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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Anna Wong has.

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Speaker 3: Been definitive at Bloomberg Intelligence in market economics. She is

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Speaker 3: in conversation with Kevin Hassett of Greenfield, Massachusetts and of

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Speaker 3: the University of Pennsylvania now at the White House.

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Speaker 2: Let's listen of its sales in the US.

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Speaker 1: We're the only customer for them, and they have like

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Speaker 1: one percent of the US market, and there are lots

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Speaker 1: of other firms selling the same product into the US. Well,

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Speaker 1: then if we put a tariff on that guy, then

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Speaker 1: it's really going to cause some harm to that firm.

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Speaker 1: And so what we did is we actually went through

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Speaker 1: all the different tariff classes. I guess what are the

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Speaker 1: called h We went through the ball and then figured

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Speaker 1: out like the relative elasticities and then maximized the sort

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Speaker 1: of or minimized the potential harm on this one. One

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Speaker 1: of the things that we've learned is that one of

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Speaker 1: the reasons why the US has a really persistent trade

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Speaker 1: deficit is that we have a few trading partners that

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Speaker 1: are like have basically a policy in their country to

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Speaker 1: create jobs and dump product into the US in order

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Speaker 1: to produce political stability at home for them. And so

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Speaker 1: our intuition early on as we're thinking about what's the

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Speaker 1: next step given the presence intuition about how tariffs can

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Speaker 1: be an important part of optimal revenue policy is that

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Speaker 1: if we put tariffs on, say China, then their supply

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Speaker 1: is really an elastic because and by definition it is

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Speaker 1: the most at elastic thing of the world, because they've

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Speaker 1: been just throwing stuff at US year after year after year,

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Speaker 1: that then they would have to cut their prices to

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Speaker 1: continue to sell enough stuff so that they could create

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Speaker 1: enough jobs they have the political stability that they wanted.

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Speaker 1: And I think if you look at the record, that's

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Speaker 1: more or less been the case since the tariffs came

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Speaker 1: on for the countries that have big persistent trade deficits

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Speaker 1: with US, that they've ended up having to cut their

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Speaker 1: import prices by so much that there's very little effect

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Speaker 1: visible effect on inflation here in the US.

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Speaker 4: So, which is so when I look at the schedule

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Speaker 4: of tariffs right now, China is at thirty one percent,

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Speaker 4: in Brazil and India are at thirty five percent, which

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Speaker 4: is higher than China.

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Speaker 5: And is this a transition phase?

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Speaker 4: Is there where the endpoint of the trade policy in

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Speaker 4: this administration say by twenty twenty eight, the tariff schedule

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Speaker 4: and the relative tariffs are around the country will be

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Speaker 4: different than what we have served now. And what's the endgame.

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Speaker 1: President Trump, you know, will decide what the endgame is.

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Speaker 1: He'll look at the deals that are being presented to

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Speaker 1: us and decide if the deal is good enough. You saw,

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Speaker 1: for example, that we just had a big reduction in

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Speaker 1: the teriff for Switzerland after a very acrimonious phone call

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Speaker 1: between the President and the Swiss that led to the

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Speaker 1: very high teriff rate. And so I think that you know,

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Speaker 1: there's a negotiation underway. I think for many countries the

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Speaker 1: negotiation has finished. In some countries, there's still work to

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Speaker 1: be done.

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Speaker 4: Do you think after all the negotiations, the trade deals

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Speaker 4: and adjustment in a tariff schedule, we might be converging

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Speaker 4: to your algorithm in the first Trump administration, No.

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Speaker 1: I think that what we'll be converging to is something

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Speaker 1: like a border adjusted business cast flow tax. Because we

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Speaker 1: in the Big Beautiful Bill, one of the things we

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Speaker 1: did is we expanded the various experts subsidies for multinationals.

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Speaker 1: And so if you have a this is inside baseball math,

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Speaker 1: but if you have an export subsidy plus a tariff

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Speaker 1: plus a payroll tax, then you basically have a border

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Speaker 1: adjusted business cash flow tax. So I think that in equilibrium,

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Speaker 1: what we're seeing is that we're getting lots of revenue.

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Speaker 1: It's a few hundred billion already this year, and it's

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Speaker 1: not causing a lot of harm.

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Speaker 2: GDP nows at four percent.

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Speaker 1: Inflation has been trending slightly down, and so I think

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Speaker 1: that it's working the way it would if it were

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Speaker 1: a border adjusted business cost blow tax.

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Speaker 4: And what have you learned about optimal how tariff fits

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Speaker 4: in this opt optimal tariff as well as optimal fiscal policy.

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Speaker 1: I think that there's a race to produce in the

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Speaker 1: US to avoid tariffs that is very beneficial for US workers.

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Speaker 1: And if you look at capital spending ye over year,

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Speaker 1: we're having one of the best years ever and that's

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Speaker 1: even before we go through the trillions of promises that

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Speaker 1: we've and the trade deals, and so there's that, which

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Speaker 1: is the sort of capital spending effect That was somewhat

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Speaker 1: of a surprise to be how big it was, because

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Speaker 1: I again thought what you might see is like price

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Speaker 1: adjustments and so on, to by the elastic suppliers and

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Speaker 1: then the consumers wouldn't really see much of a price increase.

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Speaker 1: But I think one of the things we're seeing is

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Speaker 1: a massive on shoring of activity like anything I've ever seen.

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Speaker 1: So I think that it's really been a very net

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Speaker 1: positive policy, despite what sort of conventional economics has been

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Speaker 1: teaching us since we went back to the textbooks when

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Speaker 1: I was in grad school.

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Speaker 4: Okay, so you know, I think on in Wall Street,

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Speaker 4: most of the firms, many of the firms have come

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Speaker 4: up with this costs bird and of tariff composition of

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Speaker 4: around five percent exporters, cots, it discounts seventy percent, sixty

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Speaker 4: to seventy percent absorbed by domestic firms and the rest,

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Speaker 4: you know, twenty to thirty percent with the tier of

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Speaker 4: showing up and consumer prices. Do you disagree with that

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Speaker 4: sort of breakdown.

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Speaker 1: Or well, I think it will depend on it's a

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Speaker 1: product by product kind of analysis, and I think that

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Speaker 1: it's still work in progress to figure out what the

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Speaker 1: final story is. But again we've got high growth and

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Speaker 1: no pick up at inflation. I think that the Wall

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Speaker 1: Street folks are a lot of Wall Street folks who

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Speaker 1: I respect and read in the Spring we're saying that

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Speaker 1: we're going to have stagflation, that we're going to have

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Speaker 1: four or five percent inflation because of the tariffs and

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Speaker 1: no growth.

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Speaker 2: And so I think that.

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Speaker 1: Allocating like the current state of the economy and the

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Speaker 1: impact of tariffs on it, from people who told us

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Speaker 1: that we'd have a recession with high inflation with those

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Speaker 1: models is probably not the best thing to do.

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Speaker 4: Yes, certainly Wall Street have been caught wrong on their

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Speaker 4: forecast of an inflation surge which did not happened. In fact,

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Speaker 4: I remember, I think the consensus upon Liberation Day, everybody

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Speaker 4: revised up the core of PC inflation to well over

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Speaker 4: three percent, even some closer to four percent, and now

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Speaker 4: we are on track to hit two point nine or

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Speaker 4: three percent at the end of this year. So for

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Speaker 4: sure the consensus has.

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Speaker 5: Been wrong on that.

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Speaker 4: So recently, there's a viral San Francisco FED paper that

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Speaker 4: looked at one hundred years of history of tariffs and

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Speaker 4: they found the net effect of tariff tend to be deflationary.

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Speaker 5: However, they also found that.

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Speaker 4: Because it's deflationary because it as an aggregate demand shock

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Speaker 4: more so than a supply shock, and hance, ultimately it

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Speaker 4: raised the unemployment rate, and so far this year, when

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Speaker 4: we begin the year, the consensus on Wall Street is

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Speaker 4: four point one percent unemployment rate. Currently it looks as

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Speaker 4: if we are heading to four point three to four

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Speaker 4: point four at the end of this year. How much

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Speaker 4: do you think of this slower hiring and increase in

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Speaker 4: unemployment rate as attributable to trade policy or what.

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Speaker 1: Other Well, I think it's actually, you know, quite a

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Speaker 1: mistake to look at one hundred years of history to

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Speaker 1: learn about today's situation. To do that, you're making an

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Speaker 1: underlying assumption of what a conrometricians call ergaticity, the idea

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Speaker 1: that the data generating process is the same over time,

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Speaker 1: so that you can identify it in this period and

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Speaker 1: then use your knowledge to think about the next period.

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Speaker 1: I think that, you know, one hundred years ago, if

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Speaker 1: you wanted to move production from one place to another,

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Speaker 1: it was like almost impossible. You'd have to like get

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Speaker 1: it on the Queen Mary or something and move it around.

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Speaker 1: And now it's really really easy. If you know, a

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Speaker 1: hundred years ago, I guess we didn't have a telephone,

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Speaker 1: or maybe we just started to have a telephone. But

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Speaker 1: now we've got the Internet and we've got Ai helping

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Speaker 1: us decide how to move stuff around. We've got a

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Speaker 1: capital spending boom that would have been impossible one hundred

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Speaker 1: years ago. And so I don't think that, Yeah, I

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Speaker 1: don't think that history in this case is going to

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Speaker 1: be that useful because it's clearly a point where the

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Speaker 1: assumption of erganicity is not going to apply. And so

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Speaker 1: we're seeing massive movements you've seen in the big drug companies,

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Speaker 1: every movements of production to the US that will benefit

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Speaker 1: US consumers and especially US workers. We're seeing real wages

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Speaker 1: already this year going up, recovering and maybe about a

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Speaker 1: third of the ground that we lost under Joe Biden

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Speaker 1: with the high inflation. And I think that those real

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Speaker 1: wages are going up because we're getting a lot of onshoing.

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Speaker 1: It's not just because of the big beautiful bills tax cuts,

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Speaker 1: but also because of the onshooring from the tariffs.

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Speaker 4: And well, that conclusion is not just from that paper

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Speaker 4: based on one hundred years of history. Actually, back in

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Speaker 4: twenty eighteen, when we look at the historical FMC presentations,

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Speaker 4: there was a staff presentation that used the internal Workhorse model,

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Speaker 4: the FED Sigma model.

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Speaker 5: I don't know if you're familiar with that.

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Speaker 4: To run us to evaluate your tariff algorithm back in

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Speaker 4: twenty eighteen, Suppose there's fifteen percent tariff on intermediate goods

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Speaker 4: only and fifteen percent on consumption goods only, and that

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Speaker 4: model found that if you impose tariffs on intermediate goods,

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Speaker 4: it is also over time deflationary, and it boosts the

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Speaker 4: unemployment rate by.

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Speaker 5: A little bit. In which case, how would you explain.

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Speaker 4: Then, the unemployment rate increasing from earlier this year four

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Speaker 4: point one to four three or four point four percent

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Speaker 4: later this year?

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Speaker 5: What are the drivers?

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Speaker 1: Yeah, I mean, it's such a small movement that it's

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Speaker 1: hard to say exactly. But I would say that one

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Speaker 1: of the interesting puzzles is that, you know, first, we're

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Speaker 1: having a productivity boom that is really unprecedented in the

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Speaker 1: following sense that when I worked with Alan Greenspan back

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Speaker 1: in the nineties, it was just at the dawn of

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Speaker 1: the computer age, really, and they didn't even have Netscape

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Speaker 1: Navigator when I first started working at the FED, and

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Speaker 1: so you had to use something called Gopher. I don't

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Speaker 1: know if you're old enough to remember this, which really

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Speaker 1: wasn't that good. And Greenspan had an intuition that the

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Speaker 1: computer was going to revolutionize the economy and give us

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Speaker 1: lots of growth. It was a big positive supply shock,

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Speaker 1: and so then when the unemployment rate actually kind of

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Speaker 1: went down, we had no evidence of the productivity. Member

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Speaker 1: Robert Cordon was saying, it's everywhere but of the data.

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Speaker 1: But Greenspan decided not to hike rates because he believed

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Speaker 1: that we were in the midst of a positive supply

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Speaker 1: shock that was perhaps unprecedented, and we had a kind

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Speaker 1: of five year run that's one of the best five

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Speaker 1: year runs we've ever seen, even all the way to

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Speaker 1: the point where the.

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Speaker 2: US fiscal situation was in surplus.

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Speaker 1: And so I think that it's one of the great

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Speaker 1: moves of Federal Reserve history that Greenspan saw that it

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Speaker 1: was a positive supply shock that would be both pro

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Speaker 1: growth and deflationary. Yes, you have more stuff about that done. Yeah,

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Speaker 1: but I say that to reference today. It's really interesting

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Speaker 1: that there's like evidence in peer reviewed papers or not

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Speaker 1: quite pure reviewed debt, but at NBER, which is kind

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Speaker 1: of a lot of my friends at MBR. By the way,

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Speaker 1: it's a secret of NBR authors like myself is that

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Speaker 1: you'll very often take a paper and submit it to

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Speaker 1: a journal and get the referee reports before you put

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Speaker 1: it into the NBR Working Paper series, Because if you've

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Speaker 1: got some stupid mistake, the referees will catch it. You

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Speaker 1: don't want to embarrass yourself in front of everybody by

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Speaker 1: just throwing it out there. Actually, the NBR is kind

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Speaker 1: of almost pure reviewed, but there's a lot of stuff

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Speaker 1: showing big AI gains. And the thing is that we

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Speaker 1: also see it in productivity. And so if you think

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Speaker 1: about the difference between say nineteen ninety six and today,

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Speaker 1: is that we've got this revolutionary new thing that probably

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Speaker 1: is going to be a big positive for productivity. And

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Speaker 1: you know, Steve Olner and Dan Sickle, your former colleagues

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Speaker 1: at the FED, had a famous paper that you only

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Speaker 1: see productivity booms after the benchmark revision, right, so you

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Speaker 1: never actually experience it while it's happening in the data.

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Speaker 1: And this AI boom is significant enough that we're already

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Speaker 1: seeing it in the data. Probably the benchmarker vision is

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Speaker 1: going to revise it up. And against that backdrop, I

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Speaker 1: think that the open question is how do we have

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Speaker 1: high growth and then less growth.

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Speaker 2: And employment than we expected?

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Speaker 1: And you know, I think that the tariff could be

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Speaker 1: part of the story, but I think that that probably

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Speaker 1: a very small part of the story.

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Speaker 5: Yeah.

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Speaker 4: I mean when we looked at the earning transcripts from

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Speaker 4: this third quarter and where the so far the earnings

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Speaker 4: have been surprisingly positive.

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Speaker 2: In fact, it was like the best quarter ever.

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Speaker 4: So we use surprises, we use AI to extract some

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Speaker 4: of the themes, and we did find that one of

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Speaker 4: the dominant theme is that there are other stuff happening

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Speaker 4: outside the trade policy that's helping offset a lot of

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Speaker 4: this tariff bill.

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Speaker 5: But focus.

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Speaker 1: Yeah, I don't mean to cut you off, but I

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Speaker 1: just want to highlight how important what you just said is.

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Speaker 1: And the way to think about it is that trade

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Speaker 1: is about fifteen percent of the economy, and the economies

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Speaker 1: the rest of it's like eighty five percent of the economy,

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Speaker 1: and so you could do a lot of stuff in

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Speaker 1: trade that has effects on the trade space that is

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Speaker 1: completely overwhelmed by the eighty five percent.

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Speaker 2: And eighty five percent.

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Speaker 1: Of the economy is getting this massive productivity change, and

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Speaker 1: it'd be hard for you know, a large change to

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Speaker 1: eighty five percent to not overwhelm something you did to

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Speaker 1: the fifteen percent.

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Speaker 4: Yeah, at the same time, sixty six percent of the

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Speaker 4: economy is labor share, and a lot of academic studies

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Speaker 4: are also looking into whether AI is already causing low

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Speaker 4: hiring rate among young graduates. Whoever is graduating from college

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Speaker 4: this year is probably in for a bad deal. So

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Speaker 4: I think there is a puzzle out there, which is

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Speaker 4: if you have GDP growing at three or four percent

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Speaker 4: at the same time you have a lot of the

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Speaker 4: sense of job insecurity in this labor market, and the

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Speaker 4: labor market is lagging these other you know, the GDP

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Speaker 4: growth indicators, and the question is can this GDP growth

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Speaker 4: be sustained at this three or four percent while the

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Speaker 4: labor market is so going sideways basically with labor share

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Speaker 4: probably going down pro UH probably because of productivity is

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Speaker 4: in the future.

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Speaker 2: It could be that.

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Speaker 1: I also don't forget that there's been a big reduction

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Speaker 1: in illegal immigration and employment from that aspect, and so

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Speaker 1: the UH population growth is pretty low compared to what

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Speaker 1: it was when we had tens of millions of people

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Speaker 1: crossing the border.

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Speaker 2: And so the break even.

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Speaker 1: Job's number for the payroll survey is people think is

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Speaker 1: down like quite a bit and to maybe around forty

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Speaker 1: or fifty.

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Speaker 4: Yeah, between thirty to sixty sounds wight.

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Speaker 1: Well, I was forty fifty or thirty sixty. I think

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Speaker 1: we kind of we're about the same rate. And so

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Speaker 1: that's like another thing that we could have big increases

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Speaker 1: in productivity, of big increases in output and a healthy

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Speaker 1: labor market with job numbers like the one that you forecasted,

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Speaker 1: and we'll see whether you're a right or not.

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Speaker 5: So fifty four sounds good too. I'm saying that it's

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Speaker 5: not one hundred.

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Speaker 1: That's enough to sort of keep up with population. You'd

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Speaker 1: want stronger growth of that in unemployment to go down.

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Speaker 1: But the outmployment rates a little higher than what's probably

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Speaker 1: the equilibrium unemployment rate and full employment economy, but not

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Speaker 1: a whole lot.

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Speaker 4: So Kevin, going back to this productivity boom, I recently

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Speaker 4: tweeted a couple of pictures that seems to suggest some

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Speaker 4: emergent micro evidence of how AI is boosting business formations,

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Speaker 4: and Saint Louis fed also has a piece out showing

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Speaker 4: how AI adoption is correlated to rise in sector specific unemployment. So,

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Speaker 4: you know, just evidence that AI is working through at

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Speaker 4: the micro level. But then the response I got made

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Speaker 4: me realize that it is actually a really polarizing topic

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Speaker 4: with half of the If you survey a lot of people,

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Speaker 4: half of them probably say AI is a bubble. Half

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Speaker 4: of them say that there's no evidence that there's a

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Speaker 4: productivity boom, yet that productivity is still on trend and

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Speaker 4: the improvement reflect more of a cyclical thing that happened

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Speaker 4: post pandemic as opposed to this sustained AI driven productivity.

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Speaker 5: So, if you know, we are going.

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Speaker 4: To touch on you being the one of the leading

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Speaker 4: candidates for FETCH here and going back to that nineteen

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Speaker 4: ninety five nineteen ninety six, those two critical years at

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Speaker 4: the FED, you mentioned that Alan Greenspan was really the

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Speaker 4: only one, one of the few who saw evidence of

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Speaker 4: productivity boom. And I've read the historical transcripts in December

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Speaker 4: nineteen ninety five that particular Fobascy meeting where half or

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Speaker 4: more of the FORBASC we're agitating for holding rates constant,

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Speaker 4: and in nineteen ninety six most many of them wanted

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Speaker 4: rate hikes, and somehow Greenspan was able to convince all

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Speaker 4: this these skeptics that something is afoot without the data

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Speaker 4: to support.

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Speaker 1: Let me talk about this because there's an interesting anecdote

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Speaker 1: that I don't think is ever made public about this

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Speaker 1: that so, because computers were improving so quickly, then it

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Speaker 1: was decided by the Bureau of Economic and Analysis a

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Speaker 1: lot of great professionals over there that they needed to

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Speaker 1: what we call hedonically adjust the computer price, which meant

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Speaker 1: that if you had a computer chip that was twice

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Speaker 1: as fast as the one from last year and it

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Speaker 1: costs the same, then that's like a big reduction of

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Speaker 1: the price of computing. And so that in a typical year,

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Speaker 1: right around when we were starting to have to make

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Speaker 1: the judgment on this, the computer price was dropping at

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Speaker 1: about like sixteen to twenty percent at an annual rate,

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Speaker 1: and there was so much computer investment that real GDP

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Speaker 1: he was getting a real big kick from the fact

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Speaker 1: that the deflator for computers.

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Speaker 2: Was dropping so much.

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Speaker 1: Yes, so I was in charge of that part of

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Speaker 1: the world for the staff. I spoke a lot to

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Speaker 1: Greenspan and he said to me once, how do they

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Speaker 1: deflate a communications equipment cause communications equipment is basically like

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Speaker 1: computers now And went back and looked and communications equipment

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Speaker 1: rather than dropping fifteen or twenty percent a year was

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Speaker 1: going up like two or three percent a year, And

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Speaker 1: so then I called over cause they're actually very open

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Speaker 1: about like the technical people at PA right, and I

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Speaker 1: talked to them about, well, why why is that? And

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Speaker 1: they say, well, that we use when we're making our deflators,

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Speaker 1: we use something called a match model approach. Yes, and

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Speaker 1: so if something we sold it yesterday and we're selling

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Speaker 1: it today, then that's like we look at the price

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Speaker 1: change for that, and that's where we get our deflator,

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Speaker 1: and we don't change the bundle of things that we

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Speaker 1: use the match bottel approach for very often. And it

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Speaker 1: turns out that there were a lot there was at

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Speaker 1: that point a lot of communications equipment produced in the

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Speaker 1: US for developing countries that were kind of like really

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Speaker 1: old fashioned analog things where you got like Josephine moveing.

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Speaker 2: The wires and stuff to connect the phone calls.

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Speaker 1: And since we had this really old equipment that we

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Speaker 1: were exporting to developing countries, they were using the price

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Speaker 1: of that to deflate communications equipment. It sounds like a

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Speaker 1: very technical batter. But then Charmy Greenspan said, well, Kevin,

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Speaker 1: what if we deflate communications equipment with the computer deflator instead? Like,

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Speaker 1: how much more would GDP be going up? And it

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Speaker 1: was like about one and a half percent because of that,

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Speaker 1: and so he was kind of like, yeah, we're really

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Speaker 1: growing way more than we think.

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Speaker 2: We've got a serious measurement problem.

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Speaker 1: And then if you extrapolate from that, then if you

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Speaker 1: were hedonically adjusting everything that gets like a computer to

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Speaker 1: make it better, then you're putting like a deflationary force

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Speaker 1: into the economy.

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Speaker 2: That's not being measured.

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Speaker 1: And so I think that it could be that the

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Speaker 1: communications story was a key moment where you know, everybody

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Speaker 1: at the board had a ah, yeah, I can understand

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Speaker 1: why Alan is so convinced about this.

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Speaker 4: So I was going to ask you, so what you're

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Speaker 4: It's interesting you were in the price and wages section.

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Speaker 1: No, I was the business fixed investment person.

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Speaker 5: Oh that okay?

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Speaker 1: Economic activity, Oh.

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Speaker 4: I see, and and what where? What other sections were you.

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Speaker 3: Or have you?

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Speaker 2: That's that's the only one.

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Speaker 5: Wow, that was You're very well placed for for that.

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Speaker 1: Well, that was my area rights, capital spending, and taxes.

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Speaker 1: And he did investment.

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Speaker 4: He didn't mention in the in the transcripts, the rapid

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Speaker 4: deceleration in the prices of high tech prices but I

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Speaker 4: mean Greenspan is the pioneer of alternative data. He talked,

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Speaker 4: he used in amends underwear sales for respecial remember that, yes, yes, lipsticks.

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Speaker 2: People had to calculate the way to GDP.

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Speaker 4: So, I mean he's a chairman who's really in the

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Speaker 4: weeds in the data and very creative as well. But

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Speaker 4: but let's not underestimate the challenges he faced in the

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Speaker 4: on the committee where half of the committee.

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Speaker 5: Was against this.

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Speaker 4: How did you did you have any insight then on

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Speaker 4: how he was able to Well, first of all, how

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Speaker 4: was he able to win over the FET staff, which

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Speaker 4: is fetstaff is very influential back then you have the

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Speaker 4: Green book and the Blue book now twice a year, yes,

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Speaker 4: and do you know what color is the book? Now?

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Speaker 2: Is it?

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Speaker 5: They do that to mix the green and the blue together,

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Speaker 5: that gets you teal. So I mean that's.

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Speaker 1: Probably where all their problems began.

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Speaker 5: So so you know, you.

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Speaker 4: Know it was true in nineteen ninety five, ninety ninety

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Speaker 4: six whenever the staff presents the data, because at the FED,

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Speaker 4: the bar to argue that something is a structural change

427
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Speaker 4: is very high, because you you will agree that the

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Speaker 4: quality of the feed staff is very high and you know,

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Speaker 4: one of some of the smartest people I know, and

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Speaker 4: and so for two years, even up to nineteen ninety seven.

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Speaker 4: In the transcript they were talking about no evidence of

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Speaker 4: productivity increase, only ones they have the revisions? Did it

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Speaker 4: show that in fact nineteen ninety five productivity was running

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Speaker 4: at two point five or three as opposed to one

435
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Speaker 4: point something? But but how did how did how did

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Speaker 4: the interaction between the chairman and the FET staff? How

437
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Speaker 4: did how did the chairman convince the FED staff to

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Speaker 4: to go what what was it like? I was the

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Speaker 4: chairman directing the Research and Statistics division here look for

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Speaker 4: these uh signs of productivity?

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Speaker 1: No, I think that that there was just a du

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Speaker 1: excellent so.

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Speaker 4: Uh.

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Speaker 1: The people who were there working with me at that time, Uh,

445
00:25:16,040 --> 00:25:18,760
Speaker 1: the person who was doing consumption, uh, there were two

446
00:25:18,760 --> 00:25:20,879
Speaker 1: of them. It was Karen Dinan who's now a Harvard

447
00:25:20,920 --> 00:25:24,320
Speaker 1: professor and Chris Carroll who's now at Johns Hopkins, two

448
00:25:24,320 --> 00:25:27,080
Speaker 1: of the top uh consumption analysts like over the last

449
00:25:27,160 --> 00:25:31,240
Speaker 1: forty years. Uh. The people doing business fix investment were

450
00:25:31,280 --> 00:25:36,760
Speaker 1: me and Steve Olner and uh let's see uh prices

451
00:25:37,040 --> 00:25:41,440
Speaker 1: wa that was uh, wh what's his name. Uh, actually

452
00:25:41,440 --> 00:25:42,960
Speaker 1: I forget the guy's name. There was to be prices.

453
00:25:43,000 --> 00:25:45,600
Speaker 1: But then we had Steve Bronn, who's now at the CBAK,

454
00:25:45,920 --> 00:25:48,080
Speaker 1: who was putting GDP together. But I think that the

455
00:25:48,119 --> 00:25:50,720
Speaker 1: really big thing that was happening was that the data

456
00:25:50,760 --> 00:25:54,160
Speaker 1: were actually telling us that there's a capital spending boom

457
00:25:54,359 --> 00:25:57,199
Speaker 1: really early on. And then, Uh, the way the the

458
00:25:57,240 --> 00:25:59,960
Speaker 1: FED worked then and I probably still does now, is

459
00:26:00,080 --> 00:26:03,359
Speaker 1: that we take people are assigned to be like the

460
00:26:03,400 --> 00:26:07,320
Speaker 1: consumption person, the investment person, the government person, the net

461
00:26:07,320 --> 00:26:11,920
Speaker 1: export person, and then they forecast that with very complicated bottles,

462
00:26:13,040 --> 00:26:17,919
Speaker 1: and then those forecasts get sent to the GDP coordinator,

463
00:26:18,280 --> 00:26:22,159
Speaker 1: and the GDP coordinator aggregates the models the forecasts from

464
00:26:22,200 --> 00:26:25,600
Speaker 1: each of the segments of GDP and then thinks about

465
00:26:25,840 --> 00:26:28,560
Speaker 1: what that means for interest rates and discussion back then

466
00:26:28,600 --> 00:26:31,040
Speaker 1: with Mike Prell, who was the research director, and with

467
00:26:31,320 --> 00:26:34,439
Speaker 1: Chairman Greenspan, and then Charman Greenspan might say well what

468
00:26:34,480 --> 00:26:36,480
Speaker 1: if we move rates this way or that way, and

469
00:26:36,520 --> 00:26:39,240
Speaker 1: that everybody would change their forecast. And so most of

470
00:26:39,240 --> 00:26:42,919
Speaker 1: the stuff that really influenced decisions by Greenspan was coming

471
00:26:43,000 --> 00:26:46,359
Speaker 1: out of that section of the FED, not the section

472
00:26:46,680 --> 00:26:51,600
Speaker 1: that was using at that point an updated version of

473
00:26:51,640 --> 00:26:54,000
Speaker 1: what used to be called the MPs model that was

474
00:26:54,040 --> 00:26:58,080
Speaker 1: developed by Albertando and Franco me Diguiani. That was a

475
00:26:58,200 --> 00:27:01,560
Speaker 1: sort of big kind of general Legallebrium model, ad hoc

476
00:27:01,800 --> 00:27:03,840
Speaker 1: Kainesy and general Legal Room model without a whole lot

477
00:27:03,880 --> 00:27:06,080
Speaker 1: of expectations. That was the model that we use it

478
00:27:06,119 --> 00:27:08,320
Speaker 1: back then, and so I think it was very much

479
00:27:08,520 --> 00:27:14,000
Speaker 1: data dependent. Lots of work brought up up the I

480
00:27:14,040 --> 00:27:16,119
Speaker 1: don't know if you worked in the Economic Activity section,

481
00:27:16,200 --> 00:27:19,240
Speaker 1: but we wrote a fellow named Greg Brown, who is

482
00:27:19,240 --> 00:27:21,479
Speaker 1: now a professor at North Carolina, was my research assistant

483
00:27:21,520 --> 00:27:25,560
Speaker 1: at the time, and we wrote a computer code to

484
00:27:25,720 --> 00:27:28,719
Speaker 1: do the business sector. And I think back then at

485
00:27:28,760 --> 00:27:31,639
Speaker 1: the FED, the research assistant who wrote the code you

486
00:27:31,680 --> 00:27:35,760
Speaker 1: would name. You would name the code for that part

487
00:27:35,920 --> 00:27:38,360
Speaker 1: of the program by the research assistant.

488
00:27:38,400 --> 00:27:41,199
Speaker 2: So there was like the GDP code that aggregates all the.

489
00:27:41,200 --> 00:27:43,800
Speaker 1: Forecasts was named RUTH because there was a ra A

490
00:27:44,000 --> 00:27:47,880
Speaker 1: named Ruth. And so when we finished the capital spending program,

491
00:27:48,200 --> 00:27:50,359
Speaker 1: Greg Brown did a lot of the programming. So we

492
00:27:50,440 --> 00:27:55,520
Speaker 1: called it Trout. And people say they're still running trout

493
00:27:56,200 --> 00:27:58,520
Speaker 1: that are doing capital spending, but The point is that

494
00:27:58,560 --> 00:28:01,520
Speaker 1: we really because we we're the first ones to have computers,

495
00:28:01,760 --> 00:28:05,000
Speaker 1: really and we had the data and we were studying

496
00:28:05,000 --> 00:28:08,600
Speaker 1: computers with computers. I don't think it was a top

497
00:28:09,200 --> 00:28:09,720
Speaker 1: down thing.

498
00:28:10,200 --> 00:28:12,440
Speaker 5: I see. That's great.

499
00:28:12,680 --> 00:28:15,760
Speaker 4: So since you start on the topic of the FED

500
00:28:15,840 --> 00:28:20,800
Speaker 4: in the nineteen nineties, you know, spotting a productivity boom

501
00:28:20,880 --> 00:28:21,320
Speaker 4: is tricky.

502
00:28:21,440 --> 00:28:23,680
Speaker 5: But if one think there's.

503
00:28:23,480 --> 00:28:27,679
Speaker 4: A productivitytivity boom but there actually isn't one, or you

504
00:28:27,880 --> 00:28:33,119
Speaker 4: overestimate productivity, you could be in a pretty bad situations

505
00:28:33,160 --> 00:28:36,000
Speaker 4: in the nineteen nineties nineteen sixties is one.

506
00:28:35,640 --> 00:28:36,400
Speaker 5: Of that example.

507
00:28:36,840 --> 00:28:41,640
Speaker 4: And also spotting whether inflation and expectations are anchored is

508
00:28:41,680 --> 00:28:47,000
Speaker 4: another skill that Greenspan has. He pioneered the term rational

509
00:28:47,760 --> 00:28:48,800
Speaker 4: in attention.

510
00:28:48,960 --> 00:28:52,520
Speaker 5: Right about prices. Do you think right.

511
00:28:52,360 --> 00:28:55,080
Speaker 4: Now inflation expectations are anchored?

512
00:28:55,560 --> 00:28:56,920
Speaker 2: No, I don't think that they.

513
00:28:57,200 --> 00:28:59,800
Speaker 1: I know that the FED wants them to be appropriately so,

514
00:29:00,360 --> 00:29:03,560
Speaker 1: but I think that we lost control of inflation in

515
00:29:03,720 --> 00:29:07,520
Speaker 1: recent memory, and it's more under control now, maybe not

516
00:29:07,600 --> 00:29:11,480
Speaker 1: all the way there, and so, uh, you know, I

517
00:29:11,480 --> 00:29:14,360
Speaker 1: think that people would be right to worry. Well, we'll

518
00:29:14,400 --> 00:29:18,840
Speaker 1: suppose that the policy mix that we saw, you know,

519
00:29:18,920 --> 00:29:23,040
Speaker 1: post COVID uh, in the US economy were the policy

520
00:29:23,040 --> 00:29:25,960
Speaker 1: mix that came back. I don't think President Trump would

521
00:29:25,960 --> 00:29:28,800
Speaker 1: do that, but say, in the next administration, then wouldn't

522
00:29:28,840 --> 00:29:31,160
Speaker 1: inflation go back up around nine or ten percent?

523
00:29:31,360 --> 00:29:34,720
Speaker 2: Again? You know? I why was it?

524
00:29:35,200 --> 00:29:38,440
Speaker 1: If if you're a person forming expectations over the next

525
00:29:38,480 --> 00:29:41,040
Speaker 1: five ten years, which is you know, very often.

526
00:29:40,840 --> 00:29:42,600
Speaker 2: A planning horizon for buying a house.

527
00:29:42,480 --> 00:29:46,720
Speaker 1: Or something like that, that you could legitimately worry that, uh,

528
00:29:46,760 --> 00:29:49,400
Speaker 1: that inflation's gonna come back up. And it's very important,

529
00:29:49,880 --> 00:29:52,680
Speaker 1: uh to think about why, uh, the FED was unable

530
00:29:52,720 --> 00:29:55,560
Speaker 1: to control inflation for so long and it got out

531
00:29:55,600 --> 00:29:59,120
Speaker 1: of control, and what the FED can do to signal

532
00:29:59,320 --> 00:30:00,400
Speaker 1: that that's not going.

533
00:30:00,280 --> 00:30:00,920
Speaker 2: To happen again.

534
00:30:01,200 --> 00:30:04,880
Speaker 1: I can tell you that what green Span did when

535
00:30:04,920 --> 00:30:09,560
Speaker 1: he saw like really reckless spending is that he testified

536
00:30:10,160 --> 00:30:12,400
Speaker 1: and said, you guys can't do this, that it's going

537
00:30:12,440 --> 00:30:14,440
Speaker 1: to make it impossible for me to run the FED

538
00:30:14,440 --> 00:30:18,720
Speaker 1: and keep inflation out of control. And what this set

539
00:30:18,760 --> 00:30:20,840
Speaker 1: of folks did is they said, oh, it's transitory.

540
00:30:22,320 --> 00:30:24,600
Speaker 5: If you were confirmed as Fetchhair, would you do that.

541
00:30:25,520 --> 00:30:30,840
Speaker 1: I wouldn't say oh it's transitory if it wasn't.

542
00:30:32,200 --> 00:30:38,720
Speaker 4: And so speaking about inflation. So recently Trump said, President

543
00:30:38,760 --> 00:30:42,160
Speaker 4: Trump said that he would like to give out these

544
00:30:42,200 --> 00:30:47,440
Speaker 4: two thousand dollars checks to low income individuals by mid

545
00:30:47,480 --> 00:30:48,440
Speaker 4: twenty twenty six.

546
00:30:49,880 --> 00:30:52,160
Speaker 5: I thought the administration agreed.

547
00:30:51,800 --> 00:30:55,320
Speaker 4: That at the stimulus checks during the Biden administration was

548
00:30:55,520 --> 00:30:58,400
Speaker 4: responsible for some of that inflation we have seen.

549
00:30:59,400 --> 00:31:00,240
Speaker 5: How do you.

550
00:31:01,640 --> 00:31:04,840
Speaker 4: Assess this trade off of trying to improve the affordability

551
00:31:05,000 --> 00:31:10,360
Speaker 4: of these low income, medium, middle income household or are struggling

552
00:31:10,400 --> 00:31:15,120
Speaker 4: with these affordability issues, versus giving more checks out and

553
00:31:15,160 --> 00:31:16,640
Speaker 4: perhaps stoking inflation.

554
00:31:17,360 --> 00:31:20,920
Speaker 1: Well, obviously the best way to address affordability is to

555
00:31:20,960 --> 00:31:28,000
Speaker 1: increase real incomes real wages that right before the COVID emergency,

556
00:31:28,520 --> 00:31:31,640
Speaker 1: we had promised. It's kind of like the ranges you

557
00:31:31,680 --> 00:31:34,360
Speaker 1: and I just talked about. I had promised based on

558
00:31:34,400 --> 00:31:37,240
Speaker 1: our modeling, and the President promised it all the speeches,

559
00:31:37,320 --> 00:31:40,040
Speaker 1: that we'd get about four thousand dollars of an increase

560
00:31:40,320 --> 00:31:45,240
Speaker 1: in real wages. And I had actually told him, based

561
00:31:45,280 --> 00:31:48,280
Speaker 1: on our modeling, it was between four and eight. If

562
00:31:48,320 --> 00:31:50,520
Speaker 1: it was you, you would have said six. But he

563
00:31:50,840 --> 00:31:53,720
Speaker 1: wanted to, you know, under promise and overdeliver, and then

564
00:31:53,720 --> 00:31:58,280
Speaker 1: we got the six increase in real wages and so therefore.

565
00:31:58,240 --> 00:31:59,240
Speaker 2: Things were affordable.

566
00:32:00,720 --> 00:32:06,080
Speaker 1: And then for the Biden four years, the real wage

567
00:32:06,480 --> 00:32:10,040
Speaker 1: decline is like, depending on which measure you use, twenty

568
00:32:10,040 --> 00:32:12,120
Speaker 1: five hundred to three thousand or a little bit more.

569
00:32:12,760 --> 00:32:16,320
Speaker 1: And so real wages went down, which meant that wages

570
00:32:17,000 --> 00:32:20,160
Speaker 1: went up slower than prices, which is kind of typically

571
00:32:20,640 --> 00:32:23,320
Speaker 1: a key feature of most Keynesian models is that wages

572
00:32:23,320 --> 00:32:27,080
Speaker 1: are kind of stickier the prices, and so that real

573
00:32:27,120 --> 00:32:30,160
Speaker 1: wage decline means that things people are right to say

574
00:32:30,680 --> 00:32:35,080
Speaker 1: that there's been a problem with affordability, and you know,

575
00:32:35,320 --> 00:32:39,200
Speaker 1: real wages are up this year in part because of

576
00:32:39,320 --> 00:32:42,760
Speaker 1: the things that were doing. But if you were to

577
00:32:44,080 --> 00:32:49,640
Speaker 1: be as fiscally irresponsible as the previous congress was, then

578
00:32:49,800 --> 00:32:53,720
Speaker 1: you would for sure see inflation go up at affordability

579
00:32:54,560 --> 00:32:57,640
Speaker 1: jump back into being like as you know, the change

580
00:32:57,680 --> 00:33:01,400
Speaker 1: in affordability as bad as it was before. Or the

581
00:33:01,520 --> 00:33:06,120
Speaker 1: thing is though that we've you know, basically so far

582
00:33:06,160 --> 00:33:10,000
Speaker 1: this year reduced the deficit for just this year by

583
00:33:10,440 --> 00:33:12,160
Speaker 1: I think it's three hundred and ninety billion.

584
00:33:12,240 --> 00:33:15,680
Speaker 2: Now it's a calendar year, calendar year, yea.

585
00:33:15,960 --> 00:33:18,720
Speaker 1: It's actually like a weird thing that she's right about

586
00:33:18,720 --> 00:33:21,480
Speaker 1: the calendar year, the fiscal year. The previous fiscal year

587
00:33:21,560 --> 00:33:24,239
Speaker 1: numbers don't look as good, but it was because in

588
00:33:24,280 --> 00:33:26,760
Speaker 1: the first quarter of the previous fiscal year, Joe Biden

589
00:33:26,840 --> 00:33:29,760
Speaker 1: was shoveling money out the window. And so about forty

590
00:33:29,800 --> 00:33:33,320
Speaker 1: percent of the deficit came from that first quarter because

591
00:33:33,320 --> 00:33:33,680
Speaker 1: they were.

592
00:33:33,560 --> 00:33:34,640
Speaker 2: Shoveling money out the window.

593
00:33:34,680 --> 00:33:36,880
Speaker 1: So if you wonder how are we doing, we prefer

594
00:33:36,960 --> 00:33:39,640
Speaker 1: to talk about calendar year rather than fiscal year because

595
00:33:39,640 --> 00:33:41,400
Speaker 1: then we don't get blamed for the quarter where there

596
00:33:41,400 --> 00:33:43,400
Speaker 1: are shoveling money out the window. And if you look

597
00:33:43,400 --> 00:33:45,920
Speaker 1: at that, then year over year calendar year, we're down

598
00:33:45,960 --> 00:33:49,560
Speaker 1: three hundred and ninety billion and it extrapolates to maybe

599
00:33:49,680 --> 00:33:54,640
Speaker 1: six for the year, and about a third of it

600
00:33:54,680 --> 00:33:59,640
Speaker 1: is higher revenues tax revenues because of higher growth, a

601
00:34:00,520 --> 00:34:03,080
Speaker 1: third of it is tariff revenue, and about a third

602
00:34:03,080 --> 00:34:07,920
Speaker 1: of it is reduced government spending. But if you know,

603
00:34:07,960 --> 00:34:10,960
Speaker 1: if we stay on path and cut the deficit by

604
00:34:11,400 --> 00:34:15,680
Speaker 1: six hundred billion, that's you know, with a little bit

605
00:34:15,680 --> 00:34:17,919
Speaker 1: of growth, you're looking at seven or eight TRILLIONT over ten.

606
00:34:18,440 --> 00:34:25,080
Speaker 1: That's like a very significant event that reduces inflation. With

607
00:34:25,160 --> 00:34:30,400
Speaker 1: a big macroeconomic punch to inflation, and so against that

608
00:34:30,480 --> 00:34:34,480
Speaker 1: backdrop when it was July, we hadn't seen all this

609
00:34:34,560 --> 00:34:39,160
Speaker 1: positive development yet, and so when we were negotiating with

610
00:34:39,200 --> 00:34:42,000
Speaker 1: Congress with a big, beautiful bill, then it was the

611
00:34:42,000 --> 00:34:44,239
Speaker 1: position to the President that the tariff revenue should just

612
00:34:44,239 --> 00:34:47,080
Speaker 1: buy down the national debt. But we're making so much

613
00:34:47,120 --> 00:34:50,319
Speaker 1: progress and reducing the national debt that I think it's

614
00:34:50,360 --> 00:34:53,240
Speaker 1: fair to think about what other policies we might pursue

615
00:34:53,280 --> 00:34:56,239
Speaker 1: in like a reconciliation next year, and with all the

616
00:34:56,280 --> 00:35:00,719
Speaker 1: tariff revenue that's coming in without causing a stag, I

617
00:35:00,760 --> 00:35:02,399
Speaker 1: think it would definitely be on the table to think

618
00:35:02,440 --> 00:35:04,759
Speaker 1: about how that might be rebated to.

619
00:35:04,920 --> 00:35:09,080
Speaker 4: On the table, but not necessarily a sealed deal. What

620
00:35:09,120 --> 00:35:13,799
Speaker 4: would require legislation right speaking about that, So we did

621
00:35:13,880 --> 00:35:17,920
Speaker 4: try to, you know, see how my team we did

622
00:35:17,960 --> 00:35:20,839
Speaker 4: try to see what paths there, what requirement we would

623
00:35:20,840 --> 00:35:24,160
Speaker 4: need in the economy to get fiscal deficit to the

624
00:35:24,200 --> 00:35:28,400
Speaker 4: three percent that Treasury secretaries got bestened had to propose

625
00:35:28,480 --> 00:35:31,719
Speaker 4: the three three three three percent real GDP growth, which

626
00:35:31,840 --> 00:35:34,400
Speaker 4: we look look like we're getting in a third quarter

627
00:35:34,719 --> 00:35:38,520
Speaker 4: three percent fiscal deficit in three additional barrels per day

628
00:35:38,520 --> 00:35:40,239
Speaker 4: of oil and.

629
00:35:40,760 --> 00:35:42,680
Speaker 5: There's a grillion barrels millionaires.

630
00:35:43,080 --> 00:35:50,520
Speaker 4: So so you know, there's a bunch of fiscal experts

631
00:35:50,560 --> 00:35:54,880
Speaker 4: who calculate that to stabilize the debt to GDP ratio,

632
00:35:54,920 --> 00:35:58,560
Speaker 4: which is hitting one hundred percent of GDP this year,

633
00:35:58,680 --> 00:36:02,080
Speaker 4: you do need an annual fiscal deficit of three percent.

634
00:36:02,560 --> 00:36:06,360
Speaker 5: So I do I do agree with you that in the.

635
00:36:07,840 --> 00:36:10,880
Speaker 4: Fiscal year, even the fiscal year twenty twenty five, you

636
00:36:10,880 --> 00:36:15,920
Speaker 4: can see a lot of encouraging developments, but still we

637
00:36:16,040 --> 00:36:19,000
Speaker 4: are at four point nine percent of GDP in terms

638
00:36:19,040 --> 00:36:24,440
Speaker 4: of fiscal deficit this year, and tariff revenues is probably

639
00:36:24,480 --> 00:36:29,239
Speaker 4: about one percent of GDP per year. But still it

640
00:36:29,760 --> 00:36:33,360
Speaker 4: seems really hard to get to a three percent deficit.

641
00:36:33,560 --> 00:36:36,920
Speaker 4: And I will note that in the fiscal year twenty

642
00:36:37,000 --> 00:36:40,719
Speaker 4: twenty five, the net interest payment on the debt has

643
00:36:40,800 --> 00:36:44,560
Speaker 4: breached one trillion for the first time, and the increase

644
00:36:44,719 --> 00:36:47,640
Speaker 4: was on par of the Medicare spending increase, which is

645
00:36:47,640 --> 00:36:52,160
Speaker 4: a mandatory spending. What's your plan for bringing down interest payment?

646
00:36:52,760 --> 00:36:55,719
Speaker 1: Well, I mean, what we've done so far this year,

647
00:36:55,880 --> 00:37:00,680
Speaker 1: is you concede, is we've made an enormous amount of progress,

648
00:37:00,880 --> 00:37:04,680
Speaker 1: but there's still you know, let's say that if the

649
00:37:04,719 --> 00:37:09,919
Speaker 1: progress that we see, you know, were to persist next year,

650
00:37:10,280 --> 00:37:13,400
Speaker 1: that we'd still have only made up about half the

651
00:37:13,440 --> 00:37:15,200
Speaker 1: ground that we need to make up to get to three.

652
00:37:16,400 --> 00:37:19,839
Speaker 1: But given that we've made so much progress this year,

653
00:37:20,239 --> 00:37:22,880
Speaker 1: I think I'm highly confident that we have a team

654
00:37:22,920 --> 00:37:25,960
Speaker 1: that has a well identified goal from Scott and from

655
00:37:26,000 --> 00:37:29,480
Speaker 1: the President, and we'll work it out, but it will

656
00:37:29,520 --> 00:37:33,080
Speaker 1: have to be worked out with Congress and future spending restraint.

657
00:37:33,680 --> 00:37:38,880
Speaker 1: And you know, I think that the teriff revenue will continue,

658
00:37:39,440 --> 00:37:43,280
Speaker 1: and that if we get the kind of growth effects

659
00:37:43,320 --> 00:37:45,799
Speaker 1: from the capital spending that we expect, then then I

660
00:37:45,800 --> 00:37:48,200
Speaker 1: think we could hit three percent even next year.

661
00:37:48,280 --> 00:37:53,200
Speaker 4: Perhaps, Well that's as it's your forecast that we could forecast.

662
00:37:53,239 --> 00:37:54,920
Speaker 1: I'm saying that we could possible, we.

663
00:37:54,880 --> 00:37:55,480
Speaker 2: Really could hit it.

664
00:37:55,520 --> 00:37:58,760
Speaker 4: Next is the necessary piece of this a productivity boom.

665
00:37:59,080 --> 00:38:01,719
Speaker 1: The productivity boom is a real necessary piece of it

666
00:38:01,760 --> 00:38:06,080
Speaker 1: that I think that if productivity it actually kind of

667
00:38:06,080 --> 00:38:08,000
Speaker 1: wonder what your guess a bit of what the rate

668
00:38:08,040 --> 00:38:10,359
Speaker 1: of productivity growth is, but let's say it's between two

669
00:38:10,400 --> 00:38:11,160
Speaker 1: and three right now?

670
00:38:11,320 --> 00:38:11,560
Speaker 2: Is that?

671
00:38:12,560 --> 00:38:12,719
Speaker 5: Yeah?

672
00:38:12,800 --> 00:38:16,040
Speaker 4: Yeah, I think it's just the FETs practice is to

673
00:38:16,320 --> 00:38:19,120
Speaker 4: average over two years because it's very noisy.

674
00:38:19,160 --> 00:38:21,239
Speaker 5: And if you do that, it's about two point two

675
00:38:21,360 --> 00:38:21,719
Speaker 5: right now.

676
00:38:21,800 --> 00:38:25,600
Speaker 1: Yeah, So let's just say it's two point two, and

677
00:38:25,680 --> 00:38:30,360
Speaker 1: then we've got you know, investment divided by capital minusin

678
00:38:30,400 --> 00:38:34,000
Speaker 1: appreciation rate is the capital stock growth and investment is skyrocketing.

679
00:38:34,280 --> 00:38:37,680
Speaker 1: So let's just say capital stock growth gives you like

680
00:38:38,080 --> 00:38:42,399
Speaker 1: three percent four percent because capital stuck's big, and then

681
00:38:42,440 --> 00:38:44,960
Speaker 1: that's about point three times that, So that gets you

682
00:38:45,080 --> 00:38:47,960
Speaker 1: up to three before you do something to labor. And

683
00:38:48,160 --> 00:38:51,200
Speaker 1: so you're looking at pretty good growth accounting right now.

684
00:38:51,239 --> 00:38:54,080
Speaker 1: That easily could be looking at a sequence of years

685
00:38:54,120 --> 00:38:57,600
Speaker 1: that are, you know, from three to even four because

686
00:38:57,600 --> 00:38:59,960
Speaker 1: of the productive if the productivity stays where it is,

687
00:39:00,040 --> 00:39:00,759
Speaker 1: which I think it will.

688
00:39:01,000 --> 00:39:08,640
Speaker 4: Okay, So now I'm switching to the hardball questions fed independence.

689
00:39:09,640 --> 00:39:10,520
Speaker 1: That's an easy question.

690
00:39:10,880 --> 00:39:13,279
Speaker 4: Are you where you're the leading candidate for the FET

691
00:39:13,360 --> 00:39:14,080
Speaker 4: chair position?

692
00:39:15,239 --> 00:39:16,520
Speaker 5: Is it is? It?

693
00:39:17,560 --> 00:39:20,040
Speaker 4: Would it be fair to say that you are working

694
00:39:20,160 --> 00:39:23,040
Speaker 4: a lot of hours right now? Are you working sixty

695
00:39:23,080 --> 00:39:24,080
Speaker 4: to eighty hours?

696
00:39:25,200 --> 00:39:26,920
Speaker 2: How is that related to independence?

697
00:39:29,760 --> 00:39:32,160
Speaker 4: You know, I just wonder whether if I look tired

698
00:39:32,400 --> 00:39:35,840
Speaker 4: a reason, I mean, a FET chair position would certainly

699
00:39:35,880 --> 00:39:39,160
Speaker 4: be an improvement and work life balance for you probably,

700
00:39:39,560 --> 00:39:44,200
Speaker 4: but on the FED independence issue. So so, so let's

701
00:39:44,239 --> 00:39:46,960
Speaker 4: face it, you are going, if you were confirmed, when

702
00:39:46,960 --> 00:39:48,800
Speaker 4: you go, and you'll be facing.

703
00:39:48,719 --> 00:39:49,799
Speaker 5: A lot of skeptics.

704
00:39:50,040 --> 00:39:52,919
Speaker 4: You will have a lot of colleagues who you will

705
00:39:53,000 --> 00:39:55,640
Speaker 4: have to convince to win over to your side of

706
00:39:55,680 --> 00:39:56,280
Speaker 4: the argument.

707
00:39:57,200 --> 00:39:58,000
Speaker 5: Which would you say?

708
00:39:58,000 --> 00:40:03,160
Speaker 1: So, First of all, I think the idea that government

709
00:40:03,200 --> 00:40:07,360
Speaker 1: service you know, makes it less likely that you'll pursue

710
00:40:07,400 --> 00:40:13,839
Speaker 1: an independent FED like basically rejects the evidence of what

711
00:40:13,920 --> 00:40:16,440
Speaker 1: is it the five Console of Economic Advisor chairs that

712
00:40:16,480 --> 00:40:20,279
Speaker 1: went on to be independent FED people, And so I

713
00:40:20,280 --> 00:40:22,759
Speaker 1: think it's a very common path for people who have

714
00:40:22,800 --> 00:40:24,440
Speaker 1: worked in the White House to go on and to

715
00:40:24,960 --> 00:40:26,960
Speaker 1: work well at the FED and to do so independently.

716
00:40:28,120 --> 00:40:32,400
Speaker 1: I have been critical of the policies of the current

717
00:40:32,440 --> 00:40:35,600
Speaker 1: FED because I think they haven't been data driven enough.

718
00:40:37,000 --> 00:40:39,680
Speaker 1: And I think that the way you can venture colleagues

719
00:40:39,960 --> 00:40:44,360
Speaker 1: is that you make sure that you're using models that

720
00:40:44,520 --> 00:40:47,840
Speaker 1: make sense and forecasts that make sense, and that you

721
00:40:48,120 --> 00:40:52,080
Speaker 1: have a strong argument for say, productivity producing growth that

722
00:40:52,160 --> 00:40:55,319
Speaker 1: doesn't cause inflation, and then you really have to be

723
00:40:55,440 --> 00:41:01,400
Speaker 1: convincing with the economics and the thing about independitts that

724
00:41:01,600 --> 00:41:03,319
Speaker 1: I just want to tell a little story about it

725
00:41:03,400 --> 00:41:06,480
Speaker 1: that shows how much UH the it's really important. And

726
00:41:06,640 --> 00:41:08,680
Speaker 1: there's a big literature that says that if the FED

727
00:41:08,719 --> 00:41:13,120
Speaker 1: loses it it's independence, then inflation expectations become on board.

728
00:41:14,000 --> 00:41:15,160
Speaker 2: And so you can't.

729
00:41:15,000 --> 00:41:18,759
Speaker 1: Let the FED lose UH it's independents. And UH the

730
00:41:18,840 --> 00:41:21,239
Speaker 1: story is one that goes back to the nineties that

731
00:41:21,320 --> 00:41:23,840
Speaker 1: you and I were talking about with being chairman Greenspan

732
00:41:24,320 --> 00:41:27,480
Speaker 1: that one of the first papers that I wrote when

733
00:41:27,480 --> 00:41:29,040
Speaker 1: I was on leave from Columbia and working at the

734
00:41:29,040 --> 00:41:32,359
Speaker 1: FED was with my UH colleague, UH gim Metcalf who

735
00:41:32,360 --> 00:41:35,720
Speaker 1: was at Prince at the time, and we UH President

736
00:41:35,719 --> 00:41:38,320
Speaker 1: Clinton had run on UH having a BTU tax so

737
00:41:38,400 --> 00:41:41,040
Speaker 1: the people who are old enough to go, and the

738
00:41:41,080 --> 00:41:44,120
Speaker 1: BTU tax was one of his main things that he

739
00:41:44,160 --> 00:41:45,799
Speaker 1: and al gore cause they were way ahead of the

740
00:41:45,800 --> 00:41:49,640
Speaker 1: curve on climate and so give and I are public

741
00:41:49,640 --> 00:41:51,960
Speaker 1: finance ecadomist, so we wanted to go, well, what does

742
00:41:51,960 --> 00:41:54,160
Speaker 1: a BTU tax do, how does it work?

743
00:41:54,200 --> 00:41:55,440
Speaker 2: How did model it and stuff?

744
00:41:55,800 --> 00:41:58,399
Speaker 1: And we wrote a paper UH on the be I

745
00:41:58,520 --> 00:42:01,680
Speaker 1: the economic impact of the BTU tax, and it was

746
00:42:01,680 --> 00:42:04,120
Speaker 1: really I think the first paper of the economic literature.

747
00:42:04,120 --> 00:42:05,200
Speaker 1: That also we said, what we're doing with a b

748
00:42:05,239 --> 00:42:07,239
Speaker 1: TW tax, we should do a carbon tax too. So

749
00:42:07,280 --> 00:42:09,120
Speaker 1: we had the economic effects of a carbon tax at

750
00:42:09,120 --> 00:42:12,160
Speaker 1: a BTU tax. And so we had this paper, really

751
00:42:12,200 --> 00:42:14,719
Speaker 1: good paper, I thought. And then but you had to

752
00:42:14,760 --> 00:42:19,000
Speaker 1: go through the review process at the FED, and Chairman

753
00:42:19,080 --> 00:42:23,879
Speaker 1: Greenspan ordered us not to publish the paper. He said

754
00:42:23,880 --> 00:42:26,279
Speaker 1: that right now President Clinton has said that there's going

755
00:42:26,360 --> 00:42:28,759
Speaker 1: to be a BTU tax, and we can have the

756
00:42:28,760 --> 00:42:31,360
Speaker 1: FED looking like it's put in its finger on a scale,

757
00:42:31,960 --> 00:42:35,880
Speaker 1: what's a political debate about the BTU tax. And so

758
00:42:36,360 --> 00:42:38,840
Speaker 1: sure it's a great paper, but the Fed's not going

759
00:42:38,920 --> 00:42:43,040
Speaker 1: to publish it until debate has finished on this topic.

760
00:42:43,800 --> 00:42:46,560
Speaker 1: And then like maybe nine months later, the BTU tax

761
00:42:46,600 --> 00:42:49,480
Speaker 1: failed in Congress, and then he said, well, it's okay,

762
00:42:49,480 --> 00:42:51,480
Speaker 1: you can publish your paper now. And we subsequently got

763
00:42:51,480 --> 00:42:53,560
Speaker 1: it published at a top peer reviewed journals but cited

764
00:42:53,560 --> 00:42:58,000
Speaker 1: a million times. But I think very fondly of that

765
00:42:58,160 --> 00:43:02,160
Speaker 1: story because I think that that's what it means, that's

766
00:43:02,160 --> 00:43:05,160
Speaker 1: how much you have to pay attention to independence. And

767
00:43:05,239 --> 00:43:09,080
Speaker 1: so if you're thinking about things that could improve with

768
00:43:09,239 --> 00:43:12,640
Speaker 1: the current FED, it feels like, you know, first, there's

769
00:43:12,680 --> 00:43:15,200
Speaker 1: way more communication than there was when green Sped was there.

770
00:43:15,200 --> 00:43:17,319
Speaker 1: It seems like everybody's out giving a talk every day,

771
00:43:17,760 --> 00:43:20,719
Speaker 1: but they're giving talks about things that are relevant for

772
00:43:20,760 --> 00:43:25,359
Speaker 1: what Congress is deciding today in ways that you know

773
00:43:25,520 --> 00:43:30,080
Speaker 1: basically are not necessarily relevant for monetary policy. And I

774
00:43:30,120 --> 00:43:35,160
Speaker 1: think the Greenspan's approach is a superior one meeting.

775
00:43:35,520 --> 00:43:36,680
Speaker 5: I think he has term for it.

776
00:43:36,719 --> 00:43:39,480
Speaker 4: If you understood what I'm talking, then I'm not talking there.

777
00:43:40,200 --> 00:43:44,759
Speaker 1: No, that was something else. He very often would want

778
00:43:44,800 --> 00:43:47,919
Speaker 1: to communicate things and you understood what he was saying.

779
00:43:48,680 --> 00:43:51,920
Speaker 1: It just sometimes he didn't want to answer questions directly

780
00:43:52,000 --> 00:43:55,000
Speaker 1: because like people very often will say, hey, so what

781
00:43:55,000 --> 00:43:56,520
Speaker 1: are you going to do with interest rates next week

782
00:43:56,880 --> 00:43:59,239
Speaker 1: or something like that. That's when he would be hard

783
00:43:59,239 --> 00:43:59,760
Speaker 1: to understand.

784
00:44:01,880 --> 00:44:06,279
Speaker 4: So maybe that won't be a problem with you of them.

785
00:44:06,520 --> 00:44:11,840
Speaker 4: So you know, former Chairman Berninki was actually whether the

786
00:44:11,880 --> 00:44:15,920
Speaker 4: person who pushed for all this FED communication and transparency,

787
00:44:15,960 --> 00:44:18,960
Speaker 4: and the FED is in the process of framework review

788
00:44:19,400 --> 00:44:22,640
Speaker 4: and one proposal that seems to be on the table

789
00:44:23,120 --> 00:44:29,320
Speaker 4: is for the FED to publish FED staff scenarios to

790
00:44:29,360 --> 00:44:33,520
Speaker 4: increase the public understanding of how the fed's forecasts actually

791
00:44:33,600 --> 00:44:37,640
Speaker 4: have a various risk and uncertainty band around, and just

792
00:44:37,680 --> 00:44:40,160
Speaker 4: support that type of transparency.

793
00:44:40,320 --> 00:44:46,520
Speaker 1: I think that you should have transparency about the things

794
00:44:46,560 --> 00:44:49,680
Speaker 1: that matter to you. If you're a decision maker, where

795
00:44:49,680 --> 00:44:52,400
Speaker 1: did you come up with now's a good time to

796
00:44:52,440 --> 00:44:54,799
Speaker 1: do this or that? What do you think like if

797
00:44:54,840 --> 00:44:55,920
Speaker 1: you think that we're in a boom?

798
00:44:56,000 --> 00:44:56,399
Speaker 2: How come?

799
00:44:57,560 --> 00:45:02,160
Speaker 1: And I think that one of the negative long run effects,

800
00:45:02,160 --> 00:45:05,560
Speaker 1: probably the only one of Chairman Greenspan's presence, is that

801
00:45:05,600 --> 00:45:09,800
Speaker 1: he because he was always looking at every data item

802
00:45:09,840 --> 00:45:12,880
Speaker 1: and then sorting it in his head, and he was

803
00:45:12,920 --> 00:45:15,560
Speaker 1: doing it in a really miraculous way, which made him

804
00:45:15,560 --> 00:45:18,120
Speaker 1: a legend before there word computers and so on. He

805
00:45:18,200 --> 00:45:22,000
Speaker 1: was always kind of suspicious of time series models, which

806
00:45:22,000 --> 00:45:25,920
Speaker 1: are really conditional expectations that are getting better and better

807
00:45:26,360 --> 00:45:29,200
Speaker 1: in the Stock and Watson world at helping us think

808
00:45:29,200 --> 00:45:32,440
Speaker 1: about the path of the near term economy. And I

809
00:45:32,480 --> 00:45:34,840
Speaker 1: think the one thing I can say is that in

810
00:45:34,920 --> 00:45:37,640
Speaker 1: terms of at least looking at the research papers, it

811
00:45:37,680 --> 00:45:41,399
Speaker 1: feels like the bias against that type of work, which

812
00:45:41,400 --> 00:45:43,560
Speaker 1: I think could be very useful for policy analysis, in

813
00:45:43,600 --> 00:45:46,040
Speaker 1: which we used a lot when we were at CEA

814
00:45:46,120 --> 00:45:48,160
Speaker 1: to think about what the forecast would look like if

815
00:45:48,160 --> 00:45:50,600
Speaker 1: we passed the Tax Cuts of Jobs Act and we

816
00:45:51,040 --> 00:45:53,399
Speaker 1: got the number right within a tenth or two out

817
00:45:53,440 --> 00:45:56,239
Speaker 1: a couple of years, right with those models. I think

818
00:45:56,280 --> 00:45:59,000
Speaker 1: that those time series models probably need to be invested

819
00:45:59,080 --> 00:46:02,239
Speaker 1: more in in the FED. And then if there's a

820
00:46:02,280 --> 00:46:05,759
Speaker 1: bigger staff that's doing that, then I think that there'll

821
00:46:05,760 --> 00:46:08,000
Speaker 1: be a lot of product that'll be useful for markets

822
00:46:08,040 --> 00:46:09,080
Speaker 1: to digest about.

823
00:46:09,080 --> 00:46:10,359
Speaker 2: Like, look, if we do it this way, if we.

824
00:46:10,280 --> 00:46:12,480
Speaker 1: Do it that way, no model is the right model,

825
00:46:12,920 --> 00:46:14,360
Speaker 1: but you need to look at it bunch of models

826
00:46:14,400 --> 00:46:16,919
Speaker 1: when you decide what you're thinking. I think the FED

827
00:46:16,920 --> 00:46:18,560
Speaker 1: hasn't done a good job of helping people do that.

828
00:46:18,960 --> 00:46:23,000
Speaker 4: So that's the area you would want to invest more

829
00:46:23,080 --> 00:46:27,240
Speaker 4: in these model building exercise alt.

830
00:46:27,560 --> 00:46:29,400
Speaker 1: Just like if you look at the ecadomic report of

831
00:46:29,440 --> 00:46:31,799
Speaker 1: the President, if you look at the analysis that we

832
00:46:31,880 --> 00:46:37,160
Speaker 1: did in the first Trump term, we had model we

833
00:46:37,200 --> 00:46:38,959
Speaker 1: like put on the table the bottles we were using.

834
00:46:39,040 --> 00:46:41,480
Speaker 1: We ran horse races with bottels and figured out what's

835
00:46:41,480 --> 00:46:43,920
Speaker 1: the best model for modeling this type of figure, that

836
00:46:43,960 --> 00:46:48,600
Speaker 1: type of thing, and then would publish tables where we said, well,

837
00:46:49,120 --> 00:46:51,839
Speaker 1: you know, here's all eight models that help you do this,

838
00:46:52,080 --> 00:46:54,600
Speaker 1: and here's like the central tendency or this is the

839
00:46:54,600 --> 00:46:56,440
Speaker 1: one that we believe. And so I think that that

840
00:46:56,640 --> 00:47:00,759
Speaker 1: level of detail is available to it now because the

841
00:47:00,800 --> 00:47:06,400
Speaker 1: economic science, macroeconomic science forecasting has advanced dramatically since Allen

842
00:47:06,680 --> 00:47:11,719
Speaker 1: was talking to you know, the CEO of GE and

843
00:47:11,920 --> 00:47:14,440
Speaker 1: using that to decide what GDP next quarter was going

844
00:47:14,480 --> 00:47:14,680
Speaker 1: to be.

845
00:47:15,680 --> 00:47:19,400
Speaker 4: How about alternative data and machine learning and you know

846
00:47:19,840 --> 00:47:21,879
Speaker 4: bottom up style of forecasting.

847
00:47:22,200 --> 00:47:26,560
Speaker 1: Yeah, everything everything, Look at everything that and see what works.

848
00:47:26,840 --> 00:47:32,360
Speaker 4: Okay, well, we only have a couple of minutes less pastime.

849
00:47:32,600 --> 00:47:35,239
Speaker 4: I oh really, I'll just ask you one one last

850
00:47:35,320 --> 00:47:38,799
Speaker 4: question then, So, if you were confirmed to be fet SHARE,

851
00:47:38,880 --> 00:47:42,000
Speaker 4: will you commit to preserving independence in the way that

852
00:47:42,040 --> 00:47:46,399
Speaker 4: you just understand in the conduct of monitor one hundred

853
00:47:46,400 --> 00:47:47,279
Speaker 4: percent independence?

854
00:47:47,400 --> 00:47:50,200
Speaker 1: Is anyone There are a lot of really good candidates

855
00:47:50,200 --> 00:47:54,759
Speaker 1: that the president's talking with and about, but I think

856
00:47:54,800 --> 00:47:58,280
Speaker 1: that everybody I know that's a candidate one hundred percent

857
00:47:58,360 --> 00:48:03,719
Speaker 1: understands the importance of it dependence. And yeah, I think

858
00:48:03,760 --> 00:48:05,960
Speaker 1: that that it is important and that that commitment will

859
00:48:05,960 --> 00:48:09,080
Speaker 1: be made whoever the President chooses. Over and over again

860
00:48:09,200 --> 00:48:10,759
Speaker 1: during Senate confirmation.

861
00:48:10,640 --> 00:48:12,680
Speaker 4: Okay, thank you, Kevin Hasset, Thank

862
00:48:12,719 --> 00:48:18,520
Speaker 5: You, I was any CE Director Kevin Hassett speaking fireside

863
00:48:18,560 --> 00:48:20,239
Speaker 5: chat with Bloomberg Economics and a wog