Plain English with Derek Thompson - Economic Mystery Hour: How Low Will Stocks Go? Is a Recession Inevitable?

Episode Date: May 3, 2022

Morgan Housel, author of 'The Psychology of Money' and a partner at Collaborative Fund, joins the show to play stock doctor and diagnose what's killing tech stocks. Then we debate the odds of an imminent recession and talk about how China's bizarre year could weigh on U.S. growth. Finally, we go through all the good reasons and the not-so-good reasons for cancelling student debt. Host: Derek Thompson Guest: Morgan Housel Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

Yo, Rob Harvilla from 60 Songs That Explain the 90s here to inform you that we are back with 30 more songs because the 90s were super long and had a ton of rad music. Please join us every Wednesday for more 60 songs that explain the 90s only on Spotify. Today's episode, Economic Mystery Hour. Three biggest mysteries in finance and econ today. Number one, what the hell happened to stocks in 2022? Number two, what are the chances of? of an imminent recession in the U.S. economy. And number three, what's Joe Biden going to do about student loans?

Morgan Housel is back on the pod. He's a partner at Collaborative Fund and the author of The Psychology of Money. We will answer all of those questions. But before we do, please remember, I am not a financial advisor. Do not treat me like one. This advice is worth what you're paying for it. And unless I'm mistaken, what you're paying for it is zero.

But before we get to Morgan, let me set the table for finance and econ news in 60 seconds. Stocks have been in the toilet this year. In April, NASDAQ had its worst months since 2008. So if you're 35 or younger, or if you weren't investing for whatever reason during the George W. Bush administration, this is the worst quarter for tech stocks

you have ever seen. And this is happening as some economists are warning of a recession. To understand why the warning of a recession, quick reminder about the Federal Reserve. The Federal Reserve controls monetary policy in the U.S. Its goal is to keep the U.S. pitched in a narrow band of low unemployment and low inflation. Low unemployment?

Check, we got that. The labor market is on fire. Low inflation? Not even close. The Fed's inflation target is 2%. Our inflation rate is over 8%. So the Fed is trying to execute what I guess the term is now, a soft landing.

Raise interest rates just enough to pull down inflation without pulling economic growth below 0%. That's not easy to do in normal times. It's only happened a few times in the last 70 years. It's definitely hard to do with Russia's invasion of Ukraine messing up global commodities markets that's sending commodity prices higher,

which makes it harder to pull down inflation. And number two, you've got the Chinese economy sputtering like it is, which might pull down overall U.S. growth. That's why a lot of economists who have been right about the last 18 months are predicting a recession in the next 18 months. And before I give you, Morgan, one very last thing. It has been a huge honor to do this podcast.

I've loved listening to people giving me feedback on Twitter or via email. Honestly, the positive stuff, the negative stuff, it's all useful. I'd like to hear more. So we've set up an email for you to reach me. It's plain English at Spotify.com. That's plain English, no period, at Spotify.com. What I'd really like to do is add a segment on this show where I answer your questions about anything,

the world, the news, your life. I think this show runs on curiosity, and I would love to have a segment that's like Curiosity Corner where I take time to deeply answer questions that you listeners are most curious about. So send them my way, plain English at Spotify.com. I'm Derek Thompson. This is plain English.

Morgan, welcome back to the podcast. Thanks for having me, Derek. Happy to be here. I want to start with stocks. The S&P 500 is down 14% this year. The NASDAQ is down 22%. And I wanted to bring you on to be the show's stock doctor

diagnose what exactly is happening here, but also our stock psychologist. How should we think about what's happening in the markets today? So first, let's have you play stock doctor. What do you think is happening in the markets in 2022? Well, I think I think stock doctor and stock, you know, practitioner is almost the same thing right here because you mentioned earlier the S&P 500 is down 14% year to date, which is a really actually important number because if you look at the last hundred years in stock market history, the average year, not the average bad year, just the average of all years, the peak to trough in any of those individual years on average is 13 and a half percent. So literally what we've experienced so far this year that feels so bad and feels like it's the end of

the world is literally the average year over the last hundred years. And so in many ways what we're dealing with is completely normal, completely expected, completely inevitable. I think it feels worse for two reasons. One is that we've just had a two-year period when the markets effectively just went straight up. And not only that, but you had literally tens of millions of investors who were participating in the stock market for the first time. Robin Hood, the trading app that is primarily geared towards young investors, in March of 2020, when the pandemic began, they had seven million customers, seven million accounts. By the end of last year, they had 24 million accounts. So you have literally tens of millions investors who got in are investing for the first time

and all they've known is not only a market that goes up, but a market in which it is normal to double your money every six months, which a lot of them in meme stocks were. And that's their baseline for normal. So now that you experience a 14% decline, even if historically it is so benign and expected for that cohort of investors, it's like the end of the world. The other point here is that most of those investors were in high grade. tech stocks, and those stocks are not down 14%. A lot of them are down 80%, 70%. Arc, the ETF mutual fund that gained so much prominence, was kind of like the face of the bull market. It's down 70% from its high. Now, one point that I'd make here is that there's this

theory that I like, it's not analytical. This is very like just rule of thumb, but like how fast a stock goes up, that's the half life for how much it can go down. So if you are investing in stocks that can double in one year or did double in one year. You should expect that they could also lose half their value in one year as well, which is exactly what has happened. You said two things that I definitely want to talk about. The second being that tech stocks are down a lot. And I think a lot of investors have come to expect that a lot of these tech stocks do not apply to the rules of gravity. Like the fang stocks, the software giants, they just go up. And this year has falsified that thesis. But I'm really glad that you mentioned the fact that just doing the quick numbers here, 15 to 20 million retail

investors came online in 2020 and 2021. And all they know is a stock market that since March 2020 has gone up and up and up and up in like basically kind of like an exponential style curve. I remember seeing a viral TikTok with this TikTok investor influencer who said, here's how I make $15,000 a month. Ready? Here we go. When a stock is going up, I buy it. And when a stock is going down, I sell it. That's it.

That's how I'm going to make $600,000 this year. And it was like, oh, you sweet summer child. Like, yes, that is a sensational strategy for this moment. But, oh, my God, when the stock market does what it will inevitably do and start to come down, that strategy will not work at all. Here's what's crazy about that, too. two things. A, he was not being sarcastic. He was being totally, he was being totally earnest when he said that. But B,

that strategy worked really well for like two years. So as easy as it is to poke fun at that, and we should, and I don't necessarily blame literally 20 million new investors for thinking that's how it works. And it just makes this new bath of reality that we're in right now feel that much, that much worse than it would be. Whereas if you are kind of a student of stock market history, you will understand what's going on right now is completely benign. So let's talk about that reality, Beth. I want to look at the tech stocks specifically, because I think a lot of people who are witnessing mayhem in their portfolios are witnessing mayhem because of what's happening in tech stocks. So Amazon, year-to-date, is down 25%. Alphabet, Google, is down 20%. Meta,

that's Facebook, down 38%. Netflix, down 70%. And then you have Robin Hood. Peloton, a firm, all these tech companies that are down 75% or more. What's happening in tech? What is your explanation for why tech particularly has gotten slammed this year? Well, my explanation might be completely wrong because everyone loves to kind of, you know, get attached to their own narratives. But my own narrative would be this. When interest rates are zero, all that matters for the valuation of a company is the story that you can tell about what it's going to do tomorrow, what it might be able to become. When there is no interest rates anchoring you to results this year, when there's no competition for your money this year, all that matters is the story that we can tell ourselves about next year. And that's really what pushed these tech stocks up

as high as they got over the last two years, was that I think when interest rates are that low, it just comes down to what is the most appealing narrative that you can come up with. And if investors anchor onto that, then the question of how much is this company worth is as much as people want to believe it's worth. And that's why you've got all of these what looked like crazy valuations, whether it was, Rivian was worth $150 billion and they had never sold a car before. This is an electric car company, an electric car company that went to the moon before it had sold a single vehicle. Yes, go ahead. Before they sold. And it can do that because people liked the story about it. Now, when interest rates rise, as they have very dramatically over the last

six months or so, then you just start bringing back little portions of reality that start entering the situation, that start entering the narrative. And it's less about what might you be able to do over the next 10 years. And the question starts to become more, what have you done this year? What are your actual business results? We also just lived through a period of over a decade where you had all these tech stocks that it didn't necessarily matter if they made money because you were so focused on the story about what they might be able to become. So you had all these businesses that were losing money with every transaction, every time they interact with the customer, they lose money. The more customers they have, the more money they lose. And by and large,

that was okay with investors because they're saying, ah, we're in for the high growth over the next 10, 20 years. That idea only works if those companies eventually become profitable. Like, focus on your growth, get as many customers as you want, and then we'll make the profits down the road. But down the road eventually comes. Like at some point, we are at the point where these companies have to start showing that they can actually earn real money. And I think that abruptly hit over the last 12 months. And a lot of these companies that are not profitable, that have very poor economics that don't really have a sustainable business model are being priced appropriately now. I think the way to summarize all of this is there's this quote from Nassim Talib who says, and this is tongue in cheek,

he says when most people, when someone dies, most people ask what was the cause of death? When actually what you should be asking was what was the cause of life beforehand? Like, what was actually keeping them alive beforehand? And I think there's some analogy with that with tech stocks as well. is not why did they fall 70%. The question is why were they valued so crazy beforehand? That's the bigger mystery to solve for. And maybe one answer to that is that in a low interest rate environment, people bet on stories, but in a higher interest rate environment, people bet on earnings. That's it.

And what we're seeing right now is people making that shift. They're listening to Jerome Powell. They're taking him seriously. They're listening to the Fed, which says, we are going to raise interest rates, alert, alert. and they are shifting their portfolio from stories to earnings. I think it's important to say that the story that you just gave about essentially narratives versus earnings, it is a story, but it also has a lot of economic sense to it.

Like, let's say you're a company that did really well in the pandemic. Let's say you're Peloton. All right, not a typical tech company because they sell bikes, but I think the example holds. You invest in Peloton because you say, okay, not profitable now maybe, but money's going to be cheap for a while. They're going to be able to spend and spend and get to scale. They'll flip the profit switch and boom, it'll rain earnings because people are spending all this

money every single month to get their favorite instructor telling them to pedal harder. But as interest rates rise, which is happening now, borrowing and spending becomes more expensive and those companies face a much steeper inclined to grow. So suddenly you're like, wait, Peloton's not going to make it up the hill. I wasn't planning for this metaphor, but like the rider's going to fall off before the bike gets the top of the hill. So it's time for me to pivot. I'm going to move my money from the peloton's and move it toward, you know, whatever, bonds and Walmart. And that's what's happening is that people are drawing their money from the peloton to the world and they're moving it to

safer investments and stable, you know, value companies that have shown year after year, decade that they've been able to spin off profits. Is that a decent summary of your point? I think you're, I think that's totally it. And the way that you can kind of show how strong that is, you just kind of hinted at this, a company like Berkshire Hathaway, which is Warren Buffett's company that invests in, you know, underwear and Coca-Cola and Apple, companies that actually make real good products that are profitable. Berkshire Hathaway stock has done very well over the last 12 months. So it is kind of like this changing of a guard of companies that are very sexy and

exciting but not profitable did really well in 2020 and 2021. And now those companies are falling off a cliff. and the boring basic companies that are like, quote unquote, old world, but they make money. Oil companies, big industrial companies, have actually done very well over the last 12 months because they are real businesses that generate real profits. You would agree, it's also fair to say that, you know, speaking of history, Amazon barely made it through the dot-com bust in 2001. And then they sort of hung around for a few years and people thought, oh, maybe they're just

a part of that crop that died off when everything went bust. the NASDAQ, but they kept growing, kept growing, and they became one of the largest companies in the world. Despite the fact that we are now in a transition from, say, narratives to earnings, that pendulum will swing back eventually, right? Like, in the long run, the narratives will have the day again, and there are probably companies right now that are maybe 60, 70, 80 percent off their highs in terms of valuation that are still going to potentially be like the Amazon's of 20 years from now. it's just really, really hard to understand which of these companies has the leaders that are going to be able to sort of pull them through this trough and which of them aren't, right? Like eventually, you're not saying earnings are the story forever. You're saying like earnings are where money is going right now.

And we don't know which narratives will emerge from this moment as carrying today. That's not only right, but there's a, and so you are 100% right, but there's this quirk on that, which is that people have no idea how long those cycles between narratives and earnings can last. We were talking about, we in the industry, in the investing media, we're talking about a tech bubble in 2011 and 2014 and 2018. And I point that out not to make fun of the people who said that because their arguments made a lot of sense. But just because you see something that looks unsustainable does not mean you know when it's going to end. And the other example that I like is that by any metric, tech stocks were a bubble by 1996,

1995, 1996. It was looking crazy. But the market kept going for another five years. And when you say by any metric, you're talking specifically like earnings per share, just like a really classic EPS calculation. You're not profitable, but you're extremely valuable. So your EPS is just crazy out of whack. It's basically infinity. You're saying that since the late 90s, people were making these kind of dire predictions from that standpoint.

Yes, but like by metrics of valuation, like the standard textbook spreadsheet valuation metrics, you can make a rational argument that text. stocks were a bubble in 2011 or 2014 or 2018. But I think those kind of metrics don't, like, don't have that much usefulness in the real world because those narratives can last so much longer than people think, which is just to say, if we are in this new world of earnings matter way more than narratives, that might last one year. It might last 15 years. And I don't think there's anyone in the world who knows how long that might last. It's just so much harder to do in practice than you would think. I did a little bit of research last night. I was like, You know, what stocks are up this year?

What stocks are up year to date? U.S. Steel Corporation is up. Tyson Foods is up. They sell a bunch of meat. John Deere is up. Caterpillar is up. Companies that dig stuff out of the earth. Nutrienne, the largest fertilizer company.

They're up. Bear, the German conglomerate that owns Monsanto. They're up 27% this year. I was like, is this like the medieval economy is coming back in the stock market? I went about, I was like, I wonder what like the biggest, like, publicly traded timber companies are. I found Weyerhoiser. It's up. Have you ever played Catan, settlers of Catan?

No, I don't think I have. Okay, well, for all those who have played settlers and Catan out there, it's basically you roll this dice and you try to acquire the following materials to essentially build roads and towns and cities. Wood, brick, sheep, wheat, and ore. That's what you need.

Guess what stocks are up? Wood, brick, sheep, wheat, and ore. I was like, wait, maybe you and I should, like, launch an E-T-F, like C-A-T-A-N. And just like we are invested in the medieval economy. This is our ETF. We're going to take Ark down. We're going to take Berkshire Hathaway down.

You and I, Catan, the medieval ETF. Are we doing this or are we not doing this? I'm down. We're going to lock you as soon as this recording is over. But here's what's really interesting about that. In 2020, I don't know the exact date. I'm pretty sure it's 2020. Maybe it's early 2021.

Arc, the ETF that has been kind of the poster child of the tech boom, they put out this video that was poking fun at old world companies. And it was done in the, in the format of like a pharmaceutical video. Like, you might be suffering from valuitis or whatever they called it if you're investing in oil companies and manufacturing companies and typewriter companies. And they were really making fun of the people who invested in those kind of companies. And that came at the exact moment when ARC was about to fall 70%. And the oil and industrial, the medieval companies are up 20 to 50%. So I think that, you know, that pendulum is really classic in investing. We see it happens so many times and it breaks away from what seems reasonable.

I had dinner with a friend, a very smart friend two or three months ago. And he just casually said, he said it's so obvious to me that tech stocks are going to outperform everything else for the indefinite future. And I didn't push back. I didn't want to get into any debate. But to me, it's not, to me, it's not that obvious at all. It's not obvious. It's not obvious. in the slightest that a basket of the top tech stocks are going to outperform the quote-unquote medieval stocks over the next five or ten years. And it would not surprise me in the slightest if it was the other way around. And there's a lot of precedent for that in history. I think one big takeaway from this segment in particular. It's just history is long.

History is really, really long. And we cycle between extremely different periods where certain narratives seem obvious. Oh, it's the 21st century. Software's eating the world. Of course arc is going to go to the moon. Of course the future is in soft forest stocks. And then if you looked only at 2022, you would say, you know, by the very nature, soft first stocks declined by 80% every single year. And the things that you can really count on are steel, meat, things that, you know, machines that dig shit out of the earth. And what was the last thing? Oh, grain and timber. But narratives keep spinning and history keeps going. I want to move on to the overall economy here, which definitely. definitely has a lot to do with where stocks will go in the next 12 to 18 months.

So here, as I see it, are four stories that you could tell about the U.S. economy right now, in our sort of battle royale of narratives. Story number one is the job story. And that says the economy is booming. Unemployment's under 4%. We have added so, so many jobs in the last 12 months. Story number two is the consumer spending story. And that story also says that the economy is booming.

Consumer spending is just absolutely on a rampage. Story number three is the real wage growth story. That is wage growth adjusted for inflation. And this is a murkier story. It shows that the economy is in a weird place because wages are up, but inflation is up for many people even more. And then number four is the consumer sentiment story. And this is just a disaster. Index of Consumer Settlement is a poll.

The University of Michigan has been doing for 60 years. And consumer sentiment is now hovering near. near its lowest point in 60 years. So the job story, consumer story, real wage growth story, and sentiment story pointing in four different directions. Morgan, you walk up to the economic narrative buffet, you've got an empty plate, make your selection. What is your narrative selection for what's going on in the economy right now? I think what's most interesting is the consumer sentiment part, because as you mentioned, by any, virtually any statistic, we are in like the golden age of middle-class prosperity today at this moment, the lowest unemployment, the highest wage

growth, et cetera, et cetera, et cetera. It's so good and everyone is so pissed off. It's like the Louis C. KS kit. Everything's amazing and nobody is happy. And here's what I think is interesting. I think most of the consumer sentiment is driven by inflation. What it tends to be is inflation, the stock market, and politics. That's what really moves consumers' opinion of the economy. And what's interesting to me is that if we had gone back to March of 2020 and the policy at the Fed and the White House and the Treasury had said, look, we are about to enter the second Great Depression. It is that bad, if not worse. Now, we have all of these policies that we can bring about that will prevent that. It's going to prevent the Second Great Depression. However,

in the year 2022, there's going to be 10% inflation as a consequence of those actions that we take to prevent 30% unemployment. If you had given people that option, I think 90% of Americans would have said, I will take it. I will take it, give it to me. But we were kind of accustomed, I think, because of what happened after 2008, of having the medicine and having no side effects. Because after 2008, we had a big stimulus package, and there was, by and large, no inflation that came with it, pretty much. And I think people got used to that. There was also very slow growth, right? There was slow GDP growth, and there was slow employment growth. And so we had, not a lost decade, but like a semi-lost half-decade.

We had a period of five years after that stimulus where it was a period of low flation, it was a period of low growth, it was a period of just sort of doldruminess, you know? Like just not a lot was happening. There wasn't a lot of dynamism in the economy. And now suddenly there's dynamism. Like, look, take your pick.

You want entrepreneurship? Business formation is up. You want wage growth, nominal wage growth is up. You want a hiring bonanza? Hiring could not go any faster. People are quitting their jobs left and right, sometimes to get new jobs, sometimes to start companies. People are moving more than they were five years ago. Dynamism is way, way up over where it was 15 years ago, but you are totally right.

What's the side effect that came with that medicine? The side effect may contain, you know, you were talking about the pharmaceutical ads just like 10 minutes ago, you know, may produce side effects of 8.5% inflation. That's what we're getting. And so it's tough because I don't want to be in the position of saying people shouldn't be upset about age. 0.5% inflation, this is a surprise. It's a shock. But it's a shock that's happening in the context of a kind of growth and dynamism that we really haven't seen in the last 20 years. Totally. I just think, too, that if you had given people the choice and said, what do you want? Do you want 30% unemployment or 8.5% inflation? It's so obvious what people would have taken and should have taken. But the problem

is that you can't prove a counterfactual. So the quote unquote, 30% unemployment that would have stuck around for Great Depression 2, that didn't happen. So you can't take credit for preventing it. You don't get credit for preventing the economic crisis that never happened. So I think it's almost inevitable that we're going to be here. It's like, you know, if your doctor gives you a pill that 100% guarantees you're never going to get cancer, but that pill has enormous side effects. You should probably take that pill. That seems great, but the side effects are going to piss you off and you're going to blame the doctor. So I think that's where we are right now. I understand it. I don't push back to the people who are upset right now.

I just think it's an interesting quirk of what people expect from their policymakers. I think it's fair to say, however, and I say this as a liberal. I think people listen to show know that I'm a liberal. Liberals were the pharmaceutical company that in March 2021 said, take this pill, it'll cure cancer, and there are no side effects, right? Yes, yes. They were saying, here are the stimulus checks from President Joe Biden, enjoy the stimulus checks, and don't pay attention to those people who say that inflation is coming.

Don't listen to Jason Furman, repeat cache the show. Don't listen to Larry Summers. Don't listen to these people telling you that this growth pill has side effects. It turns out, however, that the side effects were innately contained within that pill. Looking back, it's like, how did we not think that pill was going to cause like, you know, both like pure male pattern baldness and also cause weird hair growth like all over the body? Like, that's what the pill does. It just makes hair grow.

So I think it's important to say that to a large extent people are upset because they somewhat feel lied to. I actually want to take that bit and spin it forward a little. There are a lot of people who predicted inflation, like Larry Summers, who are now saying that we're not just going to get inflation plus growth. We're going to get inflation plus stagnation, famous stagflation of the 1970s. Larry Summers has said the probability of a recession is close to 100%. There's other analysts like Moody's or Goldman Sachs who put the chance of a near-term recession at about one in three. What is your recession outlook here?

Because the Federal Reserve has a hard job. They have to keep the economy humming while constricting demand just enough that inflation comes down without growth turning negative. Do you think they can pull off that trick? I think the odds of a recession are either 0% or 100%. That's my view of this. And I just say, here's, here's the analogy that I use. I've brought up 2011 a couple of times during our conversation because if you go back to

2011, a lot of people don't remember this, but the odds of a quote unquote double dip recession, the odds of stagflation in 2011 seems so obvious to so many smart people. And of course, it did not happen. And so I think whether, is that going to happen this time? I think it's, I don't think, I don't think anyone knows. There's a Buffett quote where he says, I don't take anyone's forecast seriously, including my own. And so I just think, look, no one could have foreseen how the last two years played out.

It was if you would see what happened in the stock market, what happened with unemployment growth, what happened with new job formation, everything kind of is a surprise. So the takeaway from that is like we should have some humility with what's going to happen next. And it would not surprise me in the slightest if we went, if we are about to enter a five-year period of stagflation, that wouldn't surprise me. It would not surprise me if inflation collapses. and we are about to resume kind of the path of low inflation growth that we had been on for a lot of the last decade. That would not surprise me either. Whenever you're in such an extreme environment like we are right now, all the historical precedents and all of the logical academic models get thrown out the window.

They get thrown out the window. We are in such an extreme scenario right now of so much money printing, so much stimulus, so much record this, record that, that I think the only rational response is to say nobody understands what's going to happen next. And that's disheartening for people to hear because we all want to know what's going to happen. There's such a strong appetite for accurate forecasts. I just think the only way to really deal with the reality that we don't know at a personal finance level is just have enough room for error and margin of safety in your finances that you can absorb a big variety, a big range of outcomes, because that's the best that any of us can do right now. I think you're totally right that the Federal Reserve could pull this off. they could reduce inflation without reducing growth below zero.

What's really, really hard to read is the global supply side aspect of American growth. So you already, I think we've already seen ways in which Russia's invasion of Ukraine and chaos in global commodities markets have already proved a threat to the U.S. economy. The other one that I'm watching, and I wonder very quickly, before I move on to our final segment, whether you agree that this is a big flashing red sign, the Chinese economy is looking wonky as hell right now. Oh, yeah. Beijing's zero tolerance of COVID

is absolutely shutting down cities like Beijing and Shanghai, which if they're shut down, is going to dramatically pull down China's potential growth. Real estate already had

a terrible 18, 24 months in China. Business confidence in China is down. Imports have plummeted. I was reading in the Wall Street Journal, sales of excavators, those big construction equipment thingies with the bucket

and the big metal arm that operates it, those are down 61% in April compared with the previous year. Sixty-one percent down, and this is a country that's still digging a lot. It's not very good when the thing that is doing the digging is down 60% year over year. And then a final statistic to put on top of the Sunday, China was projected to account for a quarter of global economic growth in the five years between 2021 and 2026, if that 25% is dinged, then of course the U.S. is going to feel it because we aren't exclusively relying on exports to grow, but we rely on the global economy to continue growing. And on top of everything else, if China falls apart, that would concern me.

Just really quickly, how are you looking at China? How worried are you about the situation there? I don't necessarily worry about it from my own personal investments, but I would say, look, China also has a long history of putting out economic statistics that most that are not very believable doing this for a very long time. So whatever the statistics are that show how much the Chinese economy is slowing, it's probably worse. It's true for the COVID statistics that come out as well. So there's that aspect of it. And the other thing, it's just, of course, I have no idea what I'm talking about when I speak about the pandemic itself. But everyone's experience with Omicron is like, it cannot be contained. It cannot. It's going to get out there. It is so damn contagious that once

it's out, it is out, and you're not putting that back in the jar, so to speak. So to the extent that China maintains a zero COVID policy with the reality of Omicron, it just seems completely fanciful to me. And then if they're going to hardline on that, we're going to shut the economy down until there is no more Omicron. That's a pretty daunting future that we're looking at. One more topic that I want to get your brain on before you leave is student debt forgiveness. This is all over my Twitter. I mean, to a certain extent, could be one of the most important decisions that Biden administration makes that touches the economy before the midterms. Just, I'm not going to set this up. I want you to have an open table

here. What is your attitude on the economics of student debt forgiveness? I think on one hand, it does seem completely reasonable that there is an entire generation that is just overwhelmed with student debt and it's impacting their ability to buy a house, start a family, et cetera, et cetera. And to the extent that the federal government has the ability to take some of that weight off, I think that's great. But this is a big but. I actually don't think that there is a student debt problem per se. I think there is a tuition problem. That's the root of what is going on here is that it can cost $300,000 to get a degree from a private university and tens and tens of thousands of dollars from a public university. That's the issue. And if we are going to forgive student debt but not fix the tuition problem, then this just keeps manifesting. Not only that, but let's say there is a world in which, and not only this is proposed, but let's say it's the case that, okay, Every four years, we are going to forgive $10,000 of student debt. Let's say that's the world that we're going into. If you are a university looking at that, the completely reasonable thing that you are going

to do is to raise your tuition by $10,000 and tell the students, don't worry, this is all going to be forgiven. Yep. That would be the reasonable thing to do. And by the way, if you are a student, and you do have the means to pay for tuition out of pocket, your parents are helping you, whatever it might be, the reasonable thing to do would be to go in more debt and expect it to be forgiven. So I think fixing the debt problem, great.

I agree with that. Totally, I'm on board with that. Fixing the debt problem without fixing the quote unquote tuition problem, disaster. Complete disaster that's going to brew. You brought up the moral hazard of forgiving student debt once in, say, July of 2022 and then never doing it again, raising a generation of people to believe that student debt forgiveness is just something that happens every decade. And then it doesn't happen.

So they go into more debt and it doesn't get forgiven. I think the moral hazard situation is one to look at. It's so funny, I wrote down two good things, two bad things about this policy. Two good things. One, student debt sucks. It really sucks the U.S. education system as a debt machine, and it would be nice to give some benefit to people that have gone through it. Number two, you are rewarding people, this is a good thing.

You're awarding people who have done the quote-unquote right thing. This isn't, you know, forgiving student debt wouldn't be like bailing out a bank that made a bunch of bad loans. Like you're bailing out people in their 20s, 30s and 40s who went to college, right? That's rewarding pretty beneficial behavior. But in terms of the bad things, I guess, just adding on to the moral hazard point you just made, number one, especially in an inflationary environment where we're worried about too much demand, it's a pretty wonky distribution of income.

Like if you divide the U.S. into five quartiles of income, excuse me, quintiles of income, the bottom two only get about 23% of a student debt jubilee. The top 40% of earners get just over 50%. of the benefit. So the richest 40% benefit twice as much from this policy as the poorest 40%. That's not ideal if you're doing income redistribution in an inflationary period. And the final thing, just to put one more note on this, people have been going to college for 100 years, and they will keep going to college for 100 years. If we do student debt forgiveness one time in the middle of that, that's very odd. It does nothing for 17-year-olds who start college this fall. It does nothing for

27-year-olds who stopped paying off their student loans or finished up paying off their student loans two years ago. I think it's very hard to keep in my head on the one hand that I get the virtue of this policy and also that it is an extremely random bailout if what you're trying to do, to your point, Morgan, is fix the education financing problem for the foreseeable future. Right. It's like there's two ways to do it. You can do it once in which it is incredibly unfair for that generation that got the benefit. Or you can do it. in perpetuity, you can do it forever, in which case tuition is almost certainly just going to rise by a corresponding amount, and we're in the same spot all over again.

Yeah, it's a really, really difficult spot. And the Biden administration is tough, because I think the political element you have to add to this is that the Democrats are polling so poorly across the board, like the only demographic that supports the Democratic Party and the generic ballot are people that went to college. And so if you are just a politician, you're not looking at economics, you're just a politician, you're saying, how do I get college graduates to just absolutely come out in droves for me at the polls. Well, you have a multi-billion dollar student debt Jubilee six months earlier to push them out of their homes.

Morgan, thank you so much for joining. I really appreciate it. We'll talk to you soon, man. Thanks, Derek Thompson. Is produced by Devin Manzi. Thank you so much for listening to this show. If you like us, follow us on Spotify, rate and review on Apple Podcast. We will be back on Friday.

We will see you then.