Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm in show Wisenthal.
Speaker 3: And I'm Tracy Alloway.
Speaker 2: Tracy, we're still here at Jackson Hall. It's funny saying
Speaker 2: things like we're still here because we're recorded all these
Speaker 2: episodes at the same time and we don't really know
Speaker 2: exactly when you're listening. But this is yet another Jackson Hall.
Speaker 3: Up, another special missive from Jackson Hall.
Speaker 2: So I think there's like an element, if I'm being honest,
Speaker 2: a certain surreality of Jackson Hole this year, because it
Speaker 2: is an academic conference historically, and now they're setting aside
Speaker 2: the chairman speech, which we'll talk about more. Setting aside
Speaker 2: that speech. You know, it's a place for like talking
Speaker 2: about important issues, and yeah, academic economics and that's great
Speaker 2: and I love that stuff and it's super interesting and
Speaker 2: all that, and yet the big story is really the
Speaker 2: attack on the whole premise on the independent Central Banks.
Speaker 2: And yet it sort of like feels like everything but
Speaker 2: that gets talked about.
Speaker 3: I think that's right, And you said setting aside pal speech,
Speaker 3: but it was very, very noticeable that in his speech
Speaker 3: he could have taken it as an opportunity to talk
Speaker 3: about things like central bank independence or things like data
Speaker 3: integrity given what's been happening at the Bureau of Labor Statistics,
Speaker 3: but he chose not to.
Speaker 2: Yeah, great point, you're right, Like he could have because
Speaker 2: we were wondering, like, you know, this is going to
Speaker 2: be his last speech, last time speaking as the Federal
Speaker 2: Reserve chairman, so he could have said something really big
Speaker 2: about reflecting on a career of being a central banker
Speaker 2: and the importance of all these things, and he gave
Speaker 2: a you know, macroeconomic policy speech.
Speaker 3: There's also this other layer, which is a lot of
Speaker 3: what he's trying to do now, which seems to be
Speaker 3: to focus on labor market deterioration and maybe look through
Speaker 3: some of the upside risks to inflation right now that
Speaker 3: only happens if you have a credible central bank that
Speaker 3: can pin longer term expectations for inflation down. Like, yes,
Speaker 3: the only reason he's able to do some of this
Speaker 3: is because of the credibility of the social capital that
Speaker 3: the FED has built up over decades.
Speaker 2: Exactly right. And the reason why we're talking about this,
Speaker 2: just to be very clear, it's because of the attacks
Speaker 2: from the Trump administration on Jerome Powell, also other FED
Speaker 2: governors also, you know, the whole thing. And this is
Speaker 2: just part and parcel of one attempt to sort of,
Speaker 2: you know, restructure how the US does both domestic and
Speaker 2: international policy. Because there's the tariffs obviously, and those intersected
Speaker 2: with monetary policy. But then there's just also this sort
Speaker 2: of changing relationship with other countries that gets into things
Speaker 2: like you know, like let's get payment for security or
Speaker 2: something like that. Like big look so many like big
Speaker 2: hinges and pivots at one point, it's.
Speaker 3: I mean, I don't think it's hyperbole to say it's
Speaker 3: an attempt at a restructuring of the global order, both
Speaker 3: in terms of the economy via the international financial system
Speaker 3: and also in terms of security. I think the con
Speaker 3: using part for me is it is a fact that
Speaker 3: America has the world's biggest economy. America came through the
Speaker 3: pandemic a lot better than a lot of other countries.
Speaker 3: We ended up having lower inflation than a lot of
Speaker 3: other parts in the world. And yet the Trump administration
Speaker 3: seems very very convinced that the US is somehow losing
Speaker 3: out from the current international order, or maybe they feel
Speaker 3: that there's just more that they could get from restructuring it.
Speaker 3: So I think we should talk about maybe the motivations
Speaker 3: behind some of this, and then what the new world
Speaker 3: could possibly look like.
Speaker 2: Well, we literally have the perfect guests, someone we've had
Speaker 2: on the pot, someone who we always catch up with
Speaker 2: injecta hulk.
Speaker 3: It's becoming a tradition.
Speaker 2: It's a tradition. And he's literally the perfect guest because
Speaker 2: he used to be on the Monetary Policy Committee at
Speaker 2: the Bank of England, so as all the monetary policy bonafides.
Speaker 2: He is currently the president of the Peterson Institute for
Speaker 2: International Economics, and he is the author of a recent
Speaker 2: article the New Geography Who Profits in the Post American
Speaker 2: World that was in foreign affairs. And he's not one
Speaker 2: to like sort of dance around big issues. He doesn't mean, yeah,
Speaker 2: so this is what I said, goes to talk about
Speaker 2: this someone. I was like, Okay, if we talked to Ediposen,
Speaker 2: we can actually really like talk about all these things
Speaker 2: that maybe many people are anxious to talk about. So, Adam,
Speaker 2: thank you so much for coming back on Odelaw's great
Speaker 2: to see you again here at Jackson Hall.
Speaker 4: Thank you for having me back and congratulations Tracy and
Speaker 4: Joe on the upwards profile of odd lots ever higher.
Speaker 4: So it's very cool.
Speaker 2: Very kind of you to say, are we right that
Speaker 2: there is a certain surreality to the vibes here right now?
Speaker 4: Yeah? It is. As you said, there was a lot
Speaker 4: of deliberate focusing down of chair pal speech, and there's
Speaker 4: been a lot of self discipline of members of the
Speaker 4: FOMC and everybody to be quite restrained at a time
Speaker 4: when the attacks on the FED and the weaponization of
Speaker 4: government files to attack individual FED members and so on
Speaker 4: is going on. I think Tracy's absolutely right, and we
Speaker 4: didn't script this in advance, but it is all part
Speaker 4: of this broader context of do you keep inflation expectations anchored?
Speaker 4: Do you have faith in the dollar? Do you have
Speaker 4: faith in the credit of the US, do you have
Speaker 4: faith in the US foreign policy? And those are all
Speaker 4: things which FED officials are not supposed to talk about,
Speaker 4: with the exception of the inflation expectations, and now the
Speaker 4: inflation expectations even they are, they're reluctant to talk about
Speaker 4: it because it can become self fulfilling if they talk
Speaker 4: about worrying about it, then it's ours unravel, but also
Speaker 4: to be fair, because the seeming message of the rapid
Speaker 4: come down in inflation that we talked about our last
Speaker 4: few times we were together in Jackson Hall over twenty
Speaker 4: twenty two was due to having anchored long term inflation expectations.
Speaker 4: At least that's one argument. But it is surreal, Joe.
Speaker 4: I mean, I've gotten to talk to several of the
Speaker 4: members of the committee and they are trying to get
Speaker 4: on with their lives and it's hard. But I also
Speaker 4: just want to emphasize it's not that different than their
Speaker 4: colleagues in Washington at the Treasury, or at EPA or
Speaker 4: at the Bureau of Labor Statistics that they also are
Speaker 4: under attack.
Speaker 3: So we've done an episode on this before, but I
Speaker 3: would love to get your take what exactly happens to
Speaker 3: central banks when their credibility starts to come under attack,
Speaker 3: or even when maybe on the fiscal side, you see
Speaker 3: politicians interfere a little bit more with monetary policy, even
Speaker 3: if that interference is just a truth social post or
Speaker 3: something like that.
Speaker 4: Yeah, I think Tracy, the emphasis should be on the
Speaker 4: latter part of what you said. When elected officials who
Speaker 4: are superior to central banks in any power struggle. When
Speaker 4: fiscal policy, which if it gets really out of whack,
Speaker 4: has what's called dominance, fiscal dominance can overpower whatever monetary
Speaker 4: policy is. When the context for central banking changes, then
Speaker 4: it's not so much as say the credibility the central
Speaker 4: bank per se. It's the credibility the central bank will
Speaker 4: be allowed to deliver what it's supposed to deliver. And
Speaker 4: I'm not saying that to make excuses for the central bank.
Speaker 4: There are instances like Arthur Burns in the seventies where
Speaker 4: the central bank itself is compromised and fails to deliver.
Speaker 4: But I think that's the way to see it. And
Speaker 4: where you see it is where we're already seeing it
Speaker 4: in the US, which is you see it in a
Speaker 4: slightly higher risk premium on long term government bonds. You
Speaker 4: see it in weakening of the currency. And some of
Speaker 4: this I think can be tied to the broader Again,
Speaker 4: I sorry to keep coming back to that, but to
Speaker 4: the broader Trump economic agendas. Both of you said it
Speaker 4: is a real regime change, but we're seeing it already.
Speaker 4: And so there's a chart in this Foreign Affairs article
Speaker 4: the New Economic Geography I put out thank you again,
Speaker 4: that does a simple version of something a lot of
Speaker 4: economists academics have unemore sophisticated versions, which is basically the
Speaker 4: correlations on the dollar have reversed that with a couple
Speaker 4: interruptions in two thousand and eight, in the late seventies
Speaker 4: early eighties, the dollar has the quality that when it
Speaker 4: gets into trouble, more money flows into it, and even
Speaker 4: if the US is causing a problem in the world,
Speaker 4: people believe they're safer in the US than there was
Speaker 4: the ultimate exact two thousand seldom example, dollar just down,
Speaker 4: but basically treasury bond rates and dollar move and lockstep,
Speaker 4: which is another way of saying they don't have to
Speaker 4: put up the rates to defend the dollar. And it
Speaker 4: also means that most of the movement in the dollar
Speaker 4: day to day is just macro news, just day to
Speaker 4: day news, and so putting in simple mindedly, there's a
Speaker 4: correlation very strongly positive in intra day, intraweek data between
Speaker 4: the dollar in the tenure treasure rate. Until April one,
Speaker 4: April one of this year, that correlation shifts from plus
Speaker 4: zero point eight to minus zero point four reversus sign
Speaker 4: And what happens is when something screwy happens in the US,
Speaker 4: like we decide unilaterally to bomb Iran, Like when we
Speaker 4: do crazy stuff on one big, beautiful bill, it's fiscally irresponsible,
Speaker 4: like when Powell is attacked in vicious terms by the president. Gee,
Speaker 4: interest rates go up, dollar goes down, and that looks
Speaker 4: like an emerging market. Anyway, This is not just a
Speaker 4: data mining. You can do it in very fancy econometric ways.
Speaker 4: You get the same result. The correlation of safety on
Speaker 4: the dollar has reversed, and that would be a sign
Speaker 4: of what you're talking about, Tracy.
Speaker 2: Our friend Karlick Center and who's been on the podcast,
Speaker 2: always talks about's sort of the definition of an emerging
Speaker 2: market is if your rates at the long and go
Speaker 2: up in the recessions, right, Because you know, in times
Speaker 2: of crisis in the US too historically you're like, oh,
Speaker 2: there's a really bad in the US, I'm going to
Speaker 2: pile into dollars at treasuries. This is what you're talking about,
Speaker 2: which is that reflex has not kicked in exactly.
Speaker 4: We've got four and a half months of very clear data.
Speaker 4: It's going the other way. A lot of the things
Speaker 4: that Trump administration is doing are going to reinforce that
Speaker 4: because they've talked about taxing foreign investors differently in the
Speaker 4: US than domestic investors. They've talked about punishing people who
Speaker 4: tried to switch out of the dollar. Stephen Moran, who's
Speaker 4: been nominated to be a Federal Reserve Board governor, you know,
Speaker 4: has talked about amar a Lago accord and re putting
Speaker 4: the dollar down. There's real reason for it to behave
Speaker 4: this way.
Speaker 2: Now, talk to us about like your foreign affairs piece,
Speaker 2: like the sort of you know, this idea of like
Speaker 2: the restructuring of the global and who profits from it,
Speaker 2: because you also talk about this idea of like the
Speaker 2: US is like sort of the global insurer of last resort.
Speaker 2: But talk to us a little bit about what this
Speaker 2: whole piece was about.
Speaker 4: Thank you, Joe. And this goes to what Tracy was
Speaker 4: saying at the start about how what you think you're
Speaker 4: achieving with this world change. So what I'm trying to
Speaker 4: argue is that the Trump administration decided that the world
Speaker 4: economy is playing the US for a soccer, and that
Speaker 4: very harsh direct bilateral measures starting with terroriffts, but also
Speaker 4: with other threats, Demands for investment, demands for military assaults
Speaker 4: on social media, all these things, threats to withhold military
Speaker 4: assistance in the case of Ukraine and others, that this
Speaker 4: will be a rebalancing, that this will get more money
Speaker 4: from these countries into the US and thereby make our
Speaker 4: fiscal situation better, be fairer, and somehow do great things
Speaker 4: for the US economy. This is wrong on every level,
Speaker 4: But the fundamental point going to the insurer is I
Speaker 4: build a mental model, not a mathematical model, but a
Speaker 4: mental model that I think most people have found quite
Speaker 4: apt that for the last eighty years since World War Two,
Speaker 4: the US's main role in the world economy has been
Speaker 4: to be the insurance provider. We made sure that you
Speaker 4: could ship things through with through different oceans and get
Speaker 4: there safely. That there was basically respect for property rights,
Speaker 4: respect for intellectual property rights. There were some standards, particularly
Speaker 4: technical standards, some brands. There was a dollar that you
Speaker 4: could get in and out of and park money, and
Speaker 4: it was deep enough markets and treasuries that you could
Speaker 4: get in and out that nobody cared and it didn't
Speaker 4: affect prices. There was stability to the US currency and
Speaker 4: the treasuries that let you do that. Just a whole
Speaker 4: host of things, plus military and alliance as well, obviously
Speaker 4: for NATO allies, for Japan, for Korea and others, and
Speaker 4: we charged premiums for that. We did get premiums. We
Speaker 4: had much lower interest rates. People would put a lot
Speaker 4: of money into US government debt and that made the
Speaker 4: whole economy go off better. We had basically obedience from
Speaker 4: all these countries and military alliances that they would do sanctions.
Speaker 4: For the most part, if we want to do sanctions,
Speaker 4: they would in Okinawa, in Rhinemind Air Base. They would
Speaker 4: take our troops and support them and have them garrisoned
Speaker 4: in their country, have our troops forward and doing it.
Speaker 4: Whole host of things. And on the economic front, it
Speaker 4: gave us disproportionate shares not just of the stable investment
Speaker 4: and treasuries, but things like our standards for technology, our
Speaker 4: standards for legal matters are our financial system were the default. Anyway,
Speaker 4: this had lots of benefits, lots of benefits for them,
Speaker 4: lots of benefits for us. It was a good business. Essentially.
Speaker 4: What's happened is you have a beach house in Malibu
Speaker 4: which you had insured, and you weren't going to build
Speaker 4: the beach house unless it was insured. Fine, you're paying insurance,
Speaker 4: you're getting something for it. Now there's global warming, hurricanes
Speaker 4: are more likely, there's erosion in the beach. You're prepared
Speaker 4: to pay a bit more for your insurance, but instead
Speaker 4: you find your insurer has decided, no, we're going to
Speaker 4: deny your claims. So you have to slip us something
Speaker 4: under the table to get your claim adjusted. Nope, we're
Speaker 4: tripling your premium and if you don't like it, we're
Speaker 4: going to leave the state and you're not going to
Speaker 4: have insurance anymore. That's what the Trump administration is doing.
Speaker 3: I mean, the role of insurance also acts as a
Speaker 3: sort of like umbrella for economic development, right, because if
Speaker 3: you have insurance on the beach in Malibu, other people
Speaker 3: can build houses and you can have shops and things. Exactly,
Speaker 3: maybe your house price starts to rise and you benefit
Speaker 3: from that. So this is a slightly unfair question because
Speaker 3: I'm going to ask you to channel someone else's thinking.
Speaker 3: But what exactly is the argument from the Trump administration
Speaker 3: here as to why they are losing out from the
Speaker 3: current international economic or financial order, which very much seems
Speaker 3: to have been built by the US. And as you
Speaker 3: pointed out has a lot of tangible and intangible benefits
Speaker 3: for America.
Speaker 4: Well, this is something I and colleagues of the Peterson
Speaker 4: Institute have been struggling against for several years now. On
Speaker 4: not just Trump. There are people on the Democratic side
Speaker 4: who've had this view as well. So in the same
Speaker 4: issue of foreign affairs, Wally Adamayo, who you know who
Speaker 4: was Deputy Treasury Secretary in the Biden administration, has an article, Yes,
Speaker 4: the trade system was broken during the Biden residency. The
Speaker 4: US Trade Representative gave a speech in which she said
Speaker 4: she basically agreed with everything her predecessor, Robert Leitheiser, had
Speaker 4: said during the Trump inversation. So this has been out
Speaker 4: there a long time. I know you want me to
Speaker 4: answer a question, but I'm not going to try to
Speaker 4: rationalize it. I think there are three or four things
Speaker 4: going on. One is there is an excessive sense that
Speaker 4: China has been unfair, but even more so that China
Speaker 4: got away with being unfair and is dangerous because of
Speaker 4: things we did on the economic side. And I don't
Speaker 4: think this is justified. Not that I have any love
Speaker 4: for the Chinese Communist Party, I'm on record calling she
Speaker 4: an Autocrat, but just the Tom Brady and Bill Belichick
Speaker 4: didn't win Super Bowls because they cheated in the little ways.
Speaker 4: China did not become China because it cheated a little
Speaker 4: bit here and there. The second thing is there was
Speaker 4: a legitimate concern which the Biden people cared about and
Speaker 4: the Trump people say they care about, but don't seem
Speaker 4: to care about that. If we're too dependent on concentrated,
Speaker 4: single sources for things like the semiconductors in Taiwan, that
Speaker 4: puts US at a national security risk, that puts US
Speaker 4: at an economic risk. The reason I say that Trump
Speaker 4: people don't seem to genuinely care about that is because
Speaker 4: being totally concentrated in the US in one spot isn't
Speaker 4: any good either, because then your subject still to natural disasters,
Speaker 4: to terrorism, to political problems, to corruption. You can care
Speaker 4: about this and say we got to make sure it's diversified.
Speaker 4: The third thing that's going on is there's a perception,
Speaker 4: fed by the so called China Shop literature, that US
Speaker 4: manufacturing was devastated, and this led to particular small cities
Speaker 4: and towns in the US being devastated. There's a lot
Speaker 4: of exaggerations and problems with this literature, and it doesn't
Speaker 4: square well with the reality, including the reality of most
Speaker 4: of the places that are cited as having had problems
Speaker 4: had problems in the seventies, and that there's plenty of
Speaker 4: places like Pittsburgh and Rallington, North Carolina that got back.
Speaker 4: But anyway, there's that sense. And I think you've had
Speaker 4: on my colleague Robert Lawrence with Peterson and Harvard, who
Speaker 4: talks about the limits of a manufacturing strategy. And then finally,
Speaker 4: and this is my own interpretation, people get mad at
Speaker 4: me when I say this. I think there's a lot
Speaker 4: of displaced anger. I think there are people who were
Speaker 4: relatively privileged. They weren't necessarily rich, but relatively privileged in
Speaker 4: older society, in the way the US society used to
Speaker 4: be that I have been disrupted and offended by change
Speaker 4: and by forces towards equality. I also think there's a
Speaker 4: bunch of people who are understandably very angry and disappointed
Speaker 4: with elites after the two thousand and eight financial crisis,
Speaker 4: after COVID been perceptions of mishandling after the Iraq Afghanistan
Speaker 4: invasions and occupations for twenty years that didn't produce anything,
Speaker 4: so there's a lot of anger that's discredited that they
Speaker 4: have discredited elites who are associated with being globalists, right,
Speaker 4: But I don't think that anger is well placed. And
Speaker 4: I'm not trying to be patronizing. I mean, we've seen
Speaker 4: this in the US history and other history. You know,
Speaker 4: people will stir up anger against immigrants, or stir up
Speaker 4: anger against Native Americans or people of color or refugees
Speaker 4: or com mythical communists in the government in the fifties
Speaker 4: because they're angry about something else or they're scared of
Speaker 4: something else. But it gets blamed on that. So that's
Speaker 4: where I think it comes from. But I just want
Speaker 4: to emphasize what you've said at the start, and that's
Speaker 4: part of the point my article's trying to make. Is
Speaker 4: there's a very clear list of benefits the US had
Speaker 4: by running the system, and by had a good business model.
Speaker 4: It was a profitable business model providing insurance. And like
Speaker 4: you said, if you're providing insurance for some people, that
Speaker 4: lets commerce expand and lets other people free ride, and
Speaker 4: that's a good thing that they free ride, and because
Speaker 4: then you get more commerce and more taxes and more
Speaker 4: livelihood and better off people and Additionally, one thing where
Speaker 4: the analogy breaks down, it's even more favorable for the US,
Speaker 4: because you know, if you're chiulb Order, Liberty mutual or
Speaker 4: state farm insurance, you don't really have a big effect
Speaker 4: on the extent of risks out there by how much
Speaker 4: insurance you give. But if you're the US and you
Speaker 4: say I'm going to guarantee your security, you actually do
Speaker 4: reduce the risks that are out there, and that means
Speaker 4: you're collecting the same premiums and paying out.
Speaker 3: Less at the risk of carrying the insurance analogy too far.
Speaker 3: I mean, it is true that we have insurers pulling
Speaker 3: out of areas like Florida because they say it's no
Speaker 3: longer economic to ensure these areas. It's just too risky.
Speaker 3: It's going to cost too much to rebuild. Is there
Speaker 3: a case to be made at all here that maybe
Speaker 3: the Trump administration is looking around the world and saying, well,
Speaker 3: it's riskier now than it was before, and we don't
Speaker 3: want to be on the hook to put out a
Speaker 3: billion fires.
Speaker 4: I think there is a case to be made in
Speaker 4: the national security sphere more narrowly defined, that the US
Speaker 4: may have overextended or needs to prioritize, and there is
Speaker 4: a set of foreign policy thinkers out there talking about
Speaker 4: this issue. You, I still don't think that's quite right,
Speaker 4: because actually deterrence and protection kind of like you said before,
Speaker 4: there's an umbrella effect. But let's say that the national
Speaker 4: security part you can set aside and say there is
Speaker 4: an argument to be had. The rest of it doesn't
Speaker 4: make any sense because you're giving up strength of the
Speaker 4: dollar and lower interest rates. You're giving up disproportionate compared
Speaker 4: to your size in the world. Foreign direct investment, you're
Speaker 4: giving up disproportion compared to your size in the world.
Speaker 4: Influence over technical standards, love for your brands, spread of
Speaker 4: your services. You're giving up disproportionate amounts of influence on
Speaker 4: other populations. Again, it's just like looking at foreign students
Speaker 4: coming here, which I know you've talked about in some
Speaker 4: of your episodes, that unless you come up with some
Speaker 4: absolutely mythical number of how many of them are not
Speaker 4: only spies for the Chinese but successfully pull it off,
Speaker 4: are undertail and take the Chinese information that they couldn't
Speaker 4: possibly have gotten through cyber attacks and other means. Unless
Speaker 4: you call it with an absolutely absurd number like that
Speaker 4: all the benefits come to us from having foreign students here,
Speaker 4: and that's what can be said about all these things
Speaker 4: on the economic side.
Speaker 2: By the way, when you were talking about the you know,
Speaker 2: well we had going. You know, it's like that breaking
Speaker 2: bad speech that I've seen a good thing going.
Speaker 3: Yeah.
Speaker 4: Yeah.
Speaker 2: You know. One of the reasons I like talking to you.
Speaker 2: I do feel like it's refreshing, frankly, this sort of
Speaker 2: unreformed liberal because everyone is like post you know, everyone
Speaker 2: sort of post liberal now and everyone. So I appreciate that.
Speaker 2: Also two years ago when we first d you on
Speaker 2: the podcast and you recommended as a Vogels biography of
Speaker 2: doing Chopin to me, and then I read it the
Speaker 2: next month and I read so I appreciate the book recommended.
Speaker 2: That led me down.
Speaker 3: I think that's I was going to say, that's the
Speaker 3: thing that.
Speaker 2: The whole we've read like fifty books about twentieth century China,
Speaker 2: all things to you, but I want to talk about
Speaker 2: China a little bit more because I take all your
Speaker 2: points about about everything, however, and you know, you've been
Speaker 2: sort of like refreshingly skeptical a lot of these ideas.
Speaker 2: That is particularly important to have more manufacturing in the
Speaker 2: United States, et cetera. But there is this very real
Speaker 2: concern that without robust manufacturing you actually can't have a
Speaker 2: world class military. And if you're just thinking about like, okay,
Speaker 2: we provide this insurance role in some ways very literally, say,
Speaker 2: with our navy through various straits around the world. And
Speaker 2: Setiga said, whether China cheated or not, should we be
Speaker 2: anxious if pure like manufacturing capacity and the technological frontier
Speaker 2: in building things including weapons is in China.
Speaker 4: Anxious is not the right word, Okay. And I appreciate
Speaker 4: you're saying about the liberal and that's the part I
Speaker 4: didn't say. I mean, I think a lot of people
Speaker 4: are making the case that I'm not pushing back against
Speaker 4: the tracing you asked about, because it's seems to be
Speaker 4: politically advanceable to say that old fashioned liberal values are
Speaker 4: bad in the case of China. Again, there's a difference
Speaker 4: between arguing in a frankly not just liberal but neoliberal,
Speaker 4: if I can use that word way, that there is
Speaker 4: a specific market failure to make sure we have adequate
Speaker 4: minimum sourcing and diversified sourcing of key national security inputs. Right, Yeah,
Speaker 4: so you know that's fine. You can say that, and
Speaker 4: it's like, yeah, wouldn't it be good if the Defense
Speaker 4: Department and the Commerce Department and the intelligence community actually
Speaker 4: had a process by which they identified this and actually
Speaker 4: had an ongoing commission and had a list and had
Speaker 4: expert advice and decided, excuse me, in a non partisan way,
Speaker 4: how to do that, and then actually marshaled specific money
Speaker 4: and measures to do that. And if you could do that,
Speaker 4: you should. That would affect, you know, some time, any
Speaker 4: percentage of the US economy. It might be incredibly important
Speaker 4: for having drones or aircraft carriers or whatever the right
Speaker 4: technology is. And I'm not going to pretend I know
Speaker 4: what it is okay to keep the Straits of Malacca
Speaker 4: open or to keep the Taiwan straight open. But you
Speaker 4: could do that. And when I was fighting against the
Speaker 4: Biden administration on some of their national security excuses for
Speaker 4: economics interventions in their industrial policy a few years ago,
Speaker 4: I actually had a meeting with a senior person in
Speaker 4: the White House, not somebody that senior, but senior enough,
Speaker 4: and I said, you know, you guys have to have
Speaker 4: a list, you have to do this. And this person
Speaker 4: laughed and said, you got to be kidding, maybe because
Speaker 4: no one wants to write down a list, because once
Speaker 4: you write down a list, then you're annoying certain people
Speaker 4: and excluding others. And if you're the Defense Department, you
Speaker 4: want to include as many things as possible, and you
Speaker 4: know the general dynamic of how these things go. So
Speaker 4: I don't think the right response is anxiety. I think
Speaker 4: the right response is, yeah, let's take this seriously. Let's
Speaker 4: act like grown ups and actually set up a policy
Speaker 4: process that deals with this, and let's do the spending.
Speaker 4: And even to go back to the international side, go
Speaker 4: to our specific allies and say again, it's like raising
Speaker 4: taxes on a specific thing where you're tying it to
Speaker 4: a user fee or on in the insurance I'm raising
Speaker 4: your premiums, not threefolds and threatening to leave. I'm raising
Speaker 4: your premiums for twenty five percent. And if you put
Speaker 4: a fire detector in your house, I will only raise
Speaker 4: it twenty percent. Go to Germany, go to Japan, go
Speaker 4: to Korea, go to the Netherlands, and say, in the
Speaker 4: fact i'm raising your premium I want to spend this
Speaker 4: much more in defense. But if you chip in specifically
Speaker 4: on this list of military sensitive equipment, I won't ask
Speaker 4: for as much.
Speaker 3: Yeah, the carrots are kind of missing. There's a lot
Speaker 3: of sticks and not that many carrots. Well, so you
Speaker 3: touched on this just now, But I'm basically going to
Speaker 3: ask Joe's question in a slightly different way. But are
Speaker 3: tariffs the right way to bring manufacturing back to the US?
Speaker 4: No? Sorry, you want more? I mean look again, because
Speaker 4: of the nature of terras, which are a tax, which
Speaker 4: are a distortionary tax on a narrow part of the
Speaker 4: tax base that has bad distributional effects. They're regressive, They
Speaker 4: primarily either hurt small business on the corporate side, or
Speaker 4: they hurt lower income people on the household side. And
Speaker 4: they tend to lead to corruption, even if not literal bribes,
Speaker 4: but distortions of Hey, Apple showed up in the President's
Speaker 4: office with the gold phone and what do you know,
Speaker 4: they got an exception to the terror. You know, tend
Speaker 4: to lead the stuff like that in the way the
Speaker 4: most things do. Terraffs are good for two things. Right,
Speaker 4: if there is a very specific industry and a very
Speaker 4: specific bargaining situation, not against the whole world in general,
Speaker 4: all at the same time, one specific country with whom
Speaker 4: you can bargain, and you can get other people to
Speaker 4: join you in the tariffs, so it's effectively a form
Speaker 4: of economic sanction that can work. The other thing is
Speaker 4: if you are an underdeveloped country with no state capacity,
Speaker 4: like the US in eighteen twenty or a number of
Speaker 4: South Asian and subs Aheran, African and Central American countries today,
Speaker 4: even they are not that many, Tariffs are a way
Speaker 4: to collect necessary revenues because you can literally set up
Speaker 4: guards at the border and make sure somebody gets the money,
Speaker 4: whereas other more less intrusive, less regressive, more efficient forms
Speaker 4: of taxation are harder to collect if you don't have
Speaker 4: a good stack capacity. Those are the only two things
Speaker 4: tariffs are.
Speaker 2: This is a good point because you know, you see
Speaker 2: people like, oh, back in the old days, the golden age,
Speaker 2: tariffs was like we you know, we didn't have like
Speaker 2: W two forms and stuff like that. So yeah, of
Speaker 2: course you just have to do it at the porest.
Speaker 2: Let's go back to, like, okay, setting aside the sort
Speaker 2: of structural issue with tariffs and the bad distribution effects,
Speaker 2: et cetera. Like just right now in August twenty twenty five,
Speaker 2: and we look at the state of US economy and
Speaker 2: people like, how do you perceive the interaction of tariffs
Speaker 2: with everything else that are going on right now?
Speaker 4: It's a fair question. We've done a lot of work
Speaker 4: at the Peterson Stut colleagues of mine that we've published,
Speaker 4: and others have done slightly different work, and we all
Speaker 4: come out roughly the same place. This is the way
Speaker 4: the Trump administration is doing it. In terms of the
Speaker 4: short term economic outlook is it's a tax hike. It's stagflationary,
Speaker 4: meaning it's raising inflation at the same time as slow
Speaker 4: in growth. It's collecting a sizable chunk of revenue on
Speaker 4: the order of two and two hundred and fifty billion
Speaker 4: a year at an annual rate at this very high
Speaker 4: level of taxes. That will probably diminish over time because
Speaker 4: people get around that kind of tax and people choose
Speaker 4: to produce things elsewhere and people evade it. But for
Speaker 4: the moment, it's a significant tax increase that would have
Speaker 4: been better done through more efficient means. It also is
Speaker 4: going to do nothing for manufacturing because what it does
Speaker 4: on net is well, there are certain industries that are
Speaker 4: being helped. As I know you've covered in your supply
Speaker 4: chain stories. You know, there are a lot of small
Speaker 4: businesses or even big businesses that have imported inputs, whether
Speaker 4: from China or elsewhere, and it costs them, and it's
Speaker 4: going to be very hard to replace that, and it's
Speaker 4: very expensive. And then you've got the issue again, which
Speaker 4: I know you've covered, but has to be said that
Speaker 4: there aren't American workers for good reason. There aren't American
Speaker 4: workers who want to be sitting there screwing screws into
Speaker 4: the back of iPhones. I don't mean to keep picking
Speaker 4: on Apple, but it's just it's a clear example. So
Speaker 4: you either have to pay them an incredible amount for that,
Speaker 4: or you have to let somebody else do it. So
Speaker 4: in the short term, getting back to the monetary policyly,
Speaker 4: since we're in Jackson holl I think it's not a
Speaker 4: surprise that we haven't had huge inflation yet from the
Speaker 4: terraffs because there are a number of things that mainstream
Speaker 4: people like us expected. People were going to be in
Speaker 4: denial about whether the tariffs would stay and how big
Speaker 4: they would be. People were going to have to take
Speaker 4: time to figure out, if you're a business, whether you
Speaker 4: can find a substitute source, whether that subst source is
Speaker 4: domestic if you move it to Vietnam, does that really
Speaker 4: get you out of the tariffs? Do you have a
Speaker 4: good relationship? I mean it takes. As you've discussed in detail,
Speaker 4: these supply chains emerge organically and they're not top down.
Speaker 4: Somebody makes one decision, so it takes time to reformulate
Speaker 4: the suply chains. If you were sunnya tariffs. Third, you've
Speaker 4: got a bunch of companies that were called out by
Speaker 4: name by President Trump, like GM or Walmart, that were
Speaker 4: told don't raise prices because of the tariffs, and so
Speaker 4: of course they're going to hold off as long as
Speaker 4: they can. And then eventually, when everybody's raising prices, it
Speaker 4: profit at the same time, they'll raise prices. And then finally,
Speaker 4: a lot of these companies, and a lot of the
Speaker 4: consumer goods companies had inventories, and they built up inventories
Speaker 4: in the first quarter of importing goods, and they weren't
Speaker 4: going to raise the prices until pass through the tariff costs,
Speaker 4: until they got burnt through the inventories. So she had
Speaker 4: four very solid reasons why it would take at least
Speaker 4: a few months for the tariffs to really start showing
Speaker 4: up in prices. So if I'm sitting at the Fed
Speaker 4: right now, in my view, the tariff inflation just goes
Speaker 4: up from here. First round effects probably will peak in
Speaker 4: second quarter of twenty six. And then the debate is
Speaker 4: and my estimate is higher than most people's. A lot
Speaker 4: of people think it'll peak around four on CPI. I
Speaker 4: think it's gonna peak closer a fiver a little more.
Speaker 4: And then the discussion which Governor Waller is put out there,
Speaker 4: which the chair talked about today, talked about in the speech,
Speaker 4: is how much do you think this translates into second
Speaker 4: round inflation effects? How persistent is this inflation? And that's
Speaker 4: the interesting debate, And that's a good faith debate you
Speaker 4: can have. But the tariff inflation is coming, it's on
Speaker 4: its way. It's not surprisingly low, it's not surprisingly slow.
Speaker 4: It's a tiny bit slower than I expected, but not really.
Speaker 3: And we're here, Well, I'm going to take you up
Speaker 3: on the debate, tease, but where do you fall on
Speaker 3: the side of the second order effects debate? Because you
Speaker 3: can make it feels a convincing argument for either side.
Speaker 3: You could say that while tariffs are attacks and so
Speaker 3: they destroy demand and maybe lead to deflation, or you
Speaker 3: could argue that tariffs perhaps give companies an excuse to
Speaker 3: all start raising their prices together, and so you don't
Speaker 3: get that competitive activity that would normally keep prices in check.
Speaker 4: I think you can make a plausible, serious debate on
Speaker 4: both sides, but I think the arguments are very clearly
Speaker 4: on the side that the second round effects are going
Speaker 4: to be large and persistent. There's several reasons, which is
Speaker 4: why I think it's pretty clear. The first one is
Speaker 4: we know from what happened with the tariffs under Trump,
Speaker 4: ian under Biden, from other countries in recent times that
Speaker 4: the pass through what generally you end up being if
Speaker 4: you're the company that ultimately buys the imported input or
Speaker 4: the household that buys it, the pass through the final
Speaker 4: purchaser is usually eighty five to ninety percent of the tariff.
Speaker 4: It's already very clear from the data that the foreign
Speaker 4: companies are not paying for any of this, So the
Speaker 4: question is how much are the importers eating it versus
Speaker 4: passing it on? And it takes a little time for
Speaker 4: you to get to that, but generally it's a very
Speaker 4: robust result. So even if you get less than that,
Speaker 4: you get sixty five seventy percent on average, that's still
Speaker 4: a lot. The second is implicit what you said, and
Speaker 4: then sometimes in things some of the people on the
Speaker 4: other side of this argument say is essentially the demand
Speaker 4: destruction is either symmetric to the price increase or is
Speaker 4: larger than the price increase, and there's no particularly good
Speaker 4: reason to assume that. So you have to look at
Speaker 4: what actually is going on. We have a pretty robust economy,
Speaker 4: pretty close to full employment. We are about to get
Speaker 4: though it hasn't shown up yet. This to me is
Speaker 4: the big surprise. But we're about to get more damage
Speaker 4: in a stagflationary way from migration restrictions, deportations, sudden stop
Speaker 4: of growth in the labor force. That's going to give
Speaker 4: American workers more bargaining power in the short term, that's
Speaker 4: going to create labor shortages, which put upward pressure on wages.
Speaker 4: That's going to decrease productivity and capacity. So on balance,
Speaker 4: you may get some recessionary forces out of both that
Speaker 4: and the tariff increase, but I strongly doubt they will
Speaker 4: outweigh the inflationary impulses that there will be room for
Speaker 4: price setting, price or increases excuse me, and wage increases. Third,
Speaker 4: going back to where one of the things you said
Speaker 4: at the start, anchoring inflation expectations is the game that
Speaker 4: ultimately is what allows US Central Bank to say, as Bernanki, Laubach,
Speaker 4: Michigan and I argued twenty five years ago in the
Speaker 4: Inflation Targeting Book, you're allowed to look through the first
Speaker 4: round effect of supply shocks if it's clear what the
Speaker 4: supply shok is and you have anchored expectation. I think
Speaker 4: the FED, whether they admit it or to themselves or not,
Speaker 4: is publicly underestimating how much the twenty to twenty to
Speaker 4: twenty twenty two experience de anchored inflation expectations that didn't
Speaker 4: take us to Argentina in nineteen eighty. But anybody who
Speaker 4: says that they're the same as they were before twenty twenty,
Speaker 4: I think is deluding themselves. And Then, additionally, going back
Speaker 4: to what Joe was saying about the surreal aspect of
Speaker 4: this time, if the Trump administration has been as they have,
Speaker 4: hugely attacking the independence of the FED in multiple ways,
Speaker 4: and this is showing up in a less strong dollar,
Speaker 4: then that's another reason to think that the expectations aren't
Speaker 4: going to be anchored, and you're not going to get
Speaker 4: an offset from the currency to the tariff inflation, so
Speaker 4: bing bing being that's four reasons why I think the
Speaker 4: argument is clear that we're going to get more inflation,
Speaker 4: more persistence of inflation, more second round effects than some
Speaker 4: people are saying.
Speaker 2: I have a question. I've been asking this to a
Speaker 2: bunch of people. I'm not totally satisfied with any of
Speaker 2: the answers I've gotten, So try again. Even before the terriffs,
Speaker 2: even before Trump, it appeared that from the perspective of
Speaker 2: the market that long term rates were going to be
Speaker 2: durably higher than they had been in the decade prior
Speaker 2: to COVID. How come what changed?
Speaker 4: So isn't there place where I'm there's a legitimate, real discussion,
Speaker 4: and I'm very strongly on one side of it. Okay,
Speaker 4: So I think the useful discussion. All credit goes to
Speaker 4: Larry Summers roughly was at twenty nineteen, twenty eighteen, he
Speaker 4: gave the speech about secular stagnation, reviving the concept from
Speaker 4: Alvin Hansen, and oh sorry, that was much earlier. He
Speaker 4: gave that speech. Then he gave the speech in twenty
Speaker 4: nineteen which he said secutor stagnation may be end And
Speaker 4: he made a number of points, but the biggest one
Speaker 4: was if you're in an environment where you're going to
Speaker 4: have sustained expansionary fiscal policy pushing up demand and meeting
Speaker 4: shortfalls of demand, then the r star and the neutral
Speaker 4: interest rate is higher. And that's pretty clear economics. And
Speaker 4: then the reasons which he said and others of us
Speaker 4: have developed I think are right that going back to
Speaker 4: the insurance beffoth, the risks are higher now there's climate change.
Speaker 4: China is would no matter whose fault it is or
Speaker 4: whether it was a nevil or not. China is more
Speaker 4: of a security threat than it was. Russia is more
Speaker 4: belligerent than it was. People have to spend more on that.
Speaker 4: Our societies are aging. Att are almost all the large societies,
Speaker 4: with the exception of India are aging. I mean you
Speaker 4: have to spend more on healthcare and more on social security.
Speaker 4: All of these things are going to lead to sustained
Speaker 4: increases in government spending, irrespective of whatever else you do,
Speaker 4: and they are unlikely, as we've already seen, to be
Speaker 4: fully tax financed. So that is a fundamental. The second fundamental,
Speaker 4: I would argue that's pushing up our star is that
Speaker 4: we don't know when AI is going to kick in.
Speaker 4: We don't know how big an effect, we don't know
Speaker 4: how many jobs. You guys again have had many good
Speaker 4: guests talking about this, but I think we can all
Speaker 4: agree that sometime between two and ten years from now,
Speaker 4: there will be a meaningfully increase in the productivity growth trend.
Speaker 4: There are a few smart people like I, Sam oak
Speaker 4: Glue and Johnson who say no, but most of us
Speaker 4: think interesting that there will be an increase of some sort. Now,
Speaker 4: I don't have to go all the way to McKinsey
Speaker 4: Global Institute and believe you know it's some enormous number,
Speaker 4: but whatever it is, that number an improvement in productivity
Speaker 4: growth trend is generally one for one should be thought
Speaker 4: of as raising the equilibrium interest rate, because you're raising
Speaker 4: the average return on capital. Essentially.
Speaker 2: There's totally counterintuitive to me. I would have thought that
Speaker 2: a big productivity increase would be alt equal disinflationary and
Speaker 2: rates lower.
Speaker 4: And well, no, it's disinflationary. But remember inflation we should
Speaker 4: think about as a short term phenomenon, a cyclical phenomenon,
Speaker 4: not as a structural phenomenon. So it's disinflationary in the
Speaker 4: sense that at any gift for while the productivity gain
Speaker 4: is ongoing, you're getting more stuff from less. But as
Speaker 4: a structural matter, you are raising the average returns on
Speaker 4: capital in the society, and so all capital that's competing
Speaker 4: has to compete with a higher return, and so therefore
Speaker 4: our star is hup.
Speaker 1: Interesting.
Speaker 3: So, now that we are deep in our star territory,
Speaker 3: I'm going to ask a central banking question with your
Speaker 3: central bank hat on. So you mentioned stagflation.
Speaker 2: He actually has his central bankout is a Boston rest
Speaker 2: for those who because those aren't in the room.
Speaker 3: That's right. So you mentioned stagflation earlier. What exactly are
Speaker 3: central banks supposed to do when they're faced with the
Speaker 3: stagflationary scenario. Because we just listened to pal talk about
Speaker 3: downside risks to employment and upside risks to inflation. He
Speaker 3: clearly seemed to choose the labor market over the inflationary
Speaker 3: risk at this moment in time. But there's clearly a
Speaker 3: trade off. You have to make a choice here.
Speaker 4: Yes, And this is why you try to avoid bad
Speaker 4: pop pellasies such as the ones the Trump administration are doing.
Speaker 4: Which gets you into a stagflationary situation if you can. Essentially,
Speaker 4: it's a contingent choice, and this is why the FED
Speaker 4: is right to be putting so much emphasis on debating
Speaker 4: over second round effects of inflationary shocks and things like
Speaker 4: you were saying, how much pricing power there is? How
Speaker 4: much recessionary effect do you get from these stack fleastion
Speaker 4: It's essentially a balance issue if you're forced to choose
Speaker 4: between the two goals, the two alves of the Fed's mandate,
Speaker 4: but the two goals for any central bank, essentially you
Speaker 4: have to go after the one that's more likely to
Speaker 4: spiral out of control.
Speaker 3: Ah. So this is their argument that labor market deterioration
Speaker 3: can be very not linear, right, it can kind of explode.
Speaker 4: Yeah, nonlinear is the way they think of it. I
Speaker 4: think again, it's no reason I would take the other
Speaker 4: side because the evidence is yes. And there's the discussion
Speaker 4: about the so called som rule. Did you can have
Speaker 4: these very rapid increases in unemployment. But what we've seen
Speaker 4: is much to people's surprise but has to be taken seriously,
Speaker 4: is both after two thousand and eight and after twenty twenty,
Speaker 4: So after the financial crisis. After COVID, unemployment actually came
Speaker 4: down pretty fast, and there wasn't evidence of what economists
Speaker 4: call hysteresis, which is the idea that once you put
Speaker 4: a lot of people out of work, it's harder for
Speaker 4: them to get back into work. And so it's taken
Speaker 4: from engineering. It's a concept that was very true of
Speaker 4: Europe in the seventies and eighties that every time you
Speaker 4: got an unemployment rate hike because of recession, it wouldn't
Speaker 4: come all the way back down to where it was
Speaker 4: before the recession, because there'd be a certain number of
Speaker 4: people who couldn't get back into work. And ahead of
Speaker 4: the two thousand and eight crisis, during it, including my
Speaker 4: time at the Bank of England speeches and then Jare
Speaker 4: Powell and others in twenty twenty during COVID, worried a
Speaker 4: lot about this potential for permanently having rises in the
Speaker 4: unemployment rate. But the thing is, all the evidence from
Speaker 4: two thousand and eight and all the evidence from twenty
Speaker 4: twenty is that didn't happen. And again it was a surprise,
Speaker 4: but it's a really important and a really robust result.
Speaker 2: You really are an unreformed neoliberal because so many people
Speaker 2: have accepted the opposite. Everyone almost everyone thinks there's some histories.
Speaker 4: And again, like I said, well I'm not in this.
Speaker 4: It's not so much I appreciate that joke. And this
Speaker 4: is not so much being a neoliberal as being an empiricist.
Speaker 4: So I mean, on my staff, a colleague of mine
Speaker 4: is Olivi Blacharden. He coined the Hystorici's concept may years ago,
Speaker 4: and he and Larry Summers and the co author's name,
Speaker 4: of course I forget, I apologize, did a paper in
Speaker 4: twenty thirteen. It was like the first paper they did
Speaker 4: for us after I took over at Peterson looking for
Speaker 4: Hystoresi's effects in the two thousand and eight to ten
Speaker 4: data and they couldn't find it. And then Powell, again
Speaker 4: I think, with a great deal of sympathy from me
Speaker 4: and others, talked a lot about history sis for why
Speaker 4: they were so aggressive and cutting in response to COVID.
Speaker 4: But then again, we know the unemployment came right down,
Speaker 4: So people care about this. They're coming from a good
Speaker 4: place to care about this. But it's not the illiberal
Speaker 4: it's the evidence. The evidence isn't there, and so the
Speaker 4: implication is not that you shouldn't care about unemployment. You
Speaker 4: should have temporary measures of fiscal policy like we did
Speaker 4: during COVID to extend unemployment insurance, to extend health insurance,
Speaker 4: to make it less miserable for people who are unemployed.
Speaker 4: But the inflation is probably the thing that's more likely
Speaker 4: to get out of control.
Speaker 2: In my people, Tracy asked you a question put on
Speaker 2: your Monetary policy had but I'm going to ask you
Speaker 2: a question specifically with your Monetary Policy committee hat having
Speaker 2: served at the I'm having served at the Bank of England.
Speaker 2: Long term rates in the UK are higher than the
Speaker 2: so called Liz Trust's moment and I asked you a
Speaker 2: question about this last year and it was very vague
Speaker 2: at the time. I was like, what's going on with
Speaker 2: the UK? And because it always thineks like there's some
Speaker 2: sort of mess, But now I actually have something specific
Speaker 2: to ask, which is what's going on with the UK
Speaker 2: in the sense that it seems bad, sir, it seems bad.
Speaker 2: The rates are very high. What's going on there?
Speaker 4: I think I said to you when you asked about
Speaker 4: this last year, Joe, that the single biggest call I
Speaker 4: got wrong in terms of analysis and forecasting in my
Speaker 4: career was twenty twelve at Bank of England. I and
Speaker 4: some others on the committee at the time but I'm
Speaker 4: responsible for me said, yeah, productivity has been lower in
Speaker 4: the last few years to twenty twelve because of the
Speaker 4: financial crisis, but it's gonna come back up because it's
Speaker 4: been the same long term trend since eighteen fifty and
Speaker 4: there was nothing to destroy a.
Speaker 2: Trend from it.
Speaker 4: Yeah, I don't cameer if it's eighteen fifty or eighteen sixty.
Speaker 4: But there's some incredibly long data series we have for
Speaker 4: UK productivity growth and even if you watch it, it's
Speaker 4: just a straight upward line. And even the Great Depression
Speaker 4: sort of makes a little blip, and World War Two
Speaker 4: makes a little bit, and then suddenly in two thousand
Speaker 4: and eight it goes flat. And I and a bunch
Speaker 4: of other people said, well, it's not like the Blitz, right,
Speaker 4: and so productivity growth is going to come back up
Speaker 4: to trent. It never did. The UK is the one
Speaker 4: rich economy, high income economy where productivity growth not just
Speaker 4: went down for a while, but kept going down. And
Speaker 4: so now we've had a dozen years of very low
Speaker 4: productivity growth in the UK and at some point that
Speaker 4: catches up with you, and I think that's the way
Speaker 4: to look at it is you throw bregs in it
Speaker 4: on top of that, which may be one of the
Speaker 4: reasons why productivity growth hasn't come back, and there's debate
Speaker 4: about that, but they have been running making less with
Speaker 4: more rather than more with less for a very long time,
Speaker 4: and wages and prices and the path all haven't dropped accordingly.
Speaker 4: So it's not like unfortunately grease suffered through say or
Speaker 4: Portugal during the financial crisis, and so something's out of whack.
Speaker 4: And this shows up eventually in the fiscal policy, which
Speaker 4: is what you're talking about, that they have a bunch
Speaker 4: of really hard choices to make. If the government, the
Speaker 4: current labor government, doesn't make lots of cuts, the interest
Speaker 4: rates keep going up. If they do make lots of cuts,
Speaker 4: then probably productivity growth doesn't improve. So they're just in
Speaker 4: a really, really tough situation.
Speaker 3: So Joe asked you a question with your boe hat on,
Speaker 3: and I'm going to ask something similar. Which is one
Speaker 3: of the things that makes Jackson Hole such a big
Speaker 3: deal is that we don't just have the FED here.
Speaker 3: We also have other central bankers like the ECB, the
Speaker 3: BOJ and you see them do the classic walk with
Speaker 3: the FED chair every year when it comes to central
Speaker 3: bank credibility and the independence issue. What do you think
Speaker 3: those other central bankers are thinking here and do they
Speaker 3: possibly use some of Jackson Hall We're still waiting to
Speaker 3: hear from them. That usually happens on Saturday morning. We're
Speaker 3: recording this on Friday afternoon. Do you think they maybe
Speaker 3: use this as a platform to try to push back
Speaker 3: against some of it.
Speaker 4: So, the central bankers, both publicly and in conversations I've
Speaker 4: had with them from around the world, are shocked and
Speaker 4: horrified that the Trump administration is doing this to the FED.
Speaker 4: Beyond just the obvious. They're sympathetic to their colleagues from
Speaker 4: the FED, and it's pretty yucky. Is just the fact
Speaker 4: that they have taken it for granted, the entire economics
Speaker 4: professions taking it for granted for more than forty years,
Speaker 4: going back to a classic paper by Ken Rogoff in
Speaker 4: nineteen eighty six, and then some subsequent when work others
Speaker 4: did that in central bank independence is good. It reduces
Speaker 4: inflation and reduces the volatility of inflation on average for
Speaker 4: a country in a large way without reducing the average
Speaker 4: growthroat full stop. And this is lived experience. This is
Speaker 4: what the European Central Bank was based on. This is
Speaker 4: why the Bundesbank and the Germans were willing to give
Speaker 4: up sovereignty to the European Central Bank. This is the
Speaker 4: standard practice that dozens of countries have adopted. The Bank
Speaker 4: of Japan got independence over the last thirty years. So
Speaker 4: it's kind of like with tread economists in the past,
Speaker 4: but even more in questions it's like, you know, this
Speaker 4: is like questioning vaccines, which of course nowadays people do,
Speaker 4: but at one point would have been thought of as
Speaker 4: what kind of anti scientific illiterate are you that you
Speaker 4: would question central bank independence? So, I mean, there's no
Speaker 4: way to exaggerate. That's the response at various international versions
Speaker 4: of central bank summer camp, you know, which is what
Speaker 4: Jackson Hole is. So the ECB has their version, which
Speaker 4: is called the Central Conference, and this year at CenTra
Speaker 4: every he was rallying around Jay the share Powell, and
Speaker 4: there were public statements about central bank independence and support
Speaker 4: for him at the BIS annual meeting, which is a
Speaker 4: sort of similar thing, which this year I got invited to.
Speaker 4: I don't usually get invite to that. I do get
Speaker 4: the center anyway. Again, there were public statements that are
Speaker 4: private statements that everyone's ralling around. But as we discussed,
Speaker 4: the FED leadership seems to have decided that jaer Pale
Speaker 4: should not mention a word about central bank independence in
Speaker 4: his speech this year, and so this is pure extrapolation.
Speaker 4: By the time this recording comes out, we'll find out,
Speaker 4: but my expectation is they will have passed a memo
Speaker 4: to ECB President Leguard, Bank of England Governor Bailey, Bank
Speaker 4: of Japan Governor Awaita, who are the three big central
Speaker 4: bank governors speaking on Saturday, Please don't talk about it.
Speaker 4: And I think what they've probably decided is having foreign
Speaker 4: central bankers talk about this would not play well in
Speaker 4: maga Land and might just induce more problems with the
Speaker 4: Trump people. So I think the instinct of the foreign
Speaker 4: central bankers here would be to talk very loudly about this,
Speaker 4: but I think they explicitly or implicitly have been told
Speaker 4: not to.
Speaker 2: Woll This is exciting because by the time this comes out,
Speaker 2: this will either have You'll either be very wrong or
Speaker 2: very right. Edison always great catching up with you and uh,
Speaker 2: we'll do it again next year.
Speaker 4: Thank you for having me. Congrats to both you. It's
Speaker 4: a great substantive discussion.
Speaker 3: Thank you so much you.
Speaker 2: Tracy. I love our annual catch up with Adam. It
Speaker 2: really he was like the perfect guest because he'd just
Speaker 2: say whatever you say, what's on his mind.
Speaker 3: Well, at a time when a lot of people don't
Speaker 3: want to talk about this stuff, right.
Speaker 2: Yeah, people are like anxious when people feel like there's
Speaker 2: like recriminations where people people want to people want to
Speaker 2: keep low. Yeah, people want to keep their low at
Speaker 2: a time when they don't know if there's going to
Speaker 2: be some attack on them from the White House or
Speaker 2: you know, on Twitter, or people want to keep low.
Speaker 2: And Adam I appreciate.
Speaker 3: His candor can I just say I'm always really impressed
Speaker 3: by people who are able to organize their thoughts in
Speaker 3: real time to be like, well, there are three reasons
Speaker 3: actually Number one, that's right, that's right, show, But that
Speaker 3: was a fantastic conversation. One thing, well, I guess the
Speaker 3: thing that I still don't get and I think it
Speaker 3: is really hard to make an argument that the US
Speaker 3: has lost out from an economic and financial and in
Speaker 3: some respects political system around the world that it has
Speaker 3: helped to create. Right, Like, there are tangible instances where
Speaker 3: you can say, like the US benefits in sometimes incredibly
Speaker 3: weird ways. Like if you look at the deck crisis
Speaker 3: this in like twenty thirteen or twenty eleven, you know,
Speaker 3: this is a crisis emanating from the US, from the
Speaker 3: United States, from US politics, and what you saw was
Speaker 3: investors flocked to the security of US treasuries and you know,
Speaker 3: yields actually go down, which helps with US debt. So
Speaker 3: there are these like sometimes perverse benefits that the Trump
Speaker 3: administration seems to want to throw away.
Speaker 2: You know, one thing I will say that I was
Speaker 2: thinking about in your intro is and I go think
Speaker 2: back to that book trade Wars or class Wars, which
Speaker 2: I think is actually I suspect Adam almost very disagrees
Speaker 2: with the premise of that book, et cetera. But regardless
Speaker 2: of where you stand on some of these questions, there
Speaker 2: is the relationship between you can't disrupt the domestic without
Speaker 2: disrupting the international or vice versa. These are like inextricably linked.
Speaker 2: If you perceive to be there some sort of inequality
Speaker 2: in the United States or whatever, it is these things
Speaker 2: like the trading relation ship, all of these things, they
Speaker 2: are interlinks. So it's like one thing to say, like
Speaker 2: you know, there's the views like oh knocking over all
Speaker 2: of these different institutions. I think there there are linked
Speaker 2: in fundamental ways, and there it sort of makes sense
Speaker 2: that if you you know, you go after the FED
Speaker 2: because you perceive whatever that that's part and parcel of
Speaker 2: the whole thing.
Speaker 3: You can to argue their links. But I would say,
Speaker 3: if you're trying to solve domestic inequality through international means,
Speaker 3: that doesn't seem that it seems like the emphasis and
Speaker 3: the focus is wrong.
Speaker 2: I guess what I'm saying is I'm not surprised that
Speaker 2: it all goes to because like that was my toy
Speaker 2: for like like that that the sort of Klein Peedies theory,
Speaker 2: et cetera, that you know, there's this inequality in the
Speaker 2: United States because of these winners and losers from the
Speaker 2: international trading system, right, right, and so we fight these
Speaker 2: trade wars, et cetera, because we're it's about something internal
Speaker 2: that rectifying some sort of internal imbound right. And so
Speaker 2: I do think, like I get so there's just gets
Speaker 2: some all I'm saying is I'm not surprised at all.
Speaker 3: Goes together because I see I get yeah.
Speaker 2: As part of like a policy agenda.
Speaker 3: But it's possible that we should be looking at domestic
Speaker 3: policy more rather than fighting with trading partners. That also,
Speaker 3: you're not going to say that you're lying low now,
Speaker 3: all right, I'm just.
Speaker 2: Saying I don't have an opinion the right way to
Speaker 2: do it. I'm just saying I'm not surprised that this
Speaker 2: is one way.
Speaker 3: Okay, shall we leave it there.
Speaker 4: Let's leave it there.
Speaker 3: This has been another episode of the Authoughts podcast. I'm
Speaker 3: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow our guest Adam Posen at Adam Posen. Follow our
Speaker 2: producers Carmen Rodriguez at Carman armand Dash E Bennett at
Speaker 2: Dashbod and Keil Brooks at Keilbrooks. For more Oddlots content,
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