Odd Lots - How To Use Fiscal Stimulus To Stave Off The Next Recession

Episode Date: February 3, 2020

There's a growing consensus that governments need to act more aggressively in using fiscal policy to stave off the next recession, and that monetary policy simply isn't powerful enough. But how do you actually go about it? What do you spend the money on, and how do you get politicians to disburse it in a timely manner? On this week's Odd Lots, we speak with Claudia Sahm, a former Fed economist who is now at the Washington Center for Equitable Growth, on ways to systematize and automate an early and aggressive fiscal response to economic weakness. Sahm has achieved fame for her so-called "Sahm Rule" which can provide policymakers with an early warning sign of when a recession might be brewing.See omnystudio.com/listener for privacy information.

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That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. So Tracy, you know one of the big things that we've been talking about, maybe a little bit on the podcast, but I would say finance media, eco media in general, is this idea of the monetary to fiscal handoff. Oh yeah. That is the big theme and it's sort of the big thing that a lot of people are hanging their hopes on for economic growth. So the spiel that you've been hearing a lot is that monetary policy has failed in various ways to lift inflation and to boost economic growth in a significant way. And so it is now up to the government side to actually enact fiscal stimulus

and do it that way. Right. I think there's like a couple things going on. I mean, I think A, there's the fact that people have been pretty disappointed with the pace of growth in the wake of the financial crisis. There's the fact that in much of the developed world, there may literally, according to some people, be no further scope for monetary policy as rates are more or less pinned at zero. So even if things are okay now, there's this expectation that central banks don't have a lot of juice. and, you know, something that we have talked about, just this idea that, you know, in the wake of the financial crisis, growth aside that all of the sort of old rules and old frameworks are being questioned once again. Yeah, I think that's right. But of course, I guess the key thing in all of this is that it's not central banks who are going to be responsible for the next phase. It's governments, right?

And with governments, you tend to get a hefty dose of politics. often disagreement. Right. That's the tricky part because one in theory nice thing, and it's debatable whether it's nice, but one in theory nice thing about relying on monetary policy is it can be conducted by ostensibly independent institutions that don't have to go so much by political whims or worry about getting reelected. Whereas when you rely on fiscal policy, you rely on elected officials, often who have counter goals to each other. Maybe politicians don't want to boost the economy when their opposition is in power, things like that. Fiscal policy arguably reacts much slower. So although it sounds nice to have a handoff, so to speak, it's a lot trickier than just saying we

need to rely more on fiscal policy. Yeah, which is why it's, what is it? Oh, it's 2020 now. And we're still talking about the possibility of a big round of fiscal stimulus in a lot of places, even though it feels like we've been talking about it for a long time. Right. And even in places which every economist almost in the entire world would say, yes, please spend more money. A good example of that would say be Germany. It just doesn't matter. It's so much more arbitrary and unpredictable when you're going to get the fiscal response than, say, monetary policy. which can be adjusted extremely quickly. And this is something that I remember we spoke about with Lord Robert Skidelsky. He was talking about the need for a sort of automatic fiscal stabilizer that could kick in when the economy was in trouble and sort of bypass whatever political gridlock might otherwise stop it from happening. Well, that is a perfect way to introduce our guest because our guest has,

been doing work on exactly this question. So how do you get fiscal policy to work in a timely manner, in a predictable manner, in a matter that's not as much about the political cycles in a manner that's actually well targeted and time to avoid or mitigate the effects of recession? And that is going to be our discussion today. Great. I can't wait. All right. So without further ado, I want to bring in Claudia Somm, she is the director of macroeconomic policy at the Washington Center for Equitable Growth. And Claudia, thank you very much for joining us. Yeah, thank you for having me on this show. I'm really excited.

Awesome. Well, before we get into your work and we've talked about this work you've been doing in terms of improving the speed and efficacy and predictability of fiscal policy, just tell us a little bit about your background. You were at the Federal Reserve for a long time, right? Yes, so I was at the Federal Reserve Board of Governors in D.C. until last November. So I'm very new being on the outside. And I think my education as a macroeconomist at the Fed, so very much in the monetary policy space, was unique because I started in the summer of 2007. My first forecast as a consumption expert at the board was,

in January of 2008. My first year, learning how to do macro forecasting was a birth by fire as one of my colleagues. Did you get it right? No one got it right. And I think for me, it was interesting because in my first year, just like a lot of people out of grad school, I had an immense amount of imposter syndrome.

But at some point I realized every single macroeconomist at that point in time should be having imposter syndrome. Because that first year, I learned how to do macro forecasting when none of the forecasting models worked. I mean, they never work in a recession. It's just such a severe contraction that's not, no one would ever forecast a recession. Like, it happened next year because we just, we don't have a way to predict that. They're very unpredictable by nature. So I, like I said, I had a very different education in macro forecasting.

And frankly, it has damaged me in terms of believing. that the economy always recovers and that we should trust our models, our expertise, even among a really strong, hardworking group of economists. I think strongly we've missed it before the recession and the financial crisis, but frankly, the recession, how slow it was, how much we didn't understand that. That was really my hardest time as a forecaster at the board. Can I just say I had a really similar experience because I got into really financial financial journalism in September of 2008. And I remember even financial journalists that had been doing this for 10 years were really confused about everything that was happening. And I was

just writing about it. And I felt a little bit uncomfortable. But then I realized that actually no one had any idea what was going on at that time. So everyone was pretty much starting from round zero. So I kind of wanted to ask you when you saw the health of the consumer actually start to deteriorate before the Great Recession. But obviously, since you made your first forecast in January 2008, that doesn't really apply. So let me ask instead, when did you see the health of the consumer start to really pick up after that recession? So I think his background to this, my research, my dissertation, I use household survey data. responses from households to major surveys like the Michigan survey, Health and Retirement Survey, or Health Retirement Study.

This is an unusual background. I am a macroeconomist. I was trained to be a macroeconomist, but my research has primarily been applied microeconomics. So studying household behavior by looking at household behavior, as opposed to just it all aggregated up. And I remember, late in 2007, because I started to go to briefings and get a sense of where I had landed.

And there was a discussion about consumer sentiment from the Michigan survey and how it had really started to deteriorate. And it was puzzling given all the other macroeconomic data that was coming in, like consumer spending, personal income. It just didn't quite connect. And I can remember being in a boardroom briefing. There was an exchange between the governors and the staff saying, well, what's up with consumers and, you know, our best, well, we don't know. And then it went into,

oh, this is 500 households. We should call them up and see what's going on. And no one shut down this conversation. And I was just about ready to crawl under my chair because those 500 households and having worked on a lot of household surveys, they are chosen to be representative of all adults, all households in the United States. So the idea that we were brushing it off is some inconvenient data point that didn't set in with the rest. That really caused some alarm bells, but I was really new. I wasn't, you know, in a place to jump up in the boardroom and correct governor and, you know, staff that were senior to me. But in hindsight, and this was a project I worked on when I was at the Council of Economic Advisors in 2015 and 16, I did a retrospective for

senior staff there. Jason Furman was the CEA chair. And it was about how we can look back. on the consumer sentiment data, both the expectations and then the recovery, I paid a lot of attention to the income expectations, and you can see how households were, they got it. And not because they're excellent forecast, they were living this, right? And so I spent a lot of time with the Michigan survey thinking hard. I mean, these data are hard to work with. There is some noise. You know, the people answer questions, and it's not clear what they intend. by what they're saying, but you put it all together. There's a lot there to learn. So I feel like they were telling us early on, which makes sense. It was a consumption-led recession. The housing

market started to turn south before it was showing up in the whole economy clearly. And frankly, you saw early in 2011, 2010, we broke them. The income expectations series moved in away from, I mean, Americans are by nature optimistic. They had a discreet shift in becoming much more pessimistic about their income expectations. I talked with Richard Curtin at the time, who has run the Michigan survey since the year I was born, so back 40 plus years, and he agreed with me. There's basically only other two series, the interest rate expectations around the time of Volcker and these income expectations after the Great Recession,

those are the only two series you can point to, and just there is a level shift, very abrupt, and that meant something. And that was something I spent a lot of time repeatedly in forecast meetings among staff pointing to, you know, and it was one of many things that were considered. There was a lot to learn from households. Now when we look back, we can see they were right.

That was a big part of my life as a forecaster over a decade at the Fed. And it was where I was bringing my research expertise, my passions about the fact that economists really need to listen to people. And we need to be creative about a way to take what people are telling us one by one or community by community and figure out how to roll it up in a way that the Federal Reserve, who really does need to make policy for the country as a whole, how they can. can integrate those voices, and when they're, especially when they're puzzling, into our frameworks, and use that to guide monetary policy.

I already feel like we could do a massive, two-hour discussion on just what that's like being a staffer at the Fed. And I hope you write a book on it, because now I just have a million more questions on that alone. But in the interest of time and everything, I want to skip ahead a little bit. And I feel like when we get to discussing the structure of how to do fiscal stimulus, your work on household consumption is going to be very relevant to that. But before we get to that, this idea now today that, okay, we need some sort of handoff, that we need to put more emphasis on fiscal policy, that we can't just have the central bank be the economic stabilizer of last resort. where do you think that's mostly coming from? Do you think it's coming from the slow pace of recovery? Is it the fact that rates are at zero and there's perception that central banks are out of ammo? Or is it kind of what you're saying in terms of the sole searching among economists that just the models, the basic models that have been used for so long just don't work as people thought?

So I would point to a number of factors. I'll keep it brief. in terms of sticking to what I think are the three main ones. And starting with the idea of economist soul searching, which was your last point, I do think that's a piece of it. I have been discouraged by how limited the soul searching among economists, macroeconomists, has been over the last decade. I don't, well, I have reasons for that, but we'll set those aside. And I think where the soul searching has begun,

and I'll take whatever we can get is in terms of monetary policy. So the zero lower bound has complicated how economists, how the Federal Reserve approaches their mandate from Congress. So, and right now the Federal Reserve is undergoing a framework review. I do not have high hopes for those outcomes this summer, but I am so happy that we are having that discussion in a very serious model-based way. So I think that is great.

So that's one piece because it'd be hard not to have a rethink. I think the rethink is coming from monetary policy itself. Now, a second factor that I personally think is why we are having this debate is fiscal policy did not show up in the way it has in previous recessions. In the beginnings, so you had Bush, passing the tax cuts, you had the American Recovery and Reinvestment Act as Obama's first big economic policy in 2009. So on the front end, we saw some aggressive fiscal policy responses, completely on target. Now, what we didn't see is that as the recovery went on, Congress pulled back on

fiscal policy, support to the economy in a way that was markedly different than past recessions. And again, I studied consumer behavior. I followed very closely because of my job as a consumption forecaster, each of these stimulus packages that went out broadly to households. So what we saw at the end of 2012, the payroll tax cut, which was the last of these big stimulus to households, it ended. the unemployment rate was still notably elevated. And they just, they pulled back for reasons.

There were discussions about debt. That to me is a big problem. And then because they did that, and this was an important part of the automatic stabilization, direct payments to households that I'm sure we'll get to talking about in a few minutes. The reason that I had the automatic piece, and it wasn't just about when it turns on, it was a commitment to keep doing the payments until the unemployment rate came down. That is very specifically a reaction from the fact that when Congress had to get together and do it in a discretionary way, like they had to vote on it in real time.

They didn't do it. They pulled back on the economic support. So I think that's the second one. The third one is the economy told us we are not, we did not approach this in a way that was sufficient. The tools that we had going into the recession and the recovery just didn't do it. This was a slow and long recovery. The unemployment rate stayed high for way too long. Both of these are destructive. They hurt people. They hurt businesses. They hurt the economy. I mean, productivity. There are just, there are so many bad consequences that we have seen in the

economy, this has forced a discussion about, okay, what more can we do? What are the tools that we haven't put on the table that we have to think hard about right now? So just before we get to the automatic stabilizer bit, I just want to dig in a little bit more, but like why the focus on fiscal policy specifically as a way of boosting the economy? And I know that sounds, I know that sounds like a weird question, but I just remember after the financial crisis, there was so much emphasis on monetary policy. So why did you, as a researcher, decide to look more at the fiscal side of things instead of talking about, you know, how the Fed should be calibrating its rates, or maybe if we went to negative interest rates, that would help, or maybe we should do more QE or a different form

of QE. How did you settle on fiscal? So it was my job. So as one of the experts, at the board, and keep in mind, there are 500 economists at the Federal Reserve Board who are working on supporting the board in many different dimensions. My job was to understand consumers, their behavior, how they were reacting to many things in the economy, income changing, their wealth being decimated. So I had to think about a lot of dimensions, but an important dimension was how is the government supporting these households. Now, it may seem counterintuitive.

Federal Reserve officials do not go to the hill, or at least it's a very rare occasion, do not go to the hill and tell Congress how to do their job. You can point to episodes where Bernanke, as the chair went, and in some sense, in a very macro-button-down way, begged Congress to do more. But that isn't the Fed's role, and they certainly won't comment on,

exactly what do we think that whatever fiscal program is doing to the economy, what, you know, what are the effects? They will never say that in public, but in private, we have to know that because monetary policy needs to work around the edges, so to speak. So my research program, right, my first forecast in 2008 was when we put the Bush stimulus payments into the forecast. So right out of the gate, I was working on research. I was. I was fortunate that my advisor, Matthew Shapiro at Michigan and his colleague, Joel Slemrod, had a research program already going on measuring household responses, the spending response to fiscal stimulus.

And the board was more than happy to put the financial resources into continuing to run these household surveys. And again, they were done on the Michigan survey. And Matthew and Joel were generous to let me join in on the project. that measuring fiscal stimulus. We worked on the stimulus payments in 2008. We worked on making work pay in 2009 and 10, the payroll tax cut in 2011 and 12. So this was a huge part of my research program. And at every stage I was presenting in the board room, the results from those findings, those surveys, in addition to this thing about the board, we don't march in there and just say,

well, this is my view and my research as a staff member. I was doing. very serious study of the other papers that were being written at the time. Jonathan Parker and Nick Salilis with different co-authors at different points in time did the research that economists just they can't deny. It was a gold standard research. Ben Bernanke was clear to let me know that their work was gold standard and mine was not. That's okay. But they had for various reasons, I won't get into the won't get into the won'ty economist details,

but they were able to run a study that was everything economists want to see in terms of evidence, and they showed very clearly that households, when you send them the money, they spend it. Now, to normal non-economist people, this will seem obvious to economists, they believe that you give people money, and then they, like, calculate the annuity value, and they, like, spend it out in $5 increments over the rest of their life. And so that, if that is the truth, then fiscal stimulus, giving money to households is not going to be effective. Monetary policy is the only game in town, according to a lot of the models we went into before the Great Recession. And frankly, they just, they couldn't not send out money.

And Congress has done this often. This is a way for Congress to show the American people, like we're doing something to help you. After the stimulus payments that Bush sent out, after we'd been able to study, see it. Economists understand the vast majority of them except the fact that this works. People spent. So that's a big reason why we can have this conversation now because there's a view that there's efficacy behind these policies. I, you know, I don't want to do too much economist bashing, but at some point we should just do a serious, Tracy, of things that are obvious to literally everyone else except economists, such as the fact that if you give people

cash, that's a good thing, that they'll spend it and that that will help them, whereas if you look at it through a model, somehow it doesn't happen. But that's an aside. So we have these different models for how to give households money directly. There's the form that Bush did a couple of times, like just cut everyone to check. There's payroll tax cuts so that suddenly after the tax cut, each paycheck, you get a little more than you had. before there's unemployment insurance so that people lose their job, they get some sort of money from the government to keep them going. So various programs, and we'll get to the best way to design that in a second. But before we do that, I want to get to something that has made our guest

semi-famous, I would say, and that is helping to answer the question of when, because it's one thing to say, okay, government should give households money, but we all know the political problems. And so then you have to arise. So if it's going to be done automatically in a downturn or before a downturn, you need some sort of trigger so that the payments start and they don't end too soon. Claudia, you have done work directly on this to the point that there now exists the some rule, which is now this thing out there in the world, which is a rule that exists for guiding the government for when to start spending money to support household. So talk to us about that part first, this sort of framework that you've developed or indicator that you've developed

to tell to design a program for when the check start to go out. Yes. So what's been referred to as the Psalm rule, I have been blown away by the response. I, but I understand why. So when When you spoke with Lord Robert Skidelsky, in the conversation mentioned the importance of having fiscal rules. So this is not an area that economists have had a robust discussion. There has been a robust discussion about there being monetary policy rules of various kinds that would guide the Fed. In some cases, central banks being held accountable to following a rule, or at least explaining

when they deviate from it. So the idea that we'd have a fiscal rule, and this is absolutely essential for doing anything that's an automatic stabilizer, because you have to know when to hit go in a responsible way, so you're not blowing $100 billion when there's no reason to. So first to describe the SOM rule. So what it is is I look at the monthly unemployment rate. This is the statistic on the economy that we... we want. I know several economists that if you ask them, if you were stuck on a desert island,

you could only have one data series to understand the economy. That's it. They want the unemployment rate. Totally makes sense. I agree. So what I do is I take the monthly unemployment rate. I take the three-month moving average. This is important. Monthly data bumps around, and you don't want to overreact to some wiggle in the data. So we smooth it out. Look at three-month moving averages. And then what I do is in every month, and keep in mind, the unemployment rate comes out very soon after the month end. So this is a very quick read on the economy. I compare my figure, the three-month average in a month that's just come out, and I look back over the prior 12 months. And what I do is I compare the current month to that low over the prior 12 months.

I calculate the change when that change is a half a percentage point or more. This is a small increase. It's a half a percentage point or more. We are in a recession. So I look back at recessions in the past, specifically from 1970 on, the SOM rule turns on in every single recession, two to four months in, and there are no false positives. So it doesn't turn on outside of a recession. And that's a big deal when you need a rule to turn on fiscal policy. Now, there are some alternate measures that people have turned to economists and market watchers look at for a recession.

And you can't use them for fiscal rules, or they would be very substandard. So one that there is a recession dating committee. their job is to look at a whole host of data, and they are the ones who call the recession. They will specify the quarter, the month, in which the economy peaked. So that's its highest point, downhill from there. So they call the peak, which that's the beginning of the recession.

That announcement comes from them often a year after the recession has begun. Okay, so we can't wait a year to send the checks out, okay? because you've lost an opportunity to move quickly in a recession. Okay, so that's not going to work. The next rule of thumb that's often talked about is two quarters of a negative, a decline in GDP. Okay, this is also not going to work because GDP, unlike the unemployment rate,

comes out with more of a lag. You have to get past the end of the quarter, about a month afterwards, you get a read on GDP growth, you'd have to get, you know, more than six months into a recession to see this, and GDP growth revises a lot. There's a lot of source data that comes in later that if you look at the GDP growth data through the recession, if you look at the annual revisions, which is a forecaster, I did look at those very carefully.

According to that data, our first read was not negative enough, right? So there's both a delay and not as clear of a picture as you would want to do stimulus. So the rule that I developed could be used. Like you could use this to kick on fiscal stimulus. And I think even to myself, it was a surprise at the response because, I mean, I have many Fed colleagues and former Fed, even officials, who have no, they are not impressed. They were like, well, we knew this, a small increase in the unemployment rate, it's bad news. After the sum rule became big, I checked with my former boss, Andrew Figura, and I'm like, please tell me I did not scoop our internal rule.

And he said, no, what we use is a rule of thumb is a three-tenths increase in unemployment rate. And that's for the Fed. Remember, the Fed can move faster. If the Fed cuts a quarter point, it's not like the deficit blows up. So they actually use something a little faster. It has false positives. Remember, I was really looking for something accurate. But it's in the spirit.

Small rise in the unemployment rate are bad news. What was shocking to me, and this is one of my complaints with the Fed, we bring in a lot of information, we think hard about it. We know a lot of stuff about the economy, and we often don't share it. And so I knew a small increase in the unemployment rate was bad news. I frankly knew the Psalm rule,

which I did not name it the Psalm rule. It was a recession indicator in my chapter. I knew it was going to work. I mean, I spent a lot of Saturday afternoons with the spreadsheet, and in the end, I pulled all the real-time data, which is a little extra wonky flourish at the end. So I was looking at the unemployment rate as we would have seen it in that actual time.

The unemployment rate does revise a little bit, but this was important for my approach. It worked. I was blown away by the response. My series with my name attached to the variable is in Haver and Bloomberg. And then it's in Fred. They gave me a Fred T-shirt. It's like my favorite piece of clothing.

For those who don't know, Fred is the St. Louis Federal Reserve database website charting tool. And if you're like, if you don't have a Bloomberg, of course the Bloomberg is the best thing in the world. But if you don't have a Bloomberg, it is the best website in the world for. or playing around with analyzing economic data and the fact that your indicator got in there is extremely cool. And I just want to say that. Yeah.

And an important piece of Fred, again, Bloomberg is great, the terminals, is that it's free. Anybody can get on Fred and download the series, take a look at it, understand what it is. I've been contacted by individuals in state governments who are thinking about how could we integrate this into it's time to bump up our food stamps. It's time to do something at the state level. It was then clear to me. And actually, I had reactions from people who work follow economic policy in D.C., not monetary policy, who told me, they said, Claudia, I can't believe this works. And so I realized that while at the Fed, we got this. And frankly, like, people who do economic forecasting on Wall Street, a lot of them have come from the Fed in training, they knew this too.

Their clients knew this. This has been in newsletters. But the people in state governments, the people doing fiscal policy in D.C., they didn't know. So that really opens up a whole avenue for policy, especially policy rules, fiscal policy rules to be put in place. And that could be huge. So I'm proud of this. I have a teenage daughter. She about a month ago looked at me in the car and she's like, mom, are you afraid that you've peaked with the Psalm rule?

And I was like, oh my gosh, teenagers are the best to keep your ego in check. But I told her, I said, you know, if I'm going to be a one-trick pony, this is the trick I want. Like, this is big and can help people. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value in 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 slash audio.

That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. So your idea, though, basically solves two big problems when it comes to fiscal stimulus. So it allows people to recognize that a recession is coming. And your idea about direct stimulus payments to individuals that allows everyone to pre-agree on a method to combat that recession. And you mentioned some state governments talking about ways that they might incorporate it. How? hopeful are you that your idea gets sort of integrated on an official level or maybe even a federal level in the U.S.? So I think it's really important, right? Because what I've developed right now and what's gotten a lot of attention is how to say we're in a recession. Okay. If that's not paired with a policy response that is swift and vigorous, I worry about negative responses. from consumers, businesses, and markets, right?

So I had a friend joke with me the other day. It wasn't funny, but joked with me that, oh, the next recession, it could be the Somme recession. And I was like, oh, don't do this to me. Because there is an aspect of recessions. And again, having studied consumer expectations is often referred to as animal spirits. There's a part of recessions that get into a very negative downward spiral. So if you think there's a recession coming, or frankly, households look around and they see

people in their family, their friends losing their jobs, that can create a lot of anxiety up and down the income distribution because the vast majority of Americans are one paycheck, sometimes cut in overtime hours away from having serious financial distress. So even if they don't end up losing their job, there's a chance they could. Someone in their family could. And so often, if they're able to, they will cut back in their spending. You know, maybe they're thinking about buying a car and they're like, oh, yeah, let's wait on that because I don't want to commit to these payments.

And then if I lose my job, it'll just be really painful. So if that happens, that's really bad. And that's that, you see that in recessions. This happens. So I'm hopeful that we put policies in place, in place, like the direct payments to households, that led households know ahead of time, and this could be a positive mitigating factor, they would know ahead of time the government has their back. The government is going to send them checks.

This is really straightforward. I think monetary policy is so important. monetary policy is not straightforward. We are never going to get the communications clear enough that households will understand the feds got our back. I think it's really important in that regard. We'd commit to it. People would know ahead of time. It's not just they'd get the money. They'd know that the government is really trying hard to short circuit the recession, make it shorter, make it less severe. That could have really positive effects on consumers. you could have positive effects on employers.

They might not be as apt to lay people off because they're like, okay, this is, we're just going to ride this out. This isn't going to last long. So there could be huge positive effects, but I really worry that if the Psalm rule, this great recession indicator, isn't paired with a commitment to have a policy response, it might not turn out well. So I'm very motivated right now to work with people on the Hill to get this figured out. So I'm curious, if we got a big enough policy response because the SOM rule, the recession indicator actually flashed up, would you then start getting false positives in the recession indicator? I guess what I'm asking is, is the goal to make the effects of the recession less worse than they would otherwise be? Or is the goal to completely stave off the recession that's coming? So remember my indicator says we're in a recession.

Ah, the early stages of a recession. It's clear when it starts moving up. So when you get to a three-tenths increase, I mean, this will cause consternation. And maybe in a discretionary way, Congress gets ahead of it. I mean, the Fed, like I said, three-tenths gets them worried. Like, they are likely to be moving. And at this point, they're going to be likely getting real creative about how to deal with the zero lower bound. As a macroeconomist, I no longer have enough optimism to really say this.

But if in some way this was enough, and I think there's a lot of other automatic stabilizers that Congress ought to be thinking very seriously about, but say Congress went big early in a recession, there is a possibility that the economic data would turn around in such a way that when the recession dating committee at the MBR looks back, they're like, I'm not so sure. There was really something there. Because remember, it's not a done deal until they say a recession started. I mean, frankly, if there was that scenario and people said, ah, the Zom rule didn't work, we supported all these households, we supported unemployed people. I mean, my goodness, I'll take that one. You know, the SOM non-recession will be just fine with me. That's what I was going to say. So, like, on the question of false positives, of course, like in financial markets, people look at the inverted yield curve.

But just, you know, going back to your point, if the worst thing that happens is that households got some support and we never really had a declared recession, that doesn't seem like a particular disaster in any respects. There's one more component to this that I really want to make sure we don't miss. And that is the right way to structure these household payments. And you talked about your work, sort of doing the microeconomics of households. What is the best way to do it? I mean, we have the Bush, we really had it twice under Bush, right? I believe we had it in 2001 or 2002. They cut a check to everyone. Then we had the one in 2007. Then we had the payroll tax cuts under Obama, which kind of does this, except it only goes to people who have payrolls. Based on your research, what is the best way to get the most bang for the economic buck of sending people cash?

So my proposal is to send out checks, big checks, like $500,000, calibrated off how large the economy is, how much spending there was going into the recession. So everybody gets a check. And frankly, I want those checks to go to everybody. There were some limits on who got the tax rebates, the fiscal payments in 2001 and 2008. So I want us to go broad. So that's a big piece of it. We already talked about the Psalm rule. They need to go out as soon as possible.

The only way to guarantee that is to get the logistics in place. In developing my proposal, you're right, I drew on my research, the other research that went on about all these household payments. Sadly, our research program, we had a lot of different policy responses to study because they kept going. So my read of that research is direct payments, checks, really clear, tell people they're coming, and do it fast. Now, a piece that maybe people will think is a sidebar, but I think is important for making all this happen, is if Congress pre-commits to doing these payments, then that will give the Internal Revenue Service the time to put logistics in place.

read for my research for my policy proposal, I read the Inspector General reports from the Treasury looking back on the 2008 stimulus payments. These are fascinating reads. I learned a lot looking at them. And essentially, everyone who worked at the Internal Revenue Service and Social Security Administration who worked on this ought to get a gold medal for it because they hustled in a way that is almost impossible to believe. So they were able to work together because an important, piece of the 2008 stimulus payments, and I am fully on board with this, is they wanted to get it to people who did not even have a tax liability. 2001 went entirely through the tax system. I have more thoughts on that, but setting that aside, went entirely through internal revenue service. The only people that got it were ones who had filed a tax return. Many recipients of Social Security benefits do not file tax returns.

So in 2008, the Social Security Administration did a huge push to tell Social Security recipients that they needed to file tax returns. They helped get that going. So you had, that was not a perfect take-up. I mean, they really moved. The Internal Revenue Service got all the pieces in place. What's a little bit fascinating is that the government, they don't have all of our bank account numbers or our mailing addresses to send checks. My brother who has been in agriculture, he never files his taxes electronically because he doesn't want the government to know his bank account number. So he is not alone.

And in any case, so that actually creates a challenge to get the money out. If you know that these checks that we want to get them out, it would give you an opportunity to make sure that that infrastructure is always in place. It would give you a chance to work to try and get people outside of Social Security Administration who, do not receive benefits. So think about individuals who receive food stamps. They have cards that they use to do payments. Those are run at the state level. That is an even bigger logistical lift, but there's no reason that we can't do that. So if you put all of that infrastructure in place, and of course that's something Congress would have to fund if they were to create an automatic stabilize like direct payments, but wow, that's huge. And as another little wonky detail,

Well, stimulus payments at this point cannot go out during tax season. No matter how amazing internal revenue services, they are fully on it during tax season. Recession can happen in tax season, right? So if you had a parallel structure that was in place, we could do it any time and we could get it to everybody. So I think that would be important. And this is not just my personal opinion. This is my read of the research, that this was the most effective. way in terms of the spending response, I think it was the most effective in terms of the political economy. Again, having worked on these household survey data, so my research is very much, ask households, what did you do with the check? Or what did you do with the extra bump you got in your

your payrolls from your making work pay or the payroll tax credit? When we worked on the making work pay, it was amazing to us how many individuals did not even know what we were. making work pay was. There was one woman that had some very choice comments about what it meant to her to get another 30 bucks a month in her paycheck. I mean, these, not only was it completely missed, that was the most common error when people fired their tax returns that they didn't claim the making work tax credit. Now, the IRS fixed all of that and people, you know, it showed up in their tax returns, but that just shows you people did not know. I have many reservations about us doing stealth stimulus, right? Because I think that the way that households react,

how much anxiety they have about what's happening in the economy, that's a real thing. So why in the world would you want to send them money and they don't know it? Now, I'm being a little strong here because there is some research. Dick Thaler and other behavioral economists had said before this that if people don't know, they're going to put it in a mental account. It's just kind of in their bank. And they're like, oh, I've got an extra $100 and they go spend it. I don't think that's the right policy. And we have data now that really contradicts that. And we have the fact that households were clueless and this didn't help in terms of their thinking the government had their back. And then finally, and I talk about this in

my policy proposal, what you want to do is short circuit the recession. You want to get it out fast. I think it's much better to do it in one bell swoop, one check. Any of these, things that go through payrolls, they are spread out across a year, spread out across two years. Well, that does support households in a regular way, smaller dollars at each paycheck, but why do that? Like, you want to move fast. If you have any chance of shortening the recession, it's right at the beginning. So I think there's a lot, and as you can tell, I've thought a lot about the different policies. I've thought about them both in terms of the research, and I watched it in real time in the consumer spending data, and it hurt. Like, it hurt to see that, like, the household spending

wasn't coming back, and households were really becoming pessimistic. How's the health of the U.S. consumer now? I see a lot of positive, but I, again, I want to frame that positive in in a shadow to some extent. So we are now past the 10th year of this expansion. That in any other time would be, wow, this is a big deal. I look at that 10 years of expansion, and I see a lot that isn't good. The recovery took way too long. The unemployment rate, and these are like people not with jobs, right. This is bad. It stayed up way longer than it should have. There is a lot of research, and you can talk to people. This is not hard to figure out. Being out of a job, long-term unemployment was really elevated. So being out of a job for a long time, these have consequences,

negative consequences for careers. I really feel for those students who came out onto the job market in 2009, 2010, you don't have to look too hard at like the student loan data, the wages they entered with. I mean, they got slammed. And this is not the kind of thing that, oh, we're in the 10th year of the expansion, all is good. It's never going to be all good for them. When I look at the consumer spending data now, and while I haven't been a forecaster for the last two years, I still follow the data more than probably a reasonable person would. So I look at the consumer spending data consumption is 70% of GDP those numbers are good income is good on aggregate on average right I can the last two years I managed a survey at the

Board of Governors the Survey of Household Economics and Decision-making there are and always have been groups of individuals and communities so if you think of people of color rural areas areas that have been hit hard by trade less educated. I mean, I can point to several groups that have been on the margins of the economy, have not shared in what we see in the aggregates, the averages. I mean, they deserve more in terms of the economic policy and support. They are benefiting from the expansion going longer. I find that incredibly encouraging. It's like way overdue, but there's so much upside and potential by bringing them into the economy. So I see a lot of good things. I firm,

disagreed earlier this year when the yield curve of inverted, the yield curve is a very wonky thing. Not wonky. The yield curve is a very unpredictable, I'd almost say unreliable at this point, signal of a recession down the road. It's a forecasting device. It is not a recession indicator like I was using. There's a lot of research that says with these massive balance sheets that the Federal Reserve has, that it is not going to behave financial markets. are not behaving the way they have in the past. Setting that out aside, when that came out, I was like, eh, I don't think, I'm not real worried.

And there was a lot of discussion about a recession is coming. Now, frankly, that's been very good for our recession-ready volume and people have been thinking about a recession more than I would have ever thought when I was working on my chapter early last year. But there was a lot of discussion about, oh, investment, manufacturing, they're contracting. Actually, when I came back from the White House, I worked on business investment. Because to be a generalist at the board, you have to be a specialist in multiple areas.

It's a lot of fun. So I came back and I worked on business investment. And that was actually a period for the first time ever. We had seen the business sector, business investment, contract. And we did not have a recession. So the fact that we were seeing contraction, business investment is 10% of the economy. consumers look just fine. I'm like, this is hard hitting these industries. It's hard hitting people who work in these industries. A recession is broad-based. It's across industries. It's across

the country. And to me, this did not look like something that was going to spread to the entire economy. And the numbers really aren't there unless it starts kicking around. I mean, there are orange lights flashing in financial sectors. They feel like there are always are. So I'm not saying that I completely write it off, but I personally looking at the data, and not just my recession indicator. Forecaster should never just look at one series. I see nearly no way that we are in a recession by the end of this year. And frankly, I don't, unless we find some really big unforced policy errors to pull out of the cabinet, I see no reason why we have to be in a recession anytime soon. So I worry, this is one more piece to put in here,

I worry a lot about the discussion saying the Fed has no ammunition. I worry a lot about the discussions where Congress just could never agree on this, even if we got in a recession. Right now, there's no way they'd even agree to do any stimulus. I find those very worrying because they do not calm. They do the opposite of calming consumers and businesses and financial markets. And I don't think those are really necessary discussions to have. The Fed is incredibly creative. I mean, they did stuff that was totally out of the playbook. And they got more. I mean, having been there, like, there's more in the playbook. And they were like one European disaster away from doing some other things.

So, like, I'm not as worried about the Fed. I don't think they're going to be as effective fiscal policy. We need it. I think, you know, everybody's a Keynesian in the foxhole. Like, Congress will get it together. They always have. So, like, I don't, so, really, I find those discussions, like the doom and gloom in forecasting discussions and market watching,

I think we should stop. Like, I think it's bad. Claudia, that was awesome. It's so great. to have you on. I think that's a great place to leave it there. And I'm confident just based on listening to this that you didn't peek with the SOM rule. But either way, it was really, it was awesome. Really great. Appreciate you joining us. Yeah, no, thank you both. I really appreciate it. It's a lot of fun. Thanks so much, Claudia. That was great. Thanks, Claudia.

Tracy, I really think that conversation helps move the ball forward. Maybe not this particular episode of the podcast having a big effect per se, but in terms of like wrapping our heads around what it means for the handoff or what it means for fiscal stimulus to kick in, I really feel like a lot of the ideas that Claudia expressed are really important for this discussion that everyone is having. I have so many thoughts, Joe. So number one is we need to have Claudia back on to do an episode on what it was like in the Fed and just give us all the gossip about everything that's going on and tell us how to decode all the Fed statements and all of that. The other thing is she's got some great quotes like monetary policy needs to work around the edge. Like that's a really good description of it.

And I think that's sort of starting to become a not. consensus theory, but you can see people sort of moving towards it, right? Yeah, no, absolutely. I totally agree. There were so many, like, different individual insights, observations that she had that we could have, like, each one of those could have been probably a separate conversation. So we should definitely have her back. But, you know, right now, it's still generality. You'll have, like, some sort of, like, you know, very big name and economic say, oh, it's time for fiscal, fiscal policymakers to work. but with no idea of when that is or why that is or what are the thresholds for when they should kick in, it feels kind of arbitrary, what do you spend the money on, all kinds of things. And I really feel like this was very helpful in sort of saying, okay, yes, we get it. We need fiscal stimulus to stave off recessions, but what does that actually mean? And it feels like this is a very fruitful avenue. It's a concrete proposal, that's for sure. And more than that, it also.

comes with the SOM rule, which is the recession indicator, so it can actually give you that exact trigger point for when the checks are going to get mailed out. And I thought the point that you and she also made, which is like, who cares if you get a false positive? The, okay, so the recession doesn't actually get declared. So then you ended up spending a little bit of money for a few months to help households that had gone into unemployment and everyone else. It's not a big deal. And whatever sort of cost there is to doing that is far less than allowing a sustained recession to take place, just given the lifetime hits that that has to people's entire income and so forth. I think your last point is probably valid, but I'm sure there are some people out there who

will think that sending people a bunch of money at a time when there isn't a recession adds up to something. This is your innate MTF tier from within speaking now. someone will pick up on it and probably complain. And that's, going back to the beginning of the conversation, like that is the difficulty with all of this. There is politics running through all of it, even when you're trying to make it as objective as possible. Right.

And that's its own separate thing because there is still this element of like, look, this is public money, the idea of public money, can you do it in a democratically accountable manner, fiscal policy, and have it be automatic? and just sort of set a rule and have Congress go on vacation or not need to vote. It raises sort of thorny issues. There's always this tension of how do you do things in an efficient way and in a democratic way. And I think that's another whole area that needs to be discussed.

But at least this sort of provides some framework for sort of bridging the gap between the automatic aspect of monetary policy and the democratic aspect of fiscal policy. Yeah. It's definitely an interesting one. It's a framework. Yes. All right. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway.

You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. And you should definitely follow Claudia on Twitter, who is definitely not peaked. Great insights. Her handle is at Claudia underscore SOM. That's S-A-H-M. And you should follow our producer on Twitter, Laura Carlson.

She's at Laura M. Carlson. Follow the Bloomberg head of podcasts, Francesca Levy, at Francesca Today. And check out the whole family of Bloomberg podcasts under the handle at podcasts. Thanks for listening. I'm June Grosso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest quarter. cases, the latest actions from Congress and regulators, and the legal moves driving the markets,

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