Plain English with Derek Thompson - Harsh Truths About 2024 and the Future of the U.S. Economy

Episode Date: July 19, 2024

On today's episode: the state of American politics and the future of America's economy. Derek discusses a media myth in the aftermath of the failed Trump assassination attempt and reviews three basic truths about Joe Biden's doomed presidential bid. Then, Chicago Fed president Austan Goolsbee joins the show to answer Derek's blunt question, "Are you going to cut rates next month?" Plus, they discuss the Federal Reserve, how it works, how he sees the economy, whether high rates are constraining housing production, and whether Trump's signature economic policy idea—high tariffs in an age of global inflation—would help the U.S. economy. (TLDR: No.) If you have questions, observations, or ideas for future episodes, email us at [e-mail]. Host: Derek Thompson Guest: Austan Goolsbee Producer: Devon Baroldi Links: “Stop Pretending You Know How This Will End,” Derek Thompson, The Atlantic “Hit or Miss? The Effect of Assassinations on Institutions and War,” by Benjamin Jones and Benjamin Olken Learn more about your ad choices. Visit podcastchoices.com/adchoices

Greetings, it's Mal. Call your banners because it's time to head back to Westrose for House of the Dragon, season two. The ringers, Dragon riders will soar alongside you each week with a heron-hall-sized slate of conversations. The dragon has three heads, and on Sunday nights immediately after Hot D concludes, Chris Ryan, Joanna Robinson and I will be with you for Talk the Thrones. Then on Mondays, two more shows away. Dan Lath and Charles Holmes, Steve Allman and Jomea Denneron, aka the Midnight Boys, Pugh!

We'll head to the tourney grounds to share their reactions. And of course, Chris Ryan and Andy Greenwald will sip the Arbor's finest vintage on the watch. Then on Tuesdays, Joanna and I will head to the bowels of a pleasure den for our House of our deep dives. Then on Thursdays, Joe, Neil Miller, and Dave Gonzalez will gather the Ravens for trial by content. In this season, full episodes of Talk to Thrones, House of Ar, and the Midnight Boys will also be available on video on Spotify and the new Ringervverse YouTube channel. Podcast episodes available on Spotify or wherever you get your podcast. Today, a longer open from me on an absurdly busy week in election news and our first ever interview with a Federal Reserve president on the future of the U.S. economy. Before we dive into today's show, I want to do a very brief meta-commentary on this podcast and politics.

I do not want to make plain English a wall-to-wall political show, but it is a news show. and the U.S. presidential election is the most dramatic thing happening in the news cycle right now without question. And so while I don't want to change the fundamental diet of plain English covering economics and society and psychology and tech and science, I think the way I'm going to handle politics going forward until November is that occasionally I'm going to be recording extended opens like this one to tell you how I'm seeing the election. And I'm going to put those extended recordings on top of interviews that are. about all the other incredibly interesting, incredibly important things happening in the world. So this is not to rule out the probability

of future politics shows, but it is to rule in this general frequency of shows that have nothing to do with politics. Because the truth is, there's just a lot of interesting things happening out there that I want to stay abreast of even while I offer commentary on a presidential news cycle

that is, my God, unlike anything I can remember. So first, the week in 2024 news. In the last six days, six days, we have had a dramatic failed assassination attempt of Donald Trump, the announcement of J.D. Vance as the Republican vice presidential candidate, the historic dismissal of the Trump stolen documents case, a cavalcade of Democratic heavyweights, Nancy Pelosi, Chuck Schumer, Hakeem Jeffries, reportedly telling Joe Biden that he has to drop out

of this race, and then leaking to the press that they did that. after Biden ignored their advice, followed by Biden announcing that only a medical event would push him out of the race, followed almost immediately by the announcement that he has COVID. A truly exhausting test of a person's ability to pay attention to any one particular piece of news for more than 15 seconds before waiting for some other melodrama to interrupt their focus.

Even if it seems to news junkies like something that happened nine years ago, I do want to go back to last weekend's assassination attempt. Everything that is obvious has already been said a million times about this episode. Obviously, the event itself was horrible, and obviously the photograph that ensued was extraordinary. But what I saw in the immediate aftermath of the failed assassination was a spasm of overconfidence. As I wrote in the Atlantic, I watched pundits and politicians rush to declare that they knew, they knew exactly how this event would change American politics forever. You had analysts in the left and the right predicting on social media that Trump was now faded to win a landslide.

Democratic House member told semaphore, quote, that's the whole fucking election. Vox said we should all be terrified about what happens next. The New York Times predicted on page one that the assassination attempt was likely to tear America further apart. Let me offer another interpretation of last weekend's shocking event. Nobody knows. Nobody knows what it means for the November election or for the future of political violence. And anybody who claims to have already figured out how Trump's bloody ear will influence November or the next four years is lying to you and lying to themselves. The history of failed assassination attempts in the U.S. and abroad offers only the murkiest indication of a path forward.

Benjamin Jones, an economist at Northwestern University, who has studied the effects of political assassination attempts over the last 150 years, told me that would-be assassins are, quote, chaos agents more than agents that direct the course of history. This past week, I spoke with Jones and another economist Benjamin Olkin at MIT because they are the co-authors of the only paper I know that actually attempted to provide an empirical answer to the question, what happens in the aftermath of an assassination attempt? The first thing they found is that most attempts fail. Jones and Olkin counted 298 attempts on world leaders between 1897 and 2004. Only 59 resulted in a leader's death. The second thing they found is that, yes, sometimes successful assassinations clearly redirect the course of history. To take one example, the murder of Archduke Franz Ferdinand clearly accelerated the set of events that culminated in World War I. When I asked how their research applied to the failed attempt to assassinate Trump,

Olkin told me that their results split into. In authoritarian countries, failed assassinations led autocrats to tighten the screws on the public. But in democracies, failed assassinations lead to nothing at all. In our historical data, Olkin told me, the U.S. is very much a democracy. Of course, the question before us today is whether and for how long that will remain true. Trump is, let's not forget, a man who not long ago attempted to overturn the results of an election that he had decisively lost. He is, according to the polls, not just this week, but for the last nine months, on the precipice of another four years as president, buoyed by a Supreme Court decision that just expanded the legal immunity of that office. Of course, I believe the U.S. is still a democracy.

and if Jones and Olson's historical analysis holds, then the overall effect on American politics, economics, and violence, and law should be negligible. I pray that they're right. Another reason to doubt that the failed assassination changes anything is that in this berserk news cycle, it has already been displaced many times. J.D. Vance, the stolen documents case dismissal,

the Republican National Convention, the Biden Rev. COVID, the news cycle is moving so quickly, it's difficult for any one piece of news to break through for an extended period of time. And for that reason, I think, if you look at the polls and if you read expert analysts of the polls, what they're going to tell you is that the last three weeks since the debate have not dramatically changed the race at all. Trump has been consistently, narrowly to moderately ahead and consistently the moderate favorite to win. you know, thinking about the fact that the selection isn't changing that much, even though the new cycle seems out of its mind.

I was reminded from that scene from The Simpsons, when the doctor tells Mr. Burns that he's the sickest man in the United States, they say, you have every disease, Mr. Burns. But because every disease is simultaneously trying to push its way through the proverbial door of your body, they're all getting stuck at the entry and nothing can break through. which makes Mr. Burns simultaneously overcome with disease and entirely indestructible. I think sometimes the election cycle suffers from a Mr. Burns effect. It's so much news, but not so much effect in the basic contours of the election. As for the basic contours of the election, they are very simple.

And if you're a Democrat, they are brutal. To quote Kevin Bacon's character and a few good men, the facts of the case are these, and they are undisputed. Undisputable fact, number one, Biden has a major, major problem. He is running consistently behind not only Trump, but also swing state Democratic senators. In fact, in some states,

Joe Biden is running further behind the Democratic Senate candidate than he is running behind Donald Trump. This strongly suggests that the problem is not the Democratic Party writ large, but the Democratic president himself, This is the message at the core of Nancy Pelosi and Chuck Schumer's revolt against their party's leader. It's not us.

It's you. Undisputable fact number two. Biden's biggest problem is very obvious and very easily said. A majority of voters in his own party think he is too old to run for president. And fact number three, the reason Joe Biden is cooked is that there is no plan to fix this problem. because the underlying problem itself is unfixable. Every scripted Biden TV appearance for the last two weeks since the debate has had viral moments of scrambled thinking, aborted sentences, and logical inconsistencies.

He has mumbled through written and read speeches. Within 24 hours, he called President Zelensky, Vladimir Putin, and then called Vice President Kamala Harris Donald Trump. Now, when I go to CNN or I check out clips from MSNBC, and again, I see hosts asking guests the same problem. What can Biden do? What can Biden do? The answer is as depressing as it is inevitable. There is no ripcord to pull on the passage of time. There is no miracle drug for old age. Watching Biden try to finish a long answer on television without making a major flub is like watching somebody on crutches trying to work their way down a spiral staircase.

My instinct isn't just to hold my breath, curl my toes, pay for the best. My instinct is to shout out loud, wait, why are we letting this person do this? Anybody's a fan of Biden is going to hear those sentences, and they're going to get upset. And several true facts will leap into their mind. That Joe Biden assigned legislation and clean energy, infrastructure, chip manufacturing, prescription jug pricing, that is truly historic. All true. They're going to think inflation was, in fact, as global as the pandemic.

And unlike the pandemic, where the West had no big winners, the U.S. is the clear economic winner of the last three years, with a lower inflation rate than many G7 countries and much higher GDP growth. Also true. They'll think our energy production is at all-time highs, our unemployment rate is near 50-year lows, inequality is falling, all true things. But that's the past. and past results are no guarantee of future returns. The problem with Joe Biden as the messenger of his party

isn't just that he struggles to speak clearly. It's that even when he does speak clearly, he has failed to articulate a substantive vision for what his accomplishments amount to. What is the message? For this reason, I feel real sympathy for people working on the Biden campaign. They are a production studio organized around the talents of a fading star.

And they're now caught in a strategic catch-22, where every effort to reduce the salience of Biden's age now automatically does the opposite. You keep him away from reporters, it just raises questions. You put him on camera, it just creates another viral moment that draws attention not to his very real policy wins, but rather to the faculties he is lost. Every alternative to Biden is fraught with risk.

There's no point in denying it. Replacing Biden with Kamala Harris, incredibly risky. Holding a mini-primary, ludicrously risky. But high-risk, high-reward strategies become more rational as you become more confident in your disadvantage. One more time. high risk, high reward strategies become more rational as you become more confident in your disadvantage. Jumping out of windows is generally speaking a very terrible idea.

But when your house is on fire and the flames are encroaching on your room, auto defenestration is not such a risky call. And as I said two weeks ago after the debate, I think the choice here is obvious. Democrats can sip coffee in a burning room whispering, this is fine, or recognizing the reality of their situation, they can start thinking about the best and smartest way to jump out the window. Okay. Well, speaking of messes that might or might not have happy endings, today's big interview on the state of and the future of the U.S. economy is with Austin Goulsby, the president of the Federal Reserve Bank of Chicago. A voting member of the FOMC, which will in a few weeks decide whether to finally cut interest rates. We talk about the history of the Federal Reserve, what the Fed actually does, what's going on with inflation, the ways that high rates impact consumers and workers and even the supply side of the

economy. And I even try to get Mr. Gulesby, Professor Gulesby, to anticipate and respond to a certain Republican presidential nominee's idea to raise tariffs across the board. Think about how that would affect the future of prices and inflation in America. I'm Derek Thompson. This is plain English. Austin Gouldsby, welcome with the show. Hey, thank you for having me back.

The last time you were on the show, you were merely a shared professor of economics at the University of Chicago Booth School of Business. Today, I am speaking to the president and chief executive office. of the Federal Reserve Bank of Chicago. We talk about the Fed a lot on this show. There's enormous amount of interest in the Fed. There's a mystique about the Fed. I do think this is the first time I've spoken to someone

who actually serves on the Federal Open Market Committee, the FOMC, these Wizards of American Monetary Policy. Before we talk about inflation and the labor market and the future of the U.S. economy, I have a very personal question. What is your job? Like, on an hour-to-hour basis. What are you do all day?

What do you do all that? I thought you were going to say you were a tenured professor at the University of Chicago, and now you're at the Fed. Was that a promotion or a demotion? The Fed system, as you know, is a little, it's not creaky. It's a little Byzantine. It was set up in 1913 with the Federal Reserve Act. And back then as today, people fundamentally did not trust centralized authority,

and they did not want Washington, D.C. and the New York City financial community to have a monopoly on the financial system and the monetary policy of the United States. So they set up 12 reserve banks spread around the country to be part of the FOMC and to bring independent perspectives about the economy. The Chicago Fed District is basically hard of the Midwest, 90%. percent of the population of Iowa, Wisconsin, Michigan, Indiana, and Illinois. And so one part of the job is preparing and going to these meetings where they decide a monetary policy. But the other thing that the reserve banks do, A, we're basically a bank to our member banks. So we provide, we have, they have a bank account with us. We, we

have a vault with $25 billion of cash here. We are the regulator and supervisor of member banks. And so we have a lot of regulators there. And each of the banks is meant to be a kind of a pillar of the community. So we have community development function. We're out engaging with civic leaders. we go around. I'll go tour factories and farms and I'll go out and speak in the community and I'll try to gather intelligence. So it's a lot of meetings, but it's also a lot of fun. I mean, the Fed may be a mystery to many, but once you are a member of the Federal Reserve system, you recognize that in this small part of the universe, it really matters a lot. It's interesting to think that you're both an evaluator of the economy and also a kind of

senator, like a representative of the districts, right? You're sort of a monetary senator. I guess that's right. Yeah. But in a weird way, it's like the governors, the Fed governors are political appointees confirmed by the Senate. They work in Washington, D.C. and in a way, they are like senators,

and the presidents are kind of like governors. You know, we're out, we have a district, and we have a bunch of operational responsibilities, and we're out, you know, doing these events. And just one more question about the job itself. These FOMC meetings are lore among the economic and financial nerd community. These are the meetings where the stewards of American monetary policy get together and discuss the future of the economy

and how to shape it with the tools that you're disposed. What is it like being at an FOMC meeting? If you're an econ nerd like me, the FOMC meeting is just about the coolest thing in the world. It's just as amazing as you dreamed it would be. You go in, there's a giant table, down come the shade so nobody can spy on what's being said, and then they go around the table, and every president and governor and Jay Powell himself give their opinion about the economy. And we have a debate about conditions

and what to do in monetary policy. And I've been saying, no offense to anybody else in the 21st century, my view is the FOMC's the world's greatest deliberative body. And I thought that going in and nothing has changed about that as I've been there. We are eventually going to talk about the U.S. economy, but I have one follow-up question about the FOMC,

because I'm imagining you're a smart guy, you're sitting in a room with a bunch of brilliant people thinking about the economy. But fundamentally, you are having a discussion. You're having a kind of debate. Do certain people who are just naturally good at talking have an advantage at that table in terms of shaping the future of American economic policy?

Like, you are, if I recall, from my like 2008-2009 reporting on the Obama White House, aren't you like a high school or college debate champion? Does this make you unusually and unfairly advantage to shape the future of U.S. politics? I like your positive spin, and it's kind of like the Derek version. I thought you were going to go the totally opposite way. If you're a person who talks too much, do they ignore you? Yes, probably.

But this is the deliberation I would kind of characterize in a way, partly. takes place across meetings. So each person speaks their piece, and then you have your research director or somebody there, and everyone's research director is furiously writing down what everyone else said. And then we will kind of come back and process over the meeting is approximately every six weeks, and we'll spend some of the weeks trying to update with new data, but also what did the other people say? So a bunch of the deliberation is not a debate in the moment. It's more of a longer, longer think. All right. Let's finally talk about the economy. The Fed has a big decision coming, which is whether to cut interest rates for the first time since the inflation crisis started.

And that would not only reduce the cost of borrowing by a marginal sum, but it would also signal to the market and perhaps the public that the Fed believed that some states, that some stage of the war against inflation had been won. I have to ask, just at the jump, are you interested today, Austin, in moving markets and just telling me right now if we're going to get an imminent rate cut at the next meeting. What we're going to do? Okay, let me give you the background, ground rules that I've learned. I've been there a little over a year and a half. Lesson one, I'm not, nobody on the FMC is allowed to say anything about what the other members think or what the FMC itself is going to do. They can,

they are to speak only for themselves. So I will speak that. Then second, I don't like, if you follow my 18 months on here, I don't like tying my hands even for the next meeting, much less for more forward guidance. We're going to get a lot of information. Even now where we got a meeting coming in a couple of weeks, we're still going to get important information between now and then.

So I don't like committing to a decision before we've actually had the deliberation to talk about it. Okay, well, that's obviously a disappointing answer from my reputation as a market-moving podcast, but I accept it. Let me ask a question. I think you'll be more likely to answer. The last time you raised rates, one measure of annual inflation, core PCE, was over 4%. Now it's trending down toward 2%.

And everybody is looking forward to a rate cut in the near future. Investment, community, housing, prospective homebuyers. Tell me what you see in the economy. I basically see we have in the last 18 months made substantial progress on what we call the dual mandate. So the Federal Reserve Act lays out that the Fed has two jobs, no less than two jobs and only two jobs. They are stabilized prices, maximize employment in the setting of monetary policy. In 2023, the inflation rate came down basically as much as it has ever come down in a one-year period, close to the biggest drop in inflation in recorded economic history.

And it did that without a major recession, which is virtually unparalleled, not just in the United States, but all around the world, it is extremely hard to get inflation to come down by any noticeable amount without a heavy slowing of the economy. I was describing in 2023 that I thought that was possible, even though that's historically unprecedented, I started calling it the Golden Path. You know, and so you're Wizard of Oz thing. I didn't know if it was Wizard of Oz or Elton John or what it is, but I thought the golden path was possible, partly because we had a healing supply chain and a bunch of weirdness that had led to the recession coming out of COVID. And that weirdness and unusual run-up meant that it could be an unusual wind down.

But also because, and we could get into it, I think the credit. that the Fed retained in the fundamental sense that if you went and asked people or looked at the market, what do you think the inflation rate will be five years from now? That virtually never changed. Even when inflation itself, headline got almost the double digits, they still said five years from now, 10 years from now, we think inflation will be back to 2 percent. exactly where the Fed promised it would be. The fact that we retained that made it possible to do this thing in 2023. So I feel good that these reports say we're on the through line, inflation's coming down, and so we should decide how restrictive do we want to be. Okay, so obviously this race is a follow-up.

The federal funds rate has been the same for a year, 5.25 to 5.5%. But in the last year, inflation has come down substantially. And in addition to that, the labor market has softened a bit, which we're going to get to in greater detail in a moment, how can it be the case that a federal funds rate that was appropriate when inflation was over 4% a year ago is still appropriate when inflation is trending down toward 2%. Like, if reality is changed, if, if, you're a year ago, is Isn't it absolutely necessary for the Fed to change as well? It raises two important points. The first is the right way to think of restrictiveness and monetary policy is the Fed being tight is to subtract inflation from the interest rate to get the real interest rate. By real restrictiveness, this is about the highest,

it's the highest it's been in decades. Okay, so in my mind, we are restrictive, and you should only be restrictive like this for as long as you have to be. And it is important, the second part of your question, which comes out of the first is if you hold the rates at some level while inflation goes down, you are tightening. And it's important to recognize that. you're tightening because the real funds rate is going up. And so then ask yourself, when do you want to tighten? You want to tighten if you fear overheating. And as I look at the economy, the through line over six months a year, whether you look at the labor market, whether you look at inflation, whether you look at GDP, consumer spending, this is not what overheating looks

like. If we're going to be this restrictive for too long, we're absolutely going to have to start thinking about the other side of the mandate, the employment side of the mandate. And in a way, the unemployment rate is ticking up gradually. And that in itself is very unusual, historically. As you know, the economists say the unemployment rate goes up like a rocket and down like a feather because it's far easier to destroy a job match than it is to find one and create one. So it's not usual that the unemployment rate would go up a half a point over a number of months, which is what's happened. Yeah, let me, let me jump in here and sort of set the table on what I see going on in the labor market, and then I'm going to pass it back to you to

give me some evaluation here. So as you said, the unemployment rate right, now is 4.1%. Historically, that is relatively low. And we've had an unemployment rate around or below 4% for really a historically long period of time. Real wage growth has been positive for a few years after taking a while up in 2021 and 2022. So there's a lot of good things you could point at when you look at the labor market. But to your point, there's lots of evidence of cooling. The unemployment rate has increased now three months in a row. Hires and quits have fallen. Wage growth has slowed, especially in services. Is it reasonable for people to worry that just as the unemployment rate has gone up for three consecutive months? It will keep rising from here if the Fed is similarly

restrictive. Yeah, it's totally appropriate to worry about that. I always say that, of central bankers to be worried about everything, worried that inflation could take back up, worried that foreign events could put us, drive the price of oil up, put us supply shocks again. But for sure, when you see directionally the labor market cooling, even if it needed to get into better balance, you do have to take account of the possibility that it doesn't stop and it keeps getting worse. And like I say, in past recessions, they begin with a deterioration

of a series of things like the labor market, and that doesn't happen slowly that when it starts going wrong, it goes wrong. It's not just the labor market. You cited most of the indicators that we use, not just the unemployment rate, more broad indicators of how the, labor market is doing. But this same argument is true for, say, consumer delinquency. Delinquencies are up.

In the past, rising delinquencies is a warning sign of recession. But the level of delinquencies was really low. So as they're rising up, if they stop rising, in a way, that would just be a normalization. But that highlights why we monitor a lot of these indicators of the labor market, tightness or weakness, and consumer spending measures. That's why we monitor them as closely as we do, is because they have in the past served as a leading indicator of the business cycle. We've been talking a little bit about the demand side of the economy. Let's talk about the supply side a bit. Last week, we did an episode on housing. And one thing you clearly see in the housing data is that activity in multifamily housing,

starts and permits for apartment buildings, look quite weak. Isn't it true that holding interest rates at this level is probably working against us in terms of housing supply? And are you worried about the supply-side effects of tight monetary policy at this point because restrictions to the construction of new housing units

might, in fact, raise the cost of housing in the near future? I'm not a dispute that dynamic, and I've highlighted that dynamic, but I do think it's important to recognize that the lock-in effect of high rates, that there are a bunch of people, not building of new homes, but putting the home therein on the market has been suppressed by people saying, wait a minute, I got a 4% mortgage, and if I move to a new house, I'm going to have a eight and a half percent mortgage, so I'm not going to put my house on the market. That artificially suppressed the supply of existing homes being sold, but it's important to recognize that's a

temporary phenomenon. Okay, that's just a, this is only true in the transition. And that's been true. Every rate tightening cycle has that feature, that people who were in mortgages that were low, now look at the prospect that mortgages are higher, and so that's going to suppress the supply. The two things that are a little different this time are, A, more of the mortgages are 30-year fixed mortgages. So when we looked back in earlier periods, there were more adjustable rate mortgages. So when the rates changed, there wasn't as much lock-in. And two, we went for so long with the rates so low that there are just more people

who are locked in at those kind of rates. And we had the great financial crisis and nobody built any housing for a really long time because the perception was we got massively overbuilt. So all of that makes this particular moment somewhat problematic. But if you were going to take this dynamic all the way to the extreme to make the argument that raising rates increases inflation, I think that would be a mistake.

Because this is just a temporary, that's just a temporary dynamic. And housing is always one of the interest rate sensitive sectors of the economy. So if you backed up seven years and said, the Fed is going to raise the Fed, funds rate by 550 basis points in a short period of time. Where will you see pain? Everyone would say, well, housing and construction is going to be decimated. Consumer Durables purchases will suffer. Business fixed investment, autos, you know, that you'd have a list. And some of those things have happened in a way, the fact that construction is suffering on multi-family, that is what's to be expected when you have tight monetary policy. I think that's true.

Well, if you fully extend that logic further, it really highlights just how strange the last two years have been. Like, if you went back a few years and said, you know, the Fed is going to raise the funds rate by 550 basis points in a matter of months, what do you think is going to happen next? I think everyone would say, well, obviously, that medicine to cure inflation is going to have the side effect of a brutal recession. But that's not what happened. The economy is growing. Unemployment is low. Stocks are on fire. This is very strange, right? It's very strange that the economy took this extraordinary dose of depressant, and it's still feeling chipper. The deeper puzzle that everybody's trying to figure out, I was trying to figure out before I was ever in the Fed

as an economist, and within the Fed they're trying to figure out, is the seven years ago, if we said rates are going to go up that much, you would have thought, you would have thought, auto spending, for example, would be devastated. But it isn't. Auto purchases are up, and they look like a decent year. And that fact that the economy did not go down as much as you would have thought from that move raises this question, does that mean that something about right now is less interest sensitive than it was in the old days? Or is something about right now making it so that the impact of monetary policy is more delayed than it was in the past? And it's hard to figure that out, but it matters a lot because there's been cumulative a lot of increase in the interest rate.

And so we're still trying to see, is that cumulative effect still to come? Or is it the fact that this business cycle was driven by a collapse of service sector industries. And the service sector is not historically very interest rate sensitive. So maybe it's not a surprise that when the Fed is raising rates, it's not having as big of a direct impact on the economy as it was before. Just narrowly on the question of cars, why do you think Americans kept buying so many cars, even though higher rates would typically predict much lower auto purchases.

So I talked to the highest executives at the auto companies and ask him this question, how could it be that rates could go up that much, but still people are buying the cars? And a lot of the answer that they give is it's because we had such a falsely low base. The supply chain was such a disaster, the computer chips, the shipping, and the port. that there was a massive pent-up demand for cars, that people would have bought a car, but if you go look at the age of the fleets, it's getting older and older,

and now we're coming out of that, and so there are a bunch of people buying cars, and they had excess savings, perhaps, from the stimulus, so they could buy the cars, but that is an argument about, it's just a matter of time, that, you know, once you clear out,

all the pent-up demand, then people are going to look and be like, wow, the interest rate is really high. I don't know if I can afford to buy a new car now. You know, after the weak recovery of the 2010s, when you were in the White House, I feel like two lessons that the center-left economic establishment took away from that affair was, number one, don't skimp on stimulus. That's a lesson that I think we clearly operationalized in the 2020 and 2021 fiscal bazooka bills. And number two, don't jump the gun on raising rates before you actually see inflation pick up because unemployment can probably fall further than you think.

When unemployment was at 5%, 4.5%, some people were saying raise rates, and it turned out that there was a lot further that unemployment could fall. So it was good that we didn't jump the gun there. What do you see as the lessons that 10 years from now we might take from this, inflation crisis and the Federal Reserve's response to it? This is a hugely important and challenging question, I think. I think it's going to take a lot of serious analysis to answer the question, how should central banks respond to supply shocks?

Because there is every reason to think that whether from geopolitics or natural disasters or etc. We may be getting more supply shocks going forward. And if you look back, most all of our business cycles in the past were more like conventional demand shocks. So I do think we're going to, we're going to get positive and negative lessons from this of what central banks should do. But like the old thing with the French Revolution, maybe it's too soon to tell, you know, in a way, I feel like for the folks that think that it was predominantly stimulus that led to inflation, in a way, you got to explain any school of thought has some glaring things that they got to try to explain. And the demand side have to explain how is it that the inflation rate begins soaring,

and the unemployment rate is over 6%. that's not really supposed to happen. That strongly on its face says something was going terribly wrong on the supply side too. And the fact that there was inflation, but then the inflation is going away without a recession, says the immaculate disinflation, doesn't it connote that there was some immaculate inflation, too, more than what we would have expected. So I feel like we're going to have to come to terms with that. This might seem like an over-academic point, but the pandemic was, in many ways, the exact opposite of a typical modern recession.

Like a typical recession takes down housing. The pandemic saw a home buying boom. Is it possible that pandemic-style recessions just aren't a perfect fit for the Fed tool kit. To a central bank, the reason why I was an academic for 30 years, so I'm fine with academic exercises. I quite enjoy them. But the reason this isn't just an academic exercise is the central bank has a very limited number of tools. As I say, you just have a screwdriver. You can tighten, you can loosen. If your problem is, you know, a loose bumper, then tightening is great. If your problem is making breakfast, you're going to have problems. And the fact that the most

interest rate sensitive parts of the economy tend to be the parts that are the most cyclical is basically what makes monetary policy work. It's why we rely on central banks as the first line of defense on stabilization is because the one tool they have is highly correlated, with usually, if we're getting too frothy and booming, they can tighten it down. If we're suffering, they can juice exactly those sectors that are going down. In this weird pandemic thing, we're not getting your teeth, you're not getting your cavities filled is what drove the recession. That's not interest rate sensitive. And the demand for durable goods went up in the downturn. Okay, whoa, that totally, people buying peloton's.

and TVs and stuff because they can't spend money on going to see a football game or elective surgeries or whatever, that's the thing I want us to be careful about concluding lessons that are over indexed to a weird environment. My last few questions may get you in trouble, may not get you in trouble. You may decline to answer them entirely. I don't care. We're obviously in an election year, and the presumptive Republican nominee for president, who's currently leading in the polls, has a very interesting set of economic proposals that he's

talked about, which include mass deportations and large tariffs on imported goods, including incredibly large tariffs and imported goods from China. I know that you can't comment on any individual in particular. So let me ask the question this way, Austin. Imagine that there existed a country that was recovering from a bout of inflation lasting two to three years. And an incoming president convinced the legislature to impose tariffs of between 10 and 50% on all imported goods. What effect would that have on an economy? Okay. First with the caveats, when you join the Federal Reserve, I don't know if it's like

joining the Knights Watch or something, you're out of the elections business. And I'm, so I'm not, if you were asking, should the Fed react to policy proposals or probabilities of who's going to win, no, we don't do that. You can check the minutes. You can, when the transcript comes out, word for word, what everyone said at the FOMC meetings, we're not in the elections business. We outline purely economic criteria that we're going to base our decisions on. And we stand by that. And that's what I call and people call the reaction function. We spend a lot of time years outlining here are what conditions we need to see to cut,

here are what conditions we need to see to stay where we are, here to raise, etc. whether it's tariffs or other policy, if they affect economic conditions, we respond to economic conditions. So they can have a bank shot effect on what the Fed does, but the Fed is not in the fiscal policy business either. So we're not going to say, you're never going to hear me saying this policy idea, don't make me vote to raise rates, that's not my thing. I was an economics professor, so you know, I think tariffs are terrible. They raise prices. And whether that's proposed by a Democrat, a Republican, or both, the fact is that raises

prices. That's different than being inflationary in a weird. sense. That is, if I told you, here's a thing that will raise prices one time and then stop, that's different than something that is inflationary and it spirals. So if it was a hypothetical and you were just asking empirically, what will high tariffs do, I believe they will raise costs and raise prices one time. If that led to retribution and then other countries raised the tariffs and then you raise the tariffs, that would be more inflationary of an extended spiral. But I kind of think that's what it would do. But my thing is the motto here in Chicago,

I always say is there's no bad weather, there is only bad clothing, and we will face whatever the conditions are. That's the pledge you take as central banker is you tell us the conditions and then we try to react as much as possible. If you tell me a blizzard is coming, we'll put on a jacket. If it's going to rain, we'll bring umbrella. But that's kind of way. We're not going to anticipate or tell the fiscal authorities anything. They're the boss. You know, if they want to, if they want to do tariffs, then we'll react however is appropriate. Austin Gulsby, thank you very much for speaking to me. Thank you for that very diplomatic answer.

I appreciate you fielding the question in the first place, and this was fun. Yeah, Derek, it's great to talk to you again. Thank you for listening. Today's episode was produced by Devin Beraldi. Our summer schedule for plain English for the next few weeks will be one episode a week on Fridays. We'll see you next week.