Today, Explained - Why the economy feels bad right now

Episode Date: June 2, 2022

The stock market tumble and crypto crash are symptoms of a broader shift in the US economy. Jacob Goldstein explains the end of the “Goldilocks Era.” This episode was produced by Miles Bryan, edited by Matt Collette, fact-checked by Laura Bullard, engineered by Paul Mounsey, hosted by Noel King. Transcript at vox.com/todayexplained   Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

Once upon a time, right on the edge of the forest, lived a golden-haired girl. This golden-yellow-haired girl's name was Goldilocks. Once upon a time, that time being 2019, the U.S. economy was doing something very strange and very good. And she came across the house of the bear family in between the trees. Two things were happening. Inflation was low, but not zero. There was growth. And unemployment was low, but there were still out-of-work people to fill new positions.

She dipped her spoon into the smallest one. Hmm, this porridge is neither cold nor too hot. It was just right. It's Today Explained. I'm Noelle King. Coming up, the bear market is getting closer. The Goldilocks economy has fled out a back window. What is coming next? Get groceries delivered across the GTA from Real Canadian Superstore with PC Express.

Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum Points. Visit superstore.ca to get started. Cold and flu season are upon us, which means it's especially important to keep those hands clean. And when soap is involved, the conversation can slip out of control pretty quickly. I hope you can't hear me rubbing my hands together. No, we love ASMR. ASMR episode.

Gross. This week on Explain It To Me, the dirty truth about clean hands. You can find new episodes every Wednesday, wherever you get your podcasts. It's Today Explained. I'm Noelle King. I have reunited with my old friend Jacob Goldstein. He's the host of What's Your Problem, which is a show about entrepreneurs and engineers and the problems that they're trying to solve.

But once upon a time, Jacob and I worked at NPR's Planet Money, where we covered the Volcker Rule and the Phillips Curve and moral hazard and all of these other economic terms and phenomenon. But I don't remember us covering the Goldilocks era, which was the period we were living in then. The Goldilocks era I'm thinking of is the period leading up to the pandemic, right? The sort of late teens. In the U.S., in the late teens, there was this combination of things happening that you sort of shouldn't be allowed to get. There was super low inflation, which is a big deal, important, nice for the economy. The government was running pretty big deficits, you know, keeping things going. And

unemployment was really low. It was a good time to be a worker. There was demand for workers. Workers, even at the lower end of the income distribution, we're getting raises. And so all of these things made for a really good, robust economy. And you very often can't have all of them together. I assume people refer to it as the Goldilocks era because the story was, and you have two kids, and I imagine you will know it better, but she's a tiny home invader. She goes into the house of the three bears, right? And she's like eating their food, sitting in their chairs, lying in their beds. She tried lying down on the middle-sized bed, but it was too soft. And every time she finds one of them that's perfect.

That's right. Something's too big, something's too small, and then there's one that's just right. She tried lying down on the wee little bed. It was just like her cozy bed at home. And so she went to sleep. And so this world we were living in, in lots of ways was a total disaster, obviously, but just on this macroeconomic balance of having a lot of government spending and a great job market across the board and low inflation. Like, you normally don't get all of those things together to the extent that it was

like a mystery. Macro economists by the late teens were like, why is this happening? Why is inflation not going up? I mean, if you go back a few years before that, in the, I guess it would have been early teens-ish, you know, there was this question, right? Because traditionally what happens is, as the economy is recovering from a recession, unemployment falls and falls. And then at some point, it falls low enough that the economy starts to heat up a lot. Workers are getting more and more raises. Demand is going up. Companies are investing a lot. So there's all this spending,

and that starts to drive up inflation. And people assumed in this country that when we hit, oh, say, 5% unemployment, that was the number for a long time, 5%, that's when inflation's going to start going up, and we're going to need to worry about that again. But then we hit 5%. It's when inflation's going to start going up, and we're going to need to worry about that again. But then we hit 5%. It's like, no, you know what? Inflation is still remarkably low. And then we hit 4.5%, still low. Hit 4%. You know what? Inflation's really low. Let's just keep going, right? And so that was the essence of the Goldilocks period. Inflation just stayed low, sort of no matter what. Did anyone get to an answer? How was it that you could have something that was just right?

So there are different answers, which is to say there is no clear definitive answer, but there are ideas that make sense. So here are a few of those. One is workers, even at low unemployment, in today's economy have less bargaining power than they used to because of the decline of labor unions to a large extent, right? So if you go back to the 1970s, which is sort of the, you know, they call it the great inflation. It's the big inflationary moment in the U.S. in the last many decades. Hard choices are necessary. If we want to avoid consequences that are even worse, I intend to make those hard choices.

I have already vetoed bills that would undermine our fight against inflation. A larger percentage of workers at that time were in unions, and unions would build in cost of living allowances, annual raises that would sort of go up in lockstep with inflation. So that would drive up prices for the companies that employed them. And the companies then would pass those prices along to consumers in the form of higher prices, right? So one idea is, well, there's fewer workers in unions now. So even at a really low unemployment rate, workers individually are not bargaining as hard as a union would for raises. So that's one piece of it that seems reasonable.

Another piece of it is globalization, right? For we're living through an age of fundamental economic transformation. We buy a much larger share of our stuff now from abroad than we did several decades ago. And as a result, we don't see higher prices so quickly when we have low inflation in the U.S. because we just keep buying stuff from other places. And if the workers in China, say, aren't getting raises, then our prices aren't going up on the TVs we're buying. So that's another one. A third one that's really interesting,

and I think is interesting to think about in terms of what's going on now, is this idea of inflation expectations. The key thing right now is you're starting to see inflation expectations rolling over because there's a big difference in the narrative of inflation, which is high and accelerating versus inflation, which is high and accelerating versus inflation, which is high and moderating. You know, there's this idea of a self-fulfilling prophecy, right, where if you believe a thing, it will come true.

And that appears to be really important for inflation. If people expect there to be high inflation, they will change their behavior. Companies might build, you know, incremental price increases into long-term contracts. Workers, you know, to the extent they have bargaining power, will demand more raises. And there's this idea that because inflation had been falling in low for a really long time by this Goldilocks period of the teens, that everybody expected low inflation and those low inflation expectations contributed to the persistently low inflation.

So it's like, I mean, if we're sticking with the theme of fairy tales, it's like Tinkerbell. Like, if you believe it, then it'll happen. It's really true. Do you believe? Oh, please, please believe. I don't know the Tinkerbell story that well, but if it's as you say it is, then it's perfect. Clap your hands, Jacob. Clap your hands. 2% inflation, 2% CPI, year over year, I believe. Louder, Peter.

Okay, I'm clapping. I'm clapping. All right, so everybody is worried about inflation. At the same time, everyone who has any skin in the game in the stock market is concerned about what the past seven weeks have looked like. period and how well things were going. Does that include, Jacob, the fact that for so many years, the stock market just kept going up and up and up and up with a few instances of downs? But for the most part, that also seemed mysterious. How can it just keep doing so well? Yes. And there's one more piece that we can introduce here that makes it all make sense, and that is interest rates, basically. You know, so because inflation was so low, the Fed kept interest rates low. And low interest rates are great for financial assets, for things like stock or even cryptocurrency, because, well, for a few reasons. I mean, one sort of simple mechanical reason is if you have money, extra money that you want to invest, you can either basically, you know, put it in the bank or buy bonds or you can like buy stocks or buy Bitcoin. Cryptocurrency came into existence during the Goldilocks era.

How does its creation and rise fit into the story that you're telling? Oh, that's interesting. Well, so we can start with the financial crisis, right? The Bitcoin white paper, sort of amazingly, this is the, you know, the first thing ever published about Bitcoin, was, I believe, October 2008, right? So that is like the teeth of the financial crisis. The Dow tumbled more than 500 points after two pillars of the street tumbled over the weekend. Lehman Brothers, a 158-year-old firm, filed for bankruptcy. Faith in the financial system is at a really low point. And Bitcoin is explicitly pitched as this alternative, right? You shouldn't trust the

government. Look, the government's just bailing out the banks. They're all in bed with each other. They're corrupt and untrustworthy. Look at this. You just got to trust the government. Look, the government's just bailing out the banks. They're all in bed with each other. They're corrupt and untrustworthy. Look at this. You just got to trust the code. Oh, Bitcoin, just trust the code. And so it's like this low-key thing for a while. And then this weird thing happened a few years later, right? Just as kind of we're going into like core Goldilocks period of the teens, Bitcoin really largely crossed over. You know, it keeps sort of its like libertarian vibes, but in fact, it became more and more institutionalized, right? And so cryptocurrency crosses over from being like all about being outside the system to sort of cozying up to the system. And it's really in the pandemic, low interest rates, people have a lot of money in

their pockets. Bitcoin has been around long enough to seem legit. It has the blessing, basically, of regulators. And that's really when it takes off. Fortune favors the brave. When did the Goldilocks era end? Is it ending now? Did it end with the pandemic? Like when the history is written, what will it say? By the end of last year, more or less, beginning of this year, it becomes clear that inflation is really back. For a while, it was like, oh, this inflation is just transitory. This was like the 2021 story.

The Fed used this word transitory, which just means, oh, it's just passing by. It's because reopening is like janky and supply chains are messed up. It's not real inflation. But by the end of last year, it became clear it was, I don't know, non-transitory. It's just inflation. It was just regular inflation. And the Fed was like, okay, we know what to do about inflation. We raise interest rates, right? We want to cool the economy. There's too much demand. The economy is too hot. And raising interest rates is the sign for financial assets

that like Goldilocks time is over, right? Now you can get more money by buying whatever, lend the government money for 10 years. You know, you can get a little more money. You get a lot more for that now than you could a year ago. And, you know, it's clear that this era of easy money, low interest rates is over, at least for now. And that was like the needle that popped a lot of, I don't know, was it a bubble? Whatever.

That was a key thing that drove asset prices down, that realization that the Fed is going to raise interest rates. Up ahead, what comes after Goldilocks? In this story, it's not bears. Okay, business leaders, are you playing defense or are you on the offense? Are you just, excuse me, hey, I'm trying to talk business here. As I was saying, are you here just to play or are you playing to win? If you're in it to win, meet your next MVP, NetSuite by Oracle. NetSuite is your full business management system in one suite. With NetSuite, you're running your accounting, your financials, HR, e-commerce, and more,

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What's your problem? Is there a story that defines the moment we're in now? You want a nursery rhyme? I mean, right now, like we're in now? You want a nursery rhyme? I mean, right now, like, we're in peril, right? There's people in peril all the time in fairy tales, right? So this is kind of, I don't know, end of Act I or middle of Act II in the story, right? Like, because, you know, unemployment is still very low right now. People

are mostly focused on inflation, but, like, unemployment is still at historic lows. You know, there are two job openings for every unemployed worker. Like, this is incredible. It's a good time to be a worker right now. People are less focused on that because they see prices going up and they're like, prices going up is bad. But like, the economy in a weird way right now, it's not fundamentally bad. It's just at great risk. Okay, I googled it while you were talking. Peril in the woods, a folkling tale. Or pals in peril. Or penguin in peril. Apparently, peril is a really big part of children's stories. Isn't any story, it's like some child is in peril, right? That's the story.

Are they going to be okay? And if it's like a 19th century story, they're going to die. And if it's a 20th century story, they're going to be okay, right? So, yeah. Like, is it the grim version where, like, whatever, the little match girl dies? I guess that sounds Christian Anderson. Or is it like the Disney version where, like,

the sisters love each other in the end? You've sacrificed yourself for me? I love you. And we actually don't know right now. That's the thing. Like we don't know. There's a very good chance that we could have a recession, right? Just to be clear, like inflation is quite high. The Fed is raising interest rates. And what the Fed wants to do is slow demand, slow hiring, frankly. They don't want unemployment to be 0%. They want to keep it where it is now, enough so that inflation comes down. But they don't want to do it too much, right?

Because if they slow demand too much, then we'll have a recession. Now, to be clear, we've been sort of conditioned, I think now, to think of a recession as like 2008. It wouldn't have to be that bad. Let's say we don't want to panic ourselves, but we worry we might be headed into a recession. Are there two or three things that tell us, oh, we're definitely going down that road now? Well, GDP is one, right? When we talk about the economy growing or shrinking, we're talking about GDP, gross domestic product, which is basically the value of everything everybody makes at work in America, essentially. In fact, GDP did contract in the last reading. GDP is a nasty minus 1.4, minus 1.4. But everybody's like, no, don't pay attention to that one. It was weird. It was like

weird inventory thing. So I'm taking everybody's word on that. I mean, the one that I sort of care about more that feels real to me is jobs, right? We're still adding jobs. If employment growth continues at this pace, the economy is set to recover all of the jobs lost during the coronavirus pandemic by summer. People losing their jobs is bad, right? Like, we can all agree, whatever you think. Like, it's good when people get jobs. It's bad when people lose jobs. So, you know, the jobs numbers come out every month. They're a good, reliable data set. And so if we start to see months where people are losing jobs a few months in a row, like, we should worry.

You made the point just a second ago that if we go into a recession in 2022, or if we have a recession of 2022 or 2023, it doesn't have to look like the recession of 2008. We've been friends for a long time, and I know that you don't like speculation, but what might the recession of 2022 look like? The recession of 2008 was not a normal recession. It was like a once every 50 or 70 years, I hope, financial crisis, right? And so it has sort of, is scarring, right? I mean, but it's not normal. And there were lots of recessions between the Great Depression and the financial crisis of 2008 that we have sort of forgotten because they weren't that big of a deal, right? There was the dot-com bust around 2000. Now that you can get whatever you want at Pence.com, it's like Mardi Gras! Don't give up! Don't give up! You don't want to be glib about it, right?

People do lose their jobs. But, you know, it might last for a few months, right? It might last for six months, and then the economy comes back, and unemployment goes back down, and everything's okay. That's quite normal, and I think more likely, certainly, than like a financial crisis. So it's bad, but it's not catastrophic. You don't have the government intervening in the economy. It doesn't feel like what's going on. It just feels like, oh, this is bad, and I hope it ends soon. Listen, I don't want to make fun of crypto, even though I also do want to make fun of crypto. But when we talk about the dot-com bubble 20 years ago, the deal was that everyone realized

some things were happening that were very dumb. Like the Pets.com fiasco. This company is worth tens of millions of dollars. Oh, it's not actually worth anything. And while we've seen crypto crashing, I've been wondering, did everyone just realize something about cryptocurrency in the last couple of weeks? If you go back several years, there was this idea about crypto that it would be what they call an uncorrelated asset, which is a thing you can own that doesn't go up and down with lots of other things, which is kind of nice, right? Like most stocks, say, tend to go up and down together. And, you know, crypto was like this new different thing, kind of like gold.

People compared it to gold. It is a digital gold that has those safe haven qualities that we're all looking for. But over time, and especially over the last couple of years in this great boom in speculative assets, fueled in part by really low interest rates and lots of money in people's pockets, crypto and in particular speculative tech stocks started to move together quite closely. Even just the NASDAQ, you know, the index of big tech companies, and crypto, they basically moved up and down together. So crypto just became another kind of speculative tech bet.

And I think that's what we're seeing now with the move down. I mean, tech stocks are also down a ton, right? And I think both crypto and tech stocks went up in this free money, low interest rate forever world, the Goldilocks world. And this idea that the Goldilocks world is ending or is potentially ending, which is clear now, is driving both tech stocks and crypto down. I know very little about cryptocurrency other than it turns out everybody I know under the age of 35 has been investing in it. And one of the things I wonder is whether or not we are going to learn something from our interactions with this new kind of currency. If it turns out that it's all been a bubble, what are the good lessons that we might learn? Yeah, I mean, there's a big question that I still have about crypto, which is, is it going to be really useful for something other than gambling and speculating?

Yeah. And, you know, it very well may have been a bubble, right? The price has clearly come down a lot. But if you look back over time, you see historically there are these bubbles that leave useful technologies in their wake, right? There was a famous railroad bubble in England in the 19th century, and, like, lots of people lost a lot of money. But England wound up with, like, lots of railroads, which was good for England, right? And similarly, in the dot-com bubble in this country around the turn of the 20th century, there was this huge little sub-bubble in fiber optics, right? These companies that were laying fiber optic lines went

to crazy valuations, and then the valuations plummeted. And so the investors who bought high lost a lot of money, but we got great fiber optic lines, which are great for sending data, right? So a thing that's really interesting and at some level to me perplexing about crypto is, like, it hasn't really worked yet for all of the smart people and all of the experiments. Like, there is no crypto thing that normal people who don't care about crypto use

just because it's better, right? Like, lots of people send remittances and pay high fees. Credit card fees are high. Like, there are lots of places where, like, new payment rails would be really useful. And I keep hoping crypto could be that. So, we were in optimistic times. The Goldilocks era went on for years. You've talked a lot about how people's expectations determine what happens

in the economy. Do you think that we get stuck in optimism mode and we should actually be always thinking about how precarious all of this is? I mean, nobody could have predicted the pandemic. As you said, everyone said inflation was transitory. And now it's all in peril. What is the perhaps better way to respond to all of this? So I want to separate inflation expectations from expectations about the world, right? Because we actually are, I think, all better off if everybody expects that inflation is going to be low because that actually contributes to inflation being low. That's a thing where if you believe the happy story,

it actually makes you better off. Jacob Goldstein, his new show is called What's Your Problem? Our show today was produced by Miles Bryan. It was edited by Matthew Collette and engineered by Paul Mounsey. And it was fact-checked by Laura Bullard. I'm Noelle King. It's Today Explained. you