Speaker 1: He kind of that grows the economy from the middle
Speaker 1: out the bottom up instead of just the top down.
Speaker 1: When that happens, everybody does well. This vision is a
Speaker 1: fundamental break from the economic theory that has failed America's
Speaker 1: middle class for decades now.
Speaker 2: President Joe Biden this week launched an ambitious bid to
Speaker 2: persuade Americans he's boosted the US economy, with a speech
Speaker 2: describing how his legislation in the past two and a
Speaker 2: half years would grow the economy long term and boost
Speaker 2: the position of ordinary Americans.
Speaker 1: And I'm not here to declare victory on the economy.
Speaker 1: I'm here to say we have a plan that's turning
Speaker 1: things around incredibly quickly. Well, you have more work to do.
Speaker 2: It showed that Biden will put the economy at the
Speaker 2: center of his re election campaign. It's a strategy, though
Speaker 2: not without risks. You'd think, given inflation and now mortgage
Speaker 2: rates are both sword in the Biden years, and most
Speaker 2: voters appear to race him poorly on his handling of
Speaker 2: the econom In fact, you'd think it would be the
Speaker 2: Republican candidates for president who'd be wanting to focus on
Speaker 2: the state of the US economy. But we're not hearing
Speaker 2: much of that at all. So what's going on and
Speaker 2: how important is it for President Biden and his team
Speaker 2: that we don't have a US recession in the next
Speaker 2: twelve months. Well, let me chat first to senior Bloomberg
Speaker 2: reporter Nancy Cook in DC, who's already spending a chunk
Speaker 2: of her time out on the campaign with some of
Speaker 2: these wanna be presidents. Nancy, thanks as ever for joining
Speaker 2: us on Stephanomics. I guess we should just ask the
Speaker 2: basic question, is the economy a positive or a negative
Speaker 2: of President Biden's hopes of re election?
Speaker 3: Do you think I think that President Biden's problem is
Speaker 3: he just has not been able to get credit for
Speaker 3: the good parts of the economy. The US has one
Speaker 3: of the strongest labor markets we have ever seen. Unemployment
Speaker 3: is very low. Unemployment is also low among women, it's
Speaker 3: low among African Americans. You know, there has been a
Speaker 3: big boom in infrastructure spending. The US is trying to
Speaker 3: wrestle manufacturing away from China and build more semiconductor factories here.
Speaker 3: So there's a lot of interesting things happening in the economy.
Speaker 3: Despite the historically high inflation and a lot of bright
Speaker 3: spots for the White House. But it has just been
Speaker 3: very hard for the Biden White House to sell the
Speaker 3: American public on the idea that the economy is good
Speaker 3: and for people to feel okay about it. You know,
Speaker 3: a majority of Americans cannot name a single accomplishment that
Speaker 3: the Biden White House has done, and that has really
Speaker 3: dogged them. So I would argue that their problem moving
Speaker 3: forward as they try to make economics a centerpiece of
Speaker 3: the campaign, is more of a sales pitch problem than
Speaker 3: an actual policy problem.
Speaker 2: Well, you know, as you mentioned, he has passed these
Speaker 2: massive bills, the Infrastructure Bill, the Inflation Reduction Act, which
Speaker 2: is obviously more about the green transition and investing in
Speaker 2: being carbon neutral. You've also and you saw we've also
Speaker 2: seen the Chips Act. All of those things seem to
Speaker 2: be triggering construction booms in some key election battlegrounds like
Speaker 2: Ohio and Pennsylvania. Hasn't any of that helped him?
Speaker 3: Well, I think that part of the problem with all
Speaker 3: of the legislation and the money that has been allocated
Speaker 3: to these projects is that they are long term, you know, investments.
Speaker 3: And so for instance, last year I was in Ohio
Speaker 3: with President Biden. We were standing in the middle of
Speaker 3: a field of chips at a chips factory where you know,
Speaker 3: eventually the White House and local officials hope people without
Speaker 3: college degrees can make you know, one hundred and twenty
Speaker 3: thousand dollars a year producing these chips. And that is
Speaker 3: really a huge part of the White House's message to voters.
Speaker 3: You know, we are creating really good, high end manufacturing
Speaker 3: jobs in the US. But part of the problem is
Speaker 3: that there's no guarantee that that factory, or that the
Speaker 3: infrastructure projects or the bridges and roads that are being
Speaker 3: funded by these investments, that the White House and Congress
Speaker 3: has passed that those things will be done by twenty
Speaker 3: twenty four. And so part of the White House's challenge
Speaker 3: is to convince people to sort of make them aware
Speaker 3: of projects that are in process right now.
Speaker 2: Obviously, when you look at the Republican side, it's, to
Speaker 2: put it politely, it's not exactly a traditional campaign that
Speaker 2: we're seeing, but what in general a Republican candidates saying
Speaker 2: about the economy. I mean, this is a time when
Speaker 2: you would think, you know, if he's not popular on
Speaker 2: a handling of the economy, that would be an opportunity
Speaker 2: for the opposition.
Speaker 3: You would think that you would think that Republicans day
Speaker 3: in and day out, would be hitting the White House
Speaker 3: on the last two and a half years of historically
Speaker 3: high inflation, or hitting them on the amount of money
Speaker 3: that Congress and the White House has allocated to all
Speaker 3: of these bills, which are not you know, typically you know,
Speaker 3: Republican priorities. Instead, what we have seen from the Republican
Speaker 3: candidates so interesting is really a doubling down on culture
Speaker 3: wars and sort of fear based messages. They're talking about
Speaker 3: threats from China, but not really in terms of the economy.
Speaker 3: They're talking about, you know, fears about transgender athletes participating
Speaker 3: in women's sports. They're talking about well they're not talking
Speaker 3: as much about abortion, but they're talking about sort of
Speaker 3: people getting their guns taken away. So it's a lot
Speaker 3: of these culture war messages, and I think that it
Speaker 3: just goes to show you how in the US the
Speaker 3: Republican Party has just really changed so much over the
Speaker 3: last decade. This used to be a party which was
Speaker 3: seen as much more affiliated with like country clubs and
Speaker 3: business groups. Now we have one of the leading Republican
Speaker 3: candidates Florida Governor Ron De Santis waging a huge battle
Speaker 3: with Walt Disney Corporation over their tax status and some
Speaker 3: building permits, and you know, some legislation that he has
Speaker 3: in Florida that dealt with how people talked about gender
Speaker 3: and schools. So it's just, you know, there are Publican party,
Speaker 3: I would say, has just really transformed itself into something
Speaker 3: that people wouldn't recognize from a decade ago, when they
Speaker 3: were much more concerned with tax cuts, the economy, you know,
Speaker 3: putting forward fiscal proposals. Interestingly, we have not seen any
Speaker 3: economic plans from the top two Republican candidates Florida Governor
Speaker 3: Rohnda Santis or former President Donald Trump outlining what they
Speaker 3: would do with the economy in a second term. And
Speaker 3: I think that's really telling about how the economy is
Speaker 3: being handled by Republicans at this point.
Speaker 2: And it's interesting you mentioned briefly abortion, but that was
Speaker 2: one of the cultural issues they weren't necessarily talking a
Speaker 2: lot about. I mean, famously, in that the midterms last year,
Speaker 2: there was this expectation that the state of the economy
Speaker 2: would play badly for Democrats and would be a big
Speaker 2: help for getting the Republicans into office. Ironically, it was
Speaker 2: the cultural issues and particularly abortion, that seemingly made a
Speaker 2: big difference to the Democratic showing in those midterms. I
Speaker 2: guess it is a bit of a gamble for the
Speaker 2: Republicans to stick with the with the culture issues.
Speaker 3: It is, and what we saw with you know, the
Speaker 3: Democrats too, though. I mean, Biden is going to be
Speaker 3: talking about the economy this week, but I don't want
Speaker 3: to discount the role that some of the culture issues
Speaker 3: will play for Democrats. To this, White House is very
Speaker 3: heavily playing up Republicans' efforts to restrict abortion access in
Speaker 3: the US as a very key campaign message. They're calling
Speaker 3: out Republicans past messages on cutting Social Security and Medicare,
Speaker 3: which is not something that former President Trump wants to do,
Speaker 3: but what some of the other candidates have talked about.
Speaker 3: They're making that a key message. And so they're really
Speaker 3: the Democrats overall messages trying to paint Republicans as extreme
Speaker 3: on the policy positions, from abortion to entitlements to you know,
Speaker 3: these culture war issues. And the Republicans, meanwhile, are just
Speaker 3: really trying to you know, make Americans quite fearful of
Speaker 3: a second term of President Biden both you know, what
Speaker 3: they view as his inept handling of the country, but
Speaker 3: also calling out things like his age and whether or
Speaker 3: not he is up to really have a second term.
Speaker 2: How wide does the White House will have a recession
Speaker 2: in the US in the next six to eight months.
Speaker 3: The White House has always done a lot of happy
Speaker 3: talk with the economy and has never really acknowledged, you know,
Speaker 3: the likelihood of a recession. I think that what I'm
Speaker 3: hearing from people is that if there is a recession,
Speaker 3: and this is from economists, from business leaders in DC,
Speaker 3: you know, it would be a more mild one, you know.
Speaker 3: CEOs I don't think are totally freaked out about a
Speaker 3: big recession. And so I think the question for the
Speaker 3: White House and the Biden campaign is when does that
Speaker 3: recession come. You know, if companies are cutting jobs and
Speaker 3: laying people off, which we're already seen in some sectors
Speaker 3: like the tech sector, it's much better for the Democrats
Speaker 3: if that comes earlier in the year then later in
Speaker 3: the year. Typically, you know, the summer before an election
Speaker 3: is when American voters really start to clue into what's
Speaker 3: going on. And so, you know, the best bet for
Speaker 3: the Democrats is if the recession comes in the first
Speaker 3: two quarters, not in the summer or in the fourth quarter,
Speaker 3: when people will have to go to the polls.
Speaker 2: And of course, if we have a recession, it'll be
Speaker 2: because the US Central Bank has in effect had to
Speaker 2: cause one to get inflation out of the economy in
Speaker 2: other parts of the world, and I guess in some
Speaker 2: quarters in the US we're starting to see criticism of
Speaker 2: the Feed that there's it's inflicting harm on the American
Speaker 2: people for no great gain. Do you think if things
Speaker 2: do turn sour economically and we start to see a
Speaker 2: lot of job losses, do you think that Democrats will
Speaker 2: start to be a bit more critical of the Federal Reserve.
Speaker 3: We have seen Democrats on Capitol Hill, like Senator with
Speaker 3: Warren and other progressives be critical of the FED and say,
Speaker 3: you know, now is not the time to raise interest rates,
Speaker 3: or we should not raise them any further. The Biden
Speaker 3: White House has been trying to stay totally mum on
Speaker 3: criticizing the FED because they do not want to seem
Speaker 3: like they are former President Donald Trump in any way.
Speaker 3: You know, as you remember, he really was quite critical
Speaker 3: of the FED. He was quite critical of j Powell.
Speaker 2: Despite having carefully selected I know, not given Janet yet
Speaker 2: in a second term.
Speaker 3: He was You're right, but he you know, really started
Speaker 3: attacking the FED during his presidency, and the Biden White
Speaker 3: House tries to act like Biden is the grown up
Speaker 3: in the room. Trump is not, and so part of
Speaker 3: the way that they do that is by not attacking
Speaker 3: you know, independent institutions like the Federal Reserve or the
Speaker 3: Department of Justice or these other agencies.
Speaker 2: Well see how they managed to stick to that down
Speaker 2: the road. But meantime, Nancy Cook, thank you.
Speaker 3: So much, thanks for having me.
Speaker 2: So I want to go a little deeper into the
Speaker 2: economics and the politics of all this with two excellent guests,
Speaker 2: Michael Strain, director of economic policy Studies at the American
Speaker 2: Enterprise Institute, and our own Anna Woll, Bloomberg's chief US economist.
Speaker 2: Thank you very much for joining me, both of you. Anna,
Speaker 2: maybe just start with you just to sketch out roughly
Speaker 2: where the US economy is now, but also in broad strokes,
Speaker 2: how you'd expect it to evolve over the next eighteen
Speaker 2: months or so leading up to the twenty twenty four
Speaker 2: general election.
Speaker 4: Yeah, so, I think the one word that well described
Speaker 4: the US economy right now is belold trend growth. So
Speaker 4: it's the US.
Speaker 2: Economy, isn't that three words?
Speaker 4: There's dashes in betweets, So the economy is expanding. It
Speaker 4: has defied forecasts. Are recessions last year? We called that
Speaker 4: last year. Around June of last year, half of the
Speaker 4: country in a poll says that they think the country
Speaker 4: is already in a recession. But it seems like as
Speaker 4: of now the data says nope, the economy expanded. But
Speaker 4: looking forward, our call has been and remained to be
Speaker 4: that there will be a recession towards the end of
Speaker 4: this year. And the reason for this timing is that
Speaker 4: a lot of headwinds is supposed to hit the economy
Speaker 4: around the fourth quarter this year. So first, you have
Speaker 4: household excess savings running out. We're already seeing the lower
Speaker 4: end of the income sector running out of savings and
Speaker 4: they have been resorting to credit cards and running down
Speaker 4: their existing savings in order to finance spending habits. That
Speaker 4: is one key factor for why we think that the
Speaker 4: economy is finally running out of steam. The other headwinds
Speaker 4: include the student loan forbearons could be expiring later this year,
Speaker 4: which takes away another kitchen for household Alan Greenspan has
Speaker 4: two favorite economic activity indicators. One is corrugated box shipments
Speaker 4: and second is railcar loadings, and both of them have
Speaker 4: been tanking in recent months, which seems to suggest that
Speaker 4: consumer demand are finally softening. So if a recession does
Speaker 4: happen around Q four this year, usually unemployment rate spikes
Speaker 4: only two quarters, two or three quarters after what the
Speaker 4: economy is formally in a recession. So yeah, GDP growth
Speaker 4: may decline in fourth quarter, first quarter next year, but
Speaker 4: an unemployment rate really only peaks around if that's the case,
Speaker 4: third quarter a fourth quarter next year, which is right
Speaker 4: around the presidential election. Our baseline is for unemployment rate
Speaker 4: to rise to around four point nine percent in the
Speaker 4: third quarter of twenty twenty four, So that's a couple million,
Speaker 4: one or two million decrease in jobs. So that would
Speaker 4: be a serious headwind for Biden.
Speaker 2: And just briefly, and a lot of people had been
Speaker 2: wrong footed by the resilience of the US economy so
Speaker 2: far and sort of dodging a recession so far, not
Speaker 2: least the Federal Reserve. What probability are you putting on
Speaker 2: that recession forecast, how much chance is there do you
Speaker 2: think that we could actually dodge it? And I guess
Speaker 2: the follow up to that is, just is it going
Speaker 2: to be a deep recession or is it possibly one
Speaker 2: of those ones that ends up not being felt as deeply.
Speaker 4: In the past year, the economy demonstrated resilience, but in
Speaker 4: the second half of this year we see a loss
Speaker 4: of resilience because of this combination of shocks. So how
Speaker 4: deep the recession would be depends on what combination of
Speaker 4: negative shocks do we get. So if you have a
Speaker 4: combination of severe El Nino or weather forecasters are currently
Speaker 4: saying there's a chance of at least fifty six percent
Speaker 4: of strong El Nino. If you have also a China slowdown,
Speaker 4: which tends to be very bad for investment, and on
Speaker 4: the other hand, also you have the FED continuing to
Speaker 4: raise rates because inflation is high and credit standards start
Speaker 4: tightening in the wake of the banking crisis in the US.
Speaker 4: I just don't see how the economy could survive all
Speaker 4: these shocks. But again, it depends on what combination of
Speaker 4: shocked you see.
Speaker 2: Michael Strain, You've listened very patiently to all this. Are
Speaker 2: you broadly in line with Anna's assessment of the economy
Speaker 2: looking ahead?
Speaker 5: Yeah, I think we are broadly in line. I expect
Speaker 5: a recession will hit the precise time we give that
Speaker 5: as difficult, but I think the slowdown will start, likely
Speaker 5: at the fourth quarter of this year, maybe a little
Speaker 5: bit earlier than that. I think that consumers have been
Speaker 5: buoyed by the cushions that Anna mentioned in Those are
Speaker 5: deflating student dead forbearance, excess savings that resulted from really
Speaker 5: generous pandemic era fiscal policy transfers to households. I am
Speaker 5: probably more concerned than Anna seems to be about consumers
Speaker 5: running out of steam and not heavily business investment dropping off.
Speaker 5: I kind of expect to see both, but yes, I
Speaker 5: think we're broadly aligned.
Speaker 2: We do already have consumer confidence and the consuman sentiment
Speaker 2: very low. Because inflation is felt so deeply by households,
Speaker 2: even with or without a recession, or even without a
Speaker 2: big significant rise in unemployment, we know inflation is hitting everybody,
Speaker 2: not just people who might be at risk of losing
Speaker 2: their jobs. This is already not a pretty picture for
Speaker 2: a president to be campaigning for re election. And you
Speaker 2: also potentially have a recession coming up in the months
Speaker 2: before the election. So I guess the striking thing to
Speaker 2: us has been why Republican candidates on the stump haven't
Speaker 2: in talking more about the state of the economy on
Speaker 2: the campaign trail.
Speaker 5: Yeah, it's confusing. I think there are two explanations for that.
Speaker 5: One explanation is that the fundamental problem with the economy
Speaker 5: is that economic demand substantially outpaced the productive capacity of
Speaker 5: the economy to meet that demand, and that's manifesting itself
Speaker 5: in inflation, and people just like inflation, and that's showing
Speaker 5: up in the poll numbers. President Biden's handling of the
Speaker 5: economy is not favorably by many Americans. But the flip
Speaker 5: side of that is that labor demand is extremely strong.
Speaker 5: We have a really strong job market, very low unemployment.
Speaker 5: We are adding lots and lots of jobs every single
Speaker 5: month after month, and nominal wages are growing at a
Speaker 5: really rapid rate. Now, the purchasing power of those wages
Speaker 5: is being eaten away by inflation, but what's actually in
Speaker 5: your paycheck is the number on your paycheck is growing
Speaker 5: at a pretty rapid rate. And so it may be
Speaker 5: that candidates don't quite know how to navigate that. Criticizing
Speaker 5: the president on economic performance kind of invites a question, Okay, well,
Speaker 5: what would you do? And you don't want to put
Speaker 5: yourself in a position of rooting for a weaker labor market,
Speaker 5: but you don't want to put yourself in a position
Speaker 5: of rooting of rooting for a recession, And you don't
Speaker 5: want to put yourself in a position of even really
Speaker 5: rooting for what's being described as a soft landing. And
Speaker 5: so that could be part of it. But I also
Speaker 5: think that the candidates, through a combination of the role
Speaker 5: that President Trump is playing in this primary cycle and
Speaker 5: just how early it is in the calendar, the candidates
Speaker 5: don't have fleshed out economic policy agendas and policy plans,
Speaker 5: and so that makes it hard, I think, to try
Speaker 5: to turn the focus to the economy.
Speaker 2: That's interesting, you've captured something in that answer that I
Speaker 2: was that we've seen also in terms of governments around
Speaker 2: the world actually dealing with the popular response to interest
Speaker 2: rate rises. It's hard to be setting yourself against an
Speaker 2: overheating economy and somehow arguing in order to get inflation down,
Speaker 2: arguing for less money in people's pockets. It's a very
Speaker 2: awkward place for any politician to be in where many candidates,
Speaker 2: I mean famously Governor DeSantis in Florida has been taking
Speaker 2: an economic tack, or at least been talking about some
Speaker 2: economic issues, is in sort of picking fights with the
Speaker 2: business community on the sort of anti woke agenda. It's
Speaker 2: an odd place for a Republican to be. How does
Speaker 2: it play with voters?
Speaker 5: Do you think I'm not sure that it will play
Speaker 5: that well. I think we have to wait and see.
Speaker 5: But Disney is a very popular.
Speaker 2: Company, and not just with people's children and not just with.
Speaker 5: And I think if you are a person who spends
Speaker 5: a lot of time on social media, or spends a
Speaker 5: lot of time really kind of following the day to
Speaker 5: day happenings in American politics, and you're a conservative, that
Speaker 5: this might be appealing to you. But in order to
Speaker 5: be successful, certainly in the general election, you have to
Speaker 5: appeal to independent votership, to appeal to voters who don't
Speaker 5: pay attention to the kind of hour by hour, day
Speaker 5: by day swings in the news cycle. And you know this,
Speaker 5: I'm skeptical that this will be all that appealing to
Speaker 5: many of those voters.
Speaker 2: And one thing we have seen under President Trump and
Speaker 2: President Biden, but very strikingly in the last few years
Speaker 2: under President Biden, is this activist turn in US economic policy.
Speaker 2: With President Trump, it largely took the form of tax
Speaker 2: cuts and the trade wars with China. But under President
Speaker 2: Biden we've had these big spending on green energy, infrastructure,
Speaker 2: the Chips Act, and this explicit industrial policy goal of
Speaker 2: reindustrializing the US economy. Initially, on the economics, I mean,
Speaker 2: is there a coherent strategy there for raising growth in
Speaker 2: the lasting way, increasing the potential growth rate of the
Speaker 2: US economy, or is this just another form of pumping
Speaker 2: money into the economy.
Speaker 4: My understanding is that these you know, the Chips Act,
Speaker 4: the work underpinning the Chips Act was already in the
Speaker 4: works under President Trump, and so Biden's administration is just
Speaker 4: formalized those work that was already started when we were
Speaker 4: having a trade war with China, when the Trump administration
Speaker 4: just realized that we're just having too much reliance on
Speaker 4: imports from China. But in any case, in terms of
Speaker 4: the impact on the economy from Chips Act and the
Speaker 4: Infrastructure Act, it's major. We're starting to see the impact,
Speaker 4: and the impact is number one. It prolonged the labor
Speaker 4: shortages in certain sectors, for example, in construction sectors. During
Speaker 4: the pandemic, the construction sector was already experiencing severe shortage
Speaker 4: of workers, so the ratio of job opening in the
Speaker 4: construction to unemployed was around one point seven one point eight.
Speaker 4: And now as the rest of the economy is coming
Speaker 4: back into balance, there's less shortages elsewhere. The construction sector
Speaker 4: remains very tight because of demand to build these factories
Speaker 4: and these roads. There was a massive spike in manufacturing
Speaker 4: construction starting around the last couple of months ago and
Speaker 4: it seems to be continuing unabated. And our very preliminary
Speaker 4: estimate of the total job impact of the Infrastructure Act
Speaker 4: is that a minimum number is that it could boost
Speaker 4: jobs by over half a million over a span of
Speaker 4: a couple of years. I think in the longer, in
Speaker 4: the media medium term, we will start to see the
Speaker 4: growth enhancing impact. Over time. It will boost supply as well,
Speaker 4: but that is a longer term trajectory. In the short term,
Speaker 4: what you what these acts do is boosts a demand
Speaker 4: without immediate impact on the supply. So in a way,
Speaker 4: it could actually worsen the inflationary impact. So if Powell's
Speaker 4: aim is to bring down nominal wages and then you
Speaker 4: will have the persisting the jobs. Labor shortage in construction
Speaker 4: sector is not contributing to that goal.
Speaker 2: Yeah, no, that's absolutely so it is making the federal
Speaker 2: reserves job harder. Potentially, Michael, we look at these big
Speaker 2: pieces of legislation and then very big amounts of spending
Speaker 2: that are being talked about. In a few years time,
Speaker 2: we will there will be a significant change in the
Speaker 2: in the visible change in the structure of the US
Speaker 2: economy in some of these areas. Or are we overdoing
Speaker 2: it a bit?
Speaker 1: Uh?
Speaker 5: I think that is overdoing it a bit. They're there, maybe, uh,
Speaker 5: some noticeable changes in kind of very narrowly defined sectors.
Speaker 5: And so the Chips Act, for example, very well. Could
Speaker 5: we could look back on that and say, you know,
Speaker 5: that really bolstered US production of semiconductors, although even there,
Speaker 5: I think we would be talking about kind of a relative,
Speaker 5: a relatively marginal effect. We're not going to reach a
Speaker 5: situation where half of the global supply of semiconductors are
Speaker 5: produced in Ohio and Michigan or anything like that. The
Speaker 5: Infrastructure Bill, which was passed with bipartisan support, I think
Speaker 5: will have a big effect on the economy and specifically
Speaker 5: on the nation's infrastructure. But it won't reshape the structure
Speaker 5: of the economy, but it will improve productivity and increase
Speaker 5: the kind of quality and and and I guess quantity
Speaker 5: of American infrastructure. The Inflation Reduction Act, which is really
Speaker 5: a kind of a green energy bill, I think the
Speaker 5: effects of that remain to be seen. It's extremely controversial
Speaker 5: because it threatens to launch a kind of subsidy race
Speaker 5: between the US and Europe and the UK. The British
Speaker 5: Prime Minister Rishi Sunak was just here in Washington trying
Speaker 5: to minimize the damage that the Infliction Reduction Act would
Speaker 5: do to the UK economy. Emanuel Macron, the President of France,
Speaker 5: warned that the Infliction Reduction Act might fracture the West
Speaker 5: was the phrase that he used. And so that might
Speaker 5: again have a marginal effect on increasing kind of green
Speaker 5: energy production in the US. But you know, the world
Speaker 5: won't just sit still while that happens. And that's a
Speaker 5: lesson we learned from the Trump trade war introduced tariffs
Speaker 5: on imports from China. You would think that would have
Speaker 5: a big effect on the US manufacturing tittor it would
Speaker 5: boost manufacturing employment. It turns out that it didn't. And
Speaker 5: the two reasons why it didn't are that it increased
Speaker 5: the price of intermediate inputs in production that US manufacturers
Speaker 5: import a lot from abroad, it turns out, and those
Speaker 5: imports became more expensive. And then China than just on
Speaker 5: its hands and allowed the US to engage in this regime.
Speaker 5: It retaliated, and the kind of best evidence shows that
Speaker 5: the net effect of all of these, of all these
Speaker 5: different effects is that manufacturing employment went down, not up.
Speaker 5: Something very similar could happen with the Inflation Production Act.
Speaker 5: Something very similar could even happen with the Chips Act.
Speaker 5: It's just difficult for the US Congress to say, Okay,
Speaker 5: we're going to be a semiconductor manufacturing leader, or okay
Speaker 5: we're going to launch all these green energies.
Speaker 2: If it were that easy, everybody would do it. It's
Speaker 2: striking even the words reindustrialization. Of course, those of us,
Speaker 2: you know, as economists. I was always taught that there's
Speaker 2: no fight, there's no fighting de industrialization. At some level
Speaker 2: if your advance developed economy, that you're inevitably moving on
Speaker 2: a path to have manufacturing be a smaller part of
Speaker 2: the economy. That's what we were taught for years. The
Speaker 2: idea that you're going to reverse that in a meaningful way,
Speaker 2: it seems it's certainly challenging to the orthodoxy. But Michael,
Speaker 2: one thing that many of my colleagues have pointed out
Speaker 2: to me is that there is undeniably an investment boom,
Speaker 2: manufacturing investment boom underway, in part as a result of
Speaker 2: some of this legislation or expectations around it, and it's
Speaker 2: most intense in the New South and other parts of
Speaker 2: America that are primarily strong Republican stronghold. So I just
Speaker 2: wonder how does that play. On the one hand, it
Speaker 2: seems like a Democrat administration is doing a lot to
Speaker 2: help Republican parts of the country. But I guess if
Speaker 2: you're trying to turn those Republican parts of the country
Speaker 2: a bit more Democrat, it might be just the right
Speaker 2: thing to do.
Speaker 5: Well maybe, I mean, there's you know, there's a reason
Speaker 5: why the Infrastructure Bill was bipartisan and had support among
Speaker 5: Republicans in the Congress, and there's a reason that the
Speaker 5: Chips Act was bipartisan support among Republicans in the Congress.
Speaker 5: Republican members of the Senate from those states thought that
Speaker 5: the bill would would help their states, and it very well.
Speaker 5: May I would take a little bit of issue with
Speaker 5: one argument that animated earlier, which is that these bills
Speaker 5: will create a bunch of jobs. The way that I
Speaker 5: think about it is that these bills will not kind
Speaker 5: of increase total US employment, but instead, what they will
Speaker 5: do is they will shift jobs from one part of
Speaker 5: the economy into manufacturing, or shift jobs from one part
Speaker 5: of the economy into a kind of manufacturing adjacent or
Speaker 5: infrastructure adjacent sector. And you know, that's that's hard to do,
Speaker 5: and we're seeing that right now. Semiconductor companies are talking
Speaker 5: about how hard it is to fulfill these ambitions because
Speaker 5: they can't find workers. The administration is imposing other dovestic
Speaker 5: policy goals as a condition for government contracts, like providing
Speaker 5: childcare facilities and things of this nature, and are these
Speaker 5: are exactly the kinds of frictions. But in the case
Speaker 5: of reallocating workers across sectors, that's kind of an economic friction.
Speaker 5: In the case of imposing other dovestic policy goals, that's
Speaker 5: more of a political economy friction. Both those types of
Speaker 5: frictions have been present every time the government tries to
Speaker 5: kind of step in and make big structural change to
Speaker 5: the economy from Washington, and I expect those kinds of
Speaker 5: frictions are going to are going to continue, if not grow,
Speaker 5: and I think it would basically be seen how all
Speaker 5: that shakes out. To be clear, I do think that
Speaker 5: at the end of the day, we will have more
Speaker 5: green energy. The green energy industry in the US will
Speaker 5: be relatively larger and stronger than it would have been,
Speaker 5: so many conductors in the US will be relatively larger
Speaker 5: and stronger than they would have been. But the magnitude
Speaker 5: of that boost, I think is an open question.
Speaker 2: It's sort of full circle to the beginning of our
Speaker 2: conversation around the lack of capacity in the US economy
Speaker 2: and the issue of overheating. One thing we do know
Speaker 2: is that a lot of this is costing a lot
Speaker 2: of money and for this period, and that you know, normally,
Speaker 2: when you have an economy that's at least that has
Speaker 2: been running quite hot, you would be looking at a
Speaker 2: pretty favorable fiscal situation. But that's not the case right now.
Speaker 2: Anna very briefly, what are we looking at in terms
Speaker 2: of government borrowing right now, but also sort of looking
Speaker 2: further out because that again has often been part of
Speaker 2: the discussion and the campaign trail.
Speaker 4: Yeah, so the US is embarked on it as a
Speaker 4: sustainable fiscal path. We estimate that the May CBO baseline
Speaker 4: has put the federal debt to GDP ratio on a
Speaker 4: path to reach about close to one hundred and twenty
Speaker 4: percent of GDP by twenty twenty eight, and the debt
Speaker 4: deal that Republicans struct with the Biden administration barely did
Speaker 4: anything to it. By our estimation, it only knocked off
Speaker 4: about two percentage point off the off that one hundred
Speaker 4: and twenty debt to GDP ratio. In fact, my team
Speaker 4: used a more realistic set of assumptions, and we calculate
Speaker 4: that in fact, the debt to GDP ratio should be
Speaker 4: rising to about one hundred and thirty percent of GDP
Speaker 4: by twenty twenty eight, and then by twenty twenty eight,
Speaker 4: half of the annual fiscal deficit would be due to
Speaker 4: interest payments because the FED has been raising interest rate
Speaker 4: very fast, and that funds rate is at five point
Speaker 4: two five percent and it looks like Powell has been
Speaker 4: telling us it could go up by another fifty BIPs,
Speaker 4: and so it's entirely feasible. I think that in a
Speaker 4: couple of years you would see annual fiscal deficit running
Speaker 4: at about over five percent per year, with half of
Speaker 4: which due to interest payments.
Speaker 2: Michael, we did have this big debate around the debt
Speaker 2: ceiling in recent weeks, and Republicans were very vociferous about
Speaker 2: complaining about the excess spending, but that didn't tend to
Speaker 2: translate into any desire to raise taxes. In fact, if anything,
Speaker 2: they wanted to cut taxes more. So, it just are
Speaker 2: are there still fiscal hawks in the Republican Party or
Speaker 2: are they hiding? Are they going to come out after
Speaker 2: the election.
Speaker 5: Well, I think they're reasserting themselves. I mean, so what's
Speaker 5: happening right now? Well, first of all, what we saw
Speaker 5: at the dead Ceiling bill was a desire to cut
Speaker 5: discretionary spending, which.
Speaker 2: Is a pretty small proportion of tital spending.
Speaker 5: Yes, absolutely it is, but it's notable. That's not what
Speaker 5: happened when Donald Trump was president. When Donald Trump was president,
Speaker 5: discretionary spending went up and the Congress, Republicans and Democrats
Speaker 5: in Congress reached the deal about what discretionary spending would
Speaker 5: look like going forward, and Republicans in the House right
Speaker 5: now are trying to renig on that deal, and it
Speaker 5: cut spending even more than was agreed to in the
Speaker 5: deal that was reached just a few days ago. I
Speaker 5: think that both political parties are interested in reducing the deficit.
Speaker 5: They're each just interested in doing other things. More Republicans
Speaker 5: are interested in lower taxes more than they're interested in
Speaker 5: deficit reduction. In Democrats are are interested in more generous
Speaker 5: government spending more than they're interested in deficit reduction. The
Speaker 5: striking thing to me is the bipartisan consensus on a
Speaker 5: avoiding deficit reduction. You know, it's not just Republicans that
Speaker 5: don't want to raise taxes. Democrats don't want to raise
Speaker 5: taxes on the bottom ninety eight percent of households, and
Speaker 5: President Biden repeats that over and over again. If you
Speaker 5: make less than four hundred thousand dollars a year, he's
Speaker 5: not going to raise your taxes. That's ninety eight percent
Speaker 5: of households. So the debate is whether to raise taxes
Speaker 5: on the top two percent which is not which is
Speaker 5: not going to affect the thirty year outlook for the
Speaker 5: debt to GDP ratio. Similarly, both parties are in agreement
Speaker 5: that the US Social Security and Medicare programs should not
Speaker 5: see spending productions, even though those are the two programs
Speaker 5: that are primarily responsible for pushing up the DET to
Speaker 5: GDP ratio over the next several decades. This is an
Speaker 5: area where I think both parties are very much to blame,
Speaker 5: and neither party is willing to do what's needed to
Speaker 5: be done. And you know, despite all the conflict between
Speaker 5: Republicans and Democrats, if you actually look at their stated
Speaker 5: policy goals, there's a remarkable amount of agreement. That's the
Speaker 5: drivers of the.
Speaker 2: Debt and as Anna pointed out, given the fact it's
Speaker 2: one of the big factors driving increasing spending and borrowing
Speaker 2: into the future is the higher debt interest costs. And
Speaker 2: if that continues to be an important factor, you don't
Speaker 2: feel like any winner of the next election is really
Speaker 2: going to have prepared the way to do some serious
Speaker 2: kind of damage reduction or deficit reduction. Michael, we talked
Speaker 2: for a long time. I guess the last question I
Speaker 2: would have was maybe going to undermine the fact that
Speaker 2: we've had this whole conversation, But we're going on the
Speaker 2: premise that historically the economy has been important to the
Speaker 2: result of elections. And I can certainly remember million years
Speaker 2: ago now, but when George Bush Senior lost to Bill Clinton,
Speaker 2: it was a sort of famous occasion where he partly
Speaker 2: lost because his campaign was fought on unrevised GDP numbers
Speaker 2: which showed a continued recession, when actually it turned out
Speaker 2: that things were already looking up when the campaign was
Speaker 2: being fought, but we only knew that afterwards. And do
Speaker 2: you think that it's going to come down to the
Speaker 2: economy to that extent if we do see a recession,
Speaker 2: if we do see unemployment picking up as and a
Speaker 2: forecast at the beginning of the show, do you think
Speaker 2: it will be a big factor in next year's elections
Speaker 2: or will we find, as we did in the midterms,
Speaker 2: actually that cultural wars, the cultural issues are both more
Speaker 2: decisive for both sides.
Speaker 5: My reading of the evidence suggests that historically, in a
Speaker 5: statistical sense, the trajectory of the economy really does matter
Speaker 5: quite a bit.
Speaker 2: And oh, thank goodness, we haven't wasted our time, then,
Speaker 2: that's good, yes.
Speaker 5: And my view is that what really matters is, you know,
Speaker 5: maybe one way to think of it as in the
Speaker 5: summer before the election. So in the summer of twenty
Speaker 5: twenty four, is the unemployment rate going up or is
Speaker 5: the unemployment rate going down? And if the unemployment rate
Speaker 5: is going down, that will help President Biden. If the
Speaker 5: unemployment rate is going up, that will hurt President Biden. Now,
Speaker 5: you know, we have had forty six presidents of the
Speaker 5: United States, so that is a very small sample, and
Speaker 5: I think it's important not to be overly confident. I mean,
Speaker 5: there's a sense in which the science of presidential election
Speaker 5: forecasting is a science of single instances, which is to
Speaker 5: say that it's not a science at all, as we've seen.
Speaker 5: I think, certainly over the past decade or so, anything
Speaker 5: can happen in American politics, and something unexpected certainly might
Speaker 5: happen in the twenty twenty four election. But if I had,
Speaker 5: if I had to bet, I would I would be
Speaker 5: very comfortable betting that whether the economy is improving or
Speaker 5: whether the economy is deteriorating in the months leading up
Speaker 5: to the twenty twenty four election will be a big
Speaker 5: factor in who wins?
Speaker 2: Those are wise words. Indeed, Michael Strain, thank you very
Speaker 2: much for cutting through all our discussion with such a
Speaker 2: useful takeaway for those who bother to listen to the
Speaker 2: whole thing. And Anna Wong, thank you very much for
Speaker 2: joining us.
Speaker 5: Thanks so much for having me.
Speaker 2: That's it for this episode of Stephanomics. Next week we
Speaker 2: will have more. In the meantime, you can get a
Speaker 2: lot more economic insight and news from the Bloomberg Terminal
Speaker 2: website or app. This episode was produced by Mangnus Hendrickson,
Speaker 2: Yang Yang and Summer Sadi, with help from Moses and
Speaker 2: special thanks to Nancy Cook, Anna Wong and Michael Strain.
Speaker 2: The executive producer of Stephanomics is Molly Smith and the
Speaker 2: head of Bloomberg Podcast is Sage Bohmer.