of, what's the affirmative argument for, yes, this is, the meaningful, the turn is here? So I think just to go back to when I posted this tweet, it was about a week after both the Georgia runoffs and I guess the D.C. Yes. Sort of the capital riots. or what I want to call it. Yes.

It's the insurrection. I think a lot of people would focus, obviously, on January 6th for some obvious reasons. Yeah. I was generally thinking more about the Georgia runoffs in the sense that you actually had the stars align. And I think I am generally someone who doesn't like to make big calls because they're, like, that's hard. And it's something that I'm generally skeptical of when people do start to just like always say

this is the big moment. But there's a lot of things that are going for this moment that have not been true for a long time. One is the political consensus is in a very different place in the sense of whether fiscal policy is warranted. In markets discussions, we've talked about, is this the moment where monetary policy hands off to fiscal policy for quite some time now? It's been about, I would say it's almost a decade

of that kind of speak, where kind of saw that there was a lot of focus on cutting the deficit in 2011, 2012, 2013, and it kind of just was running on fumes. There was a lot of hype about, is this infrastructure week? Is this the week when Trump is going to take fiscal policy really seriously. That was the whole thrust of the Trump trade in markets in

November 2016. I think in general, people will say that was largely underwhelming. You did get tax cuts out of that. Tax cuts that didn't really move the needle on either inflation or growth in a meaningful way, I would say. And so now we're at this point where you have the political consensus there, but you also have legislative, like, capacity, where there are 50 senators who can pass a reconciliation bill. And while there is a lot of room between Bernie Sanders and Joe Manchin, they're all pretty much on board with the using fiscal policy pretty aggressively. They may have different philosophies about how to fund certain policy measures, but they are at least open to it. And that is different from what you saw in previous instances when there was one party in control

of both the House Senate and the White House, where you had this sort of alignment in terms of, this called 2009 or 1993, but the people didn't really believe that fiscal policy was the thing to do. I think people really undersell just how much of faith there was that fiscal policy really isn't the right,

fiscal policy isn't needed, monetary policy will take care of it, let's focus on cutting the deficit, let's try to cut government spending where it's wasteful, even among the Democratic Party, which we think of as sort of more on the left. So those stars have aligned on the legislative side, which I don't think would have been true

if Georgia runoff didn't go the way they did. So you need to have that. And now the question is, can you get responsiveness, where people see that ARP passes, and then people see the benefits of it and think this works. And then even people who are maybe a little more skeptical of these measures start to think that there is some sort of

political incentive, some social incentive to actually pursue these policies in the future. So if people see this as a success, then I think it's more replicable. Right now is sort of the testing ground phase where this has passed. We're going to have to see how people digest it. Do people blame the rescue package as a sort of to create all these other problems? Or people are going to say, actually, all these people's standard of living have really improved in a material way. and now I'm more inclined to vote for Joe Biden and for Democrats because they passed this and it really made my life better.

We're going to have to see, but I think the odds are better now than they were even two months ago, or three months ago, I should say, in the sense that we actually have a package on the table that's historic in nature and the kind that even Paul Krugman's like, this is sufficient, this is sufficient to actually get us out of the current rut. So I think that's meaningful. So I just want to dwell on this point a little bit because, you know, like Joe and I were discussing in the intro, these are all ultimately political choices. And so I think it's worth spending time on how the political consensus actually shifts. But what are the conditions in place in, you know, 2020 that allowed this potential shift or at least this testing of a new type of policy to actually be put in motion? And how were they different to previous economic crises? like 2008, where we did see a lot of popular outrage about things that had happened. And we did see some cries for, you know, help to offset mortgages and things like that. But they didn't really

lead to a big break in the consensus. Mike, maybe this one's for you. Yeah, absolutely. So two things jump out that are different right now than we're different in the last decade. And let's stick with inside kind of like the center-left technocracy, and especially within the Democratic Party. Because I think it's very easy to say it's the Tea Party, it's austerity, it's the hypocrisy on the debt on the right. But the reason a lot of the stuff failed to take ignition in 2009 was because it was coming from inside that administration of President Obama's early years. And one is that you had, in 2009, you had a White House and a center-left technocracy that walked in thinking that the deficit was a fund, like an existential threat to the economy,

that the trade deficit, that we were borrowing too much from China, we were on borrowed time, that there is a bond market bubble, that fundamentally the long-term debt was a serious impediment to dealing with short and medium-term processes. And I want to emphasize this was not like a set of trade-offs where it's like, well, you know, maybe we might spend too much on net interest payment or something like that, that they really was concerned that the government might not be able to issue bonds or that there would be some sort of catastrophe or something that fundamentally lowered the long-term growth potential in the United States. The famous Reinhart-Rogov, cliff, there's all kinds of inner workings around this kind of stuff. And if you weren't there,

I actually had to go back and remember because I was like, I was there. But it was really hysterical if you go back and read some of that stuff. And that's gone. That's not there now. There's a lot of different flowers that have gotten us there. But the idea that the deficit could be an investment, that the deficit is fundamentally under our control and poses whatever problems we wanted to, or that inflate in the MMT version, that inflation is the real check we need to watch for. All of that bolstered by the fact that interest rates did in fact decline while inflation was under trend, utterly discredited that regime that was really powerful at the time. So when people think of the dead deficit, they're thinking one of like the fact that there's stuff that we need to do and there's an opportunity to do it. And the problems that could arise from large scale deficits further down the road are more manageable and more of a gradual and long-term problem as opposed to some sort of catastrophe.

That's one. The second, and I remember this quite well, is in 2016, a lot of center-left technocrats thought that unemployment could fundamentally not get below 5% for any sustained period of time, maybe 4.5%. This blew up in a lot of different ways in the context of the 2016 primary. There was an economist named Gerald Friedman who said that unemployment could get dramatically lower for a long period of time. He was associated with the Bernie Sanders campaign. There's a lot of fighting about it. But a lot of people in the center-left world put their cards on the table and said, were near full employment in 2016, where it was about 4.9% or something like that. We got unemployment below 4% for two years at 3.5% for six months, basically, before COVID had. And there was every indication that it was going to continue to improve on the participation side. That, I think, blindsided a lot of people, because if you're thinking there's one and a half percent of the labor force that could have been employed at any moment with no downside. You know, Donald Trump was winning on polling for the economy going into the election. That's like probably in large part because you had sustained low wage growth for the 2019, which you had not seen in generation.

You know, labor markets expanding much way in ways that was just not seen except for a brief period in the late 90s. And here it was much more sustained. So the idea that you could aim big and the economists who want to say that there's some sort of upper limit and if unemployment gets too low, everything is going to go sideways. that's been discredited in a pretty profound way. And those are both things elected's listened to because they pay consequences for unemployment being too high. They pay consequences when they didn't increase the deficit in the early 2010s and only

saw like the fact that, you know, they didn't get any upside and there was a lot of downside, both politically and economically. So both those things, I think, were important changes that are hopefully going to play out and sustain themselves in the years ahead. Skonda, you want to come in on that? It looks like you are going to say something. Yeah, so just to tack on to what Mike said, as I agree wholeheartedly on both points, a lot of those instincts of the 2010s were also rooted in trying to replicate the 1990s. If we think about what people saw as the sort of re-s success of high wage growth economy,

low unemployment in the final two years of the 1990s, 2000 expansion, that was a period in which there was a lot of focus on deficit reduction and the sort of private sector will sort of solve for itself. And if we just do the same things, if we cut the focus on cutting the deficit, the Fed will keep rates low and then things were solved for themselves. 2010s is a big rejection of that. Because yes, actually the deficit did go down over the course of the 2010s. Despite that, you did not have a robust recovery.

And when a lot of, especially technocratic Democrats or technocratic, liberals that talk Larry Summers, Paul Krugman, were people who were initially very supportive of ambitious fiscal policy. And then in 2016, especially after Trump was elected, talked about how now is the time for deficit reduction. They were critical of the tax cuts from the standpoint that they would overheat the economy. And so it would actually create inflation. And that was pretty clearly disproven, right? Like, yes, the tax cuts, we can probably agree that didn't really change the regime of growth in a meaningful way. And yet it also didn't also change the regime of inflation itself. So something about deficits causing inflation, deficits being unsustainable. Some of this

just doesn't add up. So I think there's a lot of learning that happened, especially on the back half of the decade for people who really bought into these frameworks. And then you kind of look back at 2010 to 2015 and you say, that was a really slow recovery. Do we really have to do all of this stuff? And a lot of that was also the byproduct of sort of there's a lot of obstructionism. And how do you avoid that obstructionism, maybe with a more ambitious stimulus in 2009 and 10? So the lessons kind of have come from sort of first realizing that the 1990s, there's a lot about that,

which was not going to be replicable very easily, especially when you have this sort of balance sheet recession of the 2009-2010 scenario. And now you see there's just, if you're going to take Vienna, take Vienna, is sort of the attitude the Biden administration is taking now. Like, we want to make sure that we use this opportunity to actually let,

I just like as much as needed and not just try to toggle at the edges the way I think people like Mary Summers, Olivier Blanchard are really worried, well, what if this is too much? I think that's something they do not want to ask that question. Just read from the tea leaves of what the Biden administration and senior Democrats are saying now. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real.

Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com.com. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. So first of all, I want to say I find some of these, your answers, both of your answers to be kind of heartening because like this idea that maybe evidence changes people's minds. I've always been sort of skeptical of that premise, but maybe it actually does.

You know, Skonda, you mentioned Olivier Blanchard and some of these sort of like grand names and economics. But I'm also thinking like one of the things that we saw. in the last 10 years was this incredible, like, opening up of the playing field of who, like, got to talk about economics. And, uh, Mike, you know, like, I've been following your writing and tweets for like probably literally, like 12 years now. Like, you were blogging back in 2008. Scanda, you've been talking for a while, like pseudonymously, now more prominently. But like, anyone can talk now. There's a lot on Twitter.

And, um, we, it's been noted that actually the Biden administration, has recruited like a bunch of like prominent like sort of like Twitter voices to like do policy. And I'm curious like in a real sense like how much has this opening up of like who got to a pine? And maybe you didn't need to be at a university anymore. Maybe you don't need to be like, you know, some like, you know, big person at the IMF or something like that. How much has this opening up of who gets the right to talk and opine sort of been a factor that changed the debate in this sort of like decade between the great financial crisis and the COVID crisis. I'll jump at first and just say, we saw this with the financial crisis, where a lot of people

turned to the blogosphere of amateur or financial experts who are often writing under pseudonyms as I was at the time and many other people to kind of understand it in real time because the experts were caught not understanding what was happening. And I think that same kind of instinct of, because it's not, if you experience the economic sphere online and Twitter, on Substack, on other places, you'll notice that it's an evolving argument with a lot of evidence and a lot of careful policing of how people are, not policing and like, like, don't say that kind of way, but like, in like building better arguments and really putting the evidence to the front. In a way that the research process doesn't really do this very well, a lot of the stuff we

write and talk about. Who is unemployed? What is the sense in which inflation is a worry? That's not the kind of stuff academics can get tenure on, though it's essential for the policymaking space. So it fills a marketing that's poorly served. And it's also like the best arguments really do evolve pretty pretty quickly up the chain. And there's still a, I want to call it a meritocracy because like that's a lie. But like there's a way in which people can really step up to the moment. And it really does get arguments out there that are not seen very well or don't transfer themselves very well through the way the academy produces research. If I were to just tack on a little bit on the sort of how people revise their priors and how do we actually learn and make course corrections,

a lot of what you're talking about on the Twitter, on the sort of Twitter discourse and how people sort of can, everyone can speak is sort of what the intuition behind sort of democratic governance is supposed to capture. That this is a way to solve problems in a way that's actually responsive to a lot of people's interests and can't easily be solved by the market or by experts. In some ways, I actually am very stunned by how a lot of the same actors who were policing the use of fiscal policy in the early 2015s are still the same experts who are trying to police fiscal policy now. They're just not as effective, right? And so the same characters are there. They're just not as effective so that in some ways other people are being elevated and why are they being elevated is a good question.

In some ways, it's more of a small D democratic governance question. It's also something that I think you can see even in markets, one of like sort of the strengths I would say of certain types of market structures and market governance is the ability to recognize when things are not going according to your hypothesis. You can actually see how things change and say, this doesn't fit the theory or my hypothesis. I have to revise it. And market participants, I would say, Florida's been a little bit ahead of the sort of highbrow academics in terms of just understanding, okay, we're at low interest rates right now.

And now what's next? Because really monetary policy has some certain functional limits on what it can do. We're going to have to have some kind of fiscal moment. This has been sort of consensus for some time, I would say. Markets themselves don't solve that problem, though, right? You actually do need to have certain types of political structures in place to actually try to solve them. And you need, hope, democracy kind of has its share of burdens,

but it also has its share of strengths in terms of being able to respond to the moment and not take the deferential, trust the experts, or trust the market approach and actually say there's something going on here that we need to rapidly revise. I kind of think at least there's something about the, like, discourse on social media.

It's a very flat culture that it can actually allow for a lot of different people from a lot of different backgrounds, to really check each other on what are the claims being made. Does it actually fit the facts? Make sure you're not making obvious descriptive errors. And that kind of discourse, there's a lot of toxicity on Twitter too, but at least if you can avoid the toxicity, there is some room for that kind of deliberative, open-minded discourse.

You have to all see hunted out where you can find it. Can I ask you both a question? As hosts, you are well-known finance professionals. Do you know Jay Powell's burner account? You don't have to tell us who it is. I forget. At some point, I knew and it doesn't follow me. So I've forgotten who it.

If it didn't follow me, I'm sure I would remember. Now I really don't want to know because if it didn't follow me, I'd be devastated. Okay. Okay. So this is a really interesting conversation, but I want to try to put some of it into, I guess, more concrete practice. So we're agreed that there's this potential break. The moment is now, testing a bunch of new policies. What are some of the, like, actual examples of this new thinking

that are being put into place and that you are watching as a test case? And I'm curious also, how do you evaluate the success of those programs? Like, what would count as a successful sort of instance of this new thinking? I think the rescue package is probably going to to determine whether this thing can actually be replicable, right, in terms of, are we going to see that people think this works? I think CARES in some ways also showed that ultimately people like the stimmy money, right? They like the checks. A lot of people really appreciated the $600 that came with UI. There were aspects of PPP was quite popular for small businesses. So there are policy solutions that came out of Congress that had some individual success,

whether people think other parts of care is good or bad, the implementation being substandard, there was at least the prospect that this can work. If you start to see that the rescue package one, you can actually say that it helped, and people really digest it as working. The Recovery Act of 2009 was pretty big for its time. And at the same time, it was not nearly enough and it was very easy to say, it really just led to a bunch of cylindra, boondoggles, it's a bunch of waste, see the economy is still struggling to recovery. That's how you know that fiscal stimulus doesn't work.

The counterfactual would have been worse. But people don't think in terms of counterfactuals, at least in terms of their intuitions. So if it actually helps to shape people's intuitions to wanting to into the point where you actually want to do this again, maybe not in the exact $1.9 trillion unpaid for spending, but rather we can find other solutions that work for fiscal policy that meet the moment and meet what's needed. I think that starts to change people's perceptions about what's possible. There's a certain feedback loop that's, especially if Republicans maybe on the next go-around,

start to see that actually this worked, we probably should have either been part of the solution or be willing to offer a more compelling counteroffer. Those are the kinds of things where I'd say, something's changing where people want to actually govern and not just sort of delegate or hope and trust that the market or some experts will come up with the right answer. answers later down the line.

Yeah, some things I'm watching for last during this year. One is that we reduced poverty in the middle of the crisis in quarter two of last year. Unemployment was probably 20-ish percent. We were probably technically in a depression. But the fiscal policy was able to reduce poverty. And we're going to cut child poverty in half this year. And hopefully in a program, it evolves and becomes much more clear and straightforward. You know, the fact that even in very difficult economic times, the level of poverty is a

policy choice, I think, was shown last year and was reflected in the bill this year. Last year, the Federal Reserve intervened directly into credit and interest rate policy on the long end of the curve for municipalities, for corporations for the secondary bond market, a lot of controversy, a lot of fighting about it. But it showed that the Fed is already thinking and will continue to evolve to think way beyond just short-term interest rates and some guidance on the long end. That will have important consequences for climate change, as the Fed will almost certainly have to be directly or indirectly involved with the funneling of credit towards green energy products and green energy investment and infrastructure. The overhaul that happened in the Fed last year,

we're still learning it. We're still figuring it out. But that's going to be with us for some time as well. This year, I think if you actually get the economy back to trend at the end of next year. You've basically disproven the theory of hysteresis and the idea that we need to understand that every recession would have a built-in downward curve. And then you can put pressure on the idea of potential output in the way it's deployed classically. The idea that, you know, overheating economy has positive spillovers that can increase productive capacity, which makes sense intuitively, but doesn't fit well into the, you know, the nuts and bolts and models of neoclassical economics. So I think there's already, like, it's going to take.

some time to like see all the things that are different. But even the fact that you, a lot of politicians that talked about, we need to do more, the risk of doing too much is less than the risk of doing too little. We need to overshoot. I thought that was like a metaphor when they were saying it, but they are actually going to try to do it. They're going to try to shoot for a potential output and they'll probably hit it. Or the way it is defined on the books at the CBO, which is already kind of a mess. If successful, that just will throw in a completely different way about the idea that we should be responding much more quickly and rapidly to recessions rather than something that largely will work itself out with some time. So those are all encouraging developments.

Some people have really been emphasizing the balance sheet nature of repairing balance sheets that's embedded in the American Recovery Plan, you know, fixing the balance sheets of transit, higher ed, pensions, state and municipalities, things that tend to get scaled down and never recover. in a air quote recovery, a lot of those political problems are going to disappear in a few weeks provided it passes the house. So that's going to open up a lot of space. So I think there's a lot of new frontiers and we don't even, there's so much going on. We don't even know them all yet, but I think they're all encouraging for a better account. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, cleanup, and half your Sunday gone. Factors solves all that.

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So in a second I want to pivot real quickly at the end of the conversation and turn this into an episode about

semiconductors for our semiconductor series and talk about industrial policy. But before we do that

real quickly, you know, we've talked a lot about fiscal policy and that's basically been our discussion. There has been also pivot at the Fed itself. And there was this framework review over the last several years announced in August that they are committing to not preemptively fight inflation actually sort of like let things run hot in a way they hadn't been. Chairman Powell talks a lot about not just using sort of headline unemployment rate to

judge when we're at full employment, but also like really look at like are the gains of employment being spread to minority groups, groups which previously didn't enjoy the fruits of recovery at the same way. I don't know, one of you want to talk a little bit about, like, there has been an intellectual evolution, even at the central bank, aside from the politics of expansionary fiscal policy.

Yeah, I think that the Fed's framework review and its subsequent forward guidance policy in September of 2020, really indicative of that major shift in the sense that they, one, started to say, actually, we don't need to target a specific unemployment rate or target a specific level of employment. We actually should be always aiming, at least for employment improvement. And we should never be saying, actually, there's too much employment in the economy. The problem, if inflation's a problem, inflation's a problem, but that's not

the same thing. That's a really big shift from the world we lived in the 70s, 80s, and 90s, and even beyond that, where everyone in sort of the world of economic said, well, okay, once you get below a certain level of unemployment, all you're going to get is much of inflation. So let's just try to like get it right on a pin. That's changed to where there is like an openness to, we don't really know where these things are and we really don't want to do any harm. And we actually want to let sort of the economy show what it's capable of. In some ways, what Jay Powell's own statements subsequent to the framework review, we're really focused on, hey, Congress, you have the spending authority, we have the lending authority, the spending authority is actually much more powerful

for shaping a lot of these outcomes. That is itself an inversion of what you saw in the 1990s when Greenspan was hiking rates in 1994, and at the same time talking about how there are bond market vigilantes, so Clinton should not be so ambitious about fiscal policy. So that contrast is very vivid. The framework review itself and I'd say J. Powell's statements are both revealing of that sort of shift towards actually we do need Congress. We're not going to solve this thing on our own. We're going to have to have some flexibility and not just try to target a specific level of unemployment or target a specific level of inflation. So there's just a little more flexibility on that side. And that shows there's some level of institutional learning and that's good.

And from there it's about are we going to learn more? Are we actually going to try and it's going to be hard, right, in some sense, because there is still all sorts of conflicts and tensions, and it may not be the case that people learn all the right lessons at the right times. But there's at least now, I said, there's a chance to really test some of this stuff out in terms of we are seeing ambitious fiscal policy, cooperative monetary policy, and no limiting constraints that way. Can I ask one quick question before we continue our never-ending semiconductor series? But the recent backup in bond yields, I've seen a few people characterize that as the beginning

of, you know, pushback from the bond vigilantes, which I don't exactly agree with. But I'm curious if you have opinions on why we're getting that backup in yields at a time when, you know, central banks more or less are promising to keep benchmark rates pretty low, is that all the work of, I guess, the market adapting to this idea of more fiscal stimulus. I'll jump in first here. I think that the sort of bond market backup you've seen right now has also coincided with, especially since the Georgia runoffs, a marginally stronger dollar, and sort of in general, the equity rally has largely continued. And so in light of that, it's all consistent with a repricing of U.S. growth to my mind. And there is, think about the Fed's

guidance is rooted in outcomes. They're rooted in outcomes about maximum employment and sort of achieving at least 2% inflation for a 12-month period. So those two things are, really, we don't know what time it's going to take to achieve that and on what dimensions is maximum employment really been achieved and how that can change itself over time. So there are a lot of open questions that are not strictly about timeline. We are also giving ourselves every opportunity, both through the sort of vaccine distribution and through the fiscal ambition we're seeing right now,

of actually achieving robust growth, getting back to at least the pre-pandemic labor market on a sort of reasonable time horizon. And those are also very encouraging about what the growth trajectory looks like, not just in 2021, but in 2022. So with all of that in place, I think that the bond markets are, in general, curve deepens whenever you see sort of low interest rates and you're kind of coming out of a, you've already cut interest rates. Now the question is, what's the time horizon by which you actually get the recovery?

where interest rate policy might be more in question, and especially since the Fed's not going to cut rates negative anytime soon it looks like, there is sort of an asymmetry that the market is repricing quite understandably, maybe even a little belatedly. Yeah, on the belatedly point, I had a write-up for the day after the election about if there was a jump in bond yields on trifecta in early November, how to understand that as essentially pricing an investment package. same way the Trump administration when Trump was elected, and that was a pretty surprise event, I think, for the market. You saw a run-up, though his term before COVID, his term, before COVID

yields were at the same rate, if not lower, depending on when you went in how you measure it. Because of the fact that the Democrats didn't control the Senate, because of the contested nature of the presidential election, you know, it wasn't until mid-January. You even had a sense that the Democrats could pass something. And up until a few weeks ago, the idea that it would be 2 trillion and be this really major fiscal push, I don't think, was quite as processed or initiated. So some of it's just readjusting for what is about to happen, which I think is appropriate and good.

And still on a long-term timeline, it's still, rates are incredibly low. And the capacity is far beyond what we can imagine. All right. Before we go, I do want to continue de facto our semiconductor series. And the reason is relevant is because there is this big discussion about the role of industrial policy and whether the U.S. can, through policy, actually sort of restore domestic semiconductor manufacturing. We're experiencing the shortage, is odd lots, listeners. Noelle. And Skanda, you wrote about that. And so I want to get, you know, your sort of like brief thoughts on what it would take.

And then, Mike, I would like to get your thoughts like from the historical perspective, from your research, industrial policy, not leaving it up to the invisible hand all the time. What is sort of history tell us about when the political will manifests to create a, you know, do industrial policy, create a domestic industry. Yeah. So I, I along with my colleague Alex Williams, wrote a piece about what we've seen more recently reveals how demand helps unlock some of the supply and capacity that otherwise wouldn't exist. So we had really low investment in a lot of high-tech equipment for about two decades following the tech bust or sort of after 2000. And a lot of people were saying, oh, that's weak productivity.

Oh, that's weak investment. It's something structural. It's globalization. It's inequality. It's all these things. And I mean, there's no problem with a lot of these arguments. It's really hard to pin down. How much of it is globalization? How much of it is business model shifts. And yet what we found was when we actually did do aggressive fiscal policy and the U.S. was not the only one to do aggressive policy, at least in the outset of the coronavirus response, You actually saw that demand for high-tech equipment was sort of historically strong. We broke out of this. And semiconductor manufacturing is called offside.

Offsides, call it globally. And the U.S., like what you've seen is there's been this underutilization of capacity since 2000. And that just didn't recover on its own. And now Washington sort of like is in a position where we've got to do something. We've got to figure out how to actually have the capacity that we want to have. And that itself is a conscious choice, right? And ultimately, if you just leave it up to the market, it's hard for the certainty to exist

for manufacturing capacity to actually be in place. I think there's something on a previous episode of yours that Willie She said that really rung true to me, which was you actually do need some stability on the demand side. You need some stability and scalability. And that requires making sure there's enough purchasing power in the economy. You make sure that there are mechanisms for coordination because there's just a certain amount of certainty

that you can get from the government that's really hard to replicate just in the private sector alone. I don't have a lot to add to that because I only know the semiconductor is where I hear from you guys and read from Skanda. The one thing that really jumps out to me is that if this boom is at the level

that it very well could be, it might change the way we talk about economic policy making in a very profound way. Because if you actually get unemployment down that rapidly, you might be able to tackle issues around decarbonization much easier because there's just going to be such voracious demand for workers. You could talk about changing the nature of supply lines, changing the nature of the way

business supply change and conduct is done, and really investing in manufacturing and other forms of onshoreing in a way that I don't think you would have the political or economic will when unemployment is quite high and the recovery is quite slow and everyone is thinking very zero sum. You might actually be able to think much more concretely about how to push the productive frontier of the economy in a way coinciding with strong labor as opposed to thinking about that in periods of weak labor demand and weak labor power. So I'm really excited to see where all this goes because I think it's going to be a side of conversations that's going to change so many things. Well, Mike and Skonda, thank you so much for coming on. There's such a important,

timely discussion, both of you, great perspective, and we'll have you on in 40 years. And we'll see if this did turn out to be a real turning point. God, that was me. I will totally take you over. Thank you. Take care. Thanks so much. Cheers. Tracy, you know, I didn't say it in the beginning, but I realized something, you know, I mentioned that Scanda tweet about, is this a trend break in neoliberalism? What's interesting is he was retweeting a tweet from the Chamber of Commerce. where they endorsed a massive stimulus program. And I think that's kind of like what's interesting, too.

It's like it really is like you have Bernie Sanders on one end right now. And the Chamber of Commerce, which historically up until recently, I think, would have been pretty associated with like the Republican Party. I think that really sort of is like what sort of captures this idea that's like something seems to be shifting here. Right. I think so. So, how to put this? So one thing I've been thinking a lot about is, so the recession from the coronavirus in 2020 was an unusual recession in so many ways, not just because of the policy response, but because

in some ways it was a government manufactured recession. And what I mean by that is, you know, the reason everything kind of stopped was because we had restrictions on where people could go and what they could do and people were scared of leaving their houses as well, independent of the government. But the point is, it was sort of a policy-led recession. And so I often wonder if that's what was needed in order to create room for, you know, more policy-focused economic solutions. Like, if this was really the perfect condition for that experiment to happen. I still think, like, some people would dispute this idea that it was the lockdowns rather than the virus itself. But I will say,

100%, there was this perception back in a year ago, basically, that this was nobody's fault. And I think that was sort of new. Because, you know, like in the last crisis, you know, there's, you could, on the left, you could blame the banks. And then you had the Tea Party and the famous Rick Santelli rant. It's like, oh, your neighbor borrowed too much for their homes. So there was like a lot of blame for it. And I think that was probably a contributor to the sort of failure to get a lot of political will to really

fight the downturn, there was very quickly emerged a consensus, like, this is really no one's fault. No business actually, like, deserves to go out of business because we have a pandemic. No one really deserves to lose their job because of this. And as such, I do think that that created some political space to do exactly what you just said. Yeah, I think that's exactly right. And the other thing, and I think it was Scanda who touched on this towards the end, or maybe it was Mike, about this sort of demand side of the equation and the idea that this is something that people are finally recognizing is actually quite important. You have to have, if not robust, demand, at least a reasonably stable level of demand in order to make a lot of these policies work.

And I think that's where the stimulus checks came in last year. And that's where we're probably seeing a pretty big perception shift as well. Yeah. And I'll just say, like, this was a point I really had not thought of as much until Scanda pointed out. It's like, you have the potential for actual popular policy. I mean, CARES was popular. People like getting the one-off checks. The expanded unemployment was powerful. And PPP was powerful. And I think people look at that. And unlike, say, the 2009 response, which left us how it's taste in people's mouth, it's like, we like this. We like the government having stepped in. Of course, not everyone. But this was generally like a pretty popular thing. The current stimulus is popular. And so you do have this potential for

self-sustaining political change if this gathers steam such that acts like the stimulus, acts like cares, actually encourage politicians to do more of the sort of responsive policy in future downturns. And that's how you get potentially the trend to break. Because one stimulus deal is not going to really like break a big trend, but a change in the politics. And around fiscal expansion or around industrial policy could actually break the trend. Yeah, well, it does remind me a lot about, so of course, there are a lot of studies about why people, why some people in the U.S. didn't like social programs for a very long time. And one of the things that always cropped up was this idea of relativism.

So, you know, this person got $500 and I haven't got anything from the U.S. government and they're living off of wheelchair checks and it's really unfair, blah, blah, blah. But I think 2020, just by dint of the fact that the stimulus checks went out to a lot of people, I think that could end up being the great equalizer, right? Like so many more people now have had personal experience of a social safety net in one form or another. Yeah, no, totally right. I think it's going to be a fascinating thing. I mean, we'll see what the aftermath of this bill is.

But again, if it leaves a positive taste in people's mouth, that changes how politicians react and you could really, that's how you get your, your trend, your trend to break. The end of neoliberalism, maybe. I do think, I know it's always a risk to mark big turning points, but I do think this theme is one that's going to, we're definitely going to be talking about it in 40 years' time. I feel like that's true. All right.

So we've booked an episode for four decades hence. All right. This has been another episode of the Oddlots podcast. I'm Tracy Allaway. You can follow me on Twitter at Tray. Tracy Allaway. And I'm Joe Wisenthel. You can follow me on Twitter at the stalwart. Follow our guests on Twitter. Skonda Amernath. He's at Irving Swisher on Twitter. And Mike Conkzel, he's at Rortybaum on Twitter. Follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of

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