WEBVTT - NEC Director Kevin Hassett Talks the Economy 0:00:02.520 --> 0:00:07.080 Bloomberg Audio Studios, podcasts, radio news. 0:00:07.320 --> 0:00:08.160 Anna Wong has. 0:00:08.080 --> 0:00:12.240 Been definitive at Bloomberg Intelligence in market economics. She is 0:00:12.280 --> 0:00:17.040 in conversation with Kevin Hassett of Greenfield, Massachusetts and of 0:00:17.120 --> 0:00:20.080 the University of Pennsylvania now at the White House. 0:00:20.239 --> 0:00:23.960 Let's listen of its sales in the US. 0:00:24.520 --> 0:00:29.120 We're the only customer for them, and they have like 0:00:29.200 --> 0:00:31.600 one percent of the US market, and there are lots 0:00:31.600 --> 0:00:34.680 of other firms selling the same product into the US. Well, 0:00:34.680 --> 0:00:36.560 then if we put a tariff on that guy, then 0:00:36.600 --> 0:00:39.400 it's really going to cause some harm to that firm. 0:00:40.280 --> 0:00:42.760 And so what we did is we actually went through 0:00:43.720 --> 0:00:49.120 all the different tariff classes. I guess what are the 0:00:49.840 --> 0:00:53.240 called h We went through the ball and then figured 0:00:53.240 --> 0:00:57.200 out like the relative elasticities and then maximized the sort 0:00:57.240 --> 0:01:01.440 of or minimized the potential harm on this one. One 0:01:01.480 --> 0:01:05.280 of the things that we've learned is that one of 0:01:05.319 --> 0:01:09.440 the reasons why the US has a really persistent trade 0:01:09.480 --> 0:01:13.399 deficit is that we have a few trading partners that 0:01:14.280 --> 0:01:19.080 are like have basically a policy in their country to 0:01:19.120 --> 0:01:23.760 create jobs and dump product into the US in order 0:01:23.840 --> 0:01:28.360 to produce political stability at home for them. And so 0:01:28.640 --> 0:01:31.480 our intuition early on as we're thinking about what's the 0:01:31.520 --> 0:01:35.200 next step given the presence intuition about how tariffs can 0:01:35.200 --> 0:01:39.360 be an important part of optimal revenue policy is that 0:01:39.560 --> 0:01:43.080 if we put tariffs on, say China, then their supply 0:01:43.200 --> 0:01:46.840 is really an elastic because and by definition it is 0:01:46.880 --> 0:01:48.880 the most at elastic thing of the world, because they've 0:01:48.880 --> 0:01:51.880 been just throwing stuff at US year after year after year, 0:01:52.720 --> 0:01:56.320 that then they would have to cut their prices to 0:01:56.440 --> 0:01:59.120 continue to sell enough stuff so that they could create 0:01:59.240 --> 0:02:01.919 enough jobs they have the political stability that they wanted. 0:02:02.240 --> 0:02:04.920 And I think if you look at the record, that's 0:02:05.000 --> 0:02:08.120 more or less been the case since the tariffs came 0:02:08.160 --> 0:02:12.960 on for the countries that have big persistent trade deficits 0:02:13.320 --> 0:02:17.120 with US, that they've ended up having to cut their 0:02:17.280 --> 0:02:21.160 import prices by so much that there's very little effect 0:02:21.480 --> 0:02:23.600 visible effect on inflation here in the US. 0:02:24.120 --> 0:02:26.960 So, which is so when I look at the schedule 0:02:27.120 --> 0:02:30.280 of tariffs right now, China is at thirty one percent, 0:02:31.320 --> 0:02:35.119 in Brazil and India are at thirty five percent, which 0:02:35.200 --> 0:02:36.440 is higher than China. 0:02:36.840 --> 0:02:39.480 And is this a transition phase? 0:02:39.600 --> 0:02:45.600 Is there where the endpoint of the trade policy in 0:02:45.639 --> 0:02:50.200 this administration say by twenty twenty eight, the tariff schedule 0:02:50.240 --> 0:02:53.560 and the relative tariffs are around the country will be 0:02:53.760 --> 0:02:58.119 different than what we have served now. And what's the endgame. 0:02:59.600 --> 0:03:03.040 President Trump, you know, will decide what the endgame is. 0:03:03.400 --> 0:03:07.040 He'll look at the deals that are being presented to 0:03:07.120 --> 0:03:10.480 us and decide if the deal is good enough. You saw, 0:03:10.639 --> 0:03:13.520 for example, that we just had a big reduction in 0:03:13.560 --> 0:03:18.560 the teriff for Switzerland after a very acrimonious phone call 0:03:19.280 --> 0:03:22.679 between the President and the Swiss that led to the 0:03:22.800 --> 0:03:26.760 very high teriff rate. And so I think that you know, 0:03:26.800 --> 0:03:30.240 there's a negotiation underway. I think for many countries the 0:03:30.280 --> 0:03:33.280 negotiation has finished. In some countries, there's still work to 0:03:33.280 --> 0:03:33.800 be done. 0:03:34.040 --> 0:03:37.640 Do you think after all the negotiations, the trade deals 0:03:37.720 --> 0:03:41.880 and adjustment in a tariff schedule, we might be converging 0:03:42.040 --> 0:03:45.360 to your algorithm in the first Trump administration, No. 0:03:45.400 --> 0:03:48.720 I think that what we'll be converging to is something 0:03:49.040 --> 0:03:53.520 like a border adjusted business cast flow tax. Because we 0:03:54.120 --> 0:03:57.160 in the Big Beautiful Bill, one of the things we 0:03:57.200 --> 0:04:02.680 did is we expanded the various experts subsidies for multinationals. 0:04:02.520 --> 0:04:05.720 And so if you have a this is inside baseball math, 0:04:05.760 --> 0:04:07.840 but if you have an export subsidy plus a tariff 0:04:08.120 --> 0:04:11.800 plus a payroll tax, then you basically have a border 0:04:11.800 --> 0:04:15.400 adjusted business cash flow tax. So I think that in equilibrium, 0:04:15.640 --> 0:04:18.000 what we're seeing is that we're getting lots of revenue. 0:04:18.040 --> 0:04:21.000 It's a few hundred billion already this year, and it's 0:04:21.080 --> 0:04:22.320 not causing a lot of harm. 0:04:22.360 --> 0:04:23.599 GDP nows at four percent. 0:04:23.680 --> 0:04:28.000 Inflation has been trending slightly down, and so I think 0:04:28.000 --> 0:04:30.800 that it's working the way it would if it were 0:04:30.800 --> 0:04:32.479 a border adjusted business cost blow tax. 0:04:32.880 --> 0:04:37.039 And what have you learned about optimal how tariff fits 0:04:37.040 --> 0:04:43.080 in this opt optimal tariff as well as optimal fiscal policy. 0:04:43.720 --> 0:04:47.640 I think that there's a race to produce in the 0:04:47.720 --> 0:04:52.080 US to avoid tariffs that is very beneficial for US workers. 0:04:52.360 --> 0:04:55.599 And if you look at capital spending ye over year, 0:04:55.640 --> 0:04:57.480 we're having one of the best years ever and that's 0:04:57.520 --> 0:04:59.760 even before we go through the trillions of promises that 0:04:59.760 --> 0:05:03.119 we've and the trade deals, and so there's that, which 0:05:03.200 --> 0:05:07.719 is the sort of capital spending effect That was somewhat 0:05:07.720 --> 0:05:10.960 of a surprise to be how big it was, because 0:05:11.200 --> 0:05:13.720 I again thought what you might see is like price 0:05:13.760 --> 0:05:17.560 adjustments and so on, to by the elastic suppliers and 0:05:17.560 --> 0:05:20.400 then the consumers wouldn't really see much of a price increase. 0:05:20.480 --> 0:05:21.800 But I think one of the things we're seeing is 0:05:21.839 --> 0:05:25.000 a massive on shoring of activity like anything I've ever seen. 0:05:25.080 --> 0:05:27.159 So I think that it's really been a very net 0:05:27.200 --> 0:05:31.120 positive policy, despite what sort of conventional economics has been 0:05:31.160 --> 0:05:34.920 teaching us since we went back to the textbooks when 0:05:34.920 --> 0:05:35.680 I was in grad school. 0:05:36.040 --> 0:05:39.360 Okay, so you know, I think on in Wall Street, 0:05:39.960 --> 0:05:43.880 most of the firms, many of the firms have come 0:05:43.960 --> 0:05:49.159 up with this costs bird and of tariff composition of 0:05:49.240 --> 0:05:57.000 around five percent exporters, cots, it discounts seventy percent, sixty 0:05:57.120 --> 0:06:01.080 to seventy percent absorbed by domestic firms and the rest, 0:06:01.279 --> 0:06:04.520 you know, twenty to thirty percent with the tier of 0:06:04.640 --> 0:06:10.160 showing up and consumer prices. Do you disagree with that 0:06:10.400 --> 0:06:11.840 sort of breakdown. 0:06:11.800 --> 0:06:15.720 Or well, I think it will depend on it's a 0:06:15.760 --> 0:06:18.680 product by product kind of analysis, and I think that 0:06:18.800 --> 0:06:21.080 it's still work in progress to figure out what the 0:06:21.080 --> 0:06:24.760 final story is. But again we've got high growth and 0:06:25.400 --> 0:06:28.479 no pick up at inflation. I think that the Wall 0:06:28.520 --> 0:06:30.160 Street folks are a lot of Wall Street folks who 0:06:30.200 --> 0:06:33.560 I respect and read in the Spring we're saying that 0:06:33.560 --> 0:06:35.840 we're going to have stagflation, that we're going to have 0:06:35.880 --> 0:06:38.000 four or five percent inflation because of the tariffs and 0:06:38.080 --> 0:06:38.640 no growth. 0:06:39.000 --> 0:06:39.800 And so I think that. 0:06:41.279 --> 0:06:45.760 Allocating like the current state of the economy and the 0:06:45.760 --> 0:06:49.880 impact of tariffs on it, from people who told us 0:06:49.880 --> 0:06:52.520 that we'd have a recession with high inflation with those 0:06:52.600 --> 0:06:54.360 models is probably not the best thing to do. 0:06:54.600 --> 0:06:57.440 Yes, certainly Wall Street have been caught wrong on their 0:06:57.480 --> 0:07:01.799 forecast of an inflation surge which did not happened. In fact, 0:07:01.800 --> 0:07:08.120 I remember, I think the consensus upon Liberation Day, everybody 0:07:08.200 --> 0:07:11.400 revised up the core of PC inflation to well over 0:07:11.560 --> 0:07:15.200 three percent, even some closer to four percent, and now 0:07:15.240 --> 0:07:18.200 we are on track to hit two point nine or 0:07:18.240 --> 0:07:20.800 three percent at the end of this year. So for 0:07:20.800 --> 0:07:22.720 sure the consensus has. 0:07:22.640 --> 0:07:23.360 Been wrong on that. 0:07:23.600 --> 0:07:27.200 So recently, there's a viral San Francisco FED paper that 0:07:27.280 --> 0:07:30.680 looked at one hundred years of history of tariffs and 0:07:30.720 --> 0:07:34.720 they found the net effect of tariff tend to be deflationary. 0:07:36.040 --> 0:07:38.120 However, they also found that. 0:07:38.040 --> 0:07:42.400 Because it's deflationary because it as an aggregate demand shock 0:07:42.560 --> 0:07:46.080 more so than a supply shock, and hance, ultimately it 0:07:46.280 --> 0:07:50.840 raised the unemployment rate, and so far this year, when 0:07:50.840 --> 0:07:53.640 we begin the year, the consensus on Wall Street is 0:07:53.640 --> 0:07:58.120 four point one percent unemployment rate. Currently it looks as 0:07:58.120 --> 0:08:00.480 if we are heading to four point three to four 0:08:00.520 --> 0:08:03.360 point four at the end of this year. How much 0:08:03.400 --> 0:08:06.880 do you think of this slower hiring and increase in 0:08:06.960 --> 0:08:11.120 unemployment rate as attributable to trade policy or what. 0:08:11.240 --> 0:08:15.080 Other Well, I think it's actually, you know, quite a 0:08:15.120 --> 0:08:18.960 mistake to look at one hundred years of history to 0:08:19.160 --> 0:08:24.600 learn about today's situation. To do that, you're making an 0:08:24.680 --> 0:08:28.800 underlying assumption of what a conrometricians call ergaticity, the idea 0:08:28.920 --> 0:08:33.880 that the data generating process is the same over time, 0:08:33.960 --> 0:08:36.280 so that you can identify it in this period and 0:08:36.320 --> 0:08:39.199 then use your knowledge to think about the next period. 0:08:39.840 --> 0:08:43.520 I think that, you know, one hundred years ago, if 0:08:43.520 --> 0:08:46.400 you wanted to move production from one place to another, 0:08:46.800 --> 0:08:49.679 it was like almost impossible. You'd have to like get 0:08:49.679 --> 0:08:52.560 it on the Queen Mary or something and move it around. 0:08:52.640 --> 0:08:57.840 And now it's really really easy. If you know, a 0:08:57.920 --> 0:09:01.120 hundred years ago, I guess we didn't have a telephone, 0:09:02.360 --> 0:09:05.080 or maybe we just started to have a telephone. But 0:09:05.200 --> 0:09:08.240 now we've got the Internet and we've got Ai helping 0:09:08.320 --> 0:09:10.840 us decide how to move stuff around. We've got a 0:09:10.840 --> 0:09:13.680 capital spending boom that would have been impossible one hundred 0:09:13.720 --> 0:09:17.040 years ago. And so I don't think that, Yeah, I 0:09:17.040 --> 0:09:20.680 don't think that history in this case is going to 0:09:20.679 --> 0:09:24.079 be that useful because it's clearly a point where the 0:09:24.120 --> 0:09:28.320 assumption of erganicity is not going to apply. And so 0:09:28.600 --> 0:09:31.960 we're seeing massive movements you've seen in the big drug companies, 0:09:32.000 --> 0:09:36.400 every movements of production to the US that will benefit 0:09:36.600 --> 0:09:40.600 US consumers and especially US workers. We're seeing real wages 0:09:40.679 --> 0:09:44.600 already this year going up, recovering and maybe about a 0:09:44.640 --> 0:09:47.280 third of the ground that we lost under Joe Biden 0:09:47.320 --> 0:09:49.520 with the high inflation. And I think that those real 0:09:49.559 --> 0:09:51.920 wages are going up because we're getting a lot of onshoing. 0:09:51.960 --> 0:09:55.360 It's not just because of the big beautiful bills tax cuts, 0:09:55.360 --> 0:09:58.480 but also because of the onshooring from the tariffs. 0:09:58.600 --> 0:10:03.840 And well, that conclusion is not just from that paper 0:10:03.880 --> 0:10:06.840 based on one hundred years of history. Actually, back in 0:10:06.920 --> 0:10:11.520 twenty eighteen, when we look at the historical FMC presentations, 0:10:12.000 --> 0:10:16.600 there was a staff presentation that used the internal Workhorse model, 0:10:16.640 --> 0:10:18.320 the FED Sigma model. 0:10:18.559 --> 0:10:20.120 I don't know if you're familiar with that. 0:10:20.440 --> 0:10:24.640 To run us to evaluate your tariff algorithm back in 0:10:24.679 --> 0:10:28.439 twenty eighteen, Suppose there's fifteen percent tariff on intermediate goods 0:10:28.480 --> 0:10:32.559 only and fifteen percent on consumption goods only, and that 0:10:32.640 --> 0:10:37.200 model found that if you impose tariffs on intermediate goods, 0:10:37.240 --> 0:10:42.240 it is also over time deflationary, and it boosts the 0:10:42.320 --> 0:10:43.480 unemployment rate by. 0:10:43.360 --> 0:10:47.400 A little bit. In which case, how would you explain. 0:10:47.120 --> 0:10:51.480 Then, the unemployment rate increasing from earlier this year four 0:10:51.520 --> 0:10:55.000 point one to four three or four point four percent 0:10:55.080 --> 0:10:55.800 later this year? 0:10:56.559 --> 0:10:58.000 What are the drivers? 0:10:58.480 --> 0:11:01.200 Yeah, I mean, it's such a small movement that it's 0:11:01.200 --> 0:11:04.760 hard to say exactly. But I would say that one 0:11:04.840 --> 0:11:09.839 of the interesting puzzles is that, you know, first, we're 0:11:09.840 --> 0:11:14.320 having a productivity boom that is really unprecedented in the 0:11:14.320 --> 0:11:17.559 following sense that when I worked with Alan Greenspan back 0:11:17.600 --> 0:11:19.960 in the nineties, it was just at the dawn of 0:11:20.160 --> 0:11:24.679 the computer age, really, and they didn't even have Netscape 0:11:24.760 --> 0:11:27.200 Navigator when I first started working at the FED, and 0:11:27.240 --> 0:11:29.160 so you had to use something called Gopher. I don't 0:11:29.160 --> 0:11:31.480 know if you're old enough to remember this, which really 0:11:31.520 --> 0:11:36.560 wasn't that good. And Greenspan had an intuition that the 0:11:36.559 --> 0:11:39.559 computer was going to revolutionize the economy and give us 0:11:40.000 --> 0:11:42.680 lots of growth. It was a big positive supply shock, 0:11:43.240 --> 0:11:46.599 and so then when the unemployment rate actually kind of 0:11:46.640 --> 0:11:50.520 went down, we had no evidence of the productivity. Member 0:11:50.559 --> 0:11:52.760 Robert Cordon was saying, it's everywhere but of the data. 0:11:53.200 --> 0:11:57.120 But Greenspan decided not to hike rates because he believed 0:11:57.120 --> 0:11:59.080 that we were in the midst of a positive supply 0:11:59.160 --> 0:12:01.839 shock that was perhaps unprecedented, and we had a kind 0:12:01.880 --> 0:12:03.760 of five year run that's one of the best five 0:12:03.840 --> 0:12:06.280 year runs we've ever seen, even all the way to 0:12:06.320 --> 0:12:07.040 the point where the. 0:12:07.080 --> 0:12:09.439 US fiscal situation was in surplus. 0:12:10.040 --> 0:12:11.960 And so I think that it's one of the great 0:12:11.960 --> 0:12:16.280 moves of Federal Reserve history that Greenspan saw that it 0:12:16.320 --> 0:12:19.520 was a positive supply shock that would be both pro 0:12:19.559 --> 0:12:24.200 growth and deflationary. Yes, you have more stuff about that done. Yeah, 0:12:25.280 --> 0:12:29.960 but I say that to reference today. It's really interesting 0:12:30.000 --> 0:12:35.160 that there's like evidence in peer reviewed papers or not 0:12:35.240 --> 0:12:38.240 quite pure reviewed debt, but at NBER, which is kind 0:12:38.240 --> 0:12:41.319 of a lot of my friends at MBR. By the way, 0:12:41.559 --> 0:12:45.440 it's a secret of NBR authors like myself is that 0:12:45.480 --> 0:12:47.680 you'll very often take a paper and submit it to 0:12:47.720 --> 0:12:50.360 a journal and get the referee reports before you put 0:12:50.360 --> 0:12:52.880 it into the NBR Working Paper series, Because if you've 0:12:52.920 --> 0:12:56.200 got some stupid mistake, the referees will catch it. You 0:12:56.200 --> 0:12:58.600 don't want to embarrass yourself in front of everybody by 0:12:58.640 --> 0:13:00.840 just throwing it out there. Actually, the NBR is kind 0:13:00.840 --> 0:13:02.439 of almost pure reviewed, but there's a lot of stuff 0:13:02.440 --> 0:13:07.560 showing big AI gains. And the thing is that we 0:13:07.600 --> 0:13:10.240 also see it in productivity. And so if you think 0:13:10.280 --> 0:13:14.360 about the difference between say nineteen ninety six and today, 0:13:14.960 --> 0:13:18.560 is that we've got this revolutionary new thing that probably 0:13:18.600 --> 0:13:21.880 is going to be a big positive for productivity. And 0:13:22.240 --> 0:13:25.200 you know, Steve Olner and Dan Sickle, your former colleagues 0:13:25.200 --> 0:13:26.840 at the FED, had a famous paper that you only 0:13:26.840 --> 0:13:31.079 see productivity booms after the benchmark revision, right, so you 0:13:31.840 --> 0:13:34.360 never actually experience it while it's happening in the data. 0:13:35.000 --> 0:13:38.160 And this AI boom is significant enough that we're already 0:13:38.160 --> 0:13:40.680 seeing it in the data. Probably the benchmarker vision is 0:13:40.679 --> 0:13:43.840 going to revise it up. And against that backdrop, I 0:13:43.880 --> 0:13:46.880 think that the open question is how do we have 0:13:46.960 --> 0:13:51.840 high growth and then less growth. 0:13:51.520 --> 0:13:52.920 And employment than we expected? 0:13:54.160 --> 0:13:57.079 And you know, I think that the tariff could be 0:13:57.120 --> 0:13:59.880 part of the story, but I think that that probably 0:14:00.200 --> 0:14:01.480 a very small part of the story. 0:14:02.240 --> 0:14:02.520 Yeah. 0:14:02.559 --> 0:14:05.160 I mean when we looked at the earning transcripts from 0:14:05.200 --> 0:14:09.360 this third quarter and where the so far the earnings 0:14:09.360 --> 0:14:10.840 have been surprisingly positive. 0:14:11.800 --> 0:14:13.280 In fact, it was like the best quarter ever. 0:14:13.480 --> 0:14:16.440 So we use surprises, we use AI to extract some 0:14:16.559 --> 0:14:19.400 of the themes, and we did find that one of 0:14:19.440 --> 0:14:22.080 the dominant theme is that there are other stuff happening 0:14:22.160 --> 0:14:25.920 outside the trade policy that's helping offset a lot of 0:14:25.960 --> 0:14:27.000 this tariff bill. 0:14:27.600 --> 0:14:28.680 But focus. 0:14:28.800 --> 0:14:30.440 Yeah, I don't mean to cut you off, but I 0:14:30.520 --> 0:14:33.160 just want to highlight how important what you just said is. 0:14:33.640 --> 0:14:35.880 And the way to think about it is that trade 0:14:35.920 --> 0:14:40.680 is about fifteen percent of the economy, and the economies 0:14:40.840 --> 0:14:43.000 the rest of it's like eighty five percent of the economy, 0:14:43.040 --> 0:14:44.720 and so you could do a lot of stuff in 0:14:44.800 --> 0:14:49.600 trade that has effects on the trade space that is 0:14:49.680 --> 0:14:51.560 completely overwhelmed by the eighty five percent. 0:14:52.640 --> 0:14:53.960 And eighty five percent. 0:14:53.680 --> 0:14:57.440 Of the economy is getting this massive productivity change, and 0:14:58.440 --> 0:15:01.120 it'd be hard for you know, a large change to 0:15:01.160 --> 0:15:04.360 eighty five percent to not overwhelm something you did to 0:15:04.400 --> 0:15:05.160 the fifteen percent. 0:15:05.400 --> 0:15:07.560 Yeah, at the same time, sixty six percent of the 0:15:07.600 --> 0:15:12.280 economy is labor share, and a lot of academic studies 0:15:12.280 --> 0:15:15.960 are also looking into whether AI is already causing low 0:15:16.080 --> 0:15:21.040 hiring rate among young graduates. Whoever is graduating from college 0:15:21.480 --> 0:15:26.080 this year is probably in for a bad deal. So 0:15:27.760 --> 0:15:30.000 I think there is a puzzle out there, which is 0:15:30.400 --> 0:15:33.360 if you have GDP growing at three or four percent 0:15:33.720 --> 0:15:36.560 at the same time you have a lot of the 0:15:36.600 --> 0:15:39.800 sense of job insecurity in this labor market, and the 0:15:39.880 --> 0:15:43.560 labor market is lagging these other you know, the GDP 0:15:43.720 --> 0:15:50.400 growth indicators, and the question is can this GDP growth 0:15:50.480 --> 0:15:55.800 be sustained at this three or four percent while the 0:15:55.880 --> 0:16:03.240 labor market is so going sideways basically with labor share 0:16:04.120 --> 0:16:08.240 probably going down pro UH probably because of productivity is 0:16:08.480 --> 0:16:09.000 in the future. 0:16:09.040 --> 0:16:09.760 It could be that. 0:16:09.880 --> 0:16:12.720 I also don't forget that there's been a big reduction 0:16:13.080 --> 0:16:17.440 in illegal immigration and employment from that aspect, and so 0:16:17.600 --> 0:16:21.560 the UH population growth is pretty low compared to what 0:16:21.600 --> 0:16:23.440 it was when we had tens of millions of people 0:16:23.440 --> 0:16:24.280 crossing the border. 0:16:24.720 --> 0:16:26.280 And so the break even. 0:16:27.760 --> 0:16:31.680 Job's number for the payroll survey is people think is 0:16:31.680 --> 0:16:33.720 down like quite a bit and to maybe around forty 0:16:33.800 --> 0:16:34.080 or fifty. 0:16:34.240 --> 0:16:36.360 Yeah, between thirty to sixty sounds wight. 0:16:36.400 --> 0:16:38.280 Well, I was forty fifty or thirty sixty. I think 0:16:38.320 --> 0:16:42.480 we kind of we're about the same rate. And so 0:16:42.880 --> 0:16:46.640 that's like another thing that we could have big increases 0:16:46.680 --> 0:16:50.560 in productivity, of big increases in output and a healthy 0:16:50.680 --> 0:16:54.479 labor market with job numbers like the one that you forecasted, 0:16:54.520 --> 0:16:55.760 and we'll see whether you're a right or not. 0:16:56.560 --> 0:17:00.240 So fifty four sounds good too. I'm saying that it's 0:17:00.240 --> 0:17:01.240 not one hundred. 0:17:02.560 --> 0:17:05.120 That's enough to sort of keep up with population. You'd 0:17:05.160 --> 0:17:07.960 want stronger growth of that in unemployment to go down. 0:17:07.960 --> 0:17:11.200 But the outmployment rates a little higher than what's probably 0:17:11.200 --> 0:17:15.600 the equilibrium unemployment rate and full employment economy, but not 0:17:15.640 --> 0:17:16.120 a whole lot. 0:17:16.920 --> 0:17:21.840 So Kevin, going back to this productivity boom, I recently 0:17:22.119 --> 0:17:25.680 tweeted a couple of pictures that seems to suggest some 0:17:25.960 --> 0:17:31.960 emergent micro evidence of how AI is boosting business formations, 0:17:32.320 --> 0:17:35.960 and Saint Louis fed also has a piece out showing 0:17:36.440 --> 0:17:42.320 how AI adoption is correlated to rise in sector specific unemployment. So, 0:17:42.840 --> 0:17:46.199 you know, just evidence that AI is working through at 0:17:46.200 --> 0:17:49.720 the micro level. But then the response I got made 0:17:49.720 --> 0:17:53.199 me realize that it is actually a really polarizing topic 0:17:53.760 --> 0:17:56.399 with half of the If you survey a lot of people, 0:17:56.560 --> 0:17:59.600 half of them probably say AI is a bubble. Half 0:17:59.600 --> 0:18:03.199 of them say that there's no evidence that there's a 0:18:03.680 --> 0:18:08.600 productivity boom, yet that productivity is still on trend and 0:18:08.640 --> 0:18:12.720 the improvement reflect more of a cyclical thing that happened 0:18:12.800 --> 0:18:19.080 post pandemic as opposed to this sustained AI driven productivity. 0:18:19.359 --> 0:18:22.440 So, if you know, we are going. 0:18:22.280 --> 0:18:25.159 To touch on you being the one of the leading 0:18:25.200 --> 0:18:28.720 candidates for FETCH here and going back to that nineteen 0:18:28.800 --> 0:18:33.160 ninety five nineteen ninety six, those two critical years at 0:18:33.160 --> 0:18:38.359 the FED, you mentioned that Alan Greenspan was really the 0:18:38.400 --> 0:18:41.639 only one, one of the few who saw evidence of 0:18:41.680 --> 0:18:46.840 productivity boom. And I've read the historical transcripts in December 0:18:46.960 --> 0:18:51.560 nineteen ninety five that particular Fobascy meeting where half or 0:18:51.720 --> 0:18:56.600 more of the FORBASC we're agitating for holding rates constant, 0:18:56.720 --> 0:18:59.800 and in nineteen ninety six most many of them wanted 0:19:00.080 --> 0:19:06.360 rate hikes, and somehow Greenspan was able to convince all 0:19:06.400 --> 0:19:11.359 this these skeptics that something is afoot without the data 0:19:11.480 --> 0:19:12.120 to support. 0:19:12.880 --> 0:19:15.920 Let me talk about this because there's an interesting anecdote 0:19:15.960 --> 0:19:18.240 that I don't think is ever made public about this 0:19:18.400 --> 0:19:24.800 that so, because computers were improving so quickly, then it 0:19:24.920 --> 0:19:27.159 was decided by the Bureau of Economic and Analysis a 0:19:27.200 --> 0:19:29.600 lot of great professionals over there that they needed to 0:19:29.880 --> 0:19:33.920 what we call hedonically adjust the computer price, which meant 0:19:33.920 --> 0:19:36.240 that if you had a computer chip that was twice 0:19:36.240 --> 0:19:39.439 as fast as the one from last year and it 0:19:39.520 --> 0:19:42.000 costs the same, then that's like a big reduction of 0:19:42.040 --> 0:19:46.080 the price of computing. And so that in a typical year, 0:19:47.119 --> 0:19:49.600 right around when we were starting to have to make 0:19:49.640 --> 0:19:53.720 the judgment on this, the computer price was dropping at 0:19:53.760 --> 0:19:56.760 about like sixteen to twenty percent at an annual rate, 0:19:56.760 --> 0:19:59.879 and there was so much computer investment that real GDP 0:20:00.040 --> 0:20:02.679 he was getting a real big kick from the fact 0:20:02.720 --> 0:20:04.720 that the deflator for computers. 0:20:04.320 --> 0:20:05.120 Was dropping so much. 0:20:05.200 --> 0:20:09.440 Yes, so I was in charge of that part of 0:20:09.480 --> 0:20:13.720 the world for the staff. I spoke a lot to 0:20:13.840 --> 0:20:19.640 Greenspan and he said to me once, how do they 0:20:19.640 --> 0:20:24.199 deflate a communications equipment cause communications equipment is basically like 0:20:24.240 --> 0:20:29.840 computers now And went back and looked and communications equipment 0:20:30.280 --> 0:20:33.439 rather than dropping fifteen or twenty percent a year was 0:20:33.480 --> 0:20:36.119 going up like two or three percent a year, And 0:20:36.160 --> 0:20:38.560 so then I called over cause they're actually very open 0:20:38.600 --> 0:20:41.200 about like the technical people at PA right, and I 0:20:41.359 --> 0:20:44.000 talked to them about, well, why why is that? And 0:20:44.040 --> 0:20:49.720 they say, well, that we use when we're making our deflators, 0:20:50.119 --> 0:20:53.679 we use something called a match model approach. Yes, and 0:20:54.560 --> 0:20:57.880 so if something we sold it yesterday and we're selling 0:20:57.920 --> 0:21:00.800 it today, then that's like we look at the price 0:21:00.880 --> 0:21:03.000 change for that, and that's where we get our deflator, 0:21:03.680 --> 0:21:07.560 and we don't change the bundle of things that we 0:21:07.680 --> 0:21:11.080 use the match bottel approach for very often. And it 0:21:11.160 --> 0:21:14.200 turns out that there were a lot there was at 0:21:14.200 --> 0:21:17.240 that point a lot of communications equipment produced in the 0:21:17.359 --> 0:21:21.200 US for developing countries that were kind of like really 0:21:21.240 --> 0:21:24.400 old fashioned analog things where you got like Josephine moveing. 0:21:24.240 --> 0:21:26.359 The wires and stuff to connect the phone calls. 0:21:26.840 --> 0:21:29.199 And since we had this really old equipment that we 0:21:29.200 --> 0:21:32.800 were exporting to developing countries, they were using the price 0:21:32.840 --> 0:21:35.879 of that to deflate communications equipment. It sounds like a 0:21:35.960 --> 0:21:39.840 very technical batter. But then Charmy Greenspan said, well, Kevin, 0:21:40.160 --> 0:21:45.919 what if we deflate communications equipment with the computer deflator instead? Like, 0:21:45.960 --> 0:21:48.240 how much more would GDP be going up? And it 0:21:48.320 --> 0:21:51.280 was like about one and a half percent because of that, 0:21:52.080 --> 0:21:54.560 and so he was kind of like, yeah, we're really 0:21:54.840 --> 0:21:56.520 growing way more than we think. 0:21:57.119 --> 0:21:59.080 We've got a serious measurement problem. 0:21:59.840 --> 0:22:04.960 And then if you extrapolate from that, then if you 0:22:04.960 --> 0:22:08.240 were hedonically adjusting everything that gets like a computer to 0:22:08.240 --> 0:22:11.880 make it better, then you're putting like a deflationary force 0:22:11.920 --> 0:22:13.240 into the economy. 0:22:12.760 --> 0:22:13.760 That's not being measured. 0:22:14.359 --> 0:22:16.240 And so I think that it could be that the 0:22:16.280 --> 0:22:20.640 communications story was a key moment where you know, everybody 0:22:20.640 --> 0:22:23.280 at the board had a ah, yeah, I can understand 0:22:23.280 --> 0:22:25.000 why Alan is so convinced about this. 0:22:25.400 --> 0:22:27.760 So I was going to ask you, so what you're 0:22:27.960 --> 0:22:30.480 It's interesting you were in the price and wages section. 0:22:30.720 --> 0:22:33.320 No, I was the business fixed investment person. 0:22:33.359 --> 0:22:34.200 Oh that okay? 0:22:34.880 --> 0:22:36.040 Economic activity, Oh. 0:22:35.960 --> 0:22:40.440 I see, and and what where? What other sections were you. 0:22:40.480 --> 0:22:40.879 Or have you? 0:22:41.119 --> 0:22:42.159 That's that's the only one. 0:22:42.359 --> 0:22:45.800 Wow, that was You're very well placed for for that. 0:22:45.960 --> 0:22:48.920