Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Anna Wong has.
Speaker 3: Been definitive at Bloomberg Intelligence in market economics. She is
Speaker 3: in conversation with Kevin Hassett of Greenfield, Massachusetts and of
Speaker 3: the University of Pennsylvania now at the White House.
Speaker 2: Let's listen of its sales in the US.
Speaker 1: We're the only customer for them, and they have like
Speaker 1: one percent of the US market, and there are lots
Speaker 1: of other firms selling the same product into the US. Well,
Speaker 1: then if we put a tariff on that guy, then
Speaker 1: it's really going to cause some harm to that firm.
Speaker 1: And so what we did is we actually went through
Speaker 1: all the different tariff classes. I guess what are the
Speaker 1: called h We went through the ball and then figured
Speaker 1: out like the relative elasticities and then maximized the sort
Speaker 1: of or minimized the potential harm on this one. One
Speaker 1: of the things that we've learned is that one of
Speaker 1: the reasons why the US has a really persistent trade
Speaker 1: deficit is that we have a few trading partners that
Speaker 1: are like have basically a policy in their country to
Speaker 1: create jobs and dump product into the US in order
Speaker 1: to produce political stability at home for them. And so
Speaker 1: our intuition early on as we're thinking about what's the
Speaker 1: next step given the presence intuition about how tariffs can
Speaker 1: be an important part of optimal revenue policy is that
Speaker 1: if we put tariffs on, say China, then their supply
Speaker 1: is really an elastic because and by definition it is
Speaker 1: the most at elastic thing of the world, because they've
Speaker 1: been just throwing stuff at US year after year after year,
Speaker 1: that then they would have to cut their prices to
Speaker 1: continue to sell enough stuff so that they could create
Speaker 1: enough jobs they have the political stability that they wanted.
Speaker 1: And I think if you look at the record, that's
Speaker 1: more or less been the case since the tariffs came
Speaker 1: on for the countries that have big persistent trade deficits
Speaker 1: with US, that they've ended up having to cut their
Speaker 1: import prices by so much that there's very little effect
Speaker 1: visible effect on inflation here in the US.
Speaker 4: So, which is so when I look at the schedule
Speaker 4: of tariffs right now, China is at thirty one percent,
Speaker 4: in Brazil and India are at thirty five percent, which
Speaker 4: is higher than China.
Speaker 5: And is this a transition phase?
Speaker 4: Is there where the endpoint of the trade policy in
Speaker 4: this administration say by twenty twenty eight, the tariff schedule
Speaker 4: and the relative tariffs are around the country will be
Speaker 4: different than what we have served now. And what's the endgame.
Speaker 1: President Trump, you know, will decide what the endgame is.
Speaker 1: He'll look at the deals that are being presented to
Speaker 1: us and decide if the deal is good enough. You saw,
Speaker 1: for example, that we just had a big reduction in
Speaker 1: the teriff for Switzerland after a very acrimonious phone call
Speaker 1: between the President and the Swiss that led to the
Speaker 1: very high teriff rate. And so I think that you know,
Speaker 1: there's a negotiation underway. I think for many countries the
Speaker 1: negotiation has finished. In some countries, there's still work to
Speaker 1: be done.
Speaker 4: Do you think after all the negotiations, the trade deals
Speaker 4: and adjustment in a tariff schedule, we might be converging
Speaker 4: to your algorithm in the first Trump administration, No.
Speaker 1: I think that what we'll be converging to is something
Speaker 1: like a border adjusted business cast flow tax. Because we
Speaker 1: in the Big Beautiful Bill, one of the things we
Speaker 1: did is we expanded the various experts subsidies for multinationals.
Speaker 1: And so if you have a this is inside baseball math,
Speaker 1: but if you have an export subsidy plus a tariff
Speaker 1: plus a payroll tax, then you basically have a border
Speaker 1: adjusted business cash flow tax. So I think that in equilibrium,
Speaker 1: what we're seeing is that we're getting lots of revenue.
Speaker 1: It's a few hundred billion already this year, and it's
Speaker 1: not causing a lot of harm.
Speaker 2: GDP nows at four percent.
Speaker 1: Inflation has been trending slightly down, and so I think
Speaker 1: that it's working the way it would if it were
Speaker 1: a border adjusted business cost blow tax.
Speaker 4: And what have you learned about optimal how tariff fits
Speaker 4: in this opt optimal tariff as well as optimal fiscal policy.
Speaker 1: I think that there's a race to produce in the
Speaker 1: US to avoid tariffs that is very beneficial for US workers.
Speaker 1: And if you look at capital spending ye over year,
Speaker 1: we're having one of the best years ever and that's
Speaker 1: even before we go through the trillions of promises that
Speaker 1: we've and the trade deals, and so there's that, which
Speaker 1: is the sort of capital spending effect That was somewhat
Speaker 1: of a surprise to be how big it was, because
Speaker 1: I again thought what you might see is like price
Speaker 1: adjustments and so on, to by the elastic suppliers and
Speaker 1: then the consumers wouldn't really see much of a price increase.
Speaker 1: But I think one of the things we're seeing is
Speaker 1: a massive on shoring of activity like anything I've ever seen.
Speaker 1: So I think that it's really been a very net
Speaker 1: positive policy, despite what sort of conventional economics has been
Speaker 1: teaching us since we went back to the textbooks when
Speaker 1: I was in grad school.
Speaker 4: Okay, so you know, I think on in Wall Street,
Speaker 4: most of the firms, many of the firms have come
Speaker 4: up with this costs bird and of tariff composition of
Speaker 4: around five percent exporters, cots, it discounts seventy percent, sixty
Speaker 4: to seventy percent absorbed by domestic firms and the rest,
Speaker 4: you know, twenty to thirty percent with the tier of
Speaker 4: showing up and consumer prices. Do you disagree with that
Speaker 4: sort of breakdown.
Speaker 1: Or well, I think it will depend on it's a
Speaker 1: product by product kind of analysis, and I think that
Speaker 1: it's still work in progress to figure out what the
Speaker 1: final story is. But again we've got high growth and
Speaker 1: no pick up at inflation. I think that the Wall
Speaker 1: Street folks are a lot of Wall Street folks who
Speaker 1: I respect and read in the Spring we're saying that
Speaker 1: we're going to have stagflation, that we're going to have
Speaker 1: four or five percent inflation because of the tariffs and
Speaker 1: no growth.
Speaker 2: And so I think that.
Speaker 1: Allocating like the current state of the economy and the
Speaker 1: impact of tariffs on it, from people who told us
Speaker 1: that we'd have a recession with high inflation with those
Speaker 1: models is probably not the best thing to do.
Speaker 4: Yes, certainly Wall Street have been caught wrong on their
Speaker 4: forecast of an inflation surge which did not happened. In fact,
Speaker 4: I remember, I think the consensus upon Liberation Day, everybody
Speaker 4: revised up the core of PC inflation to well over
Speaker 4: three percent, even some closer to four percent, and now
Speaker 4: we are on track to hit two point nine or
Speaker 4: three percent at the end of this year. So for
Speaker 4: sure the consensus has.
Speaker 5: Been wrong on that.
Speaker 4: So recently, there's a viral San Francisco FED paper that
Speaker 4: looked at one hundred years of history of tariffs and
Speaker 4: they found the net effect of tariff tend to be deflationary.
Speaker 5: However, they also found that.
Speaker 4: Because it's deflationary because it as an aggregate demand shock
Speaker 4: more so than a supply shock, and hance, ultimately it
Speaker 4: raised the unemployment rate, and so far this year, when
Speaker 4: we begin the year, the consensus on Wall Street is
Speaker 4: four point one percent unemployment rate. Currently it looks as
Speaker 4: if we are heading to four point three to four
Speaker 4: point four at the end of this year. How much
Speaker 4: do you think of this slower hiring and increase in
Speaker 4: unemployment rate as attributable to trade policy or what.
Speaker 1: Other Well, I think it's actually, you know, quite a
Speaker 1: mistake to look at one hundred years of history to
Speaker 1: learn about today's situation. To do that, you're making an
Speaker 1: underlying assumption of what a conrometricians call ergaticity, the idea
Speaker 1: that the data generating process is the same over time,
Speaker 1: so that you can identify it in this period and
Speaker 1: then use your knowledge to think about the next period.
Speaker 1: I think that, you know, one hundred years ago, if
Speaker 1: you wanted to move production from one place to another,
Speaker 1: it was like almost impossible. You'd have to like get
Speaker 1: it on the Queen Mary or something and move it around.
Speaker 1: And now it's really really easy. If you know, a
Speaker 1: hundred years ago, I guess we didn't have a telephone,
Speaker 1: or maybe we just started to have a telephone. But
Speaker 1: now we've got the Internet and we've got Ai helping
Speaker 1: us decide how to move stuff around. We've got a
Speaker 1: capital spending boom that would have been impossible one hundred
Speaker 1: years ago. And so I don't think that, Yeah, I
Speaker 1: don't think that history in this case is going to
Speaker 1: be that useful because it's clearly a point where the
Speaker 1: assumption of erganicity is not going to apply. And so
Speaker 1: we're seeing massive movements you've seen in the big drug companies,
Speaker 1: every movements of production to the US that will benefit
Speaker 1: US consumers and especially US workers. We're seeing real wages
Speaker 1: already this year going up, recovering and maybe about a
Speaker 1: third of the ground that we lost under Joe Biden
Speaker 1: with the high inflation. And I think that those real
Speaker 1: wages are going up because we're getting a lot of onshoing.
Speaker 1: It's not just because of the big beautiful bills tax cuts,
Speaker 1: but also because of the onshooring from the tariffs.
Speaker 4: And well, that conclusion is not just from that paper
Speaker 4: based on one hundred years of history. Actually, back in
Speaker 4: twenty eighteen, when we look at the historical FMC presentations,
Speaker 4: there was a staff presentation that used the internal Workhorse model,
Speaker 4: the FED Sigma model.
Speaker 5: I don't know if you're familiar with that.
Speaker 4: To run us to evaluate your tariff algorithm back in
Speaker 4: twenty eighteen, Suppose there's fifteen percent tariff on intermediate goods
Speaker 4: only and fifteen percent on consumption goods only, and that
Speaker 4: model found that if you impose tariffs on intermediate goods,
Speaker 4: it is also over time deflationary, and it boosts the
Speaker 4: unemployment rate by.
Speaker 5: A little bit. In which case, how would you explain.
Speaker 4: Then, the unemployment rate increasing from earlier this year four
Speaker 4: point one to four three or four point four percent
Speaker 4: later this year?
Speaker 5: What are the drivers?
Speaker 1: Yeah, I mean, it's such a small movement that it's
Speaker 1: hard to say exactly. But I would say that one
Speaker 1: of the interesting puzzles is that, you know, first, we're
Speaker 1: having a productivity boom that is really unprecedented in the
Speaker 1: following sense that when I worked with Alan Greenspan back
Speaker 1: in the nineties, it was just at the dawn of
Speaker 1: the computer age, really, and they didn't even have Netscape
Speaker 1: Navigator when I first started working at the FED, and
Speaker 1: so you had to use something called Gopher. I don't
Speaker 1: know if you're old enough to remember this, which really
Speaker 1: wasn't that good. And Greenspan had an intuition that the
Speaker 1: computer was going to revolutionize the economy and give us
Speaker 1: lots of growth. It was a big positive supply shock,
Speaker 1: and so then when the unemployment rate actually kind of
Speaker 1: went down, we had no evidence of the productivity. Member
Speaker 1: Robert Cordon was saying, it's everywhere but of the data.
Speaker 1: But Greenspan decided not to hike rates because he believed
Speaker 1: that we were in the midst of a positive supply
Speaker 1: shock that was perhaps unprecedented, and we had a kind
Speaker 1: of five year run that's one of the best five
Speaker 1: year runs we've ever seen, even all the way to
Speaker 1: the point where the.
Speaker 2: US fiscal situation was in surplus.
Speaker 1: And so I think that it's one of the great
Speaker 1: moves of Federal Reserve history that Greenspan saw that it
Speaker 1: was a positive supply shock that would be both pro
Speaker 1: growth and deflationary. Yes, you have more stuff about that done. Yeah,
Speaker 1: but I say that to reference today. It's really interesting
Speaker 1: that there's like evidence in peer reviewed papers or not
Speaker 1: quite pure reviewed debt, but at NBER, which is kind
Speaker 1: of a lot of my friends at MBR. By the way,
Speaker 1: it's a secret of NBR authors like myself is that
Speaker 1: you'll very often take a paper and submit it to
Speaker 1: a journal and get the referee reports before you put
Speaker 1: it into the NBR Working Paper series, Because if you've
Speaker 1: got some stupid mistake, the referees will catch it. You
Speaker 1: don't want to embarrass yourself in front of everybody by
Speaker 1: just throwing it out there. Actually, the NBR is kind
Speaker 1: of almost pure reviewed, but there's a lot of stuff
Speaker 1: showing big AI gains. And the thing is that we
Speaker 1: also see it in productivity. And so if you think
Speaker 1: about the difference between say nineteen ninety six and today,
Speaker 1: is that we've got this revolutionary new thing that probably
Speaker 1: is going to be a big positive for productivity. And
Speaker 1: you know, Steve Olner and Dan Sickle, your former colleagues
Speaker 1: at the FED, had a famous paper that you only
Speaker 1: see productivity booms after the benchmark revision, right, so you
Speaker 1: never actually experience it while it's happening in the data.
Speaker 1: And this AI boom is significant enough that we're already
Speaker 1: seeing it in the data. Probably the benchmarker vision is
Speaker 1: going to revise it up. And against that backdrop, I
Speaker 1: think that the open question is how do we have
Speaker 1: high growth and then less growth.
Speaker 2: And employment than we expected?
Speaker 1: And you know, I think that the tariff could be
Speaker 1: part of the story, but I think that that probably
Speaker 1: a very small part of the story.
Speaker 5: Yeah.
Speaker 4: I mean when we looked at the earning transcripts from
Speaker 4: this third quarter and where the so far the earnings
Speaker 4: have been surprisingly positive.
Speaker 2: In fact, it was like the best quarter ever.
Speaker 4: So we use surprises, we use AI to extract some
Speaker 4: of the themes, and we did find that one of
Speaker 4: the dominant theme is that there are other stuff happening
Speaker 4: outside the trade policy that's helping offset a lot of
Speaker 4: this tariff bill.
Speaker 5: But focus.
Speaker 1: Yeah, I don't mean to cut you off, but I
Speaker 1: just want to highlight how important what you just said is.
Speaker 1: And the way to think about it is that trade
Speaker 1: is about fifteen percent of the economy, and the economies
Speaker 1: the rest of it's like eighty five percent of the economy,
Speaker 1: and so you could do a lot of stuff in
Speaker 1: trade that has effects on the trade space that is
Speaker 1: completely overwhelmed by the eighty five percent.
Speaker 2: And eighty five percent.
Speaker 1: Of the economy is getting this massive productivity change, and
Speaker 1: it'd be hard for you know, a large change to
Speaker 1: eighty five percent to not overwhelm something you did to
Speaker 1: the fifteen percent.
Speaker 4: Yeah, at the same time, sixty six percent of the
Speaker 4: economy is labor share, and a lot of academic studies
Speaker 4: are also looking into whether AI is already causing low
Speaker 4: hiring rate among young graduates. Whoever is graduating from college
Speaker 4: this year is probably in for a bad deal. So
Speaker 4: I think there is a puzzle out there, which is
Speaker 4: if you have GDP growing at three or four percent
Speaker 4: at the same time you have a lot of the
Speaker 4: sense of job insecurity in this labor market, and the
Speaker 4: labor market is lagging these other you know, the GDP
Speaker 4: growth indicators, and the question is can this GDP growth
Speaker 4: be sustained at this three or four percent while the
Speaker 4: labor market is so going sideways basically with labor share
Speaker 4: probably going down pro UH probably because of productivity is
Speaker 4: in the future.
Speaker 2: It could be that.
Speaker 1: I also don't forget that there's been a big reduction
Speaker 1: in illegal immigration and employment from that aspect, and so
Speaker 1: the UH population growth is pretty low compared to what
Speaker 1: it was when we had tens of millions of people
Speaker 1: crossing the border.
Speaker 2: And so the break even.
Speaker 1: Job's number for the payroll survey is people think is
Speaker 1: down like quite a bit and to maybe around forty
Speaker 1: or fifty.
Speaker 4: Yeah, between thirty to sixty sounds wight.
Speaker 1: Well, I was forty fifty or thirty sixty. I think
Speaker 1: we kind of we're about the same rate. And so
Speaker 1: that's like another thing that we could have big increases
Speaker 1: in productivity, of big increases in output and a healthy
Speaker 1: labor market with job numbers like the one that you forecasted,
Speaker 1: and we'll see whether you're a right or not.
Speaker 5: So fifty four sounds good too. I'm saying that it's
Speaker 5: not one hundred.
Speaker 1: That's enough to sort of keep up with population. You'd
Speaker 1: want stronger growth of that in unemployment to go down.
Speaker 1: But the outmployment rates a little higher than what's probably
Speaker 1: the equilibrium unemployment rate and full employment economy, but not
Speaker 1: a whole lot.
Speaker 4: So Kevin, going back to this productivity boom, I recently
Speaker 4: tweeted a couple of pictures that seems to suggest some
Speaker 4: emergent micro evidence of how AI is boosting business formations,
Speaker 4: and Saint Louis fed also has a piece out showing
Speaker 4: how AI adoption is correlated to rise in sector specific unemployment. So,
Speaker 4: you know, just evidence that AI is working through at
Speaker 4: the micro level. But then the response I got made
Speaker 4: me realize that it is actually a really polarizing topic
Speaker 4: with half of the If you survey a lot of people,
Speaker 4: half of them probably say AI is a bubble. Half
Speaker 4: of them say that there's no evidence that there's a
Speaker 4: productivity boom, yet that productivity is still on trend and
Speaker 4: the improvement reflect more of a cyclical thing that happened
Speaker 4: post pandemic as opposed to this sustained AI driven productivity.
Speaker 5: So, if you know, we are going.
Speaker 4: To touch on you being the one of the leading
Speaker 4: candidates for FETCH here and going back to that nineteen
Speaker 4: ninety five nineteen ninety six, those two critical years at
Speaker 4: the FED, you mentioned that Alan Greenspan was really the
Speaker 4: only one, one of the few who saw evidence of
Speaker 4: productivity boom. And I've read the historical transcripts in December
Speaker 4: nineteen ninety five that particular Fobascy meeting where half or
Speaker 4: more of the FORBASC we're agitating for holding rates constant,
Speaker 4: and in nineteen ninety six most many of them wanted
Speaker 4: rate hikes, and somehow Greenspan was able to convince all
Speaker 4: this these skeptics that something is afoot without the data
Speaker 4: to support.
Speaker 1: Let me talk about this because there's an interesting anecdote
Speaker 1: that I don't think is ever made public about this
Speaker 1: that so, because computers were improving so quickly, then it
Speaker 1: was decided by the Bureau of Economic and Analysis a
Speaker 1: lot of great professionals over there that they needed to
Speaker 1: what we call hedonically adjust the computer price, which meant
Speaker 1: that if you had a computer chip that was twice
Speaker 1: as fast as the one from last year and it
Speaker 1: costs the same, then that's like a big reduction of
Speaker 1: the price of computing. And so that in a typical year,
Speaker 1: right around when we were starting to have to make
Speaker 1: the judgment on this, the computer price was dropping at
Speaker 1: about like sixteen to twenty percent at an annual rate,
Speaker 1: and there was so much computer investment that real GDP
Speaker 1: he was getting a real big kick from the fact
Speaker 1: that the deflator for computers.
Speaker 2: Was dropping so much.
Speaker 1: Yes, so I was in charge of that part of
Speaker 1: the world for the staff. I spoke a lot to
Speaker 1: Greenspan and he said to me once, how do they
Speaker 1: deflate a communications equipment cause communications equipment is basically like
Speaker 1: computers now And went back and looked and communications equipment
Speaker 1: rather than dropping fifteen or twenty percent a year was
Speaker 1: going up like two or three percent a year, And
Speaker 1: so then I called over cause they're actually very open
Speaker 1: about like the technical people at PA right, and I
Speaker 1: talked to them about, well, why why is that? And
Speaker 1: they say, well, that we use when we're making our deflators,
Speaker 1: we use something called a match model approach. Yes, and
Speaker 1: so if something we sold it yesterday and we're selling
Speaker 1: it today, then that's like we look at the price
Speaker 1: change for that, and that's where we get our deflator,
Speaker 1: and we don't change the bundle of things that we
Speaker 1: use the match bottel approach for very often. And it
Speaker 1: turns out that there were a lot there was at
Speaker 1: that point a lot of communications equipment produced in the
Speaker 1: US for developing countries that were kind of like really
Speaker 1: old fashioned analog things where you got like Josephine moveing.
Speaker 2: The wires and stuff to connect the phone calls.
Speaker 1: And since we had this really old equipment that we
Speaker 1: were exporting to developing countries, they were using the price
Speaker 1: of that to deflate communications equipment. It sounds like a
Speaker 1: very technical batter. But then Charmy Greenspan said, well, Kevin,
Speaker 1: what if we deflate communications equipment with the computer deflator instead? Like,
Speaker 1: how much more would GDP be going up? And it
Speaker 1: was like about one and a half percent because of that,
Speaker 1: and so he was kind of like, yeah, we're really
Speaker 1: growing way more than we think.
Speaker 2: We've got a serious measurement problem.
Speaker 1: And then if you extrapolate from that, then if you
Speaker 1: were hedonically adjusting everything that gets like a computer to
Speaker 1: make it better, then you're putting like a deflationary force
Speaker 1: into the economy.
Speaker 2: That's not being measured.
Speaker 1: And so I think that it could be that the
Speaker 1: communications story was a key moment where you know, everybody
Speaker 1: at the board had a ah, yeah, I can understand
Speaker 1: why Alan is so convinced about this.
Speaker 4: So I was going to ask you, so what you're
Speaker 4: It's interesting you were in the price and wages section.
Speaker 1: No, I was the business fixed investment person.
Speaker 5: Oh that okay?
Speaker 1: Economic activity, Oh.
Speaker 4: I see, and and what where? What other sections were you.
Speaker 3: Or have you?
Speaker 2: That's that's the only one.
Speaker 5: Wow, that was You're very well placed for for that.
Speaker 1: Well, that was my area rights, capital spending, and taxes.
Speaker 1: And he did investment.
Speaker 4: He didn't mention in the in the transcripts, the rapid
Speaker 4: deceleration in the prices of high tech prices but I
Speaker 4: mean Greenspan is the pioneer of alternative data. He talked,
Speaker 4: he used in amends underwear sales for respecial remember that, yes, yes, lipsticks.
Speaker 2: People had to calculate the way to GDP.
Speaker 4: So, I mean he's a chairman who's really in the
Speaker 4: weeds in the data and very creative as well. But
Speaker 4: but let's not underestimate the challenges he faced in the
Speaker 4: on the committee where half of the committee.
Speaker 5: Was against this.
Speaker 4: How did you did you have any insight then on
Speaker 4: how he was able to Well, first of all, how
Speaker 4: was he able to win over the FET staff, which
Speaker 4: is fetstaff is very influential back then you have the
Speaker 4: Green book and the Blue book now twice a year, yes,
Speaker 4: and do you know what color is the book? Now?
Speaker 2: Is it?
Speaker 5: They do that to mix the green and the blue together,
Speaker 5: that gets you teal. So I mean that's.
Speaker 1: Probably where all their problems began.
Speaker 5: So so you know, you.
Speaker 4: Know it was true in nineteen ninety five, ninety ninety
Speaker 4: six whenever the staff presents the data, because at the FED,
Speaker 4: the bar to argue that something is a structural change
Speaker 4: is very high, because you you will agree that the
Speaker 4: quality of the feed staff is very high and you know,
Speaker 4: one of some of the smartest people I know, and
Speaker 4: and so for two years, even up to nineteen ninety seven.
Speaker 4: In the transcript they were talking about no evidence of
Speaker 4: productivity increase, only ones they have the revisions? Did it
Speaker 4: show that in fact nineteen ninety five productivity was running
Speaker 4: at two point five or three as opposed to one
Speaker 4: point something? But but how did how did how did
Speaker 4: the interaction between the chairman and the FET staff? How
Speaker 4: did how did the chairman convince the FED staff to
Speaker 4: to go what what was it like? I was the
Speaker 4: chairman directing the Research and Statistics division here look for
Speaker 4: these uh signs of productivity?
Speaker 1: No, I think that that there was just a du
Speaker 1: excellent so.
Speaker 4: Uh.
Speaker 1: The people who were there working with me at that time, Uh,
Speaker 1: the person who was doing consumption, uh, there were two
Speaker 1: of them. It was Karen Dinan who's now a Harvard
Speaker 1: professor and Chris Carroll who's now at Johns Hopkins, two
Speaker 1: of the top uh consumption analysts like over the last
Speaker 1: forty years. Uh. The people doing business fix investment were
Speaker 1: me and Steve Olner and uh let's see uh prices
Speaker 1: wa that was uh, wh what's his name. Uh, actually
Speaker 1: I forget the guy's name. There was to be prices.
Speaker 1: But then we had Steve Bronn, who's now at the CBAK,
Speaker 1: who was putting GDP together. But I think that the
Speaker 1: really big thing that was happening was that the data
Speaker 1: were actually telling us that there's a capital spending boom
Speaker 1: really early on. And then, Uh, the way the the
Speaker 1: FED worked then and I probably still does now, is
Speaker 1: that we take people are assigned to be like the
Speaker 1: consumption person, the investment person, the government person, the net
Speaker 1: export person, and then they forecast that with very complicated bottles,
Speaker 1: and then those forecasts get sent to the GDP coordinator,
Speaker 1: and the GDP coordinator aggregates the models the forecasts from
Speaker 1: each of the segments of GDP and then thinks about
Speaker 1: what that means for interest rates and discussion back then
Speaker 1: with Mike Prell, who was the research director, and with
Speaker 1: Chairman Greenspan, and then Charman Greenspan might say well what
Speaker 1: if we move rates this way or that way, and
Speaker 1: that everybody would change their forecast. And so most of
Speaker 1: the stuff that really influenced decisions by Greenspan was coming
Speaker 1: out of that section of the FED, not the section
Speaker 1: that was using at that point an updated version of
Speaker 1: what used to be called the MPs model that was
Speaker 1: developed by Albertando and Franco me Diguiani. That was a
Speaker 1: sort of big kind of general Legallebrium model, ad hoc
Speaker 1: Kainesy and general Legal Room model without a whole lot
Speaker 1: of expectations. That was the model that we use it
Speaker 1: back then, and so I think it was very much
Speaker 1: data dependent. Lots of work brought up up the I
Speaker 1: don't know if you worked in the Economic Activity section,
Speaker 1: but we wrote a fellow named Greg Brown, who is
Speaker 1: now a professor at North Carolina, was my research assistant
Speaker 1: at the time, and we wrote a computer code to
Speaker 1: do the business sector. And I think back then at
Speaker 1: the FED, the research assistant who wrote the code you
Speaker 1: would name. You would name the code for that part
Speaker 1: of the program by the research assistant.
Speaker 2: So there was like the GDP code that aggregates all the.
Speaker 1: Forecasts was named RUTH because there was a ra A
Speaker 1: named Ruth. And so when we finished the capital spending program,
Speaker 1: Greg Brown did a lot of the programming. So we
Speaker 1: called it Trout. And people say they're still running trout
Speaker 1: that are doing capital spending, but The point is that
Speaker 1: we really because we we're the first ones to have computers,
Speaker 1: really and we had the data and we were studying
Speaker 1: computers with computers. I don't think it was a top
Speaker 1: down thing.
Speaker 5: I see. That's great.
Speaker 4: So since you start on the topic of the FED
Speaker 4: in the nineteen nineties, you know, spotting a productivity boom
Speaker 4: is tricky.
Speaker 5: But if one think there's.
Speaker 4: A productivitytivity boom but there actually isn't one, or you
Speaker 4: overestimate productivity, you could be in a pretty bad situations
Speaker 4: in the nineteen nineties nineteen sixties is one.
Speaker 5: Of that example.
Speaker 4: And also spotting whether inflation and expectations are anchored is
Speaker 4: another skill that Greenspan has. He pioneered the term rational
Speaker 4: in attention.
Speaker 5: Right about prices. Do you think right.
Speaker 4: Now inflation expectations are anchored?
Speaker 2: No, I don't think that they.
Speaker 1: I know that the FED wants them to be appropriately so,
Speaker 1: but I think that we lost control of inflation in
Speaker 1: recent memory, and it's more under control now, maybe not
Speaker 1: all the way there, and so, uh, you know, I
Speaker 1: think that people would be right to worry. Well, we'll
Speaker 1: suppose that the policy mix that we saw, you know,
Speaker 1: post COVID uh, in the US economy were the policy
Speaker 1: mix that came back. I don't think President Trump would
Speaker 1: do that, but say, in the next administration, then wouldn't
Speaker 1: inflation go back up around nine or ten percent?
Speaker 2: Again? You know? I why was it?
Speaker 1: If if you're a person forming expectations over the next
Speaker 1: five ten years, which is you know, very often.
Speaker 2: A planning horizon for buying a house.
Speaker 1: Or something like that, that you could legitimately worry that, uh,
Speaker 1: that inflation's gonna come back up. And it's very important,
Speaker 1: uh to think about why, uh, the FED was unable
Speaker 1: to control inflation for so long and it got out
Speaker 1: of control, and what the FED can do to signal
Speaker 1: that that's not going.
Speaker 2: To happen again.
Speaker 1: I can tell you that what green Span did when
Speaker 1: he saw like really reckless spending is that he testified
Speaker 1: and said, you guys can't do this, that it's going
Speaker 1: to make it impossible for me to run the FED
Speaker 1: and keep inflation out of control. And what this set
Speaker 1: of folks did is they said, oh, it's transitory.
Speaker 5: If you were confirmed as Fetchhair, would you do that.
Speaker 1: I wouldn't say oh it's transitory if it wasn't.
Speaker 4: And so speaking about inflation. So recently Trump said, President
Speaker 4: Trump said that he would like to give out these
Speaker 4: two thousand dollars checks to low income individuals by mid
Speaker 4: twenty twenty six.
Speaker 5: I thought the administration agreed.
Speaker 4: That at the stimulus checks during the Biden administration was
Speaker 4: responsible for some of that inflation we have seen.
Speaker 5: How do you.
Speaker 4: Assess this trade off of trying to improve the affordability
Speaker 4: of these low income, medium, middle income household or are struggling
Speaker 4: with these affordability issues, versus giving more checks out and
Speaker 4: perhaps stoking inflation.
Speaker 1: Well, obviously the best way to address affordability is to
Speaker 1: increase real incomes real wages that right before the COVID emergency,
Speaker 1: we had promised. It's kind of like the ranges you
Speaker 1: and I just talked about. I had promised based on
Speaker 1: our modeling, and the President promised it all the speeches,
Speaker 1: that we'd get about four thousand dollars of an increase
Speaker 1: in real wages. And I had actually told him, based
Speaker 1: on our modeling, it was between four and eight. If
Speaker 1: it was you, you would have said six. But he
Speaker 1: wanted to, you know, under promise and overdeliver, and then
Speaker 1: we got the six increase in real wages and so therefore.
Speaker 2: Things were affordable.
Speaker 1: And then for the Biden four years, the real wage
Speaker 1: decline is like, depending on which measure you use, twenty
Speaker 1: five hundred to three thousand or a little bit more.
Speaker 1: And so real wages went down, which meant that wages
Speaker 1: went up slower than prices, which is kind of typically
Speaker 1: a key feature of most Keynesian models is that wages
Speaker 1: are kind of stickier the prices, and so that real
Speaker 1: wage decline means that things people are right to say
Speaker 1: that there's been a problem with affordability, and you know,
Speaker 1: real wages are up this year in part because of
Speaker 1: the things that were doing. But if you were to
Speaker 1: be as fiscally irresponsible as the previous congress was, then
Speaker 1: you would for sure see inflation go up at affordability
Speaker 1: jump back into being like as you know, the change
Speaker 1: in affordability as bad as it was before. Or the
Speaker 1: thing is though that we've you know, basically so far
Speaker 1: this year reduced the deficit for just this year by
Speaker 1: I think it's three hundred and ninety billion.
Speaker 2: Now it's a calendar year, calendar year, yea.
Speaker 1: It's actually like a weird thing that she's right about
Speaker 1: the calendar year, the fiscal year. The previous fiscal year
Speaker 1: numbers don't look as good, but it was because in
Speaker 1: the first quarter of the previous fiscal year, Joe Biden
Speaker 1: was shoveling money out the window. And so about forty
Speaker 1: percent of the deficit came from that first quarter because
Speaker 1: they were.
Speaker 2: Shoveling money out the window.
Speaker 1: So if you wonder how are we doing, we prefer
Speaker 1: to talk about calendar year rather than fiscal year because
Speaker 1: then we don't get blamed for the quarter where there
Speaker 1: are shoveling money out the window. And if you look
Speaker 1: at that, then year over year calendar year, we're down
Speaker 1: three hundred and ninety billion and it extrapolates to maybe
Speaker 1: six for the year, and about a third of it
Speaker 1: is higher revenues tax revenues because of higher growth, a
Speaker 1: third of it is tariff revenue, and about a third
Speaker 1: of it is reduced government spending. But if you know,
Speaker 1: if we stay on path and cut the deficit by
Speaker 1: six hundred billion, that's you know, with a little bit
Speaker 1: of growth, you're looking at seven or eight TRILLIONT over ten.
Speaker 1: That's like a very significant event that reduces inflation. With
Speaker 1: a big macroeconomic punch to inflation, and so against that
Speaker 1: backdrop when it was July, we hadn't seen all this
Speaker 1: positive development yet, and so when we were negotiating with
Speaker 1: Congress with a big, beautiful bill, then it was the
Speaker 1: position to the President that the tariff revenue should just
Speaker 1: buy down the national debt. But we're making so much
Speaker 1: progress and reducing the national debt that I think it's
Speaker 1: fair to think about what other policies we might pursue
Speaker 1: in like a reconciliation next year, and with all the
Speaker 1: tariff revenue that's coming in without causing a stag, I
Speaker 1: think it would definitely be on the table to think
Speaker 1: about how that might be rebated to.
Speaker 4: On the table, but not necessarily a sealed deal. What
Speaker 4: would require legislation right speaking about that, So we did
Speaker 4: try to, you know, see how my team we did
Speaker 4: try to see what paths there, what requirement we would
Speaker 4: need in the economy to get fiscal deficit to the
Speaker 4: three percent that Treasury secretaries got bestened had to propose
Speaker 4: the three three three three percent real GDP growth, which
Speaker 4: we look look like we're getting in a third quarter
Speaker 4: three percent fiscal deficit in three additional barrels per day
Speaker 4: of oil and.
Speaker 5: There's a grillion barrels millionaires.
Speaker 4: So so you know, there's a bunch of fiscal experts
Speaker 4: who calculate that to stabilize the debt to GDP ratio,
Speaker 4: which is hitting one hundred percent of GDP this year,
Speaker 4: you do need an annual fiscal deficit of three percent.
Speaker 5: So I do I do agree with you that in the.
Speaker 4: Fiscal year, even the fiscal year twenty twenty five, you
Speaker 4: can see a lot of encouraging developments, but still we
Speaker 4: are at four point nine percent of GDP in terms
Speaker 4: of fiscal deficit this year, and tariff revenues is probably
Speaker 4: about one percent of GDP per year. But still it
Speaker 4: seems really hard to get to a three percent deficit.
Speaker 4: And I will note that in the fiscal year twenty
Speaker 4: twenty five, the net interest payment on the debt has
Speaker 4: breached one trillion for the first time, and the increase
Speaker 4: was on par of the Medicare spending increase, which is
Speaker 4: a mandatory spending. What's your plan for bringing down interest payment?
Speaker 1: Well, I mean, what we've done so far this year,
Speaker 1: is you concede, is we've made an enormous amount of progress,
Speaker 1: but there's still you know, let's say that if the
Speaker 1: progress that we see, you know, were to persist next year,
Speaker 1: that we'd still have only made up about half the
Speaker 1: ground that we need to make up to get to three.
Speaker 1: But given that we've made so much progress this year,
Speaker 1: I think I'm highly confident that we have a team
Speaker 1: that has a well identified goal from Scott and from
Speaker 1: the President, and we'll work it out, but it will
Speaker 1: have to be worked out with Congress and future spending restraint.
Speaker 1: And you know, I think that the teriff revenue will continue,
Speaker 1: and that if we get the kind of growth effects
Speaker 1: from the capital spending that we expect, then then I
Speaker 1: think we could hit three percent even next year.
Speaker 4: Perhaps, Well that's as it's your forecast that we could forecast.
Speaker 1: I'm saying that we could possible, we.
Speaker 2: Really could hit it.
Speaker 4: Next is the necessary piece of this a productivity boom.
Speaker 1: The productivity boom is a real necessary piece of it
Speaker 1: that I think that if productivity it actually kind of
Speaker 1: wonder what your guess a bit of what the rate
Speaker 1: of productivity growth is, but let's say it's between two
Speaker 1: and three right now?
Speaker 2: Is that?
Speaker 5: Yeah?
Speaker 4: Yeah, I think it's just the FETs practice is to
Speaker 4: average over two years because it's very noisy.
Speaker 5: And if you do that, it's about two point two
Speaker 5: right now.
Speaker 1: Yeah, So let's just say it's two point two, and
Speaker 1: then we've got you know, investment divided by capital minusin
Speaker 1: appreciation rate is the capital stock growth and investment is skyrocketing.
Speaker 1: So let's just say capital stock growth gives you like
Speaker 1: three percent four percent because capital stuck's big, and then
Speaker 1: that's about point three times that, So that gets you
Speaker 1: up to three before you do something to labor. And
Speaker 1: so you're looking at pretty good growth accounting right now.
Speaker 1: That easily could be looking at a sequence of years
Speaker 1: that are, you know, from three to even four because
Speaker 1: of the productive if the productivity stays where it is,
Speaker 1: which I think it will.
Speaker 4: Okay, So now I'm switching to the hardball questions fed independence.
Speaker 1: That's an easy question.
Speaker 4: Are you where you're the leading candidate for the FET
Speaker 4: chair position?
Speaker 5: Is it is? It?
Speaker 4: Would it be fair to say that you are working
Speaker 4: a lot of hours right now? Are you working sixty
Speaker 4: to eighty hours?
Speaker 2: How is that related to independence?
Speaker 4: You know, I just wonder whether if I look tired
Speaker 4: a reason, I mean, a FET chair position would certainly
Speaker 4: be an improvement and work life balance for you probably,
Speaker 4: but on the FED independence issue. So so, so let's
Speaker 4: face it, you are going, if you were confirmed, when
Speaker 4: you go, and you'll be facing.
Speaker 5: A lot of skeptics.
Speaker 4: You will have a lot of colleagues who you will
Speaker 4: have to convince to win over to your side of
Speaker 4: the argument.
Speaker 5: Which would you say?
Speaker 1: So, First of all, I think the idea that government
Speaker 1: service you know, makes it less likely that you'll pursue
Speaker 1: an independent FED like basically rejects the evidence of what
Speaker 1: is it the five Console of Economic Advisor chairs that
Speaker 1: went on to be independent FED people, And so I
Speaker 1: think it's a very common path for people who have
Speaker 1: worked in the White House to go on and to
Speaker 1: work well at the FED and to do so independently.
Speaker 1: I have been critical of the policies of the current
Speaker 1: FED because I think they haven't been data driven enough.
Speaker 1: And I think that the way you can venture colleagues
Speaker 1: is that you make sure that you're using models that
Speaker 1: make sense and forecasts that make sense, and that you
Speaker 1: have a strong argument for say, productivity producing growth that
Speaker 1: doesn't cause inflation, and then you really have to be
Speaker 1: convincing with the economics and the thing about independitts that
Speaker 1: I just want to tell a little story about it
Speaker 1: that shows how much UH the it's really important. And
Speaker 1: there's a big literature that says that if the FED
Speaker 1: loses it it's independence, then inflation expectations become on board.
Speaker 2: And so you can't.
Speaker 1: Let the FED lose UH it's independents. And UH the
Speaker 1: story is one that goes back to the nineties that
Speaker 1: you and I were talking about with being chairman Greenspan
Speaker 1: that one of the first papers that I wrote when
Speaker 1: I was on leave from Columbia and working at the
Speaker 1: FED was with my UH colleague, UH gim Metcalf who
Speaker 1: was at Prince at the time, and we UH President
Speaker 1: Clinton had run on UH having a BTU tax so
Speaker 1: the people who are old enough to go, and the
Speaker 1: BTU tax was one of his main things that he
Speaker 1: and al gore cause they were way ahead of the
Speaker 1: curve on climate and so give and I are public
Speaker 1: finance ecadomist, so we wanted to go, well, what does
Speaker 1: a BTU tax do, how does it work?
Speaker 2: How did model it and stuff?
Speaker 1: And we wrote a paper UH on the be I
Speaker 1: the economic impact of the BTU tax, and it was
Speaker 1: really I think the first paper of the economic literature.
Speaker 1: That also we said, what we're doing with a b
Speaker 1: TW tax, we should do a carbon tax too. So
Speaker 1: we had the economic effects of a carbon tax at
Speaker 1: a BTU tax. And so we had this paper, really
Speaker 1: good paper, I thought. And then but you had to
Speaker 1: go through the review process at the FED, and Chairman
Speaker 1: Greenspan ordered us not to publish the paper. He said
Speaker 1: that right now President Clinton has said that there's going
Speaker 1: to be a BTU tax, and we can have the
Speaker 1: FED looking like it's put in its finger on a scale,
Speaker 1: what's a political debate about the BTU tax. And so
Speaker 1: sure it's a great paper, but the Fed's not going
Speaker 1: to publish it until debate has finished on this topic.
Speaker 1: And then like maybe nine months later, the BTU tax
Speaker 1: failed in Congress, and then he said, well, it's okay,
Speaker 1: you can publish your paper now. And we subsequently got
Speaker 1: it published at a top peer reviewed journals but cited
Speaker 1: a million times. But I think very fondly of that
Speaker 1: story because I think that that's what it means, that's
Speaker 1: how much you have to pay attention to independence. And
Speaker 1: so if you're thinking about things that could improve with
Speaker 1: the current FED, it feels like, you know, first, there's
Speaker 1: way more communication than there was when green Sped was there.
Speaker 1: It seems like everybody's out giving a talk every day,
Speaker 1: but they're giving talks about things that are relevant for
Speaker 1: what Congress is deciding today in ways that you know
Speaker 1: basically are not necessarily relevant for monetary policy. And I
Speaker 1: think the Greenspan's approach is a superior one meeting.
Speaker 5: I think he has term for it.
Speaker 4: If you understood what I'm talking, then I'm not talking there.
Speaker 1: No, that was something else. He very often would want
Speaker 1: to communicate things and you understood what he was saying.
Speaker 1: It just sometimes he didn't want to answer questions directly
Speaker 1: because like people very often will say, hey, so what
Speaker 1: are you going to do with interest rates next week
Speaker 1: or something like that. That's when he would be hard
Speaker 1: to understand.
Speaker 4: So maybe that won't be a problem with you of them.
Speaker 4: So you know, former Chairman Berninki was actually whether the
Speaker 4: person who pushed for all this FED communication and transparency,
Speaker 4: and the FED is in the process of framework review
Speaker 4: and one proposal that seems to be on the table
Speaker 4: is for the FED to publish FED staff scenarios to
Speaker 4: increase the public understanding of how the fed's forecasts actually
Speaker 4: have a various risk and uncertainty band around, and just
Speaker 4: support that type of transparency.
Speaker 1: I think that you should have transparency about the things
Speaker 1: that matter to you. If you're a decision maker, where
Speaker 1: did you come up with now's a good time to
Speaker 1: do this or that? What do you think like if
Speaker 1: you think that we're in a boom?
Speaker 2: How come?
Speaker 1: And I think that one of the negative long run effects,
Speaker 1: probably the only one of Chairman Greenspan's presence, is that
Speaker 1: he because he was always looking at every data item
Speaker 1: and then sorting it in his head, and he was
Speaker 1: doing it in a really miraculous way, which made him
Speaker 1: a legend before there word computers and so on. He
Speaker 1: was always kind of suspicious of time series models, which
Speaker 1: are really conditional expectations that are getting better and better
Speaker 1: in the Stock and Watson world at helping us think
Speaker 1: about the path of the near term economy. And I
Speaker 1: think the one thing I can say is that in
Speaker 1: terms of at least looking at the research papers, it
Speaker 1: feels like the bias against that type of work, which
Speaker 1: I think could be very useful for policy analysis, in
Speaker 1: which we used a lot when we were at CEA
Speaker 1: to think about what the forecast would look like if
Speaker 1: we passed the Tax Cuts of Jobs Act and we
Speaker 1: got the number right within a tenth or two out
Speaker 1: a couple of years, right with those models. I think
Speaker 1: that those time series models probably need to be invested
Speaker 1: more in in the FED. And then if there's a
Speaker 1: bigger staff that's doing that, then I think that there'll
Speaker 1: be a lot of product that'll be useful for markets
Speaker 1: to digest about.
Speaker 2: Like, look, if we do it this way, if we.
Speaker 1: Do it that way, no model is the right model,
Speaker 1: but you need to look at it bunch of models
Speaker 1: when you decide what you're thinking. I think the FED
Speaker 1: hasn't done a good job of helping people do that.
Speaker 4: So that's the area you would want to invest more
Speaker 4: in these model building exercise alt.
Speaker 1: Just like if you look at the ecadomic report of
Speaker 1: the President, if you look at the analysis that we
Speaker 1: did in the first Trump term, we had model we
Speaker 1: like put on the table the bottles we were using.
Speaker 1: We ran horse races with bottels and figured out what's
Speaker 1: the best model for modeling this type of figure, that
Speaker 1: type of thing, and then would publish tables where we said, well,
Speaker 1: you know, here's all eight models that help you do this,
Speaker 1: and here's like the central tendency or this is the
Speaker 1: one that we believe. And so I think that that
Speaker 1: level of detail is available to it now because the
Speaker 1: economic science, macroeconomic science forecasting has advanced dramatically since Allen
Speaker 1: was talking to you know, the CEO of GE and
Speaker 1: using that to decide what GDP next quarter was going
Speaker 1: to be.
Speaker 4: How about alternative data and machine learning and you know
Speaker 4: bottom up style of forecasting.
Speaker 1: Yeah, everything everything, Look at everything that and see what works.
Speaker 4: Okay, well, we only have a couple of minutes less pastime.
Speaker 4: I oh really, I'll just ask you one one last
Speaker 4: question then, So, if you were confirmed to be fet SHARE,
Speaker 4: will you commit to preserving independence in the way that
Speaker 4: you just understand in the conduct of monitor one hundred
Speaker 4: percent independence?
Speaker 1: Is anyone There are a lot of really good candidates
Speaker 1: that the president's talking with and about, but I think
Speaker 1: that everybody I know that's a candidate one hundred percent
Speaker 1: understands the importance of it dependence. And yeah, I think
Speaker 1: that that it is important and that that commitment will
Speaker 1: be made whoever the President chooses. Over and over again
Speaker 1: during Senate confirmation.
Speaker 4: Okay, thank you, Kevin Hasset, Thank
Speaker 5: You, I was any CE Director Kevin Hassett speaking fireside
Speaker 5: chat with Bloomberg Economics and a wog