Claudia Sahm from the Washington Center for Equitable Growth joins Matt to explain a surprisingly simple strategy to stabilize the economy.
Claudia Sahm, (@Claudia_Sahm) Director of Macroeconomic Policy, Washington Center for Equitable Growth
Matthew Yglesias (@mattyglesias), Senior correspondent, Vox
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This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
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get clytius some on the weeds for a long time to talk about her research on what monetary policy can do to prevent recessions, it hasn't been possible because for the longest time she was working on the staff at the Federal Reserve Board and they they would not. Let me interview her, but she has a new job now. So I was able to but current I was so excited, and this is not like a topic. People are talking about all the time, but it is super duper dupe very readily port. In the next time there is a recession you're going to want to know what she has to say
About one another, so that it reads on a box ass network, I met your glaziers my guest today. Claudia SOM is the director of macroeconomic policy at the Washington Centre for equitable growth really glad to have you here near and I'm excited to be here today I was, I was trying to get you on the show. While you are in your previous job at the Federal Reserve
but that was not allowed by. I was not allowed to do podcasts as masters brave new world for me. So now we get the truth. So I really want to talk about your chapter on
This is the sort of a new idea about how we can stabilize the autonomy and prevent or or combat, were sessions, but before we get into that the details of that I want to sort of motivated like why do we need new ways to think about this? How how have we been trying to stop we're sessions and why
wise and a good enough right waving, there's been a long standing concern about dealing with recessions, fighting recessions when they happen there, incredibly damaging so their damaging to the people who lose their jobs in a recession when they ve lost their jobs and even after they go back to work decades later there there heard by their careers are hurt. So the human cost of every session are very big,
We policymakers have known this for a long time, and so we have many different tools that we try to use in a recession to blunt its effects, make it shorter, make it less severe. In previous decades the
thinking among policymakers is that the Federal Reserve takes the primary role so that they have tools in their monetary policy
toolkit lowering interest rates that they can help smooth out the recession. Now
conversation has been very important, since the great recession is that the Federal Reserve has had to use unusual tools. There refer to fortuitous unconventional policy,
because they couldn't raise, or they couldn't lower interest rates anymore, even early in the recession, and so they did asset backed purchases. They tried use forward guidance which is very frightening to have have economists, their words words to move economy,
and so they were very creative. I firmly believe that the FED will continue to be creative there more tools in their arsenal, but there is a legitimate concern
and that these are not as effective. Economically remember, Nike himself said, with quantitative easing unconventional policy
it's kind of surprising they work. Like the economic theories. Don't say these should work. I believe he believes that they did work
but we're in a very different world. The other thing that is,
concerning. Is that the effects of those policies, the asset back purchases, they could have different implications for different people, say in the wealth, distribution, income distribution and that that also could be very bad and long.
The good old days, fifty sixty seventy s. Eighty S, ninety S, up until the great recession, the FED would basically fiddle with short term interest rates, and it was felt like until two thousand and eight the general consensus was that this was.
Far right than we had taken. The decision making out of the hands of Congress, which is slow and full of nincompoops. Am the FED could sort of move fast parades down if they knew to be down up if they
is to be an end in was working while right. No an economist really believe, not surprisingly, that these decisions about how to deal with recessions, where best left to the economists to the technocrats and that the Federal Reserve is full of them.
And the the Congress in many of these recessions, especially very severe recessions, would steppin but they'd stepping in the moment they pass attacks. Rebate.
They might in the great recession they did transfers to state and local governments. All of this was figured out at the time and it was more to supplement monetary policy and just to drive home the point at how overconfident economists, God Robber,
Lucas and his presidential address at the annual economics meetings. Not just a few years before the great recession said we have conquered recessions.
We know how to stabilize the business cycle of FED is guarded under control, and that turned out not to be very preshent right. He said these have liked the whole subject with Oda. We're done so party. This wait, you, you would leave it to the technocrats to the experts because they could they couldn't do it right, but then also user dimension this, but with the conventional interest rate tool, it was understood that did they didn't have a lot of complicated implication? So so you could. You could leave it to the experts, at least in theory, but then what what went wrong is. I mean I think I think it almost sounds silly, but, like the interest rate couldn't go below zero right or the FED has chosen
not to pursue a policy that has negative interest rate. Some other countries, particularly in Europe, have explored this policy tool. I would say I would back up just a little bit and I agree that interest,
creates a lowering interest rates, that's easy to tell people, we can look at it and the financial markets, the way in which it affects the economy. Economists point to a whole bunch of different transmission mechanism. Sometimes it's real
good for people who have debt some time, it's good for
just a lot of differently. It could be a confidence channel, so there's probably hinders like eight channels that,
time point and we really dont know which one it is in fact which one it is could have, could have real implications for people, but it is
Relatively somebody. Monetary policy is not simple to communicate, but that's a whole lot
you're than saying
going out and buying a whole bunch of mortgages, we're trying to move that the long term
Treasury reminisce is just it waves into a space where its essentially the it's somewhere between impossible and varied
a cold to convey that produce an american people, but also its it's to an extent. It's like. I was filling the FED to a little bit. His leg is like the wizard,
The current right and the more you get involved with what we're gonna buy mortgage backed securities or we're gonna change twenty year. Bonds are just the more you're doing stuff that needs to be explained, the more visible it is that this group of people is making like really important decisions, and you might you know people might might get mad at you. People might criticise your choice
and that's not that's like not the rolls central bankers want to be play yet, no one, one of my unpopular opinions, while I was still a FED staffer, is that,
I feel like the policies that defend pursued- and this also goes to the bail out in the financial crisis,
is the lender of last resort, and that is such a good thing.
And then going into like you said these buying mortgage securities moving into markets where they didn't tend to be. I really feel like the FED use the political capital that they had to save Wall Street
I think they needed to do that when it came time into the recovery that was
very slow recovery. I followed consumer spending in my job at the FED and it was. It was heartbreaking to see how slow how painful it was.
When they went to do quantitative easing, so that's the main way to describe the policies they
they had drawn a lot of criticism from Congress, they had gotten a lot of attention. They did some things with the bailout that, frankly, no
on the hill knew they could do like. I said they got creative. There was a car
to that. So they were under it's hard to imagine now how
political fire there under, but they were under quite a bit in the recovery, and I feel like that constraint
their ability to go big on quantitative easing because they just they couldn't afford Lou.
Seeing the feds independence, and this is something Bernanke he talks about in his memoirs. He did not want to go down as the chairman of the Federal Reserve that ended the FED our his watch, but I mean this is this very frustrating to me, because I will
over this period- and I remember this sort of professed concern front from the staff at and the leadership and what I always wanted to, let you know yell with like
fundamentally like nobody understands this, and nobody cares like the problem is that your job is to make the economy work and it's not
working. You now, so you will. You will say, oh, like we're getting all this criticism for quantitative easing, but like the basic issue was that until we wait until this year, we have not had a condition in which the unemployment rate is like a reasonably low level now, but we don't know that it's as low as it can
oh right by an end and the fed and multiple points over the past few years has said it is those that can go
without inflation taking off to aiding the FED, is just they have painted themselves into a corner to sign?
extend to end it from another.
Happen early in the recession, I think one of the saddest moments I felt for Chairman Bernanke IE is watching him in public tried to explain to the american people dead. The Federal reserve's policy had been so successful in the great recession because we had avoided the
depression. Sure, good luck with that, like people can't imagine the alternate universe in which he didn't act and where the virus or didn't act. So if there left with that's the best, they can do to explain it.
That this is not going to work well and then they for years and years, their predictions of where they occur
we would be next year a wrong where so, ok, so
what in general, what what is an automatic stabilizer so in autumn
EC stabilizer is support to the economy or support individuals, businesses that just kicks on so
something that happens in the economy, there is to be a trigger and and
When we say ok, we're gonna,
given money, we're going to reduce taxes, taxes in fact are an automatic, stabilizer rack
in a recession and comes go down for taxes or progressive to pay less. So we have lots of these already. We could have more rights and we often talk about the sort of basic welfare state as a as an automatic stabilizer. If you lose your job, you get Medicaid, you get unemployment, insurance, you're, not paying income taxes, and this makes the budget deficit bigger, which causes some people to freak out
But this is supposed to be economically helpful right and it's helpful all the time I mean people lose their jobs every month every day. The reason it's
he turned away to fight recessions. Is alot of people lose their job in a recession.
And and Congress in the past- has given extensions a number of weeks. The United States number weeks weeks, not that long, but they give extension
Gender number of weeks sometimes will increase the payments food stamps. You see this to suit. The Congress has recognise and has acted to, support the economy
in an automatic wait like they don't have to sit down vote on it that I'll have to figure out the mean in some cases they do, but a lot of its just pre programmed
and so I mean you- you used to focus on and setting consumer spending, which is where, with these stabilizes, you really see it right. I mean people when the economy goes. Bad people is a jobs. Incomes for people on buys much stuff, but they are able to buy more stuff than they would without. You know, food stamps without unemployment insurance, so we don't we. Otherwise, you might just have like every story
right now be bad and I think, in addition to giving people money disband, there is a big confidence effect, especially early in Korea,
unemployment. It takes time to build
like not, everybody loses their job on day, one of a recession, but people can freak
on day one of a recession cause they don't know. Most Americans do not have a lot of money saved up an so if they seized people around them start
lose jobs and they know they are basically one paycheck away from a lot of financial distress. They're gonna start pull back on their spending even
getting the income they always get so
There is an aspect of just getting money out: their quickly tells people. The garments got your back, we're gonna do something and you can see it like it's a check in the mail,
RO. So was I mean this? Is like people buy? You know a durable goods ride over time. People need appliances, people want furniture, people want cars, and if you start to worry right, this is that the conference
If you start to think I'm I lose my job, then you sort of cancel those plans because you can, you can get by right without and you're trying to build up a kind of financial buffer and that's fine. Is there something wrong with saving money in some ways? It's it's good, but the problem of a recession red is that if everybody says ok, maybe I'll wait to next year, then we all have a big collective problem right right, nay, one piece of a recession that fundamentally what defines recession is the economy is
whole starts to go under contract, and I think there are some very compelling survey evidence that shows exactly this about durable spending, so it s household every month. Is it a good time to buy a durable, the maids like household goods and claims automobiles, and why you see in a recession and households are very good at picking up when we're starting to go into recession is a huge decline in the individuals who tell us is a good time to buy and what I find
These striking a may not be as widely appreciated is its everybody. I got all income levels, high income, people middle so and that's what defines a recession is if everybody gets worried and starts pulling back, that's it. That is a big. Any, can actually spiral rack, because right he's, I give everybody decides let's not by a toaster, then everybody loses their toaster jobs and they get it gets worse and worse. Ok, so I think this basic groundwork a place, let let's take a break due to adds, keep the national accounts.
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Ok, so you haven't idea I've written in a book chapter in a book. That's called recession, ready, which is a sort of it, a set of proposals to improve these automatic stabilizers. A new idea that I think is it's really intriguing in its simplicity, because I think that helps address a lot of the the sort of practical problems that that exist here. So why don't you tell people what what is it? How can we haven't? We do this, so my proposal is as soon as we think we're in a recession and come back to the Edison good good indicators. For this.
So as we're in a recession, send money out to households, send it out to all households and make it big, like one thousand dollars scale it up. If they have kids so get that money out, get it quickly. It goes to everybody, it's very transparent right, so this is like basically like keep it simple right, and one intriguing thing about this- that I think flips
old connection was one's head weight is at what, when low summers was sort of orchestrating stimulus ideas, he said we needed to be timely, targeted and temporary. You are aiming for timely here, but but not for target ants ray and
this. This comes in part from my reading of the research, my own research, that I've done
as you mentioned before it, the Federal Reserve. I was one of the economists in charge of thinking about consumer spending consumer behaviour. My first forecast that I worked at the Federal Reserve was in January two thousand eight.
So my entire education, as a macro economist out in the real world, was in the room,
recession in the long recovery. Part of my job
early on, given this timing is that I spent a lot.
I'm thinking about the stimulus that the government was giving the households
federal reserve does not take a stand. They don't go to Congress and tell people this exactly how you ought to do the fiscal stimulus, sometimes I'll say please do more, but they don't tell them how do their job, but for a cut
Yes, like me who work on the forecast that we prepare before every fairer, open market committee meeting, you have to try to understand and make an educated evidence base, guess at how they can affect the economy, because then the FED does its policy taking that into account. So that meant I did a lot of reading the research understand
heard, and I contributed to that research and I was able to study the two thousand a tax rebate.
The two thousand and ten making work pay the two thousand eleven twelve peril tax cut too.
After all that I got a lot of opinions on how to do this. Stimulus
My read of the data is targeting by income
so focusing on lower income, households, which some economists would save us right thing to do,
The evidence is conclusive,
I have some other reasons. Why don't think that's right thing to do? There is a lot of research, the targeting at TAT individuals who have a low, save
Not a lot of money in the bank that would be powerful, and I think that is probably true. I think it is basically impossible to target those people in so,
I want is a fast and I am not willing to trade off between taking out a time collecting the data and just getting it out right. So I mean, I think, that's what sort of key turning point here, because part of the obsession with targeting is like a fear that you're gonna accidentally like do too much or or something like that, like ten cents will get wasted someplace at an end. You can't do that and I think the experience of the past ten twelve years has been that the real risk is that the political sustainability of your actions just runs out before you need to do it right and my party, the genius of this is that nobody, nothing is nine hundred.
In life, but nobody needs to feel bad right, there's no like well! Why is he getting the money? Yeah? No one. I think that's incredibly important for giving cover and general support for other kinds of stimulus, support that goes to households. That's very specific people who lost their job, people who need to go on food stamps
Frankly, I think we could have made a lot more progress in supporting underwater mortgage bonds.
They're. Just there was not the political will there. What measures are wasn't support from people cause they're like where you made it bad decision rat? You gotta pay for it now now that was incredibly hard.
Go to the economy and those same people that we're saying it. But again that's hard. That's hard to understand too. I think this
get it out early. Everybody gets one so they're like. Oh, I got support so this,
over there needs a little bit more. Ok, now about this leg, bipartisan support for doing this kind of direct payments.
We have experience with this. So in two thousand one: two thousand aid there's some examples. In the past Congress agreed when things started going south we're gonna get out money, tax, rebate, stimuli.
Payments and an often those were broadly out to the economy. There is a little bit of tailoring too high income, but they went out now
My proposal, I think, that's very doable. I think the question is about commit.
Two. It now making an automatic, but was at that aside? The other thing that my proposal- those very intentional,
watch. The long recovery is that in a severe recession, part of the proposal is that Congress will commit ahead of time to continue these payments every single year until the unemployment rate,
starts to come down right. So your ideas in instead of what happened in two thousand aid was they kind of. This was back. This was Georgia. We bushes final year, Democrats were in Congress. This was what they could agree on, basically, rather than a technical analysis, but was they they cut checks to everybody, and then the economy have getting worse in the world. Just kind of move
from from that whole concept and ensure I d, a right is too instead of as a one off right. It's it's a programme. There is, will talk about the metro expected just sort of automatically goes out. Then I think we should talk about about that two thousand eat because I feel like the conventional wisdom on that kind of has turned
over the course of my career and at first there was a lot of sense that that didn't work or was disappointing and now-
I mean, I know you have a different rid of them.
And I think a lot of subsequent research has shown that that was actually even though obviously didn't prevent the recession. That was actually quite helpful. I think the time is ripe in a way that it wasn't in two thousand and eight to really commit to these big stimulus paints
whence so that will take us a lot of research that has come out since is really good notwithstanding. I am
her. Whenever the next recession happens. I will read in a bed within months of it happening with some ridiculous chart of the saving rate that so
so the saving rate went up, which is a sign of households pulling back on spending, and so the payments didn't work right,
you just you have no idea what to saving rate would have done otherwise, so like these are just their absurd, but they are like weeds. They always show up old, not like the weeds here for
guess what happens is right? The Czechs go out and then somebody does they showed
the same goes up it's a recession. When someone says oh people we're supposed to spend the extra money, but they used it to pay down their credit card bells.
And we just wasted a hundred billion dollars of the people's money and drafting yes. So what has happened since then? And this is particularly in the to that-
an aid stimulus payments, there's also research on two thousand one, but I think that, because it started to build up, there was a lot of understanding and there was what we often refer to his gold standard research so that
we do say the word gold, but in a very specific contracts- and there was a team of authors
so David Johnson, Robert Mc Jonathan, Parker,
nicolelis, who used a very technical feature of how
the tax rebates and two thousand one stimulus payments in two thousand eight went out. So there is this fascinating aspect of government.
We can only send out so many checks. In a week I had a judge
the latest cutting a mailing m ends.
Knowing this predict? This was particularly binding in two thousand and one because the extra electronic fund transfers worn as common so
They really needed the paper
they sent a lot out by paper and so to equitably deal with this very wonky restriction.
They said we will send them out according to last to digital people, so security numbers. So you got a great rationalization
an amazing random position, and so with the
Authors and they were varies savvy to get extra survey
on the consumer expenditure survey, which is one of the main like what did you spend in the last month and they
able to show in both episodes really convincing evidence me no evidence. Is you without criticism
what do they were able to show this in a way that I think, broadly across economist, they understood people spend a lot of this and
I also did research with Matthew, Shapiro Undrawn Slam rod a very different kind of survey, designed as asking people did you mostly spend it and why,
I also find it spending of facts. Are it's a little hard
pair the two I would say hours or probably a little less powerful, but
they're like where more than what the typical economists, like all you, get a dollar and you spend it spent
out over your whole life annuity value, blah blah. That does not seem to be what I mean that just is not what household do in a recession, and so, if you give the money you're going to get something as a boost and again to the targeting point, you don't find that that's hugely differentiated, like I said targeting by income.
I don't see the evidence there is conclusive. Sometimes
We'll find it. Sometimes they won't. I in
again where you might want to build political cover, wouldn't necessarily be at the bottom of the income distribution. So I
percent, but this is one where economies ideologues my everybody
money, and you know I will say the proposal
put out. This is me reading the literature me thinking about what feasible and what could be popular. I like to think about these things too, but it's entirely possible, of course,
where's committed we're gonna do this right. Now that you can sit down a whole group of experts and economists, people who work in government administration, people who work in public policy
and they could hammer out something that could be better than what I am proposing
I am totally open when they go team like to do this, but the benefit right now have
This conversation is, like you said there. There's research out there there's evidence. There is a conversation.
To be heard at all those among all those different groups that are involved in something like a direct stimulus payment. Like I
I really believe now is the time to be doing this right and in theory, if you have the precommitment in place right, a thought process that should operate is, oh, I'm afraid there might be a recession. So I'm going to get a little bit more cautious with what I do but wait, then I remember that if there actually is a recession, there's gonna be extra money coming in to me and also to everyone, so it probably won't be so bad. So I really don't need to pull back that much right,
I mean it to an extent it should. It should work without actually doing any. I dont say without knowing it isn't a trick, but it's supposed to, if you can make people think that there will be an effective, timely response to a problem that can make the problem less of a note,
It can build confidence now. This is this is something we all have a lot of evidence for, because I think this this proposal, these payments to everyone, I think its confidence confidence.
The facts will be very different from some of the other automatic stabilized, like unemployment insurance. I think the benefit of this confidence effect is
For people that are never going to lose their job, they may not know if the one thousand dollars could help kind of
them feel better than an again like you said of everybody, goes on, stop buying the toasters than that that, in and of itself causes light. Lay off
and even more negative concerns about the economy. So I think it's entirely possible that this could have confidence.
The facts and I firmly believe that the confidence of facts arcs are important in what happens in the recession and I think that's a really important reason why Congress needs to do something like if they, if they dont do. I think this is what they should do, but they don't do this. They did. They need to come up with something else, because one thing that I don't think politicians thing about enough is that what happened in two thousand and eight has punctured the confidence that had existed during that the great moderation air right it for some reason, there's re numerous
then starts white me and everybody else who writes about the economy. We're going to have to say the FED doesn't have conventional tools. There's no plan in place for what to do. It's gonna be up to Congress to come up with something on the fly and their paralyze over over impeachment. Like I don't like,
want to contribute to mass panic about downturn but like. I would then like that's the factual situation, and I would much rather report oh really glad that last year they pass the direct stimulus act. So,
If this situation abroad causes problems, like Google
money in the bank like there's something there's a plan in place like that's the basics of confidence and back in two thousand and seven, the reporting it turned out. The conference was misplaced, but we thought that the FED knew how to beat recessions. Now we know they don't and right now we have nothing set up right. I guess a few things
believe. The FED has tools to combat recessions and they can move a lot earlier, no finance
oh Margaret and start looking back, they can ease by anything. You can point to examples of that. Even in the last decade. I think one aspect that I hope you point too as a confident,
is a recession. Ready volume exists. Yes, so Heather Bouchain who's, not my boss,
She had worked on the hill during the great recession and she said it would have been amazing to have a book on the shelf that they could put
details. It has details America's really pushed by Hamilton Project numbers in my
because I'm here those gonna do literature, review and the like. No, no, no, it works better effect. If you say like one percent of consumer spending- and you know the timing and all that- and I think that makes sense when others point was we didn't, we really did have to scramble. We had to think
these details that it would be nice if there was a concrete proposal that we could just go,
so having their benefit, and really, I think, that's ok, I'm
macro economist here now I asked who has involved in Niger. I am, I am try hitting out. Even this is like my like top prayer life is India's ironically blonde beheld in both yes, but I think there is another aspect that I think is
fourteen with doing these ahead of time, there would also help your confidence cause you care about
tales are details matter, one of the things I found
fascinating in in doing more reading about my proposal, so I had a lot of fun with the inspector general reports from the Treasury. Ok because there was such a scramble not just on the hill at the Internal Revenue Service, the souci cured.
Administration. When Congress said okay, this, what do we're going to send out these checks? Oh wow, like
There is a lot of administrative details. There always are with these checks,
I think they did. Two thousand aid is this: if we want to make this broader, so anyone whose receiving so security payments, because we have payment information for them, they are going
check too now, because the IRS was overseeing all of this. What these social security recipients had to do was file a tax return. They wouldn't normally have no taxable tax liability,
ray so security to get the word out to their beneficiaries file return, and this was what the inspector general was.
And yet both on the Internal Revenue Service, I so secure demonstration, they did a heavy lift and they did it fast. So we don't have to do that to them every time we can set up if they know this could happen, this would happen in a recession. They can get the administrative framework in place.
So it's always ready to go in two thousand and eight and in the past there was no way to get these stimulus payments out during tax season and the IRS is busy sure. But if you created infrastructure, not only could you get it
out any time you needed it, you can get it to a broader population populations, again food stamp for emulate. There's just a lot more. You could do if you lead administrative agency officials think about it, get structures in place right so that the ideas this this is definitely the weeds. But but it's important right because it was formerly structure in two thousand one. He was there was a tax rebate, Warren Quote, so that meant you it's a piggy back on the IRS tax infrastructure. So, as you say, they have a busy season, there's also people who are not filing tax returns, but we could and using should set up a system that broader than that,
right. So what everybody gets a thousand years, where do due to people with kids get extra money in my proposal they do in into those on one and two thousand and eight. I know in two thousand eight. They did raise it depending
the number of doesn't like stand or fall fall on that point.
No, but I think that some poor in there
times like in two thousand and three, where they did some child tax credit, so there's different ways,
to target and I think you know the number of people in a household that need to eat and have things spent on that I mean this makes sense. Why you would I don't really think of that, as targeting. I think of that, as getting
everybody liked your literally everybody money when you talked about two thousand want this.
Minded me of another. This is a point. Probably only economists could love. Is the Congress
did more than stimulate the economy is
Did you know? Never let a crisis go to the is the time to the toothache
and one the Bush administration, with Congress approval put through a permanent tax cut the stimulus payments, attacks rebates relic, taking some of those tax cuts, bunching them up at time and pushing amount in checks were, but the changes to the tax code that reductions in taxes when on well past. That now, with a problem, is you want to send out stimulus? You want to support
the economy in a recession. The idea, I guess now there's some economists disagree with us, but the ideas you dont want to blow out the budget deficit and so
you do is you are willing to spend more than you take taken as a government during a recession and then an expansion like now. You would usually take
and more revenue, and so you would bring down the deficit by putting a permanent tax cut in place. You're, not
committing to do that
then you have administrations, cutting taxes when were in an expansion, and so there s nothing there space and
session and the government, regardless of how much debt we have going into it, should support people and businesses in a recession, but it gets harder and more
controversial them more. Debt were carrying at any time. So, given that people sort of worry about about dead and an overall debt loads, would the real way to do this that doesn't involve
borrowing the money I mean could in some sense people talk about this loosely, but you worked at the actual FED. Could the FED quote unquote print the money and give it to people so there's no debt incidents
Gosh now you're gonna get me to talk about monetizing the dead, with a FED which, when essence, because they haven't run about she back down, the FED has done
of that translation but lady, like so instead of court. Unquote, writing a check for a thousand
if you're, making any graving engraving could print up ten hundred dollar bills, and
So logistically that sounds
doing it, but at the same time like if the Dep balance is going to be a first order, concern for people
and they re out when I think you know, there's an Devlin argument to be made that during because to those
eight wasn't just about the United States was a global financial crisis. There was a interest across the
lobe in having safer assets. U S. Treasuries are right.
There in terms of being safe assets, you could issue a lot more treasuries, bring in more revenue, so I think you're right. There are different ways to do it. I don't think
Guard less energy session is not the time to get stingy prevent will pay for it. Legally, we continued to pay for how severe the great
session was well landmines. Alcohol economy pay. For it I mean people to act.
Way I mean this is still not by you, but by the world under raided, I mean,
We're talking trillions of dollars in lost economic activity forever right now
I think it's very convincing that some of these slow down and productivity growth to just you know how much people it takes to make stuff.
Think the slowdown is in part because of the great recession you had.
Companies pulling back on innovation. You had consumers not being wanting to like and that productivity growth.
On a lower path that a huge problem for standard of living,
so again their differences of opinion about what's happening with productivity growth, because it's basically the sum of our ignorance as economist, because it's just the residual. But it's really important. I did want to die
into one more very wonky detail which we talked
the report in this is one. Whenever these Hamilton project volumes are put together, they have a conference of the authors like myself.
Funeral did our draft proposal and then we go in and we presented to some academics, but largely people better and think
or maybe in the congressional budget
that they come and just react to a policy people who, like really know how to do this stuff and one of the conversation
nations a got going, and I have had this with other people, so hills staffers and things like that is well. What would the congressional budget off
Stu in terms of scoring or telling Congress how expensive obi so, there's two aspects of this:
One is the superior forecasters. Never recession, yea realized yea they're, not that stupid. Nor are we.
What they have to do is some kind of a probabilistic right,
so there's about a twenty five percent chance.
In any given year, there's gonna be a recession, something like that, so they have to have some probability over. The tenure window is so that would affect the causes
Congress waits until we're in a recession feels like the the hundred billion is going out. There's no smoke and mirrors here, you're going to pay for this now
there's another very interesting wrinkle that isn't guaranteed, that Cbo would do this. They have started with some of their proposals from Congress to do what's called dynamic scoring
so they think about not just how many money money would go out the door from the government, but they think well. What would the effect on the economy be short? So with these stimulus payments I mean I've argued, and I think it
well, backed by evidence that if you send the stimulus, payment out you're going to make the recession less severe,
you're going to and when a recession severe you get less and tax revenue. So there is this feedback that, when you do this,
their models. If they took this into account like the second round, the third round effects, it would make it it wouldn't cost a hundred billion dollars. It might cost
billion dollars. I mean, depending on how excited you are about this, and then
Do it now? Congress has less to like put into that short deficit and extra
so anyway, so there's a lot of interesting details that could make this a very like. Do it now you're kind of policy? Let us you're gonna break, and then I want to talk about some rule and and some other stuff, like that support, for this episode comes from America's leading beverage companies who are working together to reduce plastic waste in our environment. Not all plastic is the same. America's beverage companies are carefully designing one hundred percent recyclable plastic bottles, including the cap's their bottles, are made to be remained, and they are investing in community recycling programmes to help get more bottles back, so they can be turned into materials used to make new bottles that completes the circle and reduces plaster
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I feel like this came out and you immediately became economics, twitter, internet famous, not just for the substance of the proposal, but for a sort of clever thing on the side which
if you want to do this automatically at the way. The way your proposal is structured, you need a trigger the classic automatic stabilizers wide food stamps works as an automatic stabilizer. Just in the sense that the more poor people there are, the more people get the food stamps, so it doesn't have a formal trigger, but but you do because otherwise the Czechs will go out and end its it's an interesting. It's interesting ideas, interesting story.
As a? How do we know right so that parliament is trying to sell for new alluded to? This is to send out payments earlier recession. We have to know that we're in a recession and now
Looking back, that might seem totally obvious, but in fact there is a group at the
Bureau of Economic research they're referred to as the recession Dating committee. Don't ever let them set you up on a date
they are in charge of determining when the economy was at its peak and then when it is over the peak and then you're gonna fall
That's the start of his, so they do in retrospect, yes, so like in the great further to them
recession, they made their announcement that the peak was in December of two thousand and seven a year after that that time
so that is not the time where its the best time to send out these stimulus payments right. You couldn't
a lot earlier. That's fine for economics!
it doesn't work for policy. Looking back is totally fine. You can't wait for them another.
Conventional wisdom is, if you see to two quarters of GDP: negative GDP growth, so output, National Albert contracting for two quarters,
six where there were no research, it does at least six months where, because
This data also get revise, so neither
These are as good
as the indicator came up what so yeah, but
I am surprised and heartened by the real.
That my recession, indicators, gotten it has been named,
some rule this
nowhere. In my chapter, it's always referred to as a recession indicator. When I did the authors conference
Shama who, when I was at the Council of Economic advisers, senior economist, he was the member that I work most closely with because he covered macroeconomics in late, two thousand and fifteen, particularly early early, two thousand. Sixteen six,
in the economy was going through a rough patch, the oil price come down alone.
There had been
a lot of distress in the energy production
so there were just a lot of things going on and, of course, the federal the had raised interest raised, interest rates the December before thousand and fifteen
and so we had started projects of recession watch
essentially doing analysis looking at different indicators with little dashboard of red, green and orange things, and so he said,
time he had been working on. This kind of recession indicate like a small increase
the unemployment rate. I mean this is conventional wisdom for a long time among people to follow this kind of stuff that, like small increase in unemployment or bad sign. So, but when we did the others conference like
February this year, and I showed kind of the first draft of my indicator he's like Claudia. This is really good. It's like I tried to do this and I didn't do as well, so I was like hey.
So, and I fiddled arouse it's more and there's some details about some nice flourishes to my indicator, but it works really. Well, it's really trance is really straightforward.
What is ok so it is the sign room to what I do is I look at the monthly unemployment rate. I take. The three month average
I wouldn't want anybody to overreact, little and wiggles from month to month, chicken
but one thing and one month. So I look.
That three month average and then every month I compare that number
to the low over the prior twelve months and if, in the current man that at that
employment rate is up a half a percentage point or more we're in recession. Ok, leg in
since the nineteen seventies that has has been true every single time thing
not turn on outside of recessions. That would be kind of a costly missed,
if you're sending out a hundred billion dollars, so that's the trigger. On average,
It turns on for months into a recession right, so that's, and sometimes it's sooner and
that's way earlier than any.
Other indicator. That's been used widely, so the you know envy are telling us.
So that is the benefit of getting it out early, and this takes advantage of the fact that we get unemployment add on a monthly basis rather than quarterly like GDP.
First, we I mean were revisions to the unemployment data, but they're not as big
as it? The g I was. I was very intentional about using the unemployment data. I mean back in my FED worlder. Frankly, my macro tracking.
World that I live in theirs.
Kinds of tools. We ve got these leg recession, regime, switching models, factor blah blah blah. I mean the veranda looks at all kinds of stuff as they should, but I would
never want to explain the Congress or have them right legislation that depends on one of these models, spitting out like where, in a recession, unemployment rate, as you said, it comes out early a month, I urge it comes out,
weeks after the month is over. People are familiar with it. People are familiar and it matters like this is the reason recessions are, so bad people lose their jobs. So to me, it's just
It has so many attributes and it's really easy to explain its really easy to write down in a piece of legislation, but I will say so. I was surprised, pleasantly surprised at the reaction.
In fact, when I went to the launch of, and in May when you're they open,
Ben Bernanke in Christie, Roamer doing a fireside Chad about all the policies and looking back
Early in that event, before I had gone up to talk about my proposal, they started
mentioning the sombre and as I oh my gosh, what are you doing to me?
and I think part of as they knew it would be embarrassed and so legged had gotten dub this, and here I kind of push back well. I just like this, I'm really uncomfortable. I talked to Christie Roamer after the event,
an express some of this discount, like I didn't notice, was coming in and she
to me and she's Claudia. You have got to owners short, any man would only second,
Ok, so grisly roamer is like a hero, so smart, amazing policy person and economists like how can I not listen to Christy
say you got so I tried it took the little while. But then
people really latched onto it. Like this again
being at the Federal Reserve, knowing that small increases or a bad sign. I didn't think this was a big deal and frankly I had several colleagues who told me what I did wasn't a big deal.
Like they already knew this, but over time?
I'm as the reaction was so large. I realized what actually, what I did is a big deal, because people outside of the FED or people out
side of those who get Wall Street NEWS, letters from former fat economists, they didn't know, so I actually did shares
thing. There was very internal mean the FED using very smart
I mean there's rule of thumb as more. It's a three tonnes increase for them. A false positive, which there are false positives of that indicate link, is not a big deal. If the FED cut a quarter points not like the world them. So I realize I actually had done something that was important because on the hill they didn't know in a friendly, there were individuals, impolicy, think tanks who came up to me, the vat and there, like we didn't think when
described. It totally did not think this would work, but it does yeah well look. Obviously I am a believer in the importance of communicating about
outside of exit Norman. I guess I'd superber. Now I had no idea, I mean you know, obviously, is broadly aware that the unemployment rate going up is not but is actually
almost surprisingly powerful rate in the regularity with which this does. This follows because people always ask you know like some damn thing will happen in the stock market does now
commodity prices. Ah you know we now people almost overprotect recessions, because as a post, great recession,
so the mentality I know it was. It was a good way to calm people down a couple months ago here in the yield curve inverted yet which actually get. This is not here.
Along the Wall Street notes. You know, rely on this that the yield curve thing like some of these things have. I have a witchcraft element to him and they, the actual labour market data, is a lot more convincing. When you can, we be not just statistically but right, you can explain to people why this is. It is actually very unusual to see unemployment going up on that kind of that kind of level and in that kind of degree,
so then, in in your proposal. You hit this trigger, the money would come out and then it would continue going out until when were what turns, and also in a severe recession, which I d
fine, as the unemployment rate in the first year rises to percentage points or more so this, since the nineteenth is only happened three times right, so the
Eighty one, eighty two recession: seventy four! Seventy five switched an order, and these two dozen
and those are the only three that hit that that mark
and those I say every year, you'd
He knew the payment until it gets down not back to pre recession, but a lot closer again. This was very much motives
by what I saw after the great recession in terms of policymakers in two thousand thirteen, when those payments stop any kind of broad stimulus of them. Harold tax could expired, the unemployment rate was still really high.
And that's bad right, and I think that
is true in all of these very severe recessions. There need that there's a big case for like having had more rack, wet and in and in this case, where it is required that sustained poet,
goal momentum, because that was the problem I mean I remember it was drive me crazy, the negotiations and twenty thirteen, but it was just
Nobody wanted to fight for continuing the peril tax holiday, even though there was no. There was no data case that we were out of the recession, or things were fine here, but
like Congress had moved on yet one frankly by that point, I think we ought to one of the worst stimulus benefits you could have given to the american people
If that's all you can have. If that's all comers
it agree on. I would have been happier than it ending bud
the thing that the research shows- and this is very much from the work I had done. If you give the stimulus out to people in dribs and drabs like every page, like you get a little bed
first of all, you're not going to get a big bang all at once, which is what you want to do- is cut this recession short. But the other thing is, they don't know they're getting it. I am a big now you can find an infamous, I believe, New Yorker article in which you have Obama people bragging that they have divided
raised a secret stimulus that people will, I still getting well yet no Dana dig Taylor has research in experimental settings with college students that this is happening now. I know I have research that says the contrary. You I'm sure did failure would say that my research is not good, is fine. We can have disagreements, but the thing that I am sure about, so, even if it didn't even of the spending of facts, were roughly similar people had
no idea. Stealth stimulus is how is that a good policy in terms of the political effects the?
After making work, pay went into place. Now is another one that was spread out over paychecks. The most common mistake in filing tax returns was not claiming making.
Now now the Internal Revenue Service clean that I mean they were looking, they knew, and so they fixed it, but that just shows people didn't get it or they didn't
get it in terms of relay. They had gotten it and I
okay. So this is more anecdotal. We do all of the research
on the surveys of consumers at the University of Michigan, says representative sample of adult one of our research project. We get a little to fancy and some question
yes in the data, came back, look like crap, so I went and actually listened to the tapes clear trying to figure out what
wrong in the end, we confuse the coders was able to fix recode the data and it was fine. But in doing this I was listening to to people they're answering answering the and there
one woman, and so we and we d
assume in these surveys that people come in and understand what the stimulus was cause. I mean there's no reason to think
everyone would would these details. We have this little. You know couple sentences and explain you know you get it in every
page and on average about you, know fifty dollars, and this one will
It was like when you can tell the president. What are you gonna? Do with that fifty dollars, I mean like a shot like this is nothing I have all these problems and you're ready, but where's that
for a lot of Americans. You noticed that thousand hours great, yet I mean visit one of the smallest things. Some ever told me about politics. Is he said you can't? You can't take the politics out of politics, and I feel I got a problem sometimes with some of this stuff that gets cooked up in academic economics, where people were almost brag about how like politically naive, their ideas are, but you know, managing the macro economy is an inherently political tenuous gets done by the government on behalf of the american people and to be done effectively. It has to be done in ways that are legible and legitimate right, and I think a lot of the power of this idea really mean big checks
universality bolsters the rights of their like everybody can say, I understand what is happening here and why it supposed to be good. For me, I m you mentioned the the question of underwater mortgage relief, which is like such an incredible divide between having a lot of technical analysis says that what helped an enormous amount, but it's like most people, didn't have underwater mortgages, and there was no mood to
how bout the minority people who did where's your aids is thing. I literally everybody gets the hell, so no one
the only good for free bandwidth every recession they come in. All flavors and varieties, I think, we're in a really bad place of her fighting the last recession.
Again gonna come through mortgage financed with ITALY, something else so. But if you have some stimulus like these payments, it gets out fast. Then you clear up space for Congress technocrats to sit down and really think hard about the unique problems in that recession, and they just didn't mean, though, than those the issues that they faced with the mortgage disruption were really.
Complicated. They didn't have the time, in my opinion, to do that right and, like you said there was a lot of politics that had to be maneuvered to
one thing I will say broadly about the sombre
and then I think this was why gutless picked up in the event is. It could be a trigger for a lot of different policy. What they would kick on.
Radically, the the now it's not. It would not be the right trigger further extended unemployment benefits, but you make so much. Senses are levels, but one of the other proposed in the book was kick out. Infrastructure spending like have a list ahead of time of what is actually shovel ready and kick it out them the truth.
Transfers through Medicaid to state and local governments. Those were really important in the risk in the great recession in the recovery that
that was being creative there
having that ready to go so we can get ahead of what were contractions and state government. I mean the number of teachers that lost their jobs. There were huge there that huge problems that showed up at state level if you had role to kick off now, it's time to send some of that money.
Again. I think that one is a much harder politically Dupree commend to. But again, if you had like a package of these
attic state. They give my work wait a minute. I could imagine like a whole suite of things by one of which is direct payments and rituals, one of which is general revenue sharing with state governments, one of which is some kind of business tax cuts that report.
Things like you know, and any role at all together and you say: ok. This is like the recession fire right, and that would all be things that have a similarly appropriate trigger bright and would all
sort of turn on at once in after, like one quarter recession on an average rather than after.
Right and I think we have good research that shows that that whole suite of stimulus policies it works,
while I don't agree with the way making work pay was structured
bomb Administration, Christie, Roamer, leading the council economic advice? I mean they through everything they had at the recession. It should have been thrown at the recession back in two thousand eight, but
better late than never, but they really had a principle of let's just not
We don't want to go all in on one type of stimulus we want. We want to go big, they should have got bigger. Floury summers would have gotten quieter,
should have gone bigger, but they went in so many different directions that that was really successful. So,
there's a lot of ways, but for all that you need a trigger, especially if you're going to go big that just amplifies how costly the mistake would be is like. Oh yeah, it's really not right right, yes,
the credible trigger, and then hopefully I mean the credibility can even reduce that the need to level I am so. What should we talk about? The zoo washes centre for equitable growth somewhat. What does this have to do with the quad? This is about supporting people. Supporting businesses mean small businesses were hurt very hard,
in the recession. I think again, you know, I don't have these targeted payments, but the reality of it is that
he's gonna mean more shocked a pupil word of less income, particularly less wealth.
So, in addition to doing the macro forecasting at the FED the last two years, I managed the survey of household economics and decision making okay. So this reinforced
an understanding having looked at consumer behaviour for a long time that there is a it's my nor
of households, but it is a non trivial fraction of U S, households that have incredibly thin financial buffers in that they
have their very little money that they could just get to quickly if something bad happened. One of these statistics that is
compelling from the survey. Is we ask people what
you do if you were faced with a four hundred dollars- emergency expense. That's what would you do? You could do
when the survey launch and twenty thirteen member. This is when that stimulus went away. Half of U S. Adults told us that they would not pay with cash,
on a credit card. They pay off at the end of the month, so something equivalent to rehash, couldn't pull it out. Their savings account wouldn't put out their savings account. They do some
kind of borrowing there was another I mean it was smaller than fifty
and it was more like in the fifteen percent just told by no means could I pay this right now. We thus four hundred dollars like that. That is not a recession shock that that's just like your car breaks down practices.
Had a bad luck you and so that no its improved over the expansion so last year it at the end.
Two thousand aid. It was more like forty percent of households would have to borrow or urban yeah. They would borrow
it would do something like that. We see this as we did. You all show on this area so in, but I don't want to get too hooked on the numbers in this gets misquoted, and then we can explain it away. If you just look at balance sheet data yet like how much money to Venice
their service of consumers? There are millions of people finances no, no money, a quarter of? U S. Two and twenty. Sixteen did not have did not have four hundred dollars in easily accessible assets like that that
mind: boggling leg. So the way in which I would see this as being an equitable policy is that it's gonna help those people more mean they're, really, I mean frankly, I think we should have a better safety net to help them all the time shock. That's another time.
But I think back to just grow. So there's like thinking about incited the distribution looking at differences across households where their add, as I said before, I you know, cutting a research,
in short, making it less severe. This has important implications for the entire
our economy, the leading, unlike like national growth, going forward, and then that's also part
of the mission of equitable growth. This isn't just about redistribution, sometimes
important piece of policies we gotta think about. Oh, my gosh, this wealth inequality is massive. Another love different proposals that we have to address this, but there is
so just as aspect of growing the whole pie. But it's,
he paused weeds its people. Armor. On the margins, wait I mean who african Americans people with less formal education, people with criminal records, who sort of benefit the most from a robust labour. Raymie, obviously like nobody is happy about we're sessions and everybody prefers Egon.
Growth, but any need. It doesn't really impact everyone equally Emmy. Its use me. One reason why this incredibly slow recovery was considered tolerable is that sort of college educated, white people don't suffer
from the week labor market- and I remembered in
early in the recovery walking around. So I live close, I'm in Arlington right in to clear,
That is my leg. You no clear my head go for a walk in
I can remember walking around on a Friday, and I was mad because there were people in there.
Doing their party and they hang and they're gone around, whereas when I will go back to India and visit my family,
there was nobody goin out in partying in mass, I mean people were
tightening their relatives a recession, so this was where
where I live house prices didn't drop, people didn't now
as many people lost their jobs. People still had got like. I had a good income through the whole thing, so was just indices where the policy is made, so there could
This disconnect and it may be a little easier to do the whole moral thing like loads, therefore, to know how they should
save more. Why don't? They have at least four hundred dollars. So I think that that is problematic.
We do see, and this was in our survey every
dimension of economic. Well, being we look at well beyond this? How would you deal with emergency expense? Flaxen Hispanics are, in a worse place, financially less educated, in some cases, young adults
Occasionally it shows up in terms of geography. Urban turns world, so there's just like a baseline in terms
preparation right as a whole, the? U S, household, to never ready
for a recession, but there are particular groups that are really
ready, a more and then, like you said there is an aspect in an expansion going
into a recession of last in first out
oh right now and I love that
german power, the Federal Reserve as embracing this and talking about it. What we're seeing are people being brought back into work that
sadly, in many cases have been written off work.
Whether they were long term unemployed, whether they had a health disability, whether they are in a racial ethnic
nor any whether they have a criminal record. At this point, employers are gonna have to like bring them in.
Get them trained. Do that kind of stuff. Now, when the recession happens- and it doesn't have to happen anytime soon- we can see australia- I go for decades, but they'll be the first one to go
right leg in that and then there are the least prepared like restaurant
no, I mean I do think, that's important, because I think sometimes people on the left get the idea that all this macro economic stuff is like it's too technocratic. It doesn't have like the strong social justice angles that they care about, but it really matters I mean discriminatory. Policy is incredibly costly in a tight labor market, but cheap in lax one accommodating people with disabilities can be incredibly costly in a recession, but it's cheap in a strong labor market. You get good people before I let you go. I like to close out I like to ask people what did I miss? What you wish I had asked you here is a broad term
rain. Obviously, are we in a recession right now, or is it coming soon? Okay, so in November unemployment rate three and a half percent, it was really good
really good and the solemn rule? The touch negative to lay gives that dream.
Percent is basically in line with its low over the last twelve months, a little bit below. Ok, so we
not in a recession right now like no, no, no, which is good right, but then
So I used the solemn rule to think about window. Send out payments. Are we in recession? So, colleagues, it Hamilton Project too,
Another step- and I like okay, let's look at readings of the Salm role before a half a percentage point just using
store goal recession episodes. What does that tell us about? The likelihood will be in a recession. Twelve months of the likelihood will be one in twenty four months of one year
okay, so a reading of the Somme rule is a little bit less than zero. Has a really low probability of having
recession in the next year. So I firmly believe that
we are not going to be in a recession by election next year, so I've had a lot of problems with the political discourse round that, because
Someone in particular is going to benefit from that we're going to hear that yeah, so
and what I mean by that is well it just to be more specific
This is from their estimates, is that there is about a ten percent chance.
A year from now we're going to be in a recession right now
the unemployment rate is rising certain of its up three tonnes like this is a good sign then, and the the average chance,
of being in a recession any any given month is like twice that right.
So is it really low that we're gonna be in recession by the election through subdued were somewhere in subdued yeah? This is leg. We basically lights are flashing green red and even if we look two years out, the chance of being in a recession is lower than just the baseline Lincoln any,
given month so earlier this year there was a lot of talk about recession, fears which is frankly surprising and may be made the book very well. Timed
I didn't think that point given how strong the labour market was, that that was a credible, near term threat
We shall be worried, macro forecaster, I'm just pessimistic, it outlines bad things will happen, but
Recessions do not die of old age. This could keep going the labour market stays in a good plays. The FED doesn't get to
do you know antsy about, like information, might someday, show up this. Could this could this expansion could go on there being incredible banner?
Hence so we're not in one. I don't see one in the near term, but but we always should be vigilant plenty of Congress to pre comment to when ever the next recession does happen. So, let's go
let's get on it. Okay, thank you. So much Claudia SAM Washington, center for equitable growth, mount rotis engineering here, Jackson per Pouch, our producer and the West current on.
Transcript generated on 2021-05-22.